SONIC CORP, 10-Q, 2000-07-14

SONIC CORP
10-Q, 2000-07-14
EATING PLACES

Previous: NAVISTAR FINANCIAL SECURITIES CORP, 8-K, EX-4.2, 2000-07-14

Next: SONIC CORP, 10-Q, EX-15.01, 2000-07-14

QuickLinks -- Click here to rapidly navigate through this document

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

FORM 10-Q

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2000

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 14(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission File Number 0-18859

SONIC CORP.
(Exact name of registrant as specified in its charter)

Delaware
(State of Incorporation)

73-1371046
(I.R.S. Employer
Identification No.)

		101 Park Avenue
		Oklahoma City, Oklahoma (Address of Principal Executive Offices)		73102 Zip Code

Registrant's telephone number, including area code: (405) 280-7654

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 requirement for the past 90 days.
Yes /x/ No / /

As of July 7, 2000, the Registrant had 17,548,618 shares of common stock issued and outstanding (excluding 3,302,176 shares of common stock held as treasury stock).

SONIC CORP.
Index

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets at May 31, 2000 and August 31, 1999	3
	Consolidated Statements of Income for the three months and nine months ended May 31, 2000 and 1999	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 2000 and 1999	5
	Notes to Condensed Consolidated Financial Statements	6
	Independent Accountants' Review Report	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	14
Item 2.	Changes in Securities	14
Item 3.	Defaults Upon Senior Securities	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
Item 5.	Other Information	14
Item 6.	Exhibits and Reports on Form 8-K	14

SONIC CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

			(Unaudited) May 31, 2000			August 31, 1999
ASSETS
Current assets:
	Cash and cash equivalents		$	1,209		$	1,612
	Accounts and notes receivable, net			9,631			7,652
	Other current assets			4,163			3,312

		Total current assets		15,003			12,576
Property, equipment and capital leases				277,916			256,631
Less accumulated depreciation and amortization				(60,170	)		(49,855	)

	Property, equipment and capital leases, net			217,746			206,776
Trademarks, trade names and other goodwill				29,264			28,373
Other intangibles and other assets				19,718			17,775
Less accumulated amortization				(9,876	)		(8,823	)

	Intangibles and other assets, net			39,106			37,325

		Total assets	$	271,855		$	256,677

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	5,898		$	5,104
	Deposits from franchisees			580			813
	Accrued liabilities			10,539			11,006
	Income taxes payable			280			2,558
	Obligations under capital leases and long-term debt due within one year			645			838

		Total current liabilities		17,942			20,319
Obligations under capital leases due after one year				6,900			7,279
Long-term debt due after one year				93,590			72,331
Other noncurrent liabilities				8,760			6,993
Contingencies (Note 2)
Stockholders' equity:
	Preferred stock, par value $.01; 1,000,000 shares authorized; none outstanding			—			—
	Common stock, par value $.01; 40,000,000 shares authorized; 20,820,367 shares issued (20,746,462 shares issued at August 31, 1999)			208			207
	Paid-in capital			68,593			67,212
	Retained earnings			138,648			116,851

				207,449			184,270
	Treasury stock, at cost; 3,246,676 common shares (2,164,376 shares at August 31, 1999)			(62,786	)		(34,515	)

		Total stockholders' equity		144,663			149,755

		Total liabilities and stockholders' equity	$	271,855		$	256,677

See accompanying notes.

SONIC CORP.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

			(Unaudited) Three months ended						(Unaudited) Nine months ended
			May 31, 2000			May 31, 1999			May 31, 2000			May 31, 1999
Revenues:
	Company-owned restaurant sales		$	60,390		$	57,844		$	160,195		$	150,776
	Franchised restaurants:
		Franchise royalties		12,153			10,148			33,380			27,941
		Franchise fees		761			843			2,338			2,601
	Other			991			937			2,656			2,283

				74,295			69,772			198,569			183,601
Cost and expenses:
	Company-owned restaurants:
		Food and packaging		15,744			15,085			41,984			40,987
		Payroll and other employee benefits		16,430			15,795			44,823			42,986
		Other operating expenses		10,706			10,111			30,444			28,750

				42,880			40,991			117,251			112,723
	Selling, general and administrative			7,090			6,850			20,308			18,234
	Depreciation and amortization			5,134			4,719			15,003			13,773
	Minority interest in earnings of restaurants			3,200			2,900			6,919			5,695
	Provision for impairment of long-lived assets			10			604			515			1,023

				58,314			56,064			159,996			151,448

Income from operations				15,981			13,708			38,573			32,153
Interest expense				1,746			1,301			4,588			3,751
Interest income				(292	)		(202	)		(751	)		(507	)

Net interest expense				1,454			1,099			3,837			3,244

Income before income taxes				14,527			12,609			34,736			28,909
Provision for income taxes				5,411			4,697			12,939			10,769

Net income			$	9,116			7,912		$	21,797			18,140

	Net income per share—basic		$	.52		$	.42		$	1.21		$	.96

	Net income per share—diluted		$	.50		$	.40		$	1.16		$	.93

See accompanying notes.

SONIC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

				(Unaudited) Nine months ended
				May 31, 2000			May 31, 1999
Cash flows from operating activities:
	Net income			$	21,797		$	18,140
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			15,003			13,773
		Other			1,369			1,035
		(Increase) decrease in operating assets			(2,259	)		2,208
		Decrease in operating liabilities			(2,180	)		(2,802	)

			Total adjustments		11,933			14,214

			Net cash provided by operating activities		33,730			32,354
Cash flows from investing activities:
	Purchases of property and equipment				(26,131	)		(36,520	)
	Proceeds from disposition of assets				833			3,890
	Increase in intangibles and other assets				(2,582	)		(4,786	)

			Net cash used in investing activities		(27,880	)		(37,416	)
Cash flows from financing activities:
	Payments on long-term borrowings				(79,394	)		(64,088	)
	Proceeds from long-term borrowings				100,605			74,500
	Proceeds from exercise of stock options				1,381			2,628
	Purchases of treasury stock				(28,271	)		(8,897	)
	Other				(574	)		(555	)

			Net cash provided by (used in) financing activities		(6,253	)		3,588

Net decrease in cash and cash equivalents					(403	)		(1,474	)
Cash and cash equivalents at beginning of period					1,612			2,602

Cash and cash equivalents at end of period				$	1,209		$	1,128

See accompanying notes.

SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1

The unaudited Condensed Consolidated Financial Statements include all adjustments, consisting of normal, recurring accruals (and those related to the provision for impairment of long-lived assets), which Sonic Corp. (the "Company") considers necessary for a fair presentation of the financial position and the results of operations for the indicated periods. The notes to the condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company's Form 10-K for the fiscal year ended August 31, 1999. The results of operations for the nine months ended May 31, 2000, are not necessarily indicative of the results to be expected for the full year ending August 31, 2000.

Note 2

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.

Note 3

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

		Three months ended				Nine months ended
		May 31, 2000		May 31, 1999		May 31, 2000		May 31, 1999
(In thousands, except per share data)
Numerator:
	Net income	$	9,116	$	7,912	$	21,797	$	18,140
Denominator:
	Weighted average shares outstanding—basic		17,667		18,908		18,088		18,911
	Effect of dilutive employee stock options		651		689		681		571

	Weighted average shares—diluted		18,318		19,597		18,769		19,482

Net income per share—basic		$	.52	$	.42	$	1.21	$	.96

Net income per share—diluted		$	.50	$	.40	$	1.16	$	.93

Note 4

In January 2000, the Company extended the maturity of its $60 million line of credit with a group of banks by one year to July 2002.

During fiscal 2000, outstanding borrowings on this line of credit have increased by $21.3 million to $43.3 million primarily due to the Company's share repurchase program (which during fiscal year 2000 has resulted in the acquisition of 1.1 million shares of the Company's common stock at an aggregate cost of $28.3 million) and its capital additions of $21.6 million. As of May 31, 2000, the Company has availability under the line of credit of $16.4 million, a portion of which may be utilized to fund future capital additions and repurchase shares of the Company's common stock. As of May 31, 2000, the company had $10.7 million in remaining availability under its share repurchase program.

Independent Accountants' Review Report

The Board of Directors
Sonic Corp.

We have reviewed the accompanying condensed consolidated balance sheet of Sonic Corp. as of May 31, 2000, and the related consolidated statements of income for the three-month and nine-month periods ended May 31, 2000 and 1999, and the condensed consolidated statements of cash flows for the nine-month periods ended May 31, 2000 and 1999. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Sonic Corp. as of August 31, 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated October 15, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of August 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

ERNST & YOUNG LLP

Oklahoma City, Oklahoma
June 21, 2000

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-Q 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, 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 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 also are affected by the number and sales volumes of franchised restaurants. Initial franchise fee revenues 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.

PERCENTAGE RESULTS OF OPERATIONS

			Three months ended						Nine months ended
			May 31, 2000			May 31, 1999			May 31, 2000			May 31, 1999
INCOME STATEMENT DATA:
Revenues:
	Company-owned restaurant sales			81.3	%		82.9	%		80.7	%		82.1	%
	Franchised restaurants:
		Franchise royalties		16.4			14.6			16.8			15.2
		Franchise fees		1.0			1.2			1.2			1.4
	Other			1.3			1.3			1.3			1.3

				100.0	%		100.0	%		100.0	%		100.0	%

Cost and expenses:
	Company-owned restaurants (1):
		Food and packaging		26.1	%		26.1	%		26.2	%		27.2	%
		Payroll and other employee benefits		27.2			27.3			28.0			28.5
		Other operating expenses		17.7			17.5			19.0			19.1

				71.0	%		70.9	%		73.2	%		74.8	%
	Selling, general and administrative			9.5			9.8			10.2			9.9
	Depreciation and amortization			6.9			6.8			7.6			7.5
	Minority interest in earnings of restaurants (1)			5.3			5.0			4.3			3.8
	Other			0.0			0.9			0.3			0.6
Income from operations				21.5			19.6			19.4			17.5
Net interest expense				2.0			1.6			1.9			1.8
Net income				12.3	%		11.3	%		11.0	%		9.9	%
RESTAURANT OPERATING DATA:
RESTAURANT COUNT (2):
	Company-owned restaurants:
		Core-markets		228			204			228			204
		Developing markets		78			108			78			108

		All markets		306			312			306			312
	Franchise restaurants			1,807			1,655			1,807			1,655

	System-wide restaurants			2,113			1,967			2,113			1,967

SALES DATA ($ in thousands):
System-wide sales			$	477,632		$	429,912		$	1,269,248		$	1,124,869
	Percentage increase (3)			11.1	%		19.5	%		12.8	%		19.0	%
Average sales per restaurant:
	Company-owned		$	199		$	188		$	538		$	502
	Franchise			234			231			633			614
	System-wide			229			223			617			594
Change in comparable restaurant sales (4):
	Company-owned restaurants:
		Core markets		1.0	%		6.6	%		2.6	%		6.6	%
		Developing markets		(0.3	)		9.2			(0.7	)		5.0
		All markets		0.7			7.3			1.9			6.2
	Franchise			2.3			8.8			3.4			9.0
	System-wide			2.0			8.5			3.2			8.2

(1): As a percentage of Company-owned restaurant sales.
(2): Number of restaurants open at end of period.
(3): Represents percentage increase from the comparable period in the prior year.
(4): Represents percentage increase (decrease) for restaurants open in both the current and prior year.

Comparison of the Third Fiscal Quarter of 2000 to the Third Fiscal Quarter of 1999.

Total revenues increased 6.5% to $74.3 million in the third fiscal quarter of 2000 from $69.8 million in the third fiscal quarter of 1999. Company-owned restaurant sales increased 4.4% to $60.4 million in the third fiscal quarter of 2000 from $57.8 million in the third fiscal quarter of 1999. Of the $2.6 million increase, $2.1 million was due to the net addition of 14 Company-owned restaurants since the beginning of fiscal 1999 ($6.6 million from the addition of 60 Company-owned restaurants since the beginning of fiscal 1999 less $4.5 million from 46 stores sold or closed since the beginning of fiscal 1999). Average sales increases of approximately 0.7% by stores open the full reporting periods of fiscal 2000 and 1999 accounted for $0.4 million of the increase. Franchise fees decreased 9.7% as 33 franchise drive-ins opened in the third fiscal quarter of 2000 compared to 35 in the same quarter of 1999. Franchise royalties increased 19.8% to $12.2 million in the third fiscal quarter of 2000, compared to $10.1 million in the third fiscal quarter of 1999. Of the $2.1 million increase, approximately $1.1 million resulted from franchise same-store sales growth of 2.3% over the third fiscal quarter of 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 71.0% in the third fiscal quarter of 2000, compared to 70.9% in the third fiscal quarter of 1999. Food and packaging costs were flat, as a percentage of Company-owned restaurant sales, as higher beef costs were offset by lower costs in other areas, particularly lower dairy costs. Payroll and employee benefits, as a percentage of Company-owned restaurant sales, declined 10 basis points from the third fiscal quarter of 1999 reflecting the leverage of operating at higher sales volumes which helped offset the impact of continued store level initiatives, including health insurance for certain store-level employees. Other operating expenses increased 20 basis points as a result of higher costs in several areas including repair and maintenance and property taxes. As a result of the increase in restaurant operating profit as well as initiatives implemented by the Company to strengthen its partnership program, minority interest in earnings of restaurants increased, as a percentage of Company-owned restaurant sales, to 5.3% in the third fiscal quarter of 2000, compared to 5.0% in the third fiscal quarter of 1999. Many of the managers and supervisors of Company-owned restaurants own a minority interest in the restaurants, and a substantial portion of their compensation flows through the minority interest in earnings of restaurants.

Selling, general and administrative expenses decreased, as a percentage of total revenues, to 9.5% in the third fiscal quarter of 2000, compared with 9.8% in the third fiscal quarter of 1999. Management expects selling, general and administrative expenses, as a percentage of revenues, 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 8.8% or $0.4 million in the third fiscal quarter of 2000 over the comparable quarter in 1999. The increase in depreciation resulted primarily from new drive-in development and retrofits of existing restaurants. However, the rate of increase in depreciation is significantly less than the prior year. Management expects a similar trend to continue reflecting the slower rate of growth in company stores as well as the impact of sold stores.

Income from operations increased 16.6% to $16.0 million in the third fiscal quarter of 2000 from $13.7 million in the third fiscal quarter of 1999 due primarily to the growth in revenues and other matters discussed above.

Net interest expense in the third fiscal quarter of 2000 increased $0.4 million over the third fiscal quarter of 1999. This increase was the result of additional borrowings to fund, in part, capital additions and stock repurchases. The Company expects interest expense to continue to increase in fiscal 2000 primarily due to share repurchases made during the first three quarters of fiscal 2000.

Provision for income taxes reflects an effective federal and state tax rate of 37.25% for the third fiscal quarter of 2000, consistent with the same period in fiscal 1999.

Net income increased 15.2% over the comparable period in 1999. Diluted earnings per share increased to $.50 per share in the third fiscal quarter of 2000, compared to $.40 per share in the third fiscal quarter of 1999, for an increase of 25.0%.

Comparison of the First Three Fiscal Quarters of 2000 to the First Three Fiscal Quarters of 1999.

Total revenues increased 8.2% to $198.6 million in the first three fiscal quarters of 2000 from $183.6 million in the first three fiscal quarters of 1999. Company-owned restaurant sales increased 6.2% to $160.2 million in the first three fiscal quarters of 2000 from $150.8 million in the first three fiscal quarters of 1999. Of the $9.4 million increase in Company-owned restaurant sales, $6.4 million was due to the net addition of 14 Company-owned restaurants since the beginning of fiscal 1999 ($17.8 million from the addition of 60 Company-owned restaurants since the beginning of fiscal 1999 less $11.4 million from 46 stores sold or closed since the beginning of fiscal 1999). Average sales increases of approximately 1.9% by stores open the full reporting periods of fiscal 2000 and 1999 accounted for $3.0 million of the increase. Franchise fee revenues decreased 10.1% in the first three fiscal quarters of 2000 as compared to the first three fiscal quarters of 1999 due primarily to the opening of 95 franchise stores in 2000 compared to 104 in the comparable period of 1999. Franchise royalties increased 19.5% to $33.4 million in the first three fiscal quarters of 2000, compared to $27.9 million in the first three fiscal quarters of 1999. Increased sales by comparable franchised restaurants resulted in an increase in royalties of approximately $2.7 million and resulted from franchise same-store sales growth of 3.4% over the first three fiscal quarters of 1999. Additional franchised restaurants in operation resulted in an increase in royalties of $2.8 million.

Restaurant cost of operations, as a percentage of Company-owned restaurant sales, was 73.2% in the first three fiscal quarters of 2000, compared to 74.8% in the first three fiscal quarters of 1999. Food and packaging costs as a percentage of restaurant sales, for the first nine months of fiscal 2000, decreased by 100 basis points from the similar period in fiscal 1999. The decrease was primarily the result of lower unit costs for several items, most notably dairy goods, which more than offset higher beef costs. The 50 basis point decrease in payroll and other employee benefits costs reflected the benefit of leveraging costs over higher volumes as well as the impact of the disposal of under performing restaurants during fiscal year 1999 which helped offset an increase in the average wage rate caused by a tight labor market, the planned increase in labor hours at the restaurant level to maintain prompt customer service, and the cost of providing medical benefits to store level employees. Other operating expenses, as a percentage of Company-owned restaurant sales, decreased by 10 basis points due to the leveraging of fixed costs over higher volumes, and the disposition of under performing stores. Minority interest in earnings of restaurants increased, as a percentage of Company-owned restaurant sales, to 4.3% in the first three fiscal quarters of 2000 as a result of the improvement in restaurant-level margins. 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, increased to 10.2% in the first three fiscal quarters of 2000, compared with 9.9% in the first three fiscal quarters of 1999. The increase was the result of a large number of open positions in the first two quarters of fiscal 1999 that were subsequently filled. Management expects selling, general and administrative expenses, as a percentage of revenues, to decline in future periods 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 approximately $1.2 million due to the purchase of buildings and equipment for new and existing restaurants as well as retrofit of existing stores.

Income from operations increased 20.0% to $38.6 million from $32.2 million in the first three fiscal quarters of 1999 due primarily to the growth in revenues and other matters discussed above.

Net interest expense in the first three fiscal quarters of 2000 increased $0.6 million compared to the comparable fiscal quarters of 1999 due to increased borrowings to fund, in part, capital additions and stock repurchases.

Provision for income taxes reflects an effective federal and state tax rate of 37.25% for the first three fiscal quarters of 2000, consistent with the comparable period in fiscal 1999.

Net income for the first three fiscal quarters of 2000 increased 20.2% to $21.8 million, compared to $18.1 million in the comparable period of fiscal 1999. Diluted earnings per share increased to $1.16 per share in the first three fiscal quarters of 2000, compared to $.93 per share in the first three fiscal quarters of 1999, for an increase of 24.7%.

Liquidity and Sources of Capital

During the first nine months of fiscal 2000, the Company opened 17 newly-constructed restaurants and acquired two existing restaurants from franchisees. The Company funded the total capital additions for the first three fiscal quarters of 2000 of $26.1 million (which included the cost of newly-opened restaurants, retrofits of existing restaurants, restaurants under construction, new equipment for existing restaurants, and other general expenditures) from cash generated by operating activities and through borrowings under the Company's line of credit. During the nine months ended May 31, 2000, the Company purchased the real estate on 14 of the 17 newly-constructed restaurants. The Company expects to own the land and building for most of its future newly-constructed restaurants. During the first three quarters of fiscal 2000, the Company repurchased 1.1 million shares of common stock at an aggregate cost of $28.3 million. On May 9, 2000, the Company's board of directors increased the funds authorized for the repurchase of the Company's common stock from $52 million to $62 million. As of May 31, 2000, the Company's total cash balance of $1.2 million reflected the impact of the cash generated from operating activities, borrowing activity, and 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 2002. 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 May 31, 2000, the Company's outstanding borrowings under the line of credit were $43.3 million, as well as $0.3 million in outstanding letters of credit. The available line of credit as of May 31, 2000, was $16.4 million.

The Company plans total capital expenditures of approximately $35 to $40 million in fiscal 2000, excluding potential acquisitions. 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 enhancement 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. 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.

Impact of Year 2000

In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation, replacement and testing of existing software. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. As of May 31, 2000, the Company had

expensed approximately $0.4 million in connection with the remediation and replacement of its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout calendar year 2000 to ensure that any latent Year 2000 matters that arise are addressed promptly.

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 May 31, 2000 was $50 million. Should interest rates increase or decrease, the estimated fair value of these notes would decrease or increase, respectively. As of May 31, 2000, the carrying amount of the Senior Notes exceeded the estimated fair value by approximately $2.3 million as a result of the interest rates on the Company's Senior Notes being below current market rates. 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 $43.3 million as of May 31, 2000. The Company has made certain loans to its store operating partners and franchisees totaling $8.9 million as of May 31, 2000. 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 May 31, 2000 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.

PART II

Item 1. Legal Proceedings

During the fiscal quarter ended May 31, 2000, Sonic Corp. (the "Company") did not have any new material legal proceedings brought against it, its subsidiaries or their properties. In addition, no material developments occurred in connection with any previously reported legal proceedings against the Company, its subsidiaries or their properties during the last fiscal quarter.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

Exhibits. The Company has filed the following exhibits with this report:

15.01. Letter re: Unaudited Interim Financial Information.

27.01. Financial Data Schedules

Form 8-K Reports. The Company did not file any Form 8-K reports during the fiscal quarter ended May 31, 2000.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Company has caused the undersigned, duly authorized, to sign this report on behalf of the Company.