Sonic (SONC) 10-K 1999 FY Annual report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended August 31, 1999

Commission File Number 0-18859

SONIC CORP.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	73-1371046
(State of Incorporation)	(I.R.S. Employer Identification No.)
101 Park Avenue Oklahoma City, Oklahoma	73102
(Address of Principal Executive Offices)	(Zip Code)

Registrant's Telephone Number, Including Area Code: (405) 280-7654

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 this Form 10-K does not contain and, to the best of the Registrant's knowledge, the Registrant's definitive proxy statement or information statement incorporated by reference in Part III of this Form 10-K will not contain a disclosure of delinquent filers pursuant to Item 405 of Regulation S-K. YES /x/  No / /

    As of November 10, 1999, the aggregate market value of the 17,006,966 shares of common stock of the Company held by non-affiliates of the Company equaled approximately $440 million, based on the closing sales price for the common stock as reported for that date. As of November 10, 1999, the Registrant had 18,337,586 shares of common stock issued and outstanding (excluding 2,408,876 shares of common stock held as treasury stock).

(Facing Sheet Continued)

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, 1999.

FORM 10-K OF SONIC CORP.

TABLE OF CONTENTS

	Page
PART I
Item 1. Business	1
Item 2. Properties	10
Item 3. Legal Proceedings	10
Item 4. Submission of Matters to a Vote of Security Holders	10
Item 4A. Executive Officers of the Company	10
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters	14
Item 6. Selected Financial Data	14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 8. Financial Statements and Supplementary Data	23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	23
PART III
(Incorporated by reference from the Company's definitive proxy statement for its annual meeting of stockholders following the fiscal year ended August 31, 1999)
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K	23

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, 1999, the Company had 2,011 restaurants in operation, consisting of 296 Company-owned restaurants and 1,715 franchised restaurants, principally in the south central and southeastern United States. Sonic restaurants offer made-to-order hamburgers and other sandwiches and feature Sonic signature items, such as extra-long cheese coneys, hand-battered onion rings, tater tots, specialty soft drinks, including cherry limeades and slushes, and frozen desserts. 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.

    In September of 1995, the Company reorganized its operating subsidiaries into two, directly-held subsidiaries consisting of 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's Company-owned restaurants. In February of 1996, the Company sold its equipment sales division to N. Wasserstrom & Sons, Inc. of Columbus, Ohio, and discontinued that line of business.

    The Company's objective is to maintain its position as, or to become, a leading operator in terms of the number of quick-service restaurants within each of its core and developing markets. The Company has developed and is 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 and signature food 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 the Company'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 Company-owned restaurants profitably and efficiently; and (5) a commitment to support the Sonic system.

    The Company has its principal executive offices at 101 Park Avenue, Oklahoma City, Oklahoma 73102. Its telephone number is (405) 280-7654. As used in this report, the word "Company" means Sonic Corp. and each of its subsidiaries and predecessors, unless the context indicates otherwise.

Restaurant Locations

    As of August 31, 1999, the Company owned or franchised 2,011 drive-in restaurants, principally in the south central and southeastern United States. The Company's core markets, consisting of the nine contiguous states of Texas, Oklahoma, Tennessee, Missouri, Arkansas, Kansas, Louisiana, Mississippi, and New Mexico, contained approximately 79% of all Sonic restaurants as of August 31, 1999. Developing markets primarily are located in Alabama, Arizona, Colorado, Florida, Georgia, Kentucky, North Carolina, South Carolina, and Virginia. The following table sets forth the number of Company-owned and franchised restaurants by core and developing markets as of August 31, 1999:

Core Market	Company-owned Restaurants	Franchised Restaurants	Total
Texas	86	488	574
Oklahoma	24	182	206
Tennessee	31	129	160
Missouri	37	114	151
Arkansas	18	112	130
Kansas	10	99	109
Louisiana	17	94	111
Mississippi	0	97	97
New Mexico	0	59	59
Total	223	1,374	1,597

Developing Markets	Company-owned Restaurants	Franchised Restaurants	Total
Alabama	25	43	68
Arizona	0	57	57
California	0	7	7
Colorado	0	32	32
Florida	11	5	16
Georgia	5	34	39
Illinois	0	13	13
Indiana	5	6	11
Iowa	0	3	3
Kentucky	15	35	50
Nebraska	0	3	3
Nevada	0	10	10
North Carolina	0	45	45
Ohio	0	4	4
South Carolina	0	39	39
Utah	0	1	1
Virginia	12	3	15
West Virginia	0	1	1
Total	73	341	414
Total System	296	1,715	2,011

Expansion

    During fiscal 1999, the Company opened 37 Company-owned restaurants and its franchisees opened 139 restaurants. During fiscal 2000, the Company plans to open approximately 35 Company-owned restaurants and anticipates that its franchisees will open at least 140 restaurants. 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. The Company believes that its existing core and developing markets offer a significant growth opportunity for both Company-owned and franchised restaurant expansion. However, the ability of the Company and its franchisees to open the anticipated number of Sonic drive-in restaurants during fiscal 2000 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 the Company and the Company's franchisees, and the general economic and business conditions to be faced in fiscal 2000.

    The Company's expansion strategy for Company-owned restaurants involves two principal components: (1) the building-out of existing core markets and (2) the further penetration of developing markets. In addition, the Company may consider the acquisition of other similar concepts for conversion to Sonic restaurants.

Restaurant Design and Construction

    General.  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 the first half of fiscal 1995, the Company has incorporated a drive-through service and patio seating area in most new restaurants. A few Sonic restaurants provide an indoor seating area.

    Retrofit Program.  In fiscal 1997, the Company began implementing a remodeling program to retrofit all Sonic drive-in restaurants. The retrofit includes new signage, new menu and speaker housings, and significant trade dress modifications to the exterior of each restaurant's building. The Company currently estimates the cost to make a standard retrofit at approximately $58,000 to $70,000 per restaurant. The Company implemented the program on a market-by-market basis, and anticipates 100% completion of the retrofit program for Company-owned restaurants, and 90% completion for franchised restaurants by August 31, 2000. In addition, all new restaurants being built in all markets now feature the new retrofit signage and trade dress style. As of August 31, 1999, there were 287 retrofitted Company-owned restaurants and 1,091 retrofitted franchised restaurants, which together total more than two-thirds of all Sonic restaurants.

Marketing

    The Company has designed its marketing program to differentiate Sonic drive-in restaurants from the Company's competitors by emphasizing five key areas of customer satisfaction: (1) the personal manner of service by carhops, (2) made-to-order menu items, (3) speed of service, (4) quality, and (5) value. The marketing plan includes monthly promotions for use throughout the Sonic chain. The Company supports those promotions with television and radio commercials and point-of-sale materials. Those promotions center on a "meal deal" which highlights signature menu items of Sonic drive-in restaurants.

    Each year the Company and its advertising agency (with involvement of the Sonic Franchise Advisory Council) develop a marketing plan. The Company requires the formation of advertising cooperatives among restaurant owners to pool and direct advertising expenditures in local markets. Under each of the Company's license agreements, the franchisee must contribute a minimum percentage of the franchisee's gross revenues to a national media production fund and spend an additional minimum percentage of gross revenues on local advertising, either directly or through the Company-required participation in advertising cooperatives. Depending on the type of license agreement, the minimum percentages of gross revenues contributed by franchisees for local advertising cooperative funds range from 1.125% to 3.25% and, for the Sonic Advertising Fund (the national fund directed by the Company), the franchisees contribute a range of 0.375% to 0.75% of gross revenues. Franchisees may elect and frequently do elect to contribute more than the minimum percentage of gross revenues to their local advertising cooperative funds. In 1999, Sonic restaurant owners approved the establishment of a System Marketing Fund to be effective as of January 1, 2000. The purpose of this fund is to complement local advertising efforts in attracting customers to Sonic restaurants by exposing the message of the Sonic brand to a new audience. The primary focus of the fund will be to purchase advertising on national cable networks such as USA, TBS, TNT, ESPN, ESPN 2 and CMT. The System Marketing Fund will be funded by 0.5% of each franchisee's gross revenues, which amount will be redistributed to the fund from the franchisee's local advertising fund contribution.

    For fiscal 1999, franchisees participating in cooperatives contributed an average of 3.32% of gross revenues to Sonic advertising cooperatives, exceeding the required 2.375% under most license agreements in effect during that period. As of August 31, 1999, 2,009 Sonic restaurants (99.9% of the chain) participated in advertising cooperatives. The Company estimates that the total amount spent on media (principally television) exceeded $54 million for fiscal 1999 and is expected to exceed $64 million for fiscal 2000.

Purchasing

    The Company negotiates with suppliers for its primary food products (hamburger patties, dairy products, hot dogs, french fries, tater tots, cooking oil, fountain syrup, and other products) and packaging supplies to ensure adequate quantities of food and supplies and to obtain competitive prices. The Company seeks competitive bids from suppliers on many of its food products. The Company approves suppliers of those products and requires them to adhere to product specifications established by the Company. Suppliers manufacture several key products for the Company under private label and sell them to authorized distributors for resale to Company-owned and franchised restaurants. The Company and its franchisees purchase a majority of their food and beverage products from authorized local or national distributors.

    The Company requires its Company-owned and franchised restaurants to participate in purchasing cooperatives. Those cooperatives have achieved cost savings, improved food quality and consistency, and helped decrease the volatility of food and supply costs for Sonic restaurants. For fiscal 1999, the average cost of food and packaging for a Sonic restaurant, as reported to the Company by its franchisees, equaled approximately 28% of revenues. The Company believes that food purchasing cooperatives have allowed Sonic restaurants to avoid menu price increases that otherwise might have occurred. The reduction in the number of food and paper product distributors to the Sonic chain over the past few years has improved the ability of the Company to negotiate more advantageous purchasing terms and to maintain more uniform products.

Company Operations

    Ownership Program.  The Sonic restaurant philosophy stresses an ownership relationship with supervisors and managers. Most supervisors and managers of Company-owned and franchised restaurants own an equity interest in the restaurant. The Company believes that its ownership structure provides a substantial incentive for restaurant managers and supervisors to operate their restaurants profitably and efficiently.

    Under the ownership program, a separate limited liability company or general partnership owns and operates each Company-owned restaurant. As members of the limited liability company or partners of the general partnership, the Company owns a majority interest and the managers and supervisors own a minority interest in the restaurant. Ownership equity of a typical established Company-owned restaurant generally is distributed 60% to the Company, up to 20% to the manager, and up to 20% to the supervisor. The Company records other members' or partners' interests as a minority interest in earnings of restaurants on its financial statements. Under the standard operating agreement or partnership agreement, the Company has the right to purchase the interest of any other manager or supervisor on short notice. Each supervisor and manager contributes his or her pro rata portion of all start-up costs, which include the required franchise fee, opening inventory, advertising and promotion costs, initial training and insurance costs, and some amounts for working capital. The amount of capital contribution by a supervisor and manager for a restaurant typically equals approximately $10,000 for a 20% interest. Each restaurant usually purchases equipment with funds borrowed from the Company at competitive rates. In most cases, the Company alone guarantees any third-party lease entered into for the site. The restaurants distribute available cash flow to the supervisors or partners on a monthly basis pursuant to the terms of the operating agreements or partnership agreements.

Restaurant Personnel. A typical Sonic restaurant is operated by a manager, two 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 six Company-owned restaurants. Those supervisors derive their income out of their share of the available cash flow of the restaurants they supervise.

    The Company also employs nine Directors of Operations who oversee supervisors within their respective regions and three Regional Vice Presidents who oversee the Directors of Operations. The Company employs a Vice President of Operations based in Oklahoma City who oversees the operations of all Company-owned restaurants.

    Point-of-Sale Systems.  The Company is currently in the final installation phase of a planned software enhancement for the point-of-sale systems in Company-owned restaurants. The software enhancement includes added store management tools as well as expanded polling capabilities. The polling features allow the Company to integrate centrally maintained product and promotion information and also support the collection of store-level sales information.

    Hours of Operation.  Sonic restaurants operate seven days a week, typically from 10:30 a.m. to 11:00 p.m.

    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.

	1999			1998			1997			1996			1995
Average Sales per Company-owned Restaurant (in thousands)	$	702		$	663		$	649		$	601		$	577
Number of Restaurants
Total Open at Beginning of Year		292			256			231			178			142
Newly-Opened and Re-Opened		37			50			37			30			31
Purchased from Franchisees		4			—			—			28			6
Sold to Franchisees		(36	)		(14	)		(5	)		(4	)		(1	)
Closed		(1	)		—			(7	)		(1	)		—
Total Open at Year End		296			292			256			231			178

Franchise Program

    General.  During its more than 40 years in operation, the Sonic system has produced a large number of successful multi-unit franchisee groups. Those franchisees continue to develop new restaurants in their franchise territories either through area development agreements or single site development. The Company considers its franchisees a vital part of the Company's continued growth and believes its relationship with its franchisees is good.

    As of August 31, 1999, the Company had 1,715 franchised restaurants operating in 27 states and the Company had entered into area development agreements which contemplate the opening of 86 additional restaurants during fiscal 2000. However, the Company cannot give any assurance that the Company's franchisees will achieve that number of new restaurants for fiscal 2000. During fiscal 1999, the Company's franchisees opened 74 Sonic drive-in restaurants pursuant to existing area development agreements.

    Franchise Agreements.  Each Sonic restaurant, including each Company-owned restaurant, operates under a franchise agreement that provides for payments to the Company of an initial franchise fee and a royalty fee based on a graduated percentage of the gross revenues of the restaurant. In September of 1994, the Company began offering a Number 6 License Agreement, which provides for a franchise fee of $30,000 and an ascending royalty rate beginning at 1.0% of gross revenues and increasing to 5.0% as the level of gross revenues increases. In September of 1998, the Company began offering a Number 6A License Agreement, which provides for the same fees and other general terms of the Number 6 License Agreement, but also provides for mutual rights and obligations between the Company and the franchisees in the event the Company acquires operating restaurants or development sites within a franchisee's protected territory or desires to develop non-traditional restaurant locations within a protected territory. The Number 6A License Agreement requires the Company to offer the franchisee a right of first refusal to acquire the restaurant or site from the Company at its cost with the requirement to convert the restaurant or develop the site into a Sonic restaurant pursuant to the terms of the then current license agreement. Approximately 60% of all Sonic restaurants opening in fiscal year 2000 are expected to open under the Number 6 or Number 6A License Agreement. Pursuant to the terms of existing area development agreements and the outstanding license option agreements described below, approximately 40% of all Sonic restaurants opening in fiscal 2000 will open under either the Number 5 License Agreement or the Number 5.1 License Agreement. Those agreements each provide for a franchisee fee of $15,000 and an ascending royalty rate beginning at 1.0% of gross revenues and increasing to 4.0% as the level of gross revenues increases. For fiscal 1999, the Company's average royalty rate equaled 2.96%. The Number 5 License Agreement provides for a term of 15 years, with an option to renew pursuant to the terms of the then current license agreement. The Number 5.1 License Agreement, the Number 6 License Agreement and the Number 6A License Agreement provide for a term of 20 years, with one 10-year renewal option. The Company has 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 the Company's policies and standards. Many state franchise laws limit the ability of the Company to terminate or refuse to renew a franchise.

    Because of the graduated percentage royalty rates set forth in the license agreements, in fiscal year 1999, six franchised restaurants formerly operating under the Number 4.2 License Agreement had their royalty rates increase to the same rate as the Number 5 License Agreement rate. Beginning in fiscal year 2000 and continuing through fiscal year 2010, a total of 654 additional franchised restaurants currently operating under the Number 4.2 License Agreement will have their royalty rates increase to the same rate as the Number 5 License Agreement rate. Also, beginning in fiscal year 2000 and continuing through fiscal year 2010, the terms of the remaining Number 4 License Agreements will expire and the licensed restaurants either will cease operations or renew their licenses pursuant to the terms of the then current license agreement (currently the Number 6A License Agreement). The Company expects that the automatic conversion of the Number 4.2 License Agreements and the renewals of the expiring Number 4 License Agreements will result in an incremental increase in the Company's royalty revenues attributable to the change in royalty rate. For the five-year period beginning in fiscal year 2000, the Company expects that process to generate in excess of $10 million in incremental royalty revenue, which will build in a stair-stepped fashion. The actual amount of revenue will depend on a number of factors, including (among others) the average unit volumes of the affected restaurants and the extent to which the expiring Number 4 License Agreements in fact renew and convert to the Number 6A License Agreement.

    In July of 1998, the Company gave franchisees operating under a Number 1, 4, 4.1 or 5 License Agreement an opportunity to convert the franchisee's agreement to a Number 5.2 License Agreement, effective as of January 1, 1999. The Number 5.2 License Agreement allowed the franchisee with an expiring license agreement the opportunity to elect to renew prior to the actual expiration date and accept the terms of the then current Number 6 License Agreement. The franchisee paid a $1,000 conversion franchisee fee and a higher royalty rate from the time of conversion through the expiration date of the franchisee's original license agreement. Upon the expiration of the original term of the franchisee's license agreement, the Number 5.2 License Agreement will shift the royalty rate to the Number 6 License Agreement royalty schedule. Approximately 137 Number 1, 4, 4.1 and 5 License Agreements were converted to the Number 5.2 License Agreement.

    Area Development Agreements.  The Company uses area development agreements to facilitate the planned expansion of the Sonic drive-in restaurant chain through multiple unit development. While existing franchisees continue to expand on a single restaurant basis, approximately 54.6% of the new franchised restaurants opened during fiscal 1999 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, the Company has 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 1999, the Company entered into 25 new area development agreements calling for the opening of 144 Sonic drive-in restaurants during the next five years. As of August 31, 1999, the Company had a total of 80 area development agreements in effect, calling for the development of 365 additional Sonic drive-in restaurants during the next six years. Of the 78 restaurants scheduled to open during fiscal 1999 under area development agreements in place at the beginning of that fiscal year, 66 (or 84.6%) opened during the period.

    Realization by the Company of the expected benefits under various existing and future area development agreements currently depends and will continue to depend upon the ability of franchisees to open the minimum number of 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 the Company grants area development agreements only to those developers whom the Company believes possess those qualities, the Company 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 previously experienced by the Company.

    Option Agreements.  In connection with the Company's introduction of a new Number 6 License Agreement in fiscal 1995, the Company offered its existing franchisees the opportunity to acquire options to purchase the Number 5.1 License Agreement for new Sonic drive-in restaurants developed by the franchisee (the "Number 5.1 Options"). The Number 5.1 License Agreement has a lower initial franchise fee and royalty rate than the Number 6 License Agreement. All outstanding Number 5.1 Options have terms ending on December 31, 1999, with the right to renew for one additional year upon the payment of $1,000 by December 31, 1999. Unlike the area development agreements described above, the options do not cover any specific location. The Company currently is not offering additional option agreements to its franchisees and, as the options expire or the franchisees exercise them, the number of outstanding options will decrease over time. As of August 31, 1999, the Company had 74 Number 5.1 Options outstanding.

    Franchised Restaurant Development.  The Company furnishes each franchisee with assistance in selecting sites and developing restaurants. Each franchisee has responsibility for selecting the franchisee's restaurant locations but must obtain Company 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. The Company provides its franchisees with the physical specifications for the typical Sonic drive-in restaurants.

    Franchisee Financing.  The Company has entered into an agreement with Franchise Finance Company of America ("FFCA"), pursuant to which FFCA may make loans to Sonic franchisees who meet certain underwriting criteria set by FFCA. Under the terms of the agreement with FFCA, the Company may provide a guaranty of 10% of the outstanding balance of a loan from FFCA to a Sonic franchisee. The Company retains the absolute right to determine which loans it will guarantee and to impose any conditions the Company may deem appropriate.

    The Company also has entered into agreements with Federated Capital Corporation Company ("FCC"), Bank of America, N.A. ("Bank of America"), and STI Credit Corporation ("Sun Trust"), pursuant to which each of those lenders may provide financing for the Company's franchisees to implement the retrofit of their existing restaurants. Under the terms of those agreements, the Company has given FCC a limited guaranty of up to $750,000 and Bank of America and Sun Trust limited guaranties of up to $250,000 with regard to all loans made pursuant to the terms of each agreement with the lenders.

    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.

    Franchisee Support.  In addition to training, advertising and food purchasing cooperatives, and marketing programs, the Company provides various other services to its 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) assistance in selecting sites for new restaurants using demographic data and studies of traffic patterns; (3) financing through third party sources to qualified franchisees for purchasing restaurant equipment; and (4) one-stop shopping for all equipment needed to open a new restaurant through N. Wasserstrom & Sons, Inc. in Columbus, Ohio. The Company's field services organization consists of 17 field service representatives, 12 field marketing representatives, five real estate directors and managers, and 10 other field representatives, all with responsibility for defined geographic areas. The field service representatives provide operational services and support for the Company's franchisees, while the field marketing representatives assist the franchisees with point-of-sale and local marketing programs. The real estate directors and managers assist the franchisees with the identification of trade areas for new restaurants, the franchisees' selection of sites for their restaurants, and the approval of those sites by the Company. The other field representatives provide a variety of other services to franchisees.

    Franchise Operations.  All franchisees must operate their Sonic drive-in restaurants in compliance with the Company's policies, standards, and specifications, including matters such as menu items, materials, supplies, services, fixtures, furnishings, decor, and signs. Each franchisee has full discretion to determine the prices charged to its customers. All restaurants must display a Sonic drive-in restaurant sign manufactured in accordance with Company specifications. In most cases, the Company owns the sign and leases it to the franchisee and, if the franchisee breaches its franchise agreement, the Company may remove the sign.

    Franchise Advisory Council.  The Company has established a Franchise Advisory Council which provides advice, counsel, and input to the Company on important issues impacting the business, such as marketing and promotions, operations, purchasing, building design, human resources, and new products. The Franchise Advisory Council currently consists of 16 members selected by the Company. Seven executive committee members are selected at large. The remaining nine members are regional members who represent three defined regions of the country and serve two-year terms. The Franchise Advisory Council serves in an advisory capacity only and does not have decision-making power. As the franchisor of the Sonic drive-in restaurant chain, the Company has and reserves the power to change or dissolve the Franchise Advisory Council as it may deem in its best interest.

    Reporting.  The Company collects weekly and monthly sales and other operating information from its franchisees. The Company has agreements with 106 or 6% of its franchisees permitting the Company to debit electronically the franchisees' bank accounts for the payment of royalties and advertising fund contributions. That system significantly reduces the resources needed to process receivables, improves cash flow, and reduces past-due accounts receivable.

    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 the Company, and closed during the Company's last five fiscal years.

	1999			1998			1997			1996			1995
Average Sales Per Franchised Restaurant (in thousands)	$	842		$	775		$	720		$	657		$	620
Number of Restaurants:
Total Open at Beginning of Year		1,555			1,424			1,336			1,286			1,227
New Restaurants		139			120			92			81			80
Sold to the Company		(4	)		—			—			(28	)		(6	)
Purchased from the Company		36			14			5			4			1
Closed and Terminated,
Net of Re-openings		(11	)		(3	)		(9	)		(7	)		(16	)
Total Open at Year End		1,715			1,555			1,424			1,336			1,286

Equipment Sales

    In fiscal 1996, the Company sold its restaurant equipment division and discontinued that operation. As a result, the Company had no revenues from equipment sales during fiscal years 1999, 1998 and 1997, compared to approximately $3.7 million during fiscal 1996 (an amount equal to 2.5% of the Company's total consolidated revenues).

Competition

    The Company competes 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. The Company competes on the basis of speed and quality of service, method of food preparation (made-to-order), food quality, signature food items, and monthly promotions. The quality of service, featuring Sonic carhops, constitutes one of the Company's primary marketable points of difference with the competition. Several major chains, many of which have substantially greater financial resources than the Company, dominate the quick-service restaurant industry. A significant change in pricing or other marketing strategies by one or more of those competitors could have an adverse impact on the Company's sales, earnings, and growth. In selling franchises, the Company also competes with many franchisors of fast-food and other restaurants and other business opportunities.

Employees

    As of August 31, 1999, the Company had 227 full-time employees. No collective bargaining agreement covers any of its employees. Company-owned restaurants (operated as separate partnerships or limited liability companies) employed approximately 1,200 full-time and 4,800 part-time employees as of August 31, 1999, none of whom constitute employees of the Company. The Company believes that it has good labor relations with its employees.

Trademarks and Service Marks

    The Company, through a wholly-owned subsidiary, owns numerous trademarks and service marks. The Company has registered many of those marks, including the "Sonic" logo and trademark, with the United States Patent and Trademark Office. The Company believes that its trademarks and service marks have significant value and play an important role in its marketing efforts.

Government Regulation

    The Company 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. The Company 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 the Company 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 proscribed 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 the Company from seeking franchisees in any given area and have not had a significant effect on the Company's 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.

    The owners of Sonic restaurants must comply with the Fair Labor Standards Act and various state laws governing various matters, such as minimum wages, overtime, and other working conditions. Significant numbers 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.

    The owners of Sonic restaurants also must comply with the provisions of the Americans with Disabilities Act (the "ADA"), which requires the owners to provide reasonable accommodation for employees with disabilities and to make their restaurants accessible to customers with disabilities. The Company has made certain modifications to the design and construction of its restaurants in order to comply with the ADA. However, the ADA has not had a material impact on the Company, primarily because of a drive-in restaurant's inherent accessibility to all customers through their motor vehicles.

    Many owners of Sonic restaurants also must comply with the Family Medical Leave Act (the "Family Leave Act"), which covers employers of 50 or more persons at locations within any 75-mile radius. The Family Leave Act requires covered employers to grant eligible employees up to 12 weeks of unpaid leave for family and medical reasons and to reinstate the employee to the same or an equivalent position at the end of the leave. An employee may take leave for the birth, adoption, or foster care of a child; for any serious health condition of a spouse, sibling, child or parent; or for an employee's own serious health condition.

Item 2. Properties

    Of the 296 Company-owned restaurants operating as of August 31, 1999, the Company operated 106 of them on property leased from third parties and 190 of them on property owned by the Company. The leases expire on dates ranging from 1999 to 2019, 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 the Company to maintain the property and pay the cost of insurance and taxes.

    The Company has its principal office located in approximately 64,000 square feet of leased office space in Oklahoma City, Oklahoma, at an effective annual rental rate of $9.15 per square foot and approximately 500 square feet at an effective annual rental rate of $10.50 per square feet. The lease for that property expires in November of 2002. The Company also leases approximately 10,000 square feet of warehouse space in Oklahoma City, Oklahoma, at an annual rental rate of $3.75 per square foot. The lease for the warehouse space expires in December of 2001. The Company believes that its leased office and warehouse space provides an adequate amount of space and will meet the Company's needs for the foreseeable future.

Item 3. Legal Proceedings

    The Company does not have any material legal proceedings pending against the Company, any of its subsidiaries, or any of their properties.

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

    The Company did not submit any matter during the fourth quarter of the Company's last fiscal year to a vote of the Company'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.

Name	Age	Position	Officer Since
J. Clifford Hudson	45	President, Chief Executive Officer and Director	June of 1985
Kenneth L. Keymer	51	Executive Vice President, Chief Operating Officer and Director	August of 1996
Pattye L. Moore	41	Senior Vice President of Marketing and Brand Development	June of 1992
Ronald L. Matlock	48	Vice President, General Counsel and Secretary	April of 1996
W. Scott McLain	37	Vice President of Finance and Chief Financial Officer	April of 1996
Donald E. Foringer	47	Vice President of Information Technology	August of 1997
G. Michael Gent	51	Vice President of Corporate Development of Sonic Restaurants, Inc.	November of 1997
Mitchell W. Gregory	35	Vice President of Brand Development of Sonic Industries Inc.	August of 1999
Terry D. Harryman	34	Controller	January of 1999
Jill M. Hudson	36	Vice President of Human Resources and Corporate Administration	November of 1998
Stanley S. Jeska	59	Vice President of Franchise Development of Sonic Industries Inc.	September of 1993
Keith O. Jossell	34	Treasurer	August of 1999
Norman R. Kaufman	48	Vice President of Operations Services of Sonic Restaurants, Inc.	September of 1998
Kris J. Miotke	40	Vice President of Advertising and Sales of Sonic Industries Inc.	February of 1998
Michael A. Perry	41	Vice President of Franchise Services of Sonic Industries Inc.	March of 1998
Andrew G. Ritger, Jr.	42	Vice President of Purchasing of Sonic Industries Inc.	January of 1996
Nancy L. Robertson	43	Vice President of Corporate Communications	April of 1999
Stephen C. Vaughan	33	Vice President of Planning and Analysis	January of 1996
David A. Vernon	41	Vice President of Franchise Sales of Sonic Industries Inc.	September of 1998
Frank B. Young, Jr.	48	Vice President of Operations of Sonic Restaurants, Inc.	October of 1994

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 President and Chief Executive Officer of the Company since April of 1995 and has served as a director of the Company since August of 1993. He served as President and Chief Operating Officer of the Company from August of 1994 until April of 1995, and he served as Executive Vice President and Chief Operating Officer from August of 1993 until August of 1994. From August of 1992 until August of 1993, Mr. Hudson served as Senior Vice President and Chief Financial Officer of the Company. Since October of 1994, Mr. Hudson has 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.

    Kenneth L. Keymer has served as the Executive Vice President and Chief Operating Officer of the Company since January of 1998, and has served as a director of the Company since January of 1999. He has served as the President and a director of Sonic Industries Inc., the Company's franchise operations subsidiary, since August of 1996. From June of 1994 to August of 1996, Mr. Keymer served as Executive Vice President of Operations for the Memphis, Tennessee region of Perkins Family Restaurants, a subsidiary of Tennessee Restaurant Corporation of Itasca, Illinois. From March of 1993 to June of 1994, Mr. Keymer served as Senior Vice President of Operations for the then Chicago-based Boston Chicken, Inc.

    Pattye L. Moore has served as Senior Vice President of Marketing and Brand Development of the Company since August of 1996. From August of 1995 until August of 1996, Ms. Moore served as Senior Vice President of Marketing and Brand Development for Sonic Industries Inc. and served as Vice President of Marketing of Sonic Industries Inc. from June of 1992 to August of 1995.

    Ronald L. Matlock has served as Vice President, General Counsel and Secretary of the Company since April of 1996. Mr. Matlock has also served as a director of Sonic Restaurants, Inc. and as a director of Sonic Industries Inc. since April of 1996. Prior to joining the Company, Mr. Matlock practiced law from January of 1995 to April of 1996 with the Matlock Law Firm in Oklahoma City, Oklahoma, concentrating in corporate, securities and franchise law. From November of 1987 to December of 1994, Mr. Matlock was a shareholder and director of the law firm of Hastie & Kirschner in Oklahoma City, Oklahoma.

    W. Scott McLain has served as Vice President of Finance and Chief Financial Officer of the Company since August of 1997. From August of 1997 until August of 1999 he also served as Treasurer of the Company. From April of 1996 to August of 1997, he served as Vice President of Finance and Treasurer of the Company. From August of 1993 until joining the Company, Mr. McLain served as Treasurer of Stevens International, Inc. in Fort Worth, Texas.

    Donald E. Foringer has served as Vice President of Information Technology since August of 1997. From January of 1993 to August of 1997, Mr. Foringer served as the Director of Information Services for Del Taco, Inc. of Laguna Hills, California.

    G. Michael Gent has served as Vice President of Corporate Development of Sonic Restaurants, Inc. since November of 1997. From May of 1996 until joining the Company, Mr. Gent served as Vice President of Business Development of Calido Chile Traders Systems, Inc. in Merriam, Kansas. A petition under the Federal bankruptcy laws was filed by Calido Chile Traders Systems, Inc. in October of 1997. From September of 1995 until May of 1996, Mr. Gent provided consulting services for multiple unit franchisors and franchisees. From March of 1992 until September of 1995, he served as Vice President for Franchise Development of Taco John's International, Inc., in Cheyenne, Wyoming.

    Mitchell W. Gregory has served as Vice President of Brand Development for Sonic Industries Inc. since August of 1999. Mr. Gregory served as an Area Vice President of Brand Development for Sonic Industries Inc. from September of 1998 until August of 1999. From June of 1995 until September of 1998, Mr. Gregory was Director of Market Research and was also Director of Field Marketing from September of 1997 until September of 1998 for Sonic Industries Inc. From June of 1994 until joining Sonic Industries Inc., Mr. Gregory was a Market Development Representative for Pepsico, Inc. in Oklahoma City, Oklahoma.

    Terry D. Harryman has served as Controller of the Company since January of 1999. From October of 1996 until January of 1999, Mr. Harryman served as Director of Tax of the Company. From January of 1998 until January of 1999, Mr. Harryman also served as Assistant Treasurer of the Company. Mr. Harryman has served as Assistant Treasurer of Sonic Industries Inc. and Sonic Restaurants, Inc. since October of 1996. From May of 1988 until October of 1996, he was with Kerr-McGee Corporation, and served as Senior Research Tax Accountant just prior to joining Sonic.

    Jill M. Hudson has served as Vice President of Human Resources and Corporate Administration of the Company since November of 1998. From June of 1996 until joining the Company, Ms. Hudson served as a Regional Human Resources Manager of McDonald's Corporation. From June of 1993 until June of 1996, she served as a Regional Human Resources Supervisor of McDonald's.

    Stanley S. Jeska has served as Vice President of Franchise Development of Sonic Industries Inc. since July of 1996 and also served in that capacity from September of 1993 until August of 1994. Mr. Jeska served as Vice President of Corporate Development for Sonic Restaurants, Inc. from August of 1994 until July of 1996.

    Keith O. Jossell has served as Treasurer of the Company since August of 1999. From June of 1997 until August of 1999, Mr. Jossell served as Assistant Treasurer of the Company. From January of 1996 until May of 1997, Mr. Jossell was employed by the Company in the positions of Financial Analyst, Treasury Analyst, then Treasury Manager. From August of 1993 until October of 1995, Mr. Jossell was the Senior Treasury Analyst for Brinker International, in Dallas, Texas.

    Norman R. Kaufman has served as Vice President of Operations Services for Sonic Restaurants, Inc. since September of 1998. From July of 1997 to September of 1998, Mr. Kaufman served as a Regional Vice President of Sonic Industries, Inc. From June of 1993 until joining the Company, he served as the President, Chief Operating Officer, and Director of Sobik's Subs, Inc. in Orlando, Florida.

    Kris J. Miotke has served as Vice President of Advertising and Sales of Sonic Industries Inc. since February of 1998. From November of 1996 until joining the Company, Mr. Miotke served as Vice President, General Manager of Kragie/Newell, an advertising agency in St. Louis, Missouri. From November of 1993 until February of 1996, Mr. Miotke served as Director of Advertising and Promotions for Popeye's Chicken & Biscuits in Atlanta, Georgia.

    Michael A. Perry has served as Vice President of Franchise Services of Sonic Industries Inc. since September 1, 1998. Mr. Perry served as the Vice President of Operations Services of Sonic Restaurants, Inc. from March of 1998 until August of 1998. From October of 1994 until joining the Company, Mr. Perry was a Region Vice President for Au Bon Pain Co., Inc. in Chicago, Illinois. From February of 1993 until October of 1994, Mr. Perry served as the Senior Director of Operations for Taco Bell Corp., Division of Pepsico, in Elmhurst, Illinois.

    Andrew G. Ritger, Jr. has served as Vice President of Purchasing of Sonic Industries Inc. since January of 1996. From May of 1993 until joining the Company, Mr. Ritger served as Vice President of Purchasing of Fast Food Merchandisers, Inc., a subsidiary of Hardees, Inc. of Rocky Mount, North Carolina.

    Nancy L. Robertson has served as Vice President of Corporate Communications of the Company since April of 1999. Ms. Robertson served as Senior Director of Corporate Communications of the Company from September of 1997 until April of 1999. From September of 1994 until August of 1997, Ms. Robertson was Director of Corporate Communications of the Company. Ms. Robertson joined the Company as Manager of Corporate Communications in August of 1993.

    Stephen C. Vaughan has served as Vice President of Planning and Analysis of the Company since January of 1999 and as a Vice President of the Company since August of 1997. Mr. Vaughan was Controller of the Company from January of 1996 to January of 1999. Mr. Vaughan joined the Company in March of 1992 as an internal auditor and became Assistant Controller of the Company in March of 1993.

    David A.Vernon has served as Vice President of Franchise Sales for Sonic Industries Inc. since September of 1998. Mr. Vernon served as the Director of Franchise Sales for Sonic Industries from December of 1996 until August of 1998. From January of 1996 until December of 1996, Mr. Vernon was the Franchise Development Manager for Brinker International, Inc., Dallas, Texas. From February of 1990 until January of 1996, Mr. Vernon was the Director of Franchise Sales for Pizza Inn, Inc., Dallas, Texas.

    Frank B. Young, Jr. has served as Vice President of Operations of Sonic Restaurants, Inc. since October of 1994. From April of 1989 until joining the Company, Mr. Young served as the President and sole shareholder of Wendco, Inc. of Madison, Wisconsin, a business consulting firm.

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.

Quarter Ended	High		Low		Quarter Ended	High		Low
November 30, 1997	$	19.172	$	14.672	November 30, 1998	$	19.625	$	12.000
February 28, 1998	$	19.422	$	17.328	February 28, 1999	$	25.625	$	20.000
May 31, 1998	$	22.922	$	19.328	May 31, 1999	$	29.375	$	23.750
August 31, 1998	$	22.938	$	16.938	August 31, 1999	$	32.500	$	27.500

Stockholders

    As of November 10, 1999, the Company had 343 record holders of its common stock. As of that date, the Company had approximately 2,600 stockholders, including beneficial owners holding shares in street or nominee names.

Dividends

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

Item 6. Selected Financial Data

    The following table sets forth selected financial data regarding the financial condition and operating results of the Company. 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.

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

	Year ended August 31,
	1999			1998			1997		1996		1995
Income Statement Data:
Company-owned restaurant sales	$	210,419		$	182,011		$	152,739	$	120,700	$	91,438
Franchised restaurants:
Franchise fees		3,468			2,564			1,702		1,453		1,409
Franchise royalties		40,859			32,391			26,764		23,315		20,392
Other		2,861			2,141			2,813		5,662		10,521
Total revenues		257,607			219,107			184,018		151,130		123,760
Cost of restaurant sales		155,521			135,806			112,588		92,663		72,275
Selling, general and administrative		25,543			22,250			19,318		14,498		13,260
Depreciation and amortization		18,464			14,790			12,320		8,896		5,910
Minority interest in earnings of restaurants		8,623			7,904			7,558		4,806		3,259
Provision for impairment of long-lived assets		1,519			285			266		8,627		71
Special provision for litigation settlement		—			2,700			—		—		—
Other operating expenses		—			—			—		3,101		7,354
Total expenses		209,670			183,735			152,050		132,591		102,129
Income from operations		47,937			35,372			31,968		18,539		21,631
Net interest expense		4,278			2,750			1,558		476		1,414
Income before income taxes and cumulative effect of change in accounting	$	43,659		$	32,622		$	30,410	$	18,063	$	20,217
Income before cumulative effect of change in accounting	$	27,396		$	20,470		$	19,082	$	11,244	$	12,484
Cumulative effect of change in accounting, net of taxes and minority interest		—			681			—		—		—
Net income	$	27,396		$	19,789		$	19,082	$	11,244	$	12,484
Income per share before cumulative effect of change in accounting (1):
Basic	$	1.45		$	1.07		$	0.96	$	0.57	$	0.71
Diluted	$	1.41		$	1.03		$	0.95	$	0.56	$	0.70
Balance Sheet Data:
Working capital (deficit)	$	(7,743	)	$	(7,292	)	$	3,509	$	3,491	$	4,249
Property, equipment and capital leases, net		206,776			188,065			136,522		100,505		70,171
Total assets		256,677			233,180			184,841		147,444		105,331
Obligations under capital leases (including current portion)		8,048			8,379			9,183		9,808		6,274
Long-term debt (including current portion)		72,400			61,518			37,633		12,401		24,902
Stockholders' equity		149,755			132,011			118,174		109,683		63,357

(1)

Adjusted for a 3-for-2 stock split in 1998 and 1995.

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

    This Form 10-K 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 the Company's 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 the Company's working capital and cash generated from operating and financing activities for the Company's 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. The Company cautions 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 a highly competitive industry and the impact of changes in 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, the ability of the Company to manage the anticipated expansion and hire and train personnel, the financial viability of the Company's 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

    The Company derives its revenues primarily from Company-owned restaurant sales and royalty fees from franchisees. The Company also receives revenues from initial franchise fees, area development fees, the selling and leasing of signs and real estate, and from minority ownership positions in certain 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 the Company's franchising operations. The Company's revenues and expenses are directly affected by the number and sales volumes of Company-owned restaurants. The Company's revenues and, to a lesser extent, expenses are also affected by the number and sales volumes of franchised restaurants. Initial franchise fees 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 the Company's statements of income. The table also sets forth certain restaurant data for the periods indicated.

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

	Year ended August 31,
	1999			1998			1997
INCOME STATEMENT DATA:
Revenues:
Company-owned restaurant sales		81.7	%		83.0	%		83.0	%
Franchised restaurants:
Franchise fees		1.3			1.2			0.9
Franchise royalties		15.9			14.8			14.6
Other		1.1			1.0			1.5
		100.0	%		100.0	%		100.0	%
Costs and expenses:
Company-owned restaurants(1)		73.9	%		74.6	%		73.7	%
Selling, general and administrative		9.9			10.2			10.5
Depreciation and amortization		7.2			6.8			6.7
Minority interest in earnings of restaurants(1)		4.1			4.3			4.9
Provision for impairment of long-lived assets		.6			0.1			0.1
Special provision for litigation settlement		—			1.2			—
Income from operations		18.6			16.1			17.4
Net interest expense		1.7			1.3			0.8
Income before cumulative effect of change in accounting		10.6			9.3			10.4
Net income		10.6	%		9.0	%		10.4	%
RESTAURANT OPERATING DATA:
Company-owned restaurants:
Core markets		223			185			165
Developing markets		73			107			91
All markets(2)		296			292			256
Franchised restaurants(2)		1,715			1,555			1,424
Total		2,011			1,847			1,680
System-wide sales	$	1,588,498		$	1,333,877		$	1,142,636
Percentage increase(3)		19.1	%		16.7	%		16.0	%
Average sales per restaurant:
Company-owned	$	702		$	663		$	649
Franchise		842			775			720
System-wide		823			758			707
Change in comparable restaurant sales(4):
Company-owned restaurants:
Core markets		6.3	%		5.4	%		8.7	%
Developing markets		9.4			(2.5	)		(2.1	)
All markets		6.9			4.0			6.3
Franchise		8.3			6.9			8.5
System-wide		7.9			6.3			8.0

(1)

As a percentage of Company-owned restaurant sales.

(2)

Number of restaurants open at end of year (the allocation of Company-owned restaurants by core and developing markets differs from the table on page two because that table sets forth the numbers by state rather than by television market.)

(3)

Represents percentage increase from the comparable period in the prior year.

(4)

Represents percentage increase for restaurants open in both the reported and prior years.

    Comparison of Fiscal 1999 to Fiscal 1998.  Total revenues increased 17.6% to $257.6 million during fiscal year 1999 from $219.1 million in fiscal year 1998. Company-owned restaurant sales increased 15.6% to $210.4 million in fiscal year 1999 from $182.0 million in fiscal year 1998. Of the $28.4 million increase in Company-owned restaurant sales, $18.3 million was due to the net addition of 40 Company-owned restaurants since the beginning of fiscal 1998. Average sales increases of approximately 6.9% by stores open throughout the full reporting periods of fiscal 1999 and 1998 accounted for $10.1 million of the increase. One hundred thirty-nine franchise drive-ins opened in fiscal 1999 compared to 120 in fiscal 1998, with the contribution of franchise fee revenues increasing 35.3%. In addition to the larger store count, this increase resulted from a higher proportion of drive-ins opening under the current form of license agreement which requires a $30,000 franchise fee. Franchise royalties increased 26.1% to $40.9 million in fiscal 1999, compared to $32.4 million in fiscal 1998. Of the $8.5 million increase, approximately $4.5 million resulted from the franchise same-store sales growth of 8.3% in fiscal 1999. Approximately $0.6 million was due to the conversion of certain stores to new license agreements which became effective on January 1, 1999. The balance of the increase was attributable to additional franchise restaurants in operation.

    Restaurant cost of operations, as a percentage of Company-owned restaurant sales, was 73.9% in fiscal 1999, compared to 74.6% in fiscal 1998. Food and packaging costs decreased 100 basis points as a percentage of Company-owned restaurant sales, as a result of reduced discounting from standard menu pricing as well as overall lower unit costs, particularly lower ice cream mix costs. Payroll and other employee benefits, as a percentage of Company-owned restaurant sales, were down 40 basis points from fiscal 1998 due to lower pre-opening costs as a result of fewer company store openings and worker's compensation refunds received during the year. Margin improvements resulting from the leverage of operating at higher volumes were offset by an increase in the average wage rate resulting from unfavorable conditions in the labor market and an increase in the labor hours per store. The increase in labor hours resulted from the Company's continued efforts to provide superior customer service.

    The increase in other operating expenses resulted from higher marketing expenditures, increased landscaping and repair costs associated with the Sonic 2000 retrofit, and higher repair and maintenance costs resulting from the outsourcing of point-of-sale support which was handled internally during fiscal 1998. The increase in marketing expenditures reflects the Company's commitment to increased media efficiency through its system of advertising cooperatives. As a result of the increase in restaurant operating margins, minority interest in earnings of restaurants increased 9.1% to $8.6 million in fiscal year 1999, compared to $7.9 million in fiscal 1998. Many of the managers and supervisors of Company-owned restaurants own a minority interest in the restaurants, and their compensation flows through the minority interest in earnings of restaurants.

    Selling, general and administrative expenses, as a percentage of total revenues, decreased to 9.9% in fiscal 1999, compared with 10.2% in fiscal 1998. Management expects selling, general and administrative expenses, as a percentage of revenues, to continue to decline in future periods because of a declining rate of increase in the number of corporate employees and because the Company expects a significant portion of future revenue growth to 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 the Company's franchising operations since most of these expenses are reflected in restaurant cost of operations and minority interest in restaurant operations. Depreciation and amortization expense increased 24.8% or $3.7 million in fiscal 1999 resulting primarily from new drive-in development and retrofits of existing restaurants. Management expects this trend to decrease reflecting the slower rate of growth in company stores as well as the impact of sold stores.

    During fiscal year 1999, four drive-ins became impaired under the guidelines of FAS 121—"Accounting for the Impairment of Long-Lived Assets." Two additional drive-ins were written down due to accessibility and expiring lease issues. As a result, a provision for impairment of long-lived assets of $1.5 million was recorded for the drive-ins' carrying cost in excess of the present value of estimated future cash flows.

    Income from operations increased 25.9% to $47.9 million in fiscal year 1999 from $38.1 million in fiscal year 1998 (excluding a $2.7 million special provision for litigation settlement recorded in fiscal 1998).

    Net interest expense in fiscal 1999 increased to $4.3 million from $2.7 million in fiscal 1998. This increase was the result of additional borrowings to fund share repurchases of $13.0 million and capital expenditures of $46.0 million. The Company expects interest expense to increase in the 8% to 10% range during fiscal year 2000 depending on the level of future share repurchases.

    Provision for income taxes reflects an effective federal and state tax rate of 37.25% for fiscal 1999 and 1998. Net income increased 23.6% to $27.4 million in fiscal 1999 compared to $22.2 million in fiscal 1998, excluding the special provision for litigation settlement and before the cumulative effect of accounting change. Diluted earnings per share increased to $1.41 per share in fiscal 1999, compared to $1.12 per share before cumulative effect of accounting change and the special provision for litigation settlement in fiscal 1998, for an increase of 25.9%.

    Comparison of Fiscal 1998 to Fiscal 1997.  Total revenues increased 19.1% to $219.1 million in fiscal 1998 from $184.0 million in fiscal 1997. Company-owned restaurant sales increased 19.2% to $182.0 million in fiscal 1998 from $152.7 million in fiscal 1997. Of the $29.3 million increase in Company-owned restaurant sales, $24.2 million was due to the net addition of 61 Company-owned restaurants since the beginning of fiscal 1997. Average sales increases of approximately 4.0% by stores open the full reporting periods of fiscal 1998 and fiscal 1997 accounted for $5.1 million of the increase. Franchise fee revenues increased to $2.6 million during fiscal 1998 as compared to $1.7 million during fiscal 1997, primarily resulting from the opening of 120 new franchise restaurants in fiscal 1998 compared to 92 in fiscal 1997. Franchise royalties increased 21.0% to $32.4 million in fiscal 1998 compared to $26.8 million in fiscal 1997. Increased sales by comparable franchised restaurants resulted in an increase in royalties of approximately $3.1 million and resulted from the franchise same store sales growth of 6.9% over fiscal 1997. Additional franchise restaurants in operation resulted in an increase in royalties of $2.5 million. The decrease in other revenues of approximately $0.7 million resulted primarily from the fiscal year 1997 gain on the sale of the Company's minority interest in 10 restaurants.

    Restaurant cost of operations, as a percentage of Company-owned restaurant sales, was 74.6% in fiscal 1998, compared to 73.7% in fiscal 1997. The reported decline in operating margins resulted primarily from the Company's adoption of a new accounting standard, SOP 98-5, which requires that pre-opening and other start-up costs be expensed as incurred. The Company previously capitalized such costs and amortized them over 12 months. Implementation of the standard resulted in the reclassification of expenses from depreciation and amortization into restaurant cost of operations. The following table sets out the pro forma operating margins for fiscal 1998 and 1997 as if the Company had adopted the new standard as of the beginning of fiscal 1997.

	Year ended
	August 31, 1998		August 31, 1997
Pro forma margin analysis:
Company-owned restaurants:
Food and packaging	27.6	%	28.6	%
Payroll and other employee benefits	28.7		28.3
Other operating expenses	18.3		17.6
	74.6	%	74.5	%

    The following discussion is based on the pro forma margin analysis. Management believes the decrease in food and packaging costs resulted from the negotiation of more favorable contracts with suppliers, a reduction in promotional discounting from standard menu prices and a continued shift in product mix toward higher margin items such as drinks and ice cream. The increase in payroll and other employee benefit costs resulted primarily from an increase in the hourly wage rate related to a minimum wage increase which was effective September 1, 1997 without a corresponding increase in pricing. The increase in other operating expenses resulted primarily from increased marketing expenditures, which reflects the Company's commitment to increased media penetration through its system of advertising cooperatives. Minority interest in earnings of restaurants decreased, as a percentage of Company-owned restaurant sales, to 4.3% in fiscal 1998 versus 4.9% in fiscal 1997. This decrease reflected the minority partners' share of depreciation expense associated with the roll-out of a point-of-sale system.

    Selling, general and administrative expenses, as a percentage of total revenues, decreased to 10.2% in fiscal 1998 compared with 10.5% in fiscal 1997. Management expects selling, general and administrative expenses to decline in future periods, as a percentage of total revenues, because the Company plans to add fewer corporate employees, as a percentage of the existing corporate employee base, than in previous periods. This strategy is expected to result in revenues growing at a higher rate than selling, general and administrative expenses. Depreciation and amortization expense increased approximately $2.5 million due to the purchase of buildings and equipment for new restaurants, retrofit expenditures for existing restaurants and information systems upgrades.

    The Company recorded a $2.7 million special provision for litigation settlement in the third fiscal quarter of 1998 as a result of the denial by the Supreme Court of the State of Texas of the Company's appeal of a decision by the Texas Court of Appeals in a real estate related lawsuit. See Note 16 of the Notes to Consolidated Financial Statements.

    Income from operations increased to $35.4 million from $32.0 million in fiscal 1997. Excluding the special provision for litigation settlement discussed above, income from operations increased 19.1% to $38.1 million.

    Net interest expense increased to $2.8 million in fiscal 1998 from $1.6 million in fiscal 1997. This increase was the result of additional borrowings to partially fund the Company's capital additions of $67.0 million and share repurchases of $10.0 million. The Company expects interest expense to continue to increase in fiscal 1999.

    Provision for income taxes reflects an effective federal and state tax rate of 37.25% for fiscal 1998 and 1997. Net income, excluding the special provision for litigation settlement and before the cumulative effect of the change in accounting for pre-opening costs, increased 16.2%. Net income per diluted share increased 17.9% over fiscal 1997, excluding the cumulative effect of the accounting change and the special provision for litigation settlement.

Liquidity and Sources of Capital

    During fiscal 1999, the Company opened 37 newly-constructed restaurants and sold a net of 32 restaurants to franchisees. The Company funded the total capital additions for fiscal 1999 of $46.0 million, which included the cost of newly-opened restaurants, retrofits of existing restaurants, restaurants under construction, new equipment for existing restaurants, and other capital expenditures, from cash generated by operating activities and through borrowings under the Company's line of credit. During fiscal 1999, the Company purchased the real estate for 35 of the 37 newly-constructed restaurants. The Company expects to own the land and building for most of its future newly-constructed restaurants. The Company's board of directors expanded the share repurchase program during fiscal 1999, increasing the funds authorized for the repurchase of the Company's common stock from $10 million to $32 million. The Company repurchased approximately 472 thousand shares of common stock at an aggregate cost of $13.0 million during the year. As of August 31, 1999, the Company's total cash balance of $1.6 million reflected the impact of the cash generated from operating activities, borrowing activity, and capital expenditures mentioned above.

    The Company has an agreement with a group of banks which provides the Company with a $60 million line of credit expiring in July of 2001. The Company will use the line of credit to finance the opening of newly-constructed restaurants, retrofit of existing restaurants, acquisitions of existing restaurants, purchases of the Company's common stock and for other general corporate purposes. As of August 31, 1999, the Company's outstanding borrowings under the line of credit were $22.0 million, as well as $0.3 million in outstanding letters of credit. The available line of credit as of August 31, 1999, was $37.7 million.

    The Company plans capital expenditures of $50 to $55 million in fiscal 2000, excluding potential acquisitions and share repurchases. These capital expenditures primarily relate to the development of additional Company-owned restaurants, retrofit and remodeling of Company-owned restaurants, and enhancements to existing financial and operating information systems, including refinement of a point-of-sale system. The Company expects to fund these capital expenditures through borrowings under its existing unsecured revolving credit facility and cash flow from operations. As of August 31, 1999, the Company had several restaurants under construction. The estimated cost to complete construction of these restaurants was $4.2 million. The Company believes that existing cash and funds generated from internal operations, as well as borrowings under the line of credit, will meet the Company's needs for the foreseeable future.

Year 2000

    Description.  The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded computer chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations which could disrupt the Company's normal business activities.

    To date, the Company has established a plan to prepare its systems for the Year 2000 issue as well as to reasonably assure that its critical business partners are prepared. The phases of the Company's plan to resolve the Year 2000 issue involve awareness, assessment, remediation, testing and implementation. To date, the Company has completed its assessment of all internal systems that could be significantly affected by the Year 2000 issue. Based upon its assessment, the Company has determined that it will be required to modify or replace portions of its software primarily related to customized interfaces between its financial systems and other applications. The Company believes that with modifications or replacements of the identified software programs, the Year 2000 issue can be mitigated. However, if all additional phases of the Year 2000 plan are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company as set forth under Risks and Contingency Plans.

    Status.  The Company's internal information technology exposures are primarily related to financial and management information systems. As of August 31, 1999, the Company had completed the remediation of existing custom developed software and had completed the necessary replacement of certain package software with Year 2000 compliant versions. As of August 31, 1999, the Company had completed its testing and had implemented all necessary remediated applications.

    The Company's non-information technology systems consist primarily of restaurant operating equipment including its point-of-sale systems. While the Company believes the primary functionality of its point-of-sale systems is not impacted by the Year 2000 issue, the assessment of these systems has indicated that an upgrade to a Windows NT operating system will be necessary to address certain ancillary reporting functions. As of November 15, 1999, the Company had substantially completed the upgrade to the Windows NT operating system in the Company-owned stores. The remainder of the point-of-sale systems in the Company-owned stores will be upgraded by November 30, 1999.

    Significant Third Parties.  The Company's significant third party business partners consist of suppliers, banks, and its franchisees. The Company does not have any significant system interfaces with third parties. An inventory of significant suppliers and distributors has been completed and letters mailed requesting information regarding each party's Year 2000 compliance status. Additionally, the Company has met with approximately 15 key suppliers and distributors to discuss their Year 2000 readiness. The Company's process of developing contingency plans with each of its key suppliers was completed September 30, 1999.

    Letters were sent to all relationship banks before January 1, 1999 requesting an update on their Year 2000 compliance status. Review and evaluation of responses is complete. Based on the banks' information provided to Sonic, management of Sonic believes all relationship banks have adequately addressed Year 2000 concerns.

    A Year 2000 information manual and certain other correspondence has been sent to all franchisees explaining the Year 2000 issue and associated business risks. The Company will continue its efforts to raise awareness and inform franchisees of the risks posed by the Year 2000 through its regional meeting processes and continued correspondence.

    Costs.  The Company's Year 2000 plan encompasses the use of both internal and external resources to identify, remediate, test and implement systems for Year 2000 readiness. External resources include contract resources which will be used to supplement available internal resources. The total cost of the Year 2000 project, excluding non-incremental internal personnel costs, is estimated at $500 thousand and is being funded by operating cash flows. As of August 31, 1999, the Company had incurred costs of approximately $413 thousand, of which $342 thousand has been expensed and $71 thousand has been capitalized.

    Risks and Contingency Plans.  Management of the Company believes it has an effective plan in place to address the Year 2000 issue in a timely manner. However, due to the forward-looking nature and lack of historical experience with Year 2000 issues, it is difficult to predict with certainty what will happen after December 31, 1999. Despite the Year 2000 remediation efforts being made, it is likely that there will be disruptions and unexpected business problems during the early months of 2000. The Company has made diligent efforts to assess the Year 2000 readiness of its significant business partners and has developed contingency plans for critical areas where it believes its exposure to Year 2000 risk is the greatest. However, despite the Company's efforts, it may encounter unanticipated third party failures, more general public infrastructure failures or a failure to successfully conclude its remediation efforts as planned. If the Company's efforts to mitigate Year 2000 exposures are not successful, in addition to the implications noted above, the Company may be required to utilize manual processing of certain otherwise automated processes primarily related to partner compensation and cash management. Any one of these unforeseen events could have a material adverse impact on the Company's results of operations, financial condition or cash flows in 1999 and beyond. Additionally, the inability of franchisees to remit royalty payments on a timely basis could have a material adverse effect on the Company. The amount of potential loss cannot be reasonably estimated at this time.

Impact of Inflation

    Though increases in labor, food or other operating costs could adversely affect the Company's operations, management does not believe that inflation has had a material effect on income during the past several years.

Seasonality

    The Company does not expect seasonality to affect its operations in a materially adverse manner. The Company's results during its 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

    The Company's exposure to interest rate risk currently consists of its Senior Notes, outstanding line of credit and notes receivable. The Senior Notes bear interest at fixed rates which average 6.7%. The aggregate balance outstanding under the Senior Notes as of August 31, 1999 was $50.0 million. Should interest rates increase or decrease, the estimated fair value of these notes would decrease or increase, respectively. As of August 31, 1999, the carrying amount of the Senior Notes exceeded the estimated fair value by approximately $1.5 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 $22 million as of August 31, 1999. The Company has made certain loans to its store operating partners and franchisees totaling $7.6 million as of August 31, 1999. The interest rates on these notes are generally between ten and eleven percent. The Company believes the fair market value of these notes approximates their carrying amount. The impact on the Company's results of operations of a one-point interest rate change on the outstanding balances under the Senior Notes, line of credit and notes receivable as of August 31, 1999, would be immaterial.

    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, the Company has not committed to purchase any minimum quantities under these arrangements. The Company does not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost and any commodity price aberrations 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.

PART III

    Except for the information on the Company's executive officers set forth under Item 4A of Part I of this report, the Company hereby incorporates by reference the information required by Part III of this report from the definitive proxy statement which the Company must file with the Securities and Exchange Commission in connection with the Company's annual meeting of stockholders following the fiscal year ended August 31, 1999.

PART IV

Item 14. 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 14:

	Pages
Report of Independent Auditors	F-1
Consolidated Balance Sheets at August 31, 1999 and 1998	F-2
Consolidated Statements of Income for each of the three years in the period ended August 31, 1999	F-4
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended August 31, 1999	F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1999	F-6
Notes to Consolidated Financial Statements	F-8

Financial Statement Schedules

    The Company has included the following schedule immediately following this Item 14:

	Page
Schedule II—Valuation and Qualifying Accounts	F-29

    The Company has omitted all other schedules because the conditions requiring their filing do not exist or because the required information appears in the Company'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 (*).

3.01.	Certificate of Incorporation of the Company, which the Company hereby incorporates by reference from Exhibit 3.1 to the Company's Form S-1 Registration Statement No. 33-37158.
3.02.	Bylaws of the Company, which the Company hereby incorporates by reference from Exhibit 3.2 to the Company's Form S-1 Registration Statement No. 33-37158.
3.03.	Certificate of Designations of Series A Junior Preferred Stock, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company's Form 8-K filed on June 17, 1997.
3.04.	Rights Agreement, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company's Form 8-K filed on June 17, 1997.
4.01.	Specimen Certificate for Common Stock.
4.02.	Specimen Certificate for Rights, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company's Form 8-K filed on June 17, 1997.
10.01.	Form of Sonic Industries Inc. License Agreement (the Number 4 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.1 to the Company's Form S-1 Registration Statement No. 33-37158.
10.02.	Form of Sonic Industries Inc. License Agreement (the Number 5 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.2 to the Company's Form S-1 Registration Statement No. 33-37158.
10.03.	Form of Sonic Industries Inc. License Agreement (the Number 4.2 License Agreement and Number 5.1 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.03 to the Company's Form 10-K for the fiscal year ended August 31, 1994.
10.04.	Form of Sonic Industries Inc. License Agreement (the Number 6 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.04 to the Company's Form 10-K for the fiscal year ended August 31, 1994.
10.05.	Form of Sonic Industries Inc. License Agreement (the Number 6A License Agreement), which the Company hereby incorporates by reference from Exhibit 10.05 to the Company's Form 10-K for the fiscal year ended August 31, 1998.
10.06.	Form of Sonic Industries Inc. License Agreement (the Number 5.2 License Agreement), which the Company hereby incorporates by reference from Exhibit 10.06 to the Company's Form 10-K for the fiscal year ended August 31, 1998.
10.07.	Form of Sonic Industries Inc. Area Development Agreement, which the Company hereby incorporates by reference from Exhibit 10.05 to the Company's Form 10-K for the fiscal year ended August 31, 1995.
10.08.	Form of Sonic Industries Inc. Sign Lease Agreement, which the Company hereby incorporates by reference from Exhibit 10.4 to the Company's Form S-1 Registration Statement No. 33-37158.
10.09.	Form of General Partnership Agreement, Limited Liability Company Operating Agreement, Partnership Master Agreement, and Limited Liability Company Master Agreement, which the Company hereby incorporates by reference from Exhibit 10.07 to the Company's Form 10-K for the fiscal year ended August 31, 1997.

10.10.	1991 Sonic Corp. Stock Option Plan, which the Company hereby incorporates by reference from Exhibit 10.5 to the Company's Form S-1 Registration Statement No. 33-37158.*
10.11.	1991 Sonic Corp. Stock Purchase Plan, which the Company hereby incorporates by reference from Exhibit 10.6 to the Company's Form S-1 Registration Statement No. 33-37158.*
10.12.	1991 Sonic Corp. Directors' Stock Option Plan, which the Company hereby incorporates by reference from Exhibit 10.08 to the Company's Form 10-K for the fiscal year ended August 31, 1991.*
10.13.	Sonic Corp. Savings and Profit Sharing Plan, which the Company hereby incorporates by reference from Exhibit 10.8 to the Company's Form S-1 Registration Statement No. 33-37158.*
10.14.	Net Revenue Incentive Plan, which the Company hereby incorporates by reference from Exhibit 10.19 to the Company's Form S-1 Registration Statement No. 33-37158.*
10.15.	Form of Indemnification Agreement for Directors, which the Company hereby incorporates by reference from Exhibit 10.7 to the Company's Form S-1 Registration Statement No. 33-37158.*
10.16.	Form of Indemnification Agreement for Officers, which the Company hereby incorporates by reference from Exhibit 10.14 to the Company's Form 10-K for the fiscal year ended August 31, 1995.*
10.17.	Sonic Corp. 1995 Stock Incentive Plan, which the Company hereby incorporates by reference from Exhibit 10.15 to the Company's Form 10-K for the fiscal year ended August 31, 1996.*
10.18.	Form of Employment Agreement, which the Company hereby incorporates by reference from the Company's Form 10-K for the fiscal year ended August 31, 1997.
10.19.	Loan Agreement with Texas Commerce Bank National Association dated July 31, 1995, which the Company hereby incorporates by reference from Exhibit 10.26 to the Company's Form 10-K for the fiscal year ended August 31, 1995.
10.20.	First Amendment to Loan Agreement with Texas Commerce Bank National Association, which the Company hereby incorporates by reference from Exhibit 10.18 to the Company's Form 10-K for the fiscal year ended August 31, 1996.
10.21.	Second Amendment to Loan Agreement with Texas Commerce Bank National Association, which the Company hereby incorporates by reference from Exhibit 10.19 to the Company's Form 10-K for the fiscal year ended August 31, 1996.
10.22.	Third Amendment to Loan Agreement with Texas Commerce Bank National Association, which the Company hereby incorporates by reference from Exhibit 10.01 to the Company's Form 10-Q for the fiscal quarter ended May 31, 1997.
10.23.	Fourth Amendment to the Loan Agreement with Chase Bank of Texas, N.A. (formerly known as Texas Commerce Bank National Association), which the Company hereby incorporates by reference from Exhibit 10.21 to the Company's 10-Q for the fiscal quarter ended May 31, 1998.
10.24.	Fifth Amendment to the Loan Agreement with Chase Bank of Texas, N.A. (formerly known as Texas Commerce Bank National Association), which the Company hereby incorporates by reference from Exhibit 10.22 to the Company's 10-Q for the fiscal quarter ended May 31, 1998.
10.25.	Sixth Amendment to the Loan Agreement with Chase Bank of Texas, N.A. (formerly known as Texas Commerce Bank National Association).

10.26.	Note Purchase Agreement dated April 1, 1998, which the Company hereby incorporates by reference from Exhibit 10.23 to the Company's 10-Q for the fiscal quarter ended May 31, 1998.
10.27.	Form of 6.652% Senior Notes, Series A, due April 1, 2003, which the Company hereby incorporates by reference from Exhibit 10.24 to the Company's 10-Q for the fiscal quarter ended May 31, 1998.
10.28.	Form of 6.759% Senior Notes, Series B, due April 1, 2003, which the Company hereby incorporates by reference from Exhibit 10.24 to the Company's 10-Q for the fiscal quarter ended May 31, 1998.
21.01.	Subsidiaries of the Company, which the Company hereby incorporates by reference from Exhibit 21.01 to the Company's Form 10-K for the fiscal year ended August 31, 1996.
23.01.	Consent of Independent Auditors.
24.01.	Power of Attorney.
27.01.	Financial Data Schedule.

Reports on Form 8-K

    The Company did not file any reports on Form 8-K during its last fiscal quarter ended August 31, 1999.

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, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1999. Our audits also included the financial statement schedule listed in Item 14. 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 generally accepted auditing standards. 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, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 1999, in conformity with generally accepted accounting principles. 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.

    As discussed in Note 1 to the accompanying consolidated financial statements, in fiscal year 1998 Sonic Corp. changed its method of accounting for pre-opening and other start-up costs by adopting Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."

ERNST & YOUNG LLP

Oklahoma City, Oklahoma
October 15, 1999

Sonic Corp.

Consolidated Balance Sheets

	August 31,
	1999		1998
	(In Thousands)
Assets
Current assets:
Cash and cash equivalents	$	1,612	$	2,602
Accounts and notes receivable, net		7,652		7,587
Refundable income taxes		—		2,413
Net investment in direct financing and sales-type leases		645		1,092
Inventories		1,460		1,363
Deferred income taxes		567		506
Prepaid expenses and other		640		976
Total current assets		12,576		16,539
Notes receivable, net		5,871		3,579
Net investment in direct financing and sales-type leases		5,795		3,494
Property, equipment and capital leases, net		206,776		188,065
Intangibles and other assets, net		25,659		21,503
Total assets	$	256,677	$	233,180

Sonic Corp.

Consolidated Balance Sheets (continued)

	August 31,
	1999			1998
	(In Thousands)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	5,104		$	10,740
Deposits from franchisees		813			883
Accrued liabilities		13,564			11,140
Obligations under capital leases due within one year		769			950
Long-term debt due within one year		69			118
Total current liabilities		20,319			23,831
Obligations under capital leases due after one year		7,279			7,429
Long-term debt due after one year		72,331			61,400
Other noncurrent liabilities		4,489			4,704
Deferred income taxes		2,504			3,805
Commitments and contingencies (Notes 4, 7, 8, 15, and 16)
Stockholders' equity:
Preferred stock, par value $.01; 1,000,000 shares authorized; none outstanding		—			—
Common stock, par value $.01; 40,000,000 shares authorized; shares issued 20,746,462 in 1999 and 20,554,213 in 1998		207			206
Paid-in capital		67,212			63,866
Retained earnings		116,851			89,455
		184,270			153,527
Treasury stock, at cost; 2,164,376 shares in 1999 and 1,692,370 shares in 1998		(34,515	)		(21,516	)
Total stockholders' equity		149,755			132,011
Total liabilities and stockholders' equity	$	256,677		$	233,180

See accompanying notes.

Sonic Corp.

Consolidated Statements of Income

	Year ended August 31,
	1999			1998			1997
	(In Thousands, Except Per Share Data)
Revenues:
Company-owned restaurant sales	$	210,419		$	182,011		$	152,739
Franchised restaurants:
Franchise fees		3,468			2,564			1,702
Franchise royalties		40,859			32,391			26,764
Other		2,861			2,141			2,813
		257,607			219,107			184,018
Costs and expenses:
Company-owned restaurants:
Food and packaging		56,048			50,179			43,661
Payroll and other employee benefits		59,490			52,310			42,508
Other operating expenses		39,983			33,317			26,419
		155,521			135,806			112,588
Selling, general and administrative		25,543			22,250			19,318
Depreciation and amortization		18,464			14,790			12,320
Minority interest in earnings of restaurants		8,623			7,904			7,558
Provision for impairment of long-lived assets		1,519			285			266
Special provision for litigation settlement		—			2,700			—
		209,670			183,735			152,050
Income from operations		47,937			35,372			31,968
Interest expense		5,047			3,446			2,154
Interest income		(769	)		(696	)		(596	)
Net interest expense		4,278			2,750			1,558
Income before income taxes and cumulative effect of change in accounting		43,659			32,622			30,410
Provision for income taxes		16,263			12,152			11,328
Income before cumulative effect of change in accounting		27,396			20,470			19,082
Cumulative effect of change in accounting, net of income taxes of $404,000 (Note 1)		—			681			—
Net income	$	27,396		$	19,789		$	19,082
Basic income per share:
Income before cumulative effect of change in accounting	$	1.45		$	1.07		$	.96
Cumulative effect of change in accounting		—			(.04	)		—
Net income per share—basic	$	1.45		$	1.03		$	.96
Diluted income per share:
Income before cumulative effect of change in accounting	$	1.41		$	1.03		$	.95
Cumulative effect of change in accounting		—			(.03	)		—
Net income per share—diluted	$	1.41		$	1.00		$	.95

See accompanying notes.

Sonic Corp.

Consolidated Statements of Stockholders' Equity

	Common Stock								Treasury Stock
				Paid-in Capital			Retained Earnings
	Shares	Amount							Shares	Amount
	(In Thousands)
Balance at August 31, 1996	13,475	$	135	$	59,107		$	50,584	8	$	(143	)
Exercise of common stock options	57		—		784			—	—		—
Purchase of treasury stock	—		—		—			—	799		(11,375	)
Net income	—		—		—			19,082	—		—
Balance at August 31, 1997	13,532		135		59,891			69,666	807		(11,518	)
Exercise of common stock options	187		2		2,690			—	—		—
Tax benefit related to employee stock options	—		—		1,356			—	—		—
Purchase of treasury stock	—		—		—			—	414		(9,998	)
Three-for-two stock split, including $2,000 paid in cash for fractional shares	6,835		69		(71	)		—	471		—
Net income	—		—		—			19,789	—		—
Balance at August 31, 1998	20,554		206		63,866			89,455	1,692		(21,516	)
Exercise of common stock options	192		1		2,367			—	—		—
Tax benefit related to employee stock options	—		—		979			—	—		—
Purchase of treasury stock	—		—		—			—	472		(12,999	)
Net income	—		—		—			27,396	—		—
Balance at August 31, 1999	20,746	$	207	$	67,212		$	116,851	2,164	$	(34,515	)

See accompanying notes.

Sonic Corp.

Consolidated Statements of Cash Flows

	Year ended August 31,
	1999			1998			1997
	(In Thousands)
Cash flows from operating activities
Net income	$	27,396		$	19,789		$	19,082
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting		—			681			—
Depreciation		16,673			13,218			10,099
Amortization		1,791			1,572			2,221
(Gains) losses on dispositions of assets		885			(282	)		(1,491	)
Amortization of franchise and development fees		(3,468	)		(2,564	)		(1,702	)
Franchise and development fees collected		3,548			2,771			1,768
Provision (benefit) for deferred income taxes, net of $404,000 credit in 1998		(1,362	)		2,643			2,950
Provision for impairment of long-lived assets		1,519			285			266
Other		63			60			24
(Increase) decrease in operating assets:
Accounts and notes receivable		726			(632	)		(5	)
Refundable income taxes		2,413			76			(2,489	)
Inventories and prepaid expenses and other		(457	)		(309	)		62
Increase (decrease) in operating liabilities:
Accounts payable		(5,636	)		6,105			1,709
Accrued and other liabilities		3,266			3,633			1,649
Total adjustments		19,961			27,257			15,061
Net cash provided by operating activities		47,357			47,046			34,143
Cash flows from investing activities
Purchases of property and equipment		(45,711	)		(66,982	)		(48,048	)
Investments in direct financing leases		(3,937	)		(1,624	)		(935	)
Collections on direct financing leases		2,423			1,244			922
Proceeds from dispositions of assets		5,630			1,745			3,025
Increase in intangibles and other assets		(6,014	)		(1,697	)		(3,455	)
Net cash used in investing activities		(47,609	)		(67,314	)		(48,491	)

(Continued on following page)

Sonic Corp.

Consolidated Statements of Cash Flows (continued)

	Year ended August 31,
	1999			1998			1997
	(In Thousands)
Cash flows from financing activities
Proceeds from long-term borrowings	$	105,750		$	105,500		$	59,750
Payments on long-term debt		(94,868	)		(81,615	)		(34,542	)
Purchases of treasury stock		(12,999	)		(9,998	)		(11,375	)
Payments on capital lease obligations		(989	)		(1,041	)		(641	)
Exercises of stock options		2,368			2,692			784
Other		—			(2	)		—
Net cash provided by (used in) financing activities		(738	)		15,536			13,976
Net decrease in cash and cash equivalents		(990	)		(4,732	)		(372	)
Cash and cash equivalents at beginning of the year		2,602			7,334			7,706
Cash and cash equivalents at end of the year	$	1,612		$	2,602		$	7,334
Supplemental cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized)	$	4,814		$	2,271		$	2,067
Income taxes (net of refunds)		12,876			8,030			11,942
Additions to capital lease obligations		879			249			569
Accounts and notes receivable and decrease in capital lease obligations from property and equipment sales		3,685			1,330			—
Tax benefit related to employee stock options		979			1,356			—

See accompanying notes.

Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 1999, 1998 and 1997

(In Thousands, Except Share Data)

1. Summary of Significant Accounting Policies

Operations

    Sonic Corp. (the "Company") operates and franchises a chain of quick-service drive-in restaurants in the United States. In addition, the Company leases restaurant signs. The Company grants credit to its operating partners and its franchisees, all of whom are in the restaurant business. Substantially all of the notes receivable and direct financing leases are collateralized by real estate or equipment.

Principles of Consolidation

    The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned, Company-operated restaurants, organized principally as general partnerships. All significant intercompany accounts and transactions have been eliminated. Investments in minority-owned restaurants, organized principally as general partnerships, and other minority investments are accounted for under the equity method and are included in other assets.

Use of Estimates

    The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and contingent assets and liabilities disclosed in the financial statements and accompanying notes. Actual results may differ from those estimates, and such differences may be material to the financial statements.

Inventories

    Inventories consist principally of food and supplies which are carried at the lower of cost (first-in, first-out basis) or market and used restaurant equipment held for sale which is carried at the lower of weighted average cost or market.

Property, Equipment and Capital Leases

    Property and equipment are recorded at cost, and leased assets under capital leases are recorded at the present value of future minimum lease payments. Depreciation of property and equipment and amortization of capital leases are computed by the straight-line method over the estimated useful lives or initial terms of the leases, respectively.

Accounting for Long-Lived Assets

    The Company reviews long-lived assets, identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company has determined that an individual restaurant is the level at which this review will be applied. The Company's primary test for an indicator of potential impairment is operating losses. If an indication of impairment is determined to be present, the Company estimates the future cash flows expected to be generated from the use of the asset and its eventual disposal. If the sum of undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. The fair value of the asset is measured by calculating the present value of estimated future cash flows using a discount rate equivalent to the rate of return the Company expects to achieve from its investment in newly-constructed restaurants.

    Long-lived assets and identifiable intangibles held for disposal are carried at the lower of depreciated cost or fair value less cost to sell. Fair values are estimated based upon appraisals or other independent assessments of the assets' estimated sales values. During the period in which assets are being held for disposal, depreciation and amortization of such assets are not recognized.

Pre-Opening Costs

    Prior to fiscal year 1998, the Company capitalized certain direct costs associated with opening new restaurants and amortized these costs over the first twelve months of restaurant operations. Effective September 1, 1997, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that pre-opening and other start-up costs be expensed as incurred. The cumulative effect of adopting SOP 98-5 resulted in a charge to operations for the unamortized balance of pre-opening and other start-up costs as of August 31, 1997 of $681 or $.03 per share (diluted), net of income tax effects of $404 and minority interest of $248.

Intangibles and Other Assets

    Trademarks, trade names and goodwill are amortized on the straight-line method over periods not exceeding forty years. Franchise agreements, other intangibles and deferred costs included in other assets are amortized on the straight-line method over the expected period of benefit, not exceeding fifteen years.

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. Royalties from franchise operations are recognized in income as earned.

Advertising Costs

    Costs incurred in connection with advertising and promotion of the Company's products are expensed as incurred. Such costs amounted to $11,146, $9,340, and $6,983, for fiscal years 1999, 1998 and 1997, respectively.

Cash Equivalents

    Cash equivalents consist of highly liquid investments with a maturity of three months or less from date of purchase.

2. Net Income Per Share

    The following table sets forth the computation of basic and diluted earnings per share:

	Year ended August 31,
	1999		1998		1997
Numerator:
Net income	$	27,396	$	19,789	$	19,082
Denominator:
Weighted average shares outstanding—basic		18,848,378		19,107,369		19,851,970
Effect of dilutive employee stock options		618,431		631,048		304,083
Weighted average shares—diluted		19,466,809		19,738,417		20,156,053
Net income per share—basic		$1.45		$1.03		$.96
Net income per share—diluted		$1.41		$1.00		$.95
Anti-dilutive employee stock options excluded		124,909		86,828		310,913

3. Impairment of Long-Lived Assets

    As of August 31, 1999 and 1998, the Company had identified certain underperforming restaurants whose operating results indicated that certain assets of these restaurants might be impaired. The buildings and improvements of these restaurants had combined carrying amounts of $5,561 and $5,936, respectively. During fiscal year 1999, the Company performed quarterly analyses of these and other restaurants which had incurred operating losses. As a result of these analyses, the Company determined that certain restaurants with then-existing carrying amounts of $1,698 were impaired and wrote them down by $1,519 to their fair values. Management's estimate of undiscounted future cash flows indicates that the carrying amounts as of August 31, 1999 are expected to be recovered. However, it is reasonably possible that the estimate of undiscounted cash flows may change in the near future resulting in the need to write-down one or more of the identified assets to fair value. Certain restaurants held for disposal with carrying amounts of $611 and $857 were disposed of in fiscal years 1999 and 1998, respectively, with net proceeds to the Company of $362 and $870, respectively. The Company plans to dispose of remaining restaurants held for disposal during fiscal year 2000 and has estimated the sales value, net of related costs to sell, at approximately $475.

4. Restaurant Transactions With Related Party

    In March 1994, the Company entered into an agreement with a director and former officer of the Company in connection with his leaving the Company and returning to his career as a Sonic franchisee. As part of the agreement, the Company agreed to assist the director with obtaining development financing for up to six Sonic restaurants. Since March 1994, the Company has entered into certain agreements with the director and the director's lender which provide that in the event of a default by the director under the terms of the director's restaurant development loans (aggregating $1,710 as of August 31, 1999 and $3,197 as of August 31, 1998), the Company is required to purchase the collateral (shares of the Company's common stock and real estate related to Sonic restaurants) securing the director's loans at fair market value as specified in the repurchase agreements. At August 31, 1999, the Company's repurchase obligations under these agreements expire $609 in 2002 and $1,101 in 2004.

5. Accounts and Notes Receivable

    Accounts and notes receivable consist of the following at August 31, 1999 and 1998:

	1999		1998
Trade receivables	$	3,759	$	2,917
Notes receivable—current		1,573		2,523
Other		2,409		2,370
		7,741		7,810
Less allowance for doubtful accounts and notes receivable		89		223
	$	7,652	$	7,587
Notes receivable—noncurrent	$	6,062	$	3,701
Less allowance for doubtful notes receivable		191		122
	$	5,871	$	3,579

    As of August 31, 1999, notes receivable from one franchisee totaled $4,262.

6. Intangibles and Other Assets

    Intangibles and other assets consist of the following at August 31, 1999 and 1998:

	1999		1998
Trademarks, trade names, and goodwill	$	28,373	$	21,985
Franchise agreements		1,870		1,870
Other intangibles and other assets		4,239		5,545
		34,482		29,400
Less accumulated amortization		8,823		7,897
	$	25,659	$	21,503

    The net increase of $6,388 in goodwill during fiscal year 1999 resulted from purchases of interests in Company-owned restaurants.

7. Leases

Description of Leasing Arrangements

    The Company's leasing operations consist principally of leasing certain land, buildings and equipment (including signs) and subleasing certain buildings to franchise operators. The land portions of these leases are classified as operating leases and expire over the next twenty years. The buildings and equipment portions of these leases are classified principally as direct financing or sales-type leases and expire principally over the next ten years. These leases include provisions for contingent rentals which may be received on the basis of a percentage of sales in excess of stipulated amounts. Income is not recognized on contingent rentals until sales exceed the stipulated amounts. Some leases contain escalation clauses over the lives of the leases. Most of the leases contain one to four renewal options at the end of the initial term for periods of five years. These options enable the Company to retain use of properties in desirable operating areas.

    Certain Company-owned restaurants lease land and buildings from third parties. These leases, which expire over the next twenty years, include provisions for contingent rentals which may be paid on the basis of a percentage of sales in excess of stipulated amounts. The land portions of these leases are classified as operating leases and the buildings portions are classified as capital leases.

Direct Financing and Sales-type Leases

    Components of net investment in direct financing and sales-type leases are as follows at August 31, 1999 and 1998:

	1999		1998
Minimum lease payments receivable	$	10,800	$	6,425
Less unearned income		4,360		1,839
Net investment in direct financing and sales-type leases		6,440		4,586
Less amount due within one year		645		1,092
Amount due after one year	$	5,795	$	3,494

    Minimum lease payments receivable for each of the five years after August 31, 1999 are $1,451 in 2000, $1,390 in 2001, $1,309 in 2002, $1,213 in 2003, $1,079 in 2004 and $4,358 thereafter. Initial direct costs incurred in the negotiation and consummation of direct financing and sales-type lease transactions have not been material. Accordingly, no portion of unearned income has been recognized to offset those costs.

    Other revenues include $371, $140, and $143 for fiscal years 1999, 1998, and 1997, respectively, related to income from sign lease transactions that have been accounted for as sales-type leases.

Capital Leases

    Components of obligations under capital leases are as follows at August 31, 1999 and 1998:

	1999		1998
Total minimum lease payments	$	13,020	$	13,434
Less amount representing interest		4,972		5,055
Present value of net minimum lease payments		8,048		8,379
Less amount due within one year		769		950
Amount due after one year	$	7,279	$	7,429

    Maturities of these obligations under capital leases, including interest averaging 12% in fiscal years 1999 and 1998, and future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year are as follows:

	Operating		Capital
Year ending August 31:
2000	$	2,679	$	1,583
2001		2,649		1,439
2002		2,552		1,361
2003		1,949		1,301
2004		1,866		1,192
Thereafter		11,203		6,144
		22,898		13,020
Less amount representing interest		—		4,972
	$	22,898	$	8,048

    Total minimum lease payments do not include contingent rentals on capital leases which have not been material.

    Total rent expense for all operating leases consists of the following:

	Year ended August 31,
	1999			1998			1997
Minimum rentals	$	3,573		$	3,323		$	3,035
Contingent rentals		134			159			93
Less: Sublease rentals		(176	)		(134	)		(103	)
	$	3,531		$	3,348		$	3,025

8.  Property, Equipment and Capital Leases

    Property, equipment and capital leases consist of the following at August 31, 1999 and 1998:

	1999		1998
Home office:
Land and leasehold improvements	$	1,482	$	1,355
Computer and other equipment		20,420		19,156
Restaurants, including those leased to others:
Land		57,066		49,149
Buildings (including property held for disposition)		100,357		85,928
Equipment		67,084		60,812
Property and equipment, at cost		246,409		216,400
Less accumulated depreciation		45,838		34,496
Property and equipment, net		200,571		181,904
Leased restaurant buildings and equipment under capital leases, including those held for sublease		10,222		10,035
Less accumulated amortization		4,017		3,874
Capital leases, net		6,205		6,161
Property, equipment and capital leases, net	$	206,776	$	188,065

    Property and equipment include land, buildings and equipment with a carrying amount of $27,731 at August 31, 1999 which were leased under operating leases to franchisees or other parties. The accumulated depreciation related to these buildings and equipment was $2,327 at August 31, 1999.

    Property, equipment and capital leases also include assets held for disposal or sublease with aggregate net carrying amounts, exclusive of certain carrying costs reflected in liabilities, of $475 at August 31, 1999 and $265 at August 31, 1998.

    As of August 31, 1999, the Company had restaurants under construction with costs to complete which aggregated $4,200.

9.  Accrued Liabilities

    Accrued liabilities consist of the following at August 31, 1999 and 1998:

	1999		1998
Wages and other employee benefits	$	2,881	$	2,009
Income taxes payable		2,558		1,201
Taxes, other than income taxes		4,332		4,002
Accrued carrying costs for restaurant closings and disposals		398		291
Accrued interest		1,476		1,243
Annual convention deposits		124		933
Other		1,795		1,461
	$	13,564	$	11,140

10.  Long-Term Debt

    Long-term debt consists of the following at August 31, 1999 and 1998:

	1999		1998
Senior unsecured notes (A)	$	50,000	$	50,000
Borrowings under line of credit (B)		22,000		11,000
Other		400		518
		72,400		61,518
Less long-term debt due within one year		69		118
Long-term debt due after one year	$	72,331	$	61,400

(A)

In April 1998, the Company completed a private placement of $50,000 of senior unsecured notes with $20,000 of Series A notes maturing in 2003 and $30,000 of Series B notes maturing in 2005. Interest is payable semi-annually and accrues at 6.65% for the Series A notes and 6.76% for the Series B notes. The related agreement requires, among other things, the Company to maintain equity of a specified amount, maintain ratios of debt to total capital and fixed charge coverage and limits additional borrowings.

(B)

The Company has an agreement (as amended) with a group of banks which provides for a $60,000 line of credit, including a $2,000 sub-limit for letters of credit, expiring in July 2001. The agreement allows for annual renewal options, subject to approval by the banks. The Company uses the line of credit to finance the opening of newly-constructed restaurants, acquisition of existing restaurants and for general corporate purposes. Borrowings under the line of credit are unsecured and bear interest at a specified bank's prime rate or, at the Company's option, LIBOR plus 0.50% to 1.25%. In addition, the Company pays an annual commitment fee ranging from .125% to .25% on the unused portion of the line of credit. As of August 31, 1999, the Company's effective borrowing rate was 6.3%. As of August 31, 1999 there were $300 in letters of credit outstanding under the line of credit. The agreement requires, among other things, the Company to maintain equity of a specified amount, maintain ratios of debt to EBITDA and fixed charge coverage and limits additional borrowings and acquisitions of businesses.

    Maturities of long-term debt for each of the five years after August 31, 1999 are $69 in 2000, $22,021 in 2001, $23 in 2002, $20,025 in 2003, $27 in 2004 and $30,235 thereafter.

11.  Other Noncurrent Liabilities

    Other noncurrent liabilities consist of the following at August 31, 1999 and 1998:

	1999		1998
Deferred area development fees	$	749	$	599
Minority interest in consolidated restaurants		3,093		2,841
Accrued carrying costs for restaurant closings and disposals		349		971
Other		298		293
	$	4,489	$	4,704

12.  Income Taxes

    The components of the provision for income taxes related to income before cumulative effect of change in accounting principle consists of the following:

	Year ended August 31,
	1999			1998		1997
Current:
Federal	$	16,448		$	9,010	$	8,070
State		1,177			95		308
		17,625			9,105		8,378
Deferred:
Federal		(1,184	)		2,614		2,847
State		(178	)		433		103
		(1,362	)		3,047		2,950
Provision for income taxes	$	16,263		$	12,152	$	11,328

    The provision for income taxes on income before cumulative effect of change in accounting principle differs from the amount computed by applying the statutory federal income tax rate due to the following:

	Year ended August 31,
	1999		1998			1997
Amount computed by applying a tax rate of 35%	$	15,281	$	11,418		$	10,643
State income taxes (net of federal income tax benefit)		650		343			267
Permanent differences in expenses for financial and income tax reporting purposes		156		(69	)		(69	)
Other		176		460			487
Provision for income taxes	$	16,263	$	12,152		$	11,328

    Deferred tax assets and liabilities consist of the following at August 31, 1999 and 1998:

	1999			1998
Deferred tax assets:
Allowance for doubtful accounts and notes receivable	$	107		$	132
Property, equipment and capital leases		412			—
Accrued litigation costs		315			332
Other		81			113
		915			577
Valuation allowance		—			—
Deferred tax assets		915			577
Less deferred tax liabilities:
Net investment in direct financing and sales-type leases, including differences related to capitalization and amortization		915			1,528
Investment in partnerships, including differences in capitalization and depreciation related to direct financing and sales-type leases and different year ends for financial and tax reporting purposes		1,779			1,563
Property, equipment and capital leases		—			360
Intangibles and other assets		135			422
Other		23			3
Deferred tax liabilities		2,852			3,876
Net deferred tax liabilities	$	(1,937	)	$	(3,299	)

13.  Stockholders' Equity

    On April 30, 1998, the Company's board of directors authorized a three-for-two stock split in the form of a stock dividend. A total of 6,835,095 shares of common stock were issued in connection with the split. The stated par value of each share was not changed from $.01. An aggregate amount equal to the par value of the common stock issued plus cash paid in lieu of fractional shares of $71 was reclassified from paid-in capital to common stock. All references in the accompanying consolidated financial statements to weighted average numbers of shares outstanding, per share amounts and Stock Purchase Plan, Stock Options and Stock Incentive Plan share data have been adjusted to reflect the stock split on a retroactive basis.

Stock Purchase Plan

    The Company has an employee stock purchase plan for all full-time regular employees. Employees are eligible to purchase shares of common stock each year through a payroll deduction not in excess of the lesser of 10% of compensation or $25. The aggregate amount of stock that employees may purchase each calendar year under this plan is limited to 225,000 shares. The purchase price will be between 85% and 100% of the stock's fair market value. Such price will be determined by the Company's board of directors.

Stock Options

    The Company has an Incentive Stock Option Plan (the "Incentive Plan") and a Directors' Stock Option Plan (the "Directors' Plan"). Under the Incentive Plan, the Company is authorized to grant options to purchase up to 2,805,000 shares of the Company's common stock to officers and key employees of the Company and its subsidiaries. Under the Directors' Plan, the Company is authorized to grant options to purchase up to 337,500 shares of the Company's common stock to the Company's outside directors. The exercise price of the options to be granted is equal to the fair market value of the Company's common stock on the date of grant. Unless otherwise provided by the Company's Stock Plan Committee, options under both plans become exercisable ratably over a three-year period or immediately upon change in control of the Company, as defined by the plans. All options expire at the earlier of termination of employment or ten years after the date of grant.

    The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing such stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

    Pro forma information regarding net income and net income per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its stock options granted subsequent to August 31, 1995 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal years 1999, 1998, and 1997, respectively: risk-free interest rates of 5.2%, 5.7%, and 6.3%; a dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 42.1%, 40.0%, and 39.9%; and a weighted average expected life of the options of five years.

    The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

    For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the years ended August 31 follows:

	1999		1998		1997
Pro forma net income	$	25,370	$	18,394	$	18,026
Pro forma net income per share-diluted	$	1.30	$	.93	$	.89

    Because Statement 123 is applicable only to options granted subsequent to fiscal year 1995, its pro forma effect was not fully reflected until fiscal year 1998.

    A summary of the Company's stock option activity (adjusted for the stock split), and related information for the years ended August 31 follows:

	1999			1998			1997
	Options		Weighted Average Exercise Price	Options		Weighted Average Exercise Price	Options		Weighted Average Exercise Price
Outstanding—beginning of year	1,764,727		$13.37	1,795,287		$11.40	1,522,375		$11.13
Granted	361,811		27.31	388,332		20.26	531,272		11.90
Exercised	(192,249	)	12.32	(256,910	)	10.48	(84,776	)	9.24
Forfeited	(79,861	)	16.69	(161,982	)	12.69	(173,584	)	11.64
Outstanding—end of year	1,854,428		$16.05	1,764,727		$13.37	1,795,287		$11.40
Exercisable at end of year	1,146,423		$12.13	970,851		$11.13	883,877		$10.50
Weighted average fair value of options granted during the year	$12.12			$8.87			$5.31

    A summary of the Company's options as of August 31, 1999 follows:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life (Yrs.)	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$ 6.67 to $10.08	414,747	4.7	$	9.05	372,273	$	8.93
$10.55 to $12.45	390,497	6.2		11.78	337,663		11.74
$12.83 to $17.69	413,937	7.0		14.21	349,079		13.77
$17.75 to $24.69	388,849	8.8		21.49	87,408		20.75
$29.00 to $30.56	246,398	9.7		29.12	—		—
$6.67 to $30.56	1,854,428	7.1	$	16.05	1,146,423	$	12.13

Stockholder Rights Plan

    In June 1997, the Company's board of directors adopted a stockholder rights plan (the "Rights Plan"). The Rights Plan is designed to deter coercive takeover tactics and to prevent a potential acquirer from gaining control of the Company without offering a fair price to all of the Company's stockholders. The rights were issued to stockholders of record as of June 27, 1997 and expire on June 16, 2007.

    The plan provided for the issuance of one common stock purchase right for each outstanding share of the Company's common stock. Each right initially entitles stockholders to buy one unit of a share of preferred stock for $85. The rights will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company's common stock. At August 31, 1999, 50,000 shares of preferred stock have been reserved for issuance upon exercise of these rights.

    If any person becomes the beneficial owner of 15% or more of the Company's common stock, other than pursuant to a tender or exchange offer for all outstanding shares of the Company approved by a majority of the independent directors not affiliated with a 15%-or-more stockholder, then each right not owned by a 15%-or-more stockholder or related parties will then entitle its holder to purchase, at the right's then current exercise price, shares of the Company's common stock having a value of twice the right's then current exercise price. In addition, if, after any person has become a 15%-or-more stockholder, the Company is involved in a merger or other business combination transaction with another person in which the Company does not survive or in which its common stock is changed or exchanged, or sells 50% or more of its assets or earning power to another person, each right will entitle its holder to purchase, at the right's then current exercise price, shares of common stock of such other person having a value of twice the right's then current exercise price. Unless a triggering event occurs, the rights will not trade separately from the common stock.

    The Company will generally be entitled to redeem the rights at $0.01 per right at any time until 10 days (subject to extension) following a public announcement that a 15% position has been acquired.

Stock Incentive Plan

    Under the Sonic Corp. 1995 Stock Incentive Plan (the "Stock Incentive Plan"), the Company may issue up to 180,000 shares of common stock to certain key employees. Participants in the Stock Incentive Plan receive awards of shares of restricted common stock (the "Restricted Stock"), subject to vesting only if the Company meets certain annual performance criteria. If the Company meets the performance criteria, the portion of the award tied to the criteria will vest. Until the Restricted Stock vests, an escrow agent holds the Restricted Stock. If the Company does not meet the performance criteria, the portion of the award tied to that criteria will not vest and the related shares are available for future awards. Upon vesting, the participant will have the right to receive certificates representing the shares of vested Restricted Stock.

    During fiscal year 1996, the Company awarded 130,500 shares of Restricted Stock which vest over a three-year period if specified performance goals are met (no shares were awarded in fiscal years 1999, 1998, and 1997). The Company did not meet the specified performance criteria in fiscal years 1999, 1998, and 1997 which resulted in 13,500 shares, 28,500 shares, and 36,000 shares, respectively, not vesting. In addition, 7,500 shares and 15,000 shares were forfeited in fiscal years 1998 and 1997, respectively, due to termination of employment. All of the awards of shares granted in 1996 pursuant to the Stock Incentive Plan have expired without vesting.

14.  Employee Benefit Plans

Savings and Profit Sharing Plan

    The Company has a Savings and Profit Sharing Plan (the "Plan"), as amended, for eligible employees. Employees who have completed one year of service with the Company are eligible to participate in the Plan. Under the Plan, participating employees may authorize payroll deductions up to 11% of their earnings. The Company may elect to contribute a percentage of participants' contributions to the Plan. Additional amounts may be contributed at the option of the Company's board of directors. Company contributions are subject to vesting at the rate of 20% each year upon completion of two years of service, with 100% vesting after six years. Matching contributions of $166, $184, and $142 were made by the Company during fiscal years 1999, 1998 and 1997, respectively. For fiscal year 1999, a discretionary contribution of $200 was recognized as expense ($100 and $75 for fiscal years 1998 and 1997, respectively).

Net Revenue Incentive Plan

    The Company has a Net Revenue Incentive Plan (the "Incentive Plan"), as amended, which applies to certain members of management and is at all times discretionary with the Company's board of directors. If certain predetermined earnings goals are met, the Incentive Plan provides that a predetermined percentage of the employee's salary may be paid in the form of a bonus. The Company recognized as expense incentive bonuses of $1,398, $1,137, and $804 during fiscal years 1999, 1998 and 1997, respectively.

15.  Employment Agreements

    The Company has employment contracts with its President and several members of its senior management. These contracts provide for use of Company automobiles or related allowances, medical, life and disability insurance, annual base salaries, as well as an incentive bonus. These contracts also contain provisions for payments in the event of the termination of employment and provide for payments aggregating $4,095 at August 31, 1999 due to loss of employment in the event of a change in control (as defined in the contracts).

16.  Contingencies

    During fiscal year 1998, the Texas Supreme Court (the "Court") denied the Company's motion for rehearing of the application for a writ of error regarding the Texas Court of Appeals' reversal of the district court's judgment notwithstanding the verdict which reinstated the jury's verdict of $782 of actual damages, $1,000 of punitive damages, and interest in an action in which the plaintiffs claimed a subsidiary of the Company interfered with the contractual relations of the plaintiffs. The Court refused to exercise its discretionary jurisdiction to consider the decision of the Texas Court of Appeals. In connection with the denial, the Company recorded a $2,700 provision for litigation. The judgment was paid in full as of August 31, 1998.

    The Company has contingent liabilities for taxes, lawsuits and various other matters occurring in the ordinary course of business. Management of the Company believes that the ultimate resolution of these contingencies will not have a material adverse effect on the Company's financial position or results of operations. However, it is reasonably possible that the Company's assessment of these contingencies may change in the near future resulting in the need to provide for losses.

    The Company has entered into agreements with several lenders pursuant to which such lenders may make loans to qualified franchisees. Under the terms of these agreements, the Company provides certain guarantees of a portion of the outstanding balances of the loans to franchisees. At August 31, 1999, these guarantees totaled $3,461, none of which were in default.

17.  Selected Quarterly Financial Data (Unaudited)

	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Full Year
	1999		1998		1999		1998		1999		1998		1999		1998		1999		1998
Income statement data:
Company-owned restaurant sales	$	48,713	$	41,235	$	44,219	$	37,198	$	57,844	$	49,927	$	59,643	$	53,651	$	210,419	$	182,011
Franchised restaurants fees and royalties		10,232		8,342		9,319		7,005		10,991		8,691		13,785		10,917		44,327		34,955
Other		677		295		669		623		937		600		578		623		2,861		2,141
Total revenues		59,622		49,872		54,207		44,826		69,772		59,218		74,006		65,191		257,607		219,107
Company-owned restaurants operating expenses		37,695		31,109		34,037		28,269		40,991		36,073		42,798		40,355		155,521		135,806
Selling, general and administrative		5,444		5,048		5,940		5,274		6,850		5,977		7,309		5,951		25,543		22,250
Depreciation and amortization		4,416		3,463		4,638		3,566		4,719		3,739		4,691		4,022		18,464		14,790
Minority interest in earnings of restaurants		1,579		1,583		1,216		1,392		2,900		2,730		2,928		2,199		8,623		7,904
Provision for impairment of long-lived assets		16		15		403		14		604		166		496		90		1,519		285
Special provision for litigation		—		—		—		—		—		2,700		—		—		—		2,700
Total expenses		49,150		41,218		46,234		38,515		56,064		51,385		58,222		52,617		209,670		183,735
Income from operations		10,472		8,654		7,973		6,311		13,708		7,833		15,784		12,574		47,937		35,372
Interest expense, net		1,022		619		1,123		631		1,099		665		1,034		835		4,278		2,750
Income before income taxes and cumulative effect		9,450		8,035		6,850		5,680		12,609		7,168		14,750		11,739		43,659		32,622
Provision for income taxes		3,520		2,992		2,552		2,116		4,697		2,670		5,494		4,374		16,263		12,152
Income before cumulative effect		5,930		5,043		4,298		3,564		7,912		4,498		9,256		7,365		27,396		20,470
Cumulative effect of change in accounting		—		681		—		—		—		—		—		—		—		681
Net income	$	5,930	$	4,362	$	4,298	$	3,564	$	7,912	$	4,498	$	9,256	$	7,365	$	27,396	$	19,789
Income before cumulative effect per share:
Basic	$	.31	$	.26	$	.23	$	.19	$	.42	$	.23	$	.50	$	.39	$	1.45	$	1.07
Diluted	$	.31	$	.25	$	.22	$	.18	$	.40	$	.23	$	.48	$	.38	$	1.41	$	1.03
Net income per share:
Basic	$	.31	$	.23	$	.23	$	.19	$	.42	$	.23	$	.50	$	.39	$	1.45	$	1.03
Diluted	$	.31	$	.22	$	.22	$	.18	$	.40	$	.23	$	.48	$	.38	$	1.41	$	1.00
Weighted average shares outstanding:
Basic		18,880		19,113		18,944		19,179		18,908		19,231		18,661		18,907		18,848		19,107
Diluted		19,290		19,701		19,560		19,824		19,597		19,913		19,421		19,517		19,467		19,738

18.  Fair Values of Financial Instruments

    The following discussion of fair values is not indicative of the overall fair value of the Company's consolidated balance sheet since the provisions of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," do not apply to all assets, including intangibles.

    The following methods and assumptions were used by the Company in estimating its fair values of financial instruments:

Cash and cash equivalents—Carrying value approximates fair value.

Notes receivable—For variable rate loans with no significant change in credit risk since the loan origination, fair values approximate carrying amounts. Fair values for fixed rate loans are estimated using discounted cash flow analysis, using interest rates which would currently be offered for loans with similar terms to borrowers of similar credit quality and/or the same remaining maturities.

    As of August 31, 1999 and 1998, carrying values approximate their estimated fair values.

Borrowed funds—Fair values for fixed rate borrowings are estimated using a discounted cash flow analysis that applies interest rates currently being offered on borrowings of similar amounts and terms to those currently outstanding. Carrying values for variable rate borrowings approximate their fair values.

    The carrying amounts and estimated fair values of the Company's fixed rate borrowings at August 31, 1999 were $51,399 and $49,941, respectively, and at August 31, 1998 were $51,203 and $52,442, respectively.

Sonic Corp.

Schedule II—Valuation and Qualifying Accounts

Description	Balance at Beginning of Year		Additions Charged to Costs and Expenses		Amounts Written Off Against the Allowance		Recoveries		Balance at End of Year
	(In Thousands)
Allowance for doubtful accounts and notes receivable
Year ended:
August 31, 1999	$	345	$	111	$	176	$	—	$	280
August 31, 1998	$	273	$	72	$	—	$	—	$	345
August 31, 1997	$	263	$	125	$	115	$	—	$	273
Accrued carrying costs for restaurant closings and disposals
Year ended:
August 31, 1999	$	1,262	$	1,023	$	1,538	$	—	$	747
August 31, 1998	$	1,126	$	285	$	149	$	—	$	1,262
August 31, 1997	$	1,462	$	71	$	407	$	—	$	1,126

SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has caused the undersigned, duly-authorized, to sign this report on its behalf on this 23rd day of November, 1999.

SONIC CORP.

By:  /s/ J. CLIFFORD HUDSON

J. Clifford Hudson
President and Chief Executive Officer

    Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the undersigned have signed this report on behalf of the Company, in the capacities and on the dates indicated.

Signature	Title	Date
/s/ J. CLIFFORD HUDSON J. Clifford Hudson, Principal Executive Officer	President, Chief Executive Officer and Director	November 23, 1999
/s/ W. SCOTT MCLAIN W. Scott McLain, Principal Financial Officer	Vice President and Chief Financial Officer	November 23, 1999
/s/ TERRY D. HARRYMAN Terry D. Harryman, Principal Accounting Officer	Controller	November 23, 1999
/s/ E. DEAN WERRIES E. Dean Werries	Chairman of the Board and Director	November 23, 1999
/s/ DENNIS H. CLARK Dennis H. Clark	Director	November 23, 1999
/s/ KENNETH L. KEYMER Kenneth L. Keymer	Executive Vice President, Chief Operating Officer and Director	November 23, 1999
/s/ LEONARD LIEBERMAN Leonard Lieberman	Director	November 23, 1999
/s/ H. E. RAINBOLT H.E. Rainbolt	Director	November 23, 1999
/s/ FRANK E. RICHARDSON Frank E. Richardson	Director	November 23, 1999
/s/ ROBERT M. ROSENBERG Robert M. Rosenberg	Director	November 23, 1999

EXHIBIT INDEX

Exhibit Number and Description
4.01.	Specimen Certificate for Common Stock.
10.25.	Sixth Amendment to the Loan Agreement with Chase Bank of Texas, N.A.
23.01.	Consent of Independent Auditors
24.01.	Power of Attorney
27.01.	Financial Data Schedule

QuickLinks

PART I
Item 1. Business

Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 4A. Executive Officers of the Company
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
Item 6. Selected Financial Data

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K