SONIC AUTOMOTIVE INC - Quarter Report: 2010 March (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

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

Commission file number 1-13395

 

SONIC AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		56-2010790 (I.R.S. Employer Identification No.)

6415 Idlewild Road, Suite 109, Charlotte, North Carolina (Address of principal executive offices)		28212 (Zip Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file).
Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o     No þ

As of April 28, 2010, there were 40,574,059 shares of Class A Common Stock and 12,029,375 shares of Class B Common Stock outstanding.

 

 

INDEX TO FORM 10-Q

		Page
PART I — FINANCIAL INFORMATION			3
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)			3
Condensed Consolidated Statements of Income — Quarter ended March 31, 2009 and March 31, 2010			3
Condensed Consolidated Balance Sheets — December 31, 2009 and March 31, 2010			4
Condensed Consolidated Statement of Stockholders’ Equity — Three-month period ended March 31, 2010			5
Condensed Consolidated Statements of Cash Flows — Three-month period ended March 31, 2009 and March 31, 2010			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			35
ITEM 4. Controls and Procedures			36
PART II — OTHER INFORMATION			37
ITEM 1. Legal Proceedings			37
ITEM 1A. Risk Factors			38
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
ITEM 6. Exhibits			41
SIGNATURES			44

PART I — FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands except per share amounts)
(Unaudited)

		First Quarter Ended
		March 31,
		2009				2010
Revenues:
New vehicles		$	704,717			$	784,242
Used vehicles			329,209				423,610
Wholesale vehicles			37,796				31,384
Total vehicles			1,071,722				1,239,236
Parts, service and collision repair			271,641				279,370
Finance, insurance and other			35,135				40,959
Total revenues			1,378,498				1,559,565
Cost of Sales:
New vehicles			(657,899	)			(729,731	)
Used vehicles			(298,251	)			(390,121	)
Wholesale vehicles			(37,889	)			(32,076	)
Total vehicles			(994,039	)			(1,151,928	)
Parts, service and collision repair			(136,992	)			(138,946	)
Total cost of sales			(1,131,031	)			(1,290,874	)
Gross profit			247,467				268,691
Selling, general and administrative expenses			(205,920	)			(224,310	)
Impairment charges			(57	)			(44	)
Depreciation and amortization			(7,625	)			(8,501	)
Operating income			33,865				35,836
Other income (expense):
Interest expense, floor plan			(5,198	)			(4,942	)
Interest expense, other, net			(18,252	)			(17,189	)
Interest expense, non-cash, convertible debt			(2,619	)			(1,677	)
Interest expense, non-cash, cash flow swaps			—				(1,683	)
Other income, net			50				62
Total other expense			(26,019	)			(25,429	)
Income from continuing operations before taxes			7,846				10,407
Income tax provision			(3,531	)			(4,475	)
Income from continuing operations			4,315				5,932
Discontinued operations:
Loss from operations and the sale of discontinued franchises			(3,675	)			(2,868	)
Income tax benefit			1,038				1,090
Loss from discontinued operations			(2,637	)			(1,778	)
Net income		$	1,678			$	4,154
Basic earnings per share:
Earnings per share from continuing operations		$	0.11			$	0.11
Loss per share from discontinued operations			(0.07	)			(0.03	)
Earnings per share		$	0.04			$	0.08
Weighted average common shares outstanding			40,099				51,889
Diluted earnings per share:
Earnings per share from continuing operations		$	0.11			$	0.11
Loss per share from discontinued operations			(0.07	)			(0.03	)
Earnings per share		$	0.04			$	0.08
Weighted average common shares outstanding			40,338				52,579

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

						(Unaudited)
		December 31,				March 31,
		2009				2010
ASSETS
Current Assets:
Cash and cash equivalents		$	30,035			$	214,063
Receivables, net			232,969				211,594
Inventories			795,275				830,255
Assets held for sale			12,167				11,672
Other current assets			14,937				18,492
Total Current Assets			1,085,383				1,286,076
Property and Equipment, net			382,085				382,375
Goodwill			469,482				470,151
Other Intangible Assets, net			80,806				80,392
Other Assets			51,099				59,510
Total Assets		$	2,068,855			$	2,278,504
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable — floor plan — trade		$	214,871			$	410,073
Notes payable — floor plan — non-trade			548,493				356,840
Trade accounts payable			55,345				54,715
Accrued interest			16,146				13,010
Other accrued liabilities			144,709				141,284
Liabilities associated with assets held for sale — non-trade			3,346				4,057
Current maturities of long-term debt			23,991				223,189
Total Current Liabilities			1,006,901				1,203,168
Long-Term Debt			552,150				562,520
Other Long-Term Liabilities			141,052				138,560
Stockholders’ Equity:
Class A convertible preferred stock, none issued			—				—
Class A common stock, $.01 par value; 100,000,000 shares authorized; 54,986,875 shares issued and 40,099,559 shares outstanding at December 31, 2009; 55,432,031 shares issued and 40,479,172 shares outstanding at March 31, 2010			550				554
Class B common stock; $.01 par value; 30,000,000 shares authorized; 12,029,375 shares outstanding at December 31, 2009 and March 31, 2010			121				121
Paid-in capital			662,186				663,446
Accumulated deficit			(35,180	)			(31,025	)
Accumulated other comprehensive income			(22,350	)			(21,482	)
Treasury stock, at cost (14,887,316 Class A shares held at December 31, 2009 and 14,952,859 Class A shares held at March 31, 2010)			(236,575	)			(237,358	)
Total Stockholders’ Equity			368,752				374,256
Total Liabilities and Stockholders’ Equity		$	2,068,855			$	2,278,504

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Dollars and shares in thousands)
(Unaudited)

																														Accumulated
		Class A								Class B																				Other				Total				Compre-
		Common Stock								Common Stock								Paid-In				Accumulated				Treasury				Comprehensive				Stockholders’				hensive
		Shares				Amount				Shares				Amount				Capital				Deficit				Stock				Income				Equity				Income
BALANCE AT DECEMBER 31, 2009			54,987			$	550				12,029			$	121			$	662,186			$	(35,180	)		$	(236,575	)		$	(22,350	)		$	368,752
Shares awarded under stock compensation plans			119				1				—				—				174				—				—				—				175				—
Purchases of treasury stock			—				—				—				—				—				—				(783	)			—				(783	)			—
Income tax benefit associated with stock compensation plans			—				—				—				—				218				—				—				—				218				—
Income tax benefit associated with convertible note hedge			—				—				—				—				66				—				—				—				66				—
Fair value of interest rate swap agreements, net of tax expense of $644			—				—				—				—				—				—				—				868				868				868
Stock-based compensation expense			—				—				—				—				164				—				—				—				164				—
Restricted stock amortization, net of forfeitures			—				—				—				—				641				—				—				—				641				—
Net income			—				—				—				—				—				4,154				—				—				4,154				4,154
Other			326				3				—				—				(3	)			1				—				—				1				—
BALANCE AT MARCH 31, 2010			55,432			$	554				12,029			$	121			$	663,446			$	(31,025	)		$	(237,358	)		$	(21,482	)		$	374,256			$	5,022

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

		First Quarter Ended
		March 31,
		2009				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,678			$	4,154
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment			7,733				8,510
Provision for bad debt expense			262				332
Other amortization			414				414
Debt issuance cost amortization			338				1,012
Debt discount amortization, net of premium amortization			2,791				1,266
Stock — based compensation expense			108				164
Amortization of restricted stock			711				641
Deferred income taxes			(1,338	)			(244	)
Equity interest in earnings of investees			(157	)			(195	)
Asset impairment charges			1,586				44
Loss (gain) on disposal of franchises and property and equipment			4				(21	)
Loss on exit of leased dealerships			946				1,461
Changes in assets and liabilities that relate to operations:
Receivables			26,732				17,574
Inventories			153,528				(35,881	)
Other assets			(20,801	)			(10,879	)
Notes payable — floor plan — trade			(30,229	)			195,202
Trade accounts payable and other liabilities			22,556				(9,258	)
Total adjustments			165,184				170,142
Net cash provided by operating activities			166,862				174,296
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment			(20,407	)			(7,766	)
Proceeds from sales of property and equipment			435				(41	)
Proceeds from sale of franchises			—				504
Net cash used in investing activities			(19,972	)			(7,303	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on notes payable floor plan — non-trade borrowings on notes payable floor plan — non-trade			(160,184	)			(190,942	)
Borrowings on revolving credit facilities			226,596				40,000
Repayments on revolving credit facilities			(197,552	)			(40,000	)
Proceeds from long-term debt			—				209,839
Principal payments on long-term debt			(1,421	)			(1,538	)
Settlement of cash flow swaps			(16,454	)			—
Purchase of treasury stock			(31	)			(783	)
Income tax benefit associated with stock compensation plans			—				218
Income tax benefit associated with convertible hedge			569				66
Issuance of shares under stock compensation plans			94				175
Dividends paid			(4,864	)			—
Net cash provided by / (used in) financing activities			(153,247	)			17,035
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS			(6,357	)			184,028
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			6,971				30,035
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	614			$	214,063
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Change in fair value of cash flow hedging instruments (net of tax expense of $9,984 and $644 for the first quarter ended March 31, 2009 and 2010, respectively)		$	16,290			$	868
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest, net of amount capitalized		$	29,627			$	26,663
Income taxes		$	(10,897	)		$	(123	)

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation — The accompanying unaudited condensed consolidated financial information for the first quarter ended March 31, 2009 and 2010 has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). All significant intercompany accounts and transactions have been eliminated. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and the results of operations for the periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the audited consolidated financial statements of Sonic Automotive, Inc. (“Sonic” or the “Company”) for the year ended December 31, 2009, which were included in Sonic’s Annual Report on Form 10-K .

     Recent Developments — On March 12, 2010, Sonic issued $210.0 million in aggregate principal amount of 9.0% Senior Subordinated Notes due 2018 (the “9.0% Notes”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 and in offshore transactions pursuant to Regulation S under the Securities Act. The notes were issued at 99.299% of par. Net proceeds received from the issuance of the 9.0% Notes were approximately $203.8 million, after deducting applicable discounts and commissions. On April 12, 2010, Sonic used these net proceeds, together with cash on hand, to redeem $200.0 million of the Company’s 8.625% Senior Subordinated Notes due 2013 (the “8.625% Notes”). See Note 6 for further discussion of the 9.0% Notes and 8.625% Notes.

     Reclassifications — The statement of income for the first quarter ended March 31, 2009 reflects the reclassification of balances from continuing operations to discontinued operations from the prior year presentation for additional franchises sold and terminated or identified for sale subsequent to March 31, 2009. The statement of income for the first quarter ended March 31, 2009 also reflects the reclassification of balances from discontinued operations to continuing operations for franchises identified for sale as of March 31, 2009, but which Sonic has decided to retain and operate as of March 31, 2010.

     Lease Exit Accruals — Lease exit accruals relate to facilities Sonic has ceased using in its operations. The accruals represent the present value of the lease payments, net of estimated sublease proceeds, for the remaining life of the operating leases and other accruals necessary to satisfy the lease commitment to the landlord. A summary of the activity of these lease exit accruals consists of the following:

		(dollars in thousands)
Balance, December 31, 2009		$	47,825
Lease exit expense			1,461
Payments			(2,612	)
Balance, March 31, 2010		$	46,674

     Of the $1.5 million lease exit expense, approximately $1.7 million was recorded in discontinued operations. A benefit of approximately $0.3 million resulting from a reduction in lease exit accruals was included in selling, general and administrative expenses partially offset by approximately $0.1 million in interest expense included in Interest Expense, other, net in the accompanying Condensed Consolidated Statements of Income.

     Of the $2.6 million of lease payments, $2.2 million was recorded in discontinued operations and $0.4 million was included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.

     Income Tax Expense — The overall effective tax rates for the first quarter ended March 31, 2009 and 2010 are higher than federal statutory rates due to the effect of state income taxes.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. DISCONTINUED OPERATIONS

     Dispositions — The operating results of franchises held for sale are included in the loss from discontinued operations in Sonic’s statements of income. Assets to be disposed of in connection with franchises held for sale but not yet sold have been classified in assets held for sale in Sonic’s balance sheets along with other assets held for sale. The major components of assets held for sale consist of the following:

		(dollars in thousands)
		December 31,				March 31,
		2009				2010
Inventories		$	4,528			$	5,363
Property and equipment, net			4,838				4,681
Goodwill			2,801				1,628
Assets held for sale		$	12,167			$	11,672

     Liabilities to be disposed in connection with these dispositions are comprised primarily of notes payable — floor plan and are classified as liabilities associated with assets held for sale on Sonic’s balance sheets. Revenues and other activities associated with franchises classified as discontinued operations were as follows:

		(dollars in thousands)
		First Quarter Ended March 31,
		2009				2010
Loss from operations		$	(1,284	)		$	(1,518	)
Gain (loss) on disposal of franchises			(80	)			318
Lease exit charges			(782	)			(1,668	)
Property impairment charges			(130	)			—
Goodwill impairment charges			(1,399	)			—
Pre-tax loss		$	(3,675	)		$	(2,868	)
Total Revenues		$	72,294			$	9,372

     Lease exit charges recorded for the first quarter ended March 31, 2009 and 2010 relate to the revision of estimates and establishment of lease exit accruals. The lease exit accruals are calculated by either discounting the remaining lease payments, net of estimated sublease proceeds or estimating the amount necessary to satisfy the lease commitment to the landlord. See Note 4 for a discussion of property impairment charges and see Note 5 for a discussion of goodwill impairment charges.

     Sonic allocates corporate level interest expense to discontinued operations based on the net assets of the discontinued operations group. Interest allocated to discontinued operations for the first quarter ended March 31, 2009 and 2010 was $0.6 million and $0.1 million, respectively.

3. Inventories

     Inventories consist of the following:

		(dollars in thousands)
		December 31,				March 31,
		2009				2010
New vehicles		$	557,319			$	561,127
Used vehicles			138,401				170,512
Parts and accessories			51,470				50,968
Other			52,613				53,011
		$	799,803			$	835,618
Less inventories classified as assets held for sale			(4,528	)			(5,363	)
Inventories		$	795,275			$	830,255

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. Property And Equipment

     Property and equipment consists of the following:

		(dollars in thousands)
		December 31,				March 31,
		2009				2010
Land		$	61,886			$	58,852
Building and improvements			322,632				318,836
Office equipment and fixtures			75,801				77,414
Parts and service equipment			54,981				56,048
Company vehicles			8,440				8,160
Construction in progress			40,000				48,290
Total, at cost			563,740				567,600
Less accumulated depreciation			(176,817	)			(180,544	)
Subtotal			386,923				387,056
Less assets held for sale			(4,838	)			(4,681	)
Property and equipment, net		$	382,085			$	382,375

     In the first quarter ended March 31, 2009, Sonic recorded fixed asset impairment charges of $0.2 million, $0.1 million of which was recorded in continuing operations.

5. Goodwill And Intangible Assets

		(dollars in thousands)
										Accumulated
		Franchise Agreements				Gross Goodwill				Impairment				Net Goodwill
Balance, December 31, 2009		$	64,835			$	1,266,207			$	(796,725	)		$	469,482
Reductions from sales of franchises			—				(504	)			—				(504	)
Reclassification (to) / from assets held for sale, net			—				1,173				—				1,173
Balance, March 31, 2010		$	64,835			$	1,266,876			$	(796,725	)		$	470,151

     In the first quarter ended March 31, 2009, Sonic recorded a goodwill impairment charge of $1.4 million within discontinued operations. The impairment charge recorded was based on the determination that recorded values were not recoverable under asset disposal agreements entered into during the first quarter ended March 31, 2009.

     At December 31, 2009, Sonic had $16.0 million of definite life intangibles recorded relating to favorable lease agreements. After the effect of amortization of the definite life intangibles, the balance recorded at March 31, 2010 was $15.6 million and was included in Other Intangible Assets, net, in the accompanying Condensed Consolidated Balance Sheets.

6. Long-Term Debt

     Long-term debt consists of the following:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		(dollars in thousands)
		December 31,				March 31,
		2009				2010
2010 Revolving Credit Facility (1)		$	—			$	—
2006 Revolving Credit Sub-Facility (2)			—				—
Senior Subordinated Notes bearing interest at 8.625%			275,000				275,000
Senior Subordinated Notes bearing interest at 9.0%			—				210,000
Convertible Senior Notes bearing interest at 5.0%			172,500				172,500
Convertible Senior Subordinated Notes bearing interest at 4.25%			17,045				17,045
Notes payable to a finance company bearing interest from 9.52% to 10.52% (with a weighted average of 10.19%)			17,778				17,253
Mortgage notes to finance companies-fixed rate, bearing interest from 5.80% to 7.03%			78,424				77,840
Mortgage notes to finance companies-variable rate, bearing interest at 1.25 to 3.30 percentage points above one-month LIBOR			38,251				39,172
Net debt discount and premium (3)			(29,199	)			(29,373	)
Other			6,342				6,272
		$	576,141			$	785,709
Less current maturities			(23,991	)			(223,189	)
Long-term debt		$	552,150			$	562,520

2006 Credit Facility

     The 2006 Revolving Credit Sub-Facility, the 2006 New Vehicle Floor Plan Sub-Facility and the 2006 Used Vehicle Floor Plan Sub-Facility would have matured on February 17, 2010. The 2006 Credit Facility was refinanced on January 15, 2010. See 2010 Credit Facilities discussion below.

2010 Credit Facilities

     On January 15, 2010, Sonic entered into an amended and restated syndicated credit agreement with Bank of America, N.A., as administrative agent and Bank of America, N.A., DCFS USA LLC, BMW Financial Services NA, LLC, Toyota Motor Credit Corporation, JPMorgan Chase Bank, N.A., Wachovia Bank, National Association, Comerica Bank and World Omni Financial Corp., as Lenders and Wells Fargo Bank National Association as LC issuer (the “Revolving Credit Facility”) and a syndicated floor plan credit facility with Bank of America, N.A., as administrative agent, and Bank of America, N.A., JPMorgan Chase Bank, N.A., Wachovia Bank, National Association and Comerica Bank, as lenders (the “Floorplan Facility”). The Revolving Credit Facility and Floorplan Facility (collectively the “2010 Credit Facilities”) mature on August 15, 2012.

     The Revolving Credit Facility has a borrowing limit of $150 million, which may be expanded up to $215 million in total credit availability upon satisfaction of certain conditions. The Revolving Credit Facility is available for acquisitions, capital expenditures, working capital and general corporate purposes. The amount available for borrowing under the Revolving Credit Facility is reduced on a dollar-for-dollar basis by the aggregate face amount of any outstanding letters of credit under the Revolving Credit Facility and is subject to compliance with a borrowing base. The borrowing base is calculated based on the value of eligible accounts, eligible inventory, eligible equipment and 5,000,000 shares of common stock of Speedway Motorsports, Inc. (“SMI”) pledged as collateral by one of Sonic’s affiliates, Sonic Financial Corporation (“SFC”).

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     As of March 31, 2010, the 2010 Revolving Borrowing Base was approximately $137.2 million. At March 31, 2010, Sonic had no outstanding borrowings and $61.4 million in outstanding letters of credit resulting in total borrowing availability of $75.8 million under the 2010 Revolving Credit Facility.

     In connection with the Revolving Credit Facility, Sonic, substantially all of its subsidiaries and SFC entered into various collateral documents. These documents include an amended and restated security agreement, an amended and restated escrow and security agreement and amended and restated securities pledge agreements (the “Collateral Documents”) with Bank of America, N.A., as administrative agent. Under the Collateral Documents, outstanding obligations under the Revolving Credit Facility are secured by a pledge of substantially all of Sonic’s assets and the assets of substantially of its domestic subsidiaries, and by the pledge of 5,000,000 shares of common stock of SMI by SFC. The Collateral Documents also provide for the pledge of the franchise agreements and stock or equity interests of Sonic’s dealership franchise subsidiaries, except for those dealership franchise subsidiaries where the applicable manufacturer prohibits such a pledge, in which cases the stock or equity interests of the dealership franchise subsidiary is subject to an escrow arrangement with the administrative agent. Substantially all of Sonic’s domestic subsidiaries also guarantee its obligations under the Revolving Credit Facility under the terms of an amended and restated guaranty agreement with Bank of America, N.A., as administrative agent, entered into in connection with the Revolving Credit Facility.

     The Floorplan Facility is comprised of a new vehicle revolving floor plan facility in an amount up to $321 million (the “New Vehicle Floorplan Facility”) and a used vehicle revolving floor plan facility in an amount up to $50 million, subject to compliance and a borrowing base (the “Used Vehicle Floorplan Facility”). Sonic may, under certain conditions, request an increase in the Floorplan Facility by up to $125 million, which shall be allocated between the New Vehicle Floorplan Facility and the Used Vehicle Floorplan Facility as Sonic request, with no more than 15% of the aggregate commitments allocated to the commitments under the Used Vehicle Floorplan Facility.

     Under the terms of the amended and restated security agreement entered into in connection with the Revolving Credit Facility and guaranty agreements entered into by Sonic and certain of its subsidiaries in connection with the Floorplan Facility, outstanding obligations under the Floorplan Facility are guaranteed by Sonic and certain of its subsidiaries and are secured by a pledge of substantially of Sonic’s assets and the assets of certain of its domestic subsidiaries.

     The amounts outstanding under the 2010 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR or the Base Rate according to a performance-based pricing grid determined by Sonic’s Consolidated Total Debt to EBITDA Ratio as of the last day of the immediately preceding fiscal quarter.

Covenants

     The 2010 Credit Facilities contain certain covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends, capital expenditures and material dispositions and acquisitions of assets as well as other customary covenants and default provisions. Financial covenants include required specified ratios (as each is defined in the 2010 Credit Facilities) of:

Covenant

Consolidated

Consolidated

Consolidated

Fixed Charge

Total Senior

Liquidity

Coverage

Secured Debt to

Ratio

Ratio

EBITDA Ratio

Through March 30, 2011

≥ 1.00

≥ 1.10

≤ 2.25

March 31, 2011 through and including March 30, 2012

≥ 1.05

≥ 1.15

≤ 2.25

March 31, 2012 and thereafter

≥ 1.10

≥ 1.20

≤ 2.25

March 31, 2010 actual

1.15

1.40

1.37

     The 2010 Credit Facilities contain events of default, including cross-defaults to other material indebtedness, change of control events and events of default customary for syndicated commercial credit facilities. Upon the occurrence of an event of default, Sonic could be required to immediately repay all outstanding amounts under the 2010 Credit Facilities.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     In addition, many of Sonic’s facility leases are governed by a guarantee agreement between the landlord and Sonic that contains financial and operating covenants. The financial covenants are identical to those under the 2010 Credit Facilities with the exception of one financial covenant related to the ratio of EBTDAR to Rent with a required ratio of no less than 1.5 to 1.0. At March 31, 2010, the ratio was 1.77 to 1.00.

9.0% Notes

     On March 12, 2010, Sonic issued $210.0 million aggregate principal amount of 9.0% Notes under the terms of an Indenture dated as of March 12, 2010. Sonic received approximately $203.8 million in net proceeds from the offering, after deducting applicable discounts and commissions. Sonic used these net proceeds, together with cash on hand, to redeem $200.0 million of its 8.625% Notes due 2013 on April 12, 2010. The 9.0% Notes are unsecured senior subordinated obligations of Sonic and are guaranteed by Sonic’s domestic operative subsidiaries. The 9.0% Notes bear interest which is payable semi-annually on March 15 and September 15 each year (beginning on September 15, 2010), until maturity on March 15, 2018 or earlier redemption or repurchase. Sonic may redeem the 9.0% Notes in whole or in part at any time after March 15, 2014 at the following redemption prices, which are expressed as percentages of the principal amount.

		Redemption
		Price
Beginning on March 15, 2014			104.50	%
Beginning on March 15, 2015			102.25	%
Beginning on March 15, 2016 and thereafter			100.00	%

     In addition, on or before March 15, 2013, Sonic may redeem up to 35% of the aggregate principal amount of the 9.0% Notes with proceeds from certain equity offerings at par value of the 9.0% Notes, plus any accrued and unpaid interest to but excluding the redemption date. The Indenture also provides that holders of 9.0% Notes may require Sonic to repurchase the 9.0% Notes at 101% of the par value of the 9.0% Notes, plus accrued and unpaid interest to but excluding the change of control purchase date, if Sonic undergoes a “change of control” as defined in the Indenture.

     The indenture governing the 9.0% Notes contain certain specified restrictive and required financial covenants. Sonic has agreed not to pledge any assets to any third party lender of senior subordinated debt except under certain limited circumstances. Sonic also has agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, capital stock, guaranties, asset sales, investments, cash dividends to stockholders, distributions and redemptions. Specifically, the indenture governing Sonic’s 9.0% Notes limits Sonic’s ability to pay quarterly cash dividends on Sonic’s Class A and B common stock in excess of $0.10 per share. Sonic may only pay quarterly cash dividends on Sonic’s Class A and B common stock if Sonic complies with Section 1009 of the indenture governing the 9.0% Notes. Sonic was in compliance with all restrictive covenants as of March 31, 2010.

     Balances outstanding under Sonic’s 9.0% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets or operations. The non-domestic and non-operating subsidiaries that are not guarantors are considered to be minor as defined by the SEC.

     Sonic’s obligations under the 9.0% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 9.0% Notes then outstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, or breach, of Sonic’s covenants under the 9.0% Notes; and (3) certain defaults under other agreements under which Sonic or its subsidiaries have outstanding indebtedness in excess of $35.0 million.

8.625% Notes

     Sonic had $275.0 million of principal amount outstanding of the 8.625% Notes at March 31, 2009. The 8.625% Notes are unsecured obligations that rank equal in right of payment to all of Sonic’s existing and future senior subordinated indebtedness, mature on August 15, 2013 and are redeemable at Sonic’s option after August 15, 2008.

     The indenture governing the 8.625% Notes contain certain specified restrictive and required financial covenants. Sonic has agreed not to pledge any assets to any third party lender of senior subordinated debt except under certain limited

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

circumstances. Sonic also has agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, capital stock, guaranties, asset sales, investments, cash dividends to shareholders, distributions and redemptions. Specifically, the indenture governing Sonic’s 8.625% Notes limits Sonic’s ability to pay quarterly cash dividends on Sonic’s Class A and B common stock in excess of $0.10 per share. Sonic may only pay quarterly cash dividends on Sonic’s Class A and B common stock if Sonic complies with Section 1009 of the indenture governing the 8.625% Notes, which was filed as Exhibit 4.4 to Sonic’s Registration Statement on Form S-4 (File No. 333-109426). Sonic was in compliance with all restrictive covenants as of March 31, 2010.

     Balances outstanding under Sonic’s 8.625% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets or operations. The non-domestic and non-operating subsidiaries that are not guarantors are considered to be minor as defined by the SEC.

     On March 12, 2010, Sonic issued a redemption notice to holders of the 8.625% Notes to redeem $200.0 million in aggregate principal amount of its outstanding 8.625% Notes. As such, $200.0 million of these notes have been reclassified into Current Maturities of Long-Term Debt in the accompanying Condensed Consolidated Balance Sheet. On April 12, 2010, Sonic used the net proceeds obtained from the issuance of the 9.0% Notes, together with cash on hand, to redeem the $200.0 million of aggregate principal amount at the applicable redemption price (102.875% of principal redeemed) plus accrued but unpaid interest. Sonic recorded a loss on extinguishment of debt of approximately $7.0 million which will be recognized in April 2010.

5.0% Convertible Senior Notes (“5.0% Convertible Notes”)

     Sonic has $172.5 million in aggregate principal amount of 5.0% Convertible Notes outstanding. The 5.0% Convertible Notes bear interest at a rate of 5.0% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2010. The 5.0% Convertible Notes mature on October 1, 2029. Sonic may redeem some or all of the 5.0% Convertible Notes for cash at any time subsequent to October 1, 2014 at a repurchase price equal to 100% of the principal amount of the Notes. Holders have the right to require Sonic to purchase the 5.0% Convertible Notes on each of October 1, 2014, October 1, 2019 and October 1, 2024 or in the event of a change in control for cash at a purchase price equal to 100% of the principal amount of the notes.

     Holders of the 5.0% Convertible Notes may convert their notes at their option prior to the close of business on the business day immediately preceding July 1, 2029 only under the following circumstances: (1) during any fiscal quarter commencing after December 31, 2009, if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price (as defined below) per $1,000 principal amount of notes for each day of that measurement period was less than 98% of the product of the last reported sale price of Sonic’s Class A common stock and the applicable conversion rate on each such day; (3) if Sonic calls any or all of the notes for redemption, at any time prior to the close of business on the third scheduled trading day prior to the redemption date; or (4) upon the occurrence of specified corporate events. On and after July 1, 2029 to (and including) the close of business on the third scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. The conversion rate is 74.7245 shares of Class A common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $13.38 per share of Class A common stock. None of the conversion features on the 5.0% Convertible Notes were triggered in the first quarter of 2010.

     To recognize the equity component of a convertible borrowing instrument, upon issuance of the 5.0% Convertible Notes in September 2009, Sonic recorded a debt discount of $31.0 million and a corresponding amount (net of taxes of $12.8 million) to equity. The debt discount is being amortized to interest expense through October 2014, the earliest redemption date.

4.25% Convertible Senior Subordinated Notes (“4.25% Convertible Notes”)

     Sonic has approximately $17.0 million aggregate principal amount of 4.25% Notes outstanding. The 4.25% Convertible Notes bear interest at an annual rate of 4.25% until November 30, 2010 and 4.75% thereafter. The 4.25% Convertible Notes are unsecured obligations that rank equal in right of payment to all of Sonic’s existing and future senior subordinated indebtedness, mature on November 30, 2015 and are redeemable by Sonic or the holders on or after November

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

30, 2010. Sonic’s obligations under the 4.25% Convertible Notes are not guaranteed by any of Sonic’s subsidiaries. Holders of the 4.25% Convertible Notes may convert them into cash and shares of Sonic’s Class A common stock at an initial conversion rate of 41.4185 shares per $1,000 of principal amount, subject to distributions on, or other changes in Sonic’s Class A common stock, if any, prior to the conversion date.

     The 4.25% Convertible Notes are convertible into cash and shares of Sonic’s Class A common stock if prior to October 31, 2010, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of 4.25% Convertible Notes was less than 103% of the product of the closing price of Sonic’s Class A common stock and the applicable conversion rate for the 4.25% Convertible Notes; if Sonic calls the 4.25% Convertible Notes for redemption; or upon the occurrence of certain corporate transactions; or on or after October 31, 2010. Upon conversion of the 4.25% Convertible Notes, Sonic will be required to deliver cash equal to the lesser of the aggregate principal amount of the 4.25% Convertible Notes being converted and Sonic’s total conversion obligation. If Sonic’s total conversion obligation exceeds the aggregate principal amount of the 4.25% Convertible Notes being converted, Sonic will deliver shares of Class A common stock to the extent of the excess amount, if any. None of the conversion features on the 4.25% Convertible Notes were triggered in the first quarter ended March 31, 2010.

Notes Payable to a Finance Company

     Three notes payable (due October 2015 and August 2016) were assumed in connection with an acquisition in 2005 (the “Assumed Notes”). Sonic recorded the Assumed Notes at fair value using an interest rate of 5.35%. The interest rate used to calculate the fair value was based on a quoted market price for notes with similar terms as of the date of assumption. As a result of calculating the fair value, a premium of $7.3 million was recorded that will be amortized over the lives of the Assumed Notes.

Mortgage Notes

     Sonic has mortgage financing related to several of its dealership properties. These mortgage notes require monthly payments of principal and interest through maturity and are secured by the underlying properties. Maturity dates range between June 2013 and December 2029. The weighted average interest rate was 5.1% at March 31, 2010.

Derivative Instruments and Hedging Activities

     At March 31, 2010 Sonic had interest rate swap agreements (the “Fixed Swaps”) to effectively convert a portion of its LIBOR-based variable rate debt to a fixed rate. The fair value of these swap positions at March 31, 2010 was a liability of $33.3 million included in Other Long-Term Liabilities in the accompanying Condensed Consolidated Balance Sheets. Under the terms of the Fixed Swaps, Sonic will receive and pay interest based on the following:

Notional Amount				Pay Rate				Receive Rate (1)		Maturing Date
(in millions)
$	200.0				4.935	%		one-month LIBOR		May 1, 2012
$	100.0				5.265	%		one-month LIBOR		June 1, 2012
$	3.8				7.100	%		one-month LIBOR		July 10, 2017
$	25.0	(2)			5.160	%		one-month LIBOR		September 1, 2012
$	15.0	(2)			4.965	%		one-month LIBOR		September 1, 2012
$	25.0	(2)			4.885	%		one-month LIBOR		October 1, 2012
$	11.8				4.655	%		one-month LIBOR		December 10, 2017
$	8.9				6.860	%		one-month LIBOR		August 1, 2017
$	7.2				4.330	%		one-month LIBOR		July 1, 2013

     During the first quarter ended March 31, 2009, Sonic settled its $100 million notional, pay 5.002% and $100 million notional, pay 5.319% swaps with a payment to the counterparty of $16.5 million. This settlement loss was deferred and will be amortized into earnings over the swaps’ initial remaining term.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     As a result of the refinancing of Sonic’s 2006 Credit Facility and the new terms of the 2010 Credit Facilities, it is no longer probable that Sonic will incur interest payments that match the terms of certain Fixed Swaps that previously were designated and qualified as cash flow hedges. Of the Fixed Swaps (including the two $100.0 million notional swaps which were settled in 2009), $565.0 million of the notional amount had previously been documented as hedges against the variability of cash flows related to interest payments on certain debt obligations. At March 31, 2010, Sonic estimates that under the new 2010 Credit Facilities and other facilities with matching terms, it is probable that the expected debt balance with interest payments that match the terms of the Fixed Swaps will be $400.0 million and it is reasonably possible that the expected debt balance with interest payments that match the terms of the Fixed Swaps will be between $400.0 million and $475.0 million. As a result, at March 31, 2010, a non-cash charge of approximately $1.7 million related to $65.0 million in notional of the Fixed Swaps and amortization of amounts in accumulated other comprehensive income relates to other terminated cash flow swaps was included in interest expense, non-cash, cash flow swaps in the accompanying Condensed Consolidated Statements of Income.

     For the Fixed Swaps which qualify as cash flow hedges, the changes in the fair value of these swaps have been recorded in other comprehensive income/(loss), net of related income taxes, in the Condensed Consolidated Statements of Stockholders’ Equity. The incremental interest expense (the difference between interest paid and interest received) related to the Fixed Swaps was $6.7 million and $5.0 million for the quarters ended March 31, 2009 and 2010, respectively, and is included in interest expense, other, net in the accompanying Condensed Consolidated Statements of Income. The estimated net expense expected to be reclassified out of other comprehensive income/(loss) into results of operations during the next twelve months is approximately $5.3 million.

7. Stock-Based Compensation

     Sonic currently has two active stock compensation plans, the Sonic Automotive, Inc. 2004 Stock Incentive Plan (the “2004 Plan”) and the 2005 Formula Restricted Stock Plan for Non-Employee Directors (the “2005 Formula Plan”), and two inactive stock compensation plans which only have grants outstanding, the Sonic Automotive, Inc. Formula Stock Option Plan for Independent Directors and the Sonic Automotive, Inc. 1997 Stock Option Plan (collectively, the “Stock Plans”). See Sonic’s Annual Report on Form 10-K for the year ended December 31, 2009 for a more detailed description of the Stock Plans. A summary of the status of the stock options related to the Stock Plans is presented below:

														Weighted Average
		Options				Exercise Price				Weighted Average				Remaining				Aggregate
		Outstanding				Per Share				Exercise Price				Contractual Term				Intrinsic Value
		(in thousands)												(in years)				(in thousands)
Balance — December 31, 2009			4,014			$	1.81 - $37.50			$	15.48				5.9			$	12,349
Exercised			(74	)		$	1.81 - $8.88				3.58
Forfeited			(44	)		$	1.81 - $37.50				18.60
Balance — March 31, 2010			3,896			$	1.81 - $37.50			$	15.67				5.6			$	12,671
Exercisable			2,949			$	1.81 - $37.50			$	19.88				4.5			$	4,214

		First Quarter Ended
(dollars in thousands, except per option amounts)		March 31, 2010
Fair Value of Options Vested		$	453
Intrinsic Value of Options Exercised		$	575

     Sonic recognized compensation expense related to stock options within selling, general and administrative expenses of $0.1 million and $0.2 million in the first quarter ended March 31, 2009 and 2010, respectively. Tax benefits recognized related to the compensation expenses were $0.1 million for both the first quarter ended March 31, 2009 and 2010. The total compensation cost related to unvested options not yet recognized at March 31, 2010 was $0.9 million and is expected to be recognized over a weighted average period of 1.9 years.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     A summary of the status of restricted stock and restricted stock unit grants related to the Stock Plans is presented below:

		Unvested Restricted				Weighted Average
		Stock and Restricted				Grant Date Fair
		Stock Units				Value
		(in thousands)
Balance — December 31, 2009			313			$	17.45
Granted			472				10.30
Vested			(151	)			21.40
Balance — March 31, 2010			634			$	11.18

     In the first quarter ended March 31, 2010, 472,305 restricted shares of Class A common stock and restricted stock units were awarded to Sonic’s executive officers and certain other executives under the 2004 Plan. Awards made in the quarter ended March 31, 2010 vest one-third annually over a three year period from the grant date. The shares and units granted in conjunction with 2010 incentive compensation for executive officers are subject to forfeiture, in whole or in part, based upon specified measures of Sonic’s earnings per share and customer satisfaction index performance for the 2010 fiscal year, continuation of employment and compliance with any restrictive covenants contained in any agreement between Sonic and the respective officer. These awards are generally subject to the same restrictions and rights as the awards granted in prior years to certain executive officers.

     Sonic recognized compensation expense related to restricted stock and restricted stock units of $0.7 million and $0.6 million in the first quarter ended March 31, 2009 and 2010, respectively. Sonic recognized $0.3 million and $0.2 million of tax benefit related to the compensation expenses for the first quarter ended March 31, 2009 and 2010. Total compensation cost related to unvested restricted stock and restricted stock units not yet recognized at March 31, 2010 was $4.9 million, and is expected to be recognized over a weighted average period of 2.8 years.

8. Per Share Data and Stockholders’ Equity

     The calculation of diluted earnings per share considers the potential dilutive effect of Sonic’s contingently convertible debt issuances and stock options and shares to purchase shares of Class A common stock under the Stock Plans. The following table illustrates the dilutive effect of such items on earnings per share for the first quarter ended March 31, 2009 and 2010:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		For the First Quarter Ended March 31, 2009
						Income								Loss
						From Continuing								From Discontinued
						Operations								Operations								Net Income
		Class A & B								Per Common								Per Common								Per Common
		Shares				Amount				Share Amount				Amount				Share Amount				Amount				Share Amount
		(dollars in thousands except per share amounts)
Earnings (Loss) and Shares			40,099			$	4,315							$	(2,637	)						$	1,678
Effect of Participating Securities:
Unvested Restricted Stock and Stock Units			—				(31	)							—								(31	)
Basic Earnings (Loss) Per Share			40,099			$	4,284			$	0.11			$	(2,637	)		$	(0.07	)		$	1,647			$	0.04
Effect of Dilutive Securities:
Stock Plans			239				—								—								—
Diluted Earnings (Loss) Per Share			40,338			$	4,284			$	0.11			$	(2,637	)		$	(0.07	)		$	1,647			$	0.04
		For the First Quarter Ended March 31, 2010
						Income								Loss
						From Continuing								From Discontinued
						Operations								Operations								Net Income
		Class A & B								Per Common								Per Common								Per Common
		Shares				Amount				Share Amount				Amount				Share Amount				Amount				Share Amount
		(dollars in thousands except per share amounts)
Earnings (Loss) and Shares			51,889			$	5,932							$	(1,778	)						$	4,154
Effect of Participating Securities:
Unvested Restricted Stock and Stock Units			—				(71	)							—								(71	)
Basic Earnings (Loss) Per Share			51,889			$	5,861			$	0.11			$	(1,778	)		$	(0.03	)		$	4,083			$	0.08
Effect of Dilutive Securities:
Stock Plans			690				—								—								—
Diluted Earnings (Loss) Per Share			52,579			$	5,861			$	0.11			$	(1,778	)		$	(0.03	)		$	4,083			$	0.08

     In addition to the stock options included in the table above, options to purchase 3.1 million shares and 2.4 million shares of Class A common stock were outstanding at March 31, 2009 and 2010, respectively, but were not included in the computation of diluted earnings per share because the options were not dilutive. In addition, in the event the effect of potentially dilutive shares associated with the 5.25% Convertible Notes, 4.25% Convertible Notes or 5.0% Convertible Notes were anti-dilutive, the effect of those shares have also been excluded from the computation of diluted earnings per share.

9. Contingencies

Legal and Other Proceedings:

     Sonic is a defendant in the matter of Galura, et al. v. Sonic Automotive, Inc., a private civil action filed in the Circuit Court of Hillsborough County, Florida. In this action, originally filed on December 30, 2002, the plaintiffs allege that Sonic and its Florida dealerships sold an antitheft protection product in a deceptive or otherwise illegal manner, and further sought representation on behalf of any customer of any of Sonic’s Florida dealerships who purchased the antitheft protection product since December 30, 1998. The plaintiffs are seeking monetary damages and injunctive relief on behalf of this class of customers. In June 2005, the court granted the plaintiffs’ motion for certification of the requested class of customers, but the court has made no finding to date regarding actual liability in this lawsuit. Sonic subsequently filed a notice of appeal of the court’s class certification ruling with the Florida Court of Appeals. In April 2007, the Florida Court of Appeals affirmed a portion of the trial court’s class certification, and overruled a portion of the trial court’s class certification. In November 2009, the Florida trial court granted Summary Judgment in Sonic’s favor against Plaintiff Enrique Galura, and his claim has been dismissed. Virginia Galura’s claim is still pending. Sonic currently intends to continue its vigorous appeal and defense of this lawsuit and to assert available defenses. However, an adverse resolution of this lawsuit could result in the payment of significant costs and damages, which could have a material adverse effect on Sonic’s future results of operations, financial condition and cash flows.

     Several private civil actions have been filed against Sonic Automotive, Inc. and several of its dealership subsidiaries that purport to represent classes of customers as potential plaintiffs and make allegations that certain products sold in the finance and insurance departments were done so in a deceptive or otherwise illegal manner. One of these private civil actions has been filed in South Carolina state court against Sonic Automotive, Inc. and 10 of Sonic’s South Carolina subsidiaries. This group of plaintiffs’ attorneys has filed another private civil class action lawsuit in state court in North Carolina seeking certification of a multi-state class of plaintiffs. The South Carolina state court action and the North Carolina state court

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

action have since been consolidated into a single proceeding in private arbitration. On November 12, 2008, claimants in the consolidated arbitration filed a Motion for Class Certification as a national class action including all of the states in which Sonic operates dealerships. Claimants are seeking monetary damages and injunctive relief on behalf of this class of customers. The parties have briefed and argued the issue of class certification and an order from the arbitrator on class certification is expected in 2010. If a class is certified against Sonic and its dealerships, there would still be a hearing to determine the merits of claimants’ claims and potential liability. Sonic currently intends to continue its vigorous defense of this arbitration and to assert all available defenses. However, an adverse resolution of this arbitration could result in the payment of significant costs and damages, which could have a material adverse effect on Sonic’s future results of operations, financial condition and cash flows.

     Sonic is involved, and expects to continue to be involved, in numerous legal and administrative proceedings arising out of the conduct of its business, including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has been certified. Although Sonic vigorously defends itself in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out of the conduct of Sonic’s business, including litigation with customers, employment related lawsuits, contractual disputes, class actions, purported class actions and actions brought by governmental authorities, cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have a material adverse effect on Sonic’s business, financial condition, results of operations, cash flows or prospects. Included in other accrued liabilities at December 31, 2009 and March 31, 2010 were $9.2 million and $8.4 million, respectively, in reserves that Sonic has provided for pending proceedings.

Guarantees and Indemnification Obligations:

     In connection with franchise dispositions, certain of Sonic’s dealership subsidiaries have assigned or sublet to the buyer its interests in real property leases associated with such dealerships. In general, the subsidiaries retain responsibility for the performance of certain obligations under such leases, including rent payments, and repairs to leased property upon termination of the lease, to the extent that the assignee or sub-lessee does not perform. In the event the sub-lessees do not perform under their obligations Sonic remains liable for the lease payments. The total amount relating to this risk was approximately $106.0 million as of December 31, 2009. See Sonic’s Annual Report on Form 10-K for the year ended December 31, 2009 for further discussion.

     In accordance with the terms of agreements entered into for the sale of Sonic’s franchises, Sonic generally agrees to indemnify the buyer from certain exposure and costs arising subsequent to the date of sale, including environmental exposure and exposure resulting from the breach of representations or warranties made in accordance with the agreement. While Sonic’s exposure with respect to environmental remediation and repairs is difficult to quantify, Sonic estimates that the maximum exposure associated with these general indemnifications if the counterparties failed to perform under their contractual obligations was approximately $13.9 million at December 31, 2009 and March 31, 2010. These indemnifications generally expire within a period of one to three years following the date of sale. The estimated fair value of these indemnifications was not material.

10. Fair Value Measurements

     In determining fair value, Sonic uses various valuation approaches including market, income and/or cost approaches. “Fair Value Measurements and Disclosures” in the ASC establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of Sonic. Unobservable inputs are inputs that reflect Sonic’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that Sonic has the ability to access. Assets utilizing Level 1 inputs include marketable securities that are actively traded.

Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include fair value and cash flow swap instruments.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating fair value of non-financial assets and non-financial liabilities in purchase acquisitions, those used in assessing impairment under “Property, Plant and Equipment” in the ASC and those used in the reporting unit valuation in the first step of the annual goodwill impairment evaluation. For instance, certain assets held for sale in the accompanying condensed consolidated balance sheets are valued based on estimated proceeds to be received in connection with the disposal of those assets.

     The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required by Sonic in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input (Level 3 being the lowest level) that is significant to the fair value measurement.

     Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, Sonic’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. Sonic uses inputs that are current as of the measurement date, including during periods when the market may be abnormally high or abnormally low. Accordingly, fair value measurements can be volatile based on various factors that may or may not be within Sonic’s control.

     Assets or liabilities recorded at fair value in the accompanying balance sheet as of March 31, 2010 are as follows:

						Fair Value at Reporting Date Using:
										Significant
						Quoted Prices in				Other				Significant
						Active Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
(dollars in millions)		Total				(Level 1)				(Level 2)				(Level 3)
Cash Flow Swaps (1)		$	(33.3	)		$	—			$	(33.3	)		$	—
Total		$	(33.3	)		$	—			$	(33.3	)		$	—

     Assets or liabilities measured at fair value on a nonrecurring basis in the accompanying balance sheet as of March 31, 2010 are as follows:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		(dollars in millions)
						Significant
		First				Unobservable
		Quarter Ended				Inputs				Total
		3/31/2010				(Level 3)				Gains / (Losses)
Long-lived assets held and used (1)		$	382.4			$	382.4			$	—
Goodwill (2)			470.2				470.2				—
Franchise assets (2)			64.8				64.8				—
Long-lived assets held for sale (3)			6.3				6.3				—

     During the first quarter ended March 31, 2009, Sonic settled its $100 million notional, pay 5.002% and $100 million notional, pay 5.319% swaps with a payment to the counterparty of $16.5 million. This settlement loss was deferred and will be amortized into earnings over the swaps’ initial remaining term.

     As of December 31, 2009 and March 31, 2010, the fair values of Sonic’s financial instruments including receivables, notes receivable from finance contracts, notes payable-floor plan, trade accounts payable, payables for acquisitions, borrowings under the revolving credit facilities and certain mortgage notes approximate their carrying values due either to length of maturity or existence of variable interest rates that approximate prevailing market rates.

     The fair value and carrying value of Sonic’s fixed rate long-term debt was as follows:

		(dollars in thousands)
		December 31, 2009								March 31, 2010
		Fair Value				Carrying Value				Fair Value				Carrying Value
9.00% Senior Subordinated Notes (1)		$	—			$	—			$	213,150			$	208,533
8.625% Senior Subordinated Notes (1)		$	266,750			$	273,455			$	278,795			$	273,543
5.0% Convertible Senior Notes (1)		$	188,072			$	142,743			$	194,771			$	143,950
4.25% Convertible Senior Subordinated Notes (1)		$	16,363			$	16,423			$	17,002			$	16,599
Mortgage Notes (2)		$	78,333			$	78,424			$	77,755			$	77,840
Notes Payable to a Finance Company (2)		$	17,859			$	20,260			$	17,328			$	19,560

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11. Subsequent Events

     On April 12, 2010, Sonic used the net proceeds obtained from the issuance of the 9.0% Notes, together with cash on hand, to redeem $200.0 million of aggregate principal amount of the 8.625% Notes at the applicable redemption price (102.875% of principal redeemed) plus accrued but unpaid interest. Sonic recorded a loss on extinguishment of debt of approximately $7.0 million in April 2010. See Note 6 for further discussion of the 9.0% Notes and 8.625% Notes.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the Sonic Automotive, Inc. and Subsidiaries Unaudited Condensed Consolidated Financial Statements and the related notes thereto appearing elsewhere in this report, as well as the audited financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in our Annual Report on Form 10-K for the year ended December 31, 2009.

Overview

     We are one of the largest automotive retailers in the United States. As of March 31, 2010, we operated 145 dealership franchises, representing 29 different brands of cars and light trucks, at 122 locations and 26 collision repair centers in 15 states. Our dealerships provide comprehensive services including sales of both new and used cars and light trucks, sales of replacement parts, performance of vehicle maintenance, manufacturer warranty repairs, paint and collision repair services, and arrangement of extended service contracts, financing, insurance and other aftermarket products for our customers.

     Economic Conditions

     Although General Motors had attempted to sell its Hummer brand, on April 7, 2010, General Motors announced it plans to discontinue its Hummer brand. As of March 31, 2010, we operated three Hummer franchises at three multi-franchise dealership locations. All three of our Hummer franchises are scheduled to be terminated prior to October 31, 2010 in accordance with the termination agreement reached with General Motors. In the year ended December 31, 2009, we only sold approximately 110 Hummer new vehicle units at retail. As a result, we do not expect the terminations of these franchises to have a material impact on our operations, financial position or cash flows.

     In the first quarter ended March 31, 2010, Toyota Motor Corporation issued recalls affecting certain of its most popular models in certain model years due to design problems with accelerator pedals and anti-lock brake systems. Toyota Motor Corporation had also instructed its dealerships to stop selling vehicles affected by the accelerator pedal recall until it developed a solution to the design problem and provided the necessary parts and instructions to fix the issue. During the period of time when affected vehicles could not be sold, Toyota Motor Corporation offered its dealers floor plan assistance to help reduce dealers’ cost of carrying vehicles which it could not sell due to the recall which helped to reduce interest expense, floor plan. As of March 31, 2010, we operated 11 Toyota franchises. During the first quarter ended March 31, 2010, vehicle sales at our Toyota dealership franchise locations were negatively impacted by the recall. However, we experienced a benefit to our fixed operations business as a result of work performed on vehicles affected by the recall which was paid for by the manufacturer and provided free of charge to the customer. We cannot estimate how this recall will affect consumer preferences over the long-term.

     The following is a detail of our new vehicle revenues by brand for the first quarter ended March 31, 2009 and 2010:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

		Percentage of New Vehicle Revenue
		First Quarter Ended March 31,
		2009				2010
Brand (1)
BMW			18.2	%			16.0	%
Honda			14.0	%			13.6	%
Toyota			11.0	%			10.9	%
Mercedes			10.6	%			10.6	%
Ford			9.8	%			8.9	%
General Motors (2)			6.7	%			7.0	%
Lexus			5.6	%			6.5	%
Cadillac			5.1	%			5.7	%
Other (3)			3.7	%			3.2	%
Audi			2.4	%			3.1	%
Volkswagen			2.0	%			2.1	%
Hyundai			2.0	%			2.0	%
Land Rover			1.5	%			1.9	%
Porsche			1.3	%			1.7	%
Nissan			1.1	%			1.7	%
Infiniti			1.2	%			1.5	%
Volvo			0.9	%			1.3	%
Other Luxury (4)			1.1	%			0.9	%
Acura			1.0	%			0.9	%
Chrysler (5)			0.8	%			0.5	%
Total			100.0	%			100.0	%

Results of Operations

     The following discussions are based on reported figures. Same store amounts do not vary significantly from reported totals as there have not been any significant acquisitions in the last 24 months.

New Vehicles

     The automobile retail industry uses the Seasonally Adjusted Annual Rate (SAAR) to measure the amount of new vehicle unit sales activity within the United States market. The SAAR averages below reflect a blended average of all brands marketed or sold in the United States market. The SAAR includes brands we do not sell and markets in which we do not operate.

		First Quarter Ended March 31,
		2009				2010				% Change
SAAR (in millions of vehicles)			9.5				11.0				15.8	%

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

     Our reported new vehicle (including fleet) results are as follows:

		First Quarter Ended March 31,								Better / (Worse)
(in thousands except units and per unit data)		2009				2010				Change				% Change
Reported:
Revenue		$	704,717			$	784,242			$	79,525				11.3	%
Gross profit		$	46,818			$	54,511			$	7,693				16.4	%
Unit sales			21,753				23,234				1,481				6.8	%
Revenue per Unit		$	32,396			$	33,754			$	1,358				4.2	%
Gross profit per unit		$	2,152			$	2,346			$	194				9.0	%
Gross profit as a % of revenue			6.6	%			7.0	%		40		bps

     For the first quarter ended March 31, 2010, new vehicle revenues increased from the same period in the prior year due to higher unit volume coupled with an increase in revenue per unit. Our import and domestic stores experienced increases of 11.5% and 10.6%, respectively, in new vehicle revenues for the first quarter ended March 31, 2010 as compared to the same period in the prior year.

     New vehicle unit volume increased at our import stores in the first quarter ended March 31, 2010 by 8.0% when compared to the same prior year period. The increase in import new vehicle unit sales was led by our Mercedes and Lexus stores, which posted increases of 8.1% and 18.2%, respectively, during the first quarter ended March 31, 2010 when compared to the prior year period. When compared to national industry increases for the first quarter ended March 31, 2010, our Lexus stores outperformed the Lexus national industry increase while our BMW and Mercedes stores underperformed their respective brand national industry increases.

     New vehicle unit volume increased at our domestic stores in the first quarter ended March 31, 2010 by 3.4%. Our GM, Cadillac, and Ford stores experienced increases of 9.2%, 19.9% and 30.3%, respectively, in the first quarter ended March 31, 2010 as compared to the same period in the prior year. During the first quarter ended March 31, 2010, our GM and Ford stores underperformed their respective national industry increases while our Cadillac stores outperformed the Cadillac national industry increase.

     For the first quarter ended March 31, 2010, new vehicle revenue per unit experienced an increase of 4.2% over the same period in the prior year. This increase is due primarily to shifts in our sales mix. Our new luxury unit volume as a percentage of total new vehicle unit volume increased in the first quarter ended March 31, 2010 by 31 basis points as compared to the first quarter ended March 31, 2009. We believe the increase in new luxury unit volume is due primarily to improved economic conditions compared to the same period of the prior year.

     Increases in new vehicle gross profit for the first quarter ended March 31, 2010, as compared to the same period in the prior year, were primarily due a higher mix of luxury and import vehicles which generally generate higher gross profit dollars per vehicle. The increase in import and luxury new vehicle units retailed is primarily due to the improved economic conditions as compared to the same period in the prior year.

Used Vehicles

     Our reported used vehicle results are as follows:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

		First Quarter Ended March 31,								Better / (Worse)
(in thousands except units and per unit data)		2009				2010				Change				% Change
Reported:
Revenue		$	329,209			$	423,610			$	94,401				28.7	%
Gross profit		$	30,958			$	33,489			$	2,531				8.2	%
Unit sales			17,411				21,750				4,339				24.9	%
Revenue per Unit		$	18,908			$	19,476			$	568				3.0	%
Gross profit per unit		$	1,778			$	1,540			$	(238	)			(13.4	%)
Gross profit as a % of revenue			9.4	%			7.9	%		(150		)	bps
CPO revenue		$	186,104			$	204,676			$	18,572				10.0	%
CPO unit sales			7,632				7,627				(5	)			(0.1	%)

     Used vehicle unit volume increased by 24.9% for the first quarter ended March 31, 2010, as compared to the same period in the prior year. This increase is primarily due to the implementation of our used vehicle playbook which standardizes used vehicle inventory management and sales strategy. Our used vehicle playbook focuses on better management of trade-ins and used vehicle inventory which improves the quantity and quality of used vehicles at each of our stores, thereby increasing the number of used vehicle units that can be sold at retail versus those sold wholesale.

     For the first quarter ended March 31, 2010, gross profit per unit for used vehicles declined by 13.4% over the same period of the prior year. The reduction in gross profit per unit of 13.4% was primarily driven by our effort to retail a higher volume of units. We believe the higher used vehicle gross profit dollars generated by our used vehicle department along with the benefits to our fixed operations business (reconditioning used vehicles) and effects of incremental F&I activity more than offset the effects of lower gross profit per used vehicle unit.

Wholesale Vehicles

     Our reported wholesale results are as follows:

		First Quarter Ended March 31,								Better / (Worse)
(in thousands except units and per unit data)		2009				2010				Change				% Change
Reported:
Revenue		$	37,796			$	31,384			$	(6,412	)			(17.0	%)
Gross profit		$	(94	)		$	(693	)		$	(599	)			(637.2	%)
Unit sales			6,532				5,200				(1,332	)			(20.4	%)
Revenue per Unit		$	5,786			$	6,035			$	249				4.3	%
Gross profit per unit		$	(14	)		$	(133	)		$	(119	)			(850.0	%)
Gross profit as a % of revenue			(0.2	%)			(2.2	%)		(200		)	bps

     Lower wholesale vehicle revenues during the first quarter ended March 31, 2010, as compared to the same prior year period, resulted from a decrease in wholesale unit volume of 20.4%. The decrease in wholesale unit volume was partially offset by an increase in wholesale unit revenue of 4.3% as compared to the same prior year period. Both the decline in wholesale unit volume and the increase in wholesale unit revenue can be primarily attributed to the implementation of our used vehicle playbook. See previous heading, “Used Vehicles”.

     During the first quarter ended March 31, 2010, wholesale vehicle gross profit per unit loss increased significantly as compared to the same period in the prior year. This is primarily due to the increased focus of retailing used vehicles that were previously disposed through our wholesale channels.

Parts, Service and Collision Repair (“Fixed Operations”)

     Our reported Fixed Operations results are as follows:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

		First Quarter Ended March 31,								Better / (Worse)
(in thousands)		2009				2010				Change				% Change
Reported:
Revenue
Parts		$	148,759			$	148,285			$	(474	)			(0.3	%)
Service			109,741				118,237				8,496				7.7	%
Collision Repair			13,141				12,848				(293	)			(2.2	%)
Total		$	271,641			$	279,370			$	7,729				2.8	%
Gross profit
Parts		$	49,739			$	49,612			$	(127	)			(0.3	%)
Service			77,501				83,672				6,171				8.0	%
Collision Repair			7,409				7,140				(269	)			(3.6	%)
Total		$	134,649			$	140,424			$	5,775				4.3	%
Gross profit as a % of revenue
Parts			33.4	%			33.5	%		10			bps
Service			70.6	%			70.8	%		20			bps
Collision Repair			56.4	%			55.6	%		(80)			bps
Total			49.6	%			50.3	%		70			bps