##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 ý
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission files 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
    
    28212(Address of principal executive offices)
    
    (Zip Code)
 (704) 566-2400
 (Registrants telephone number, including area code)
 
 ý o
 o o
  Large Accelerated Filer o
Accelerated Filer ý
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company o o ý




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##### 



INDEX TO FORM 10-Q
 PagePART I  FINANCIAL INFORMATIONITEM 1.  Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Statements of Income 
Third Quarter and Nine-month Periods Ended September 30, 2009 and September 30,
2010
    
    
    3Condensed Consolidated Balance Sheets 
December 31, 2009 and September 30, 2010
    
    
    4Condensed Consolidated Statement of Stockholders Equity 
Nine-month Periods Ended September 30, 2010
    
    
    5Condensed Consolidated Statements of Cash Flows 
Nine-month Periods Ended September 30, 2009 and September 30,2010
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7ITEM 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
    
    
    35ITEM 4.  Controls and Procedures
    
    
    36PART II  OTHER INFORMATIONITEM 1.     Legal Proceedings
    
    
    37ITEM 1A.  Risk Factors
    
    
    39ITEM 2.     Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42ITEM 6.     Exhibits
    
    
    43SIGNATURES45EX-10.24EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



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)
 Third Quarter Ended
    
    
    Nine Months EndedSeptember 30,

    
    September 30,2009

    
    2010

    
    2009

    
    2010Revenues:New vehicles
    
    $
    903,716
    
    
    $
    937,709
    
    
    $
    2,367,236
    
    
    $
    2,611,988Used vehicles
    
    
    379,389
    
    
    
    453,815
    
    
    
    1,081,855
    
    
    
    1,339,323Wholesale vehicles
    
    
    34,588
    
    
    
    47,597
    
    
    
    105,451
    
    
    
    108,336Total vehicles
    
    
    1,317,693
    
    
    
    1,439,121
    
    
    
    3,554,542
    
    
    
    4,059,647Parts, service and collision repair
    
    
    268,801
    
    
    
    283,741
    
    
    
    807,556
    
    
    
    842,697Finance, insurance and other
    
    
    43,403
    
    
    
    47,398
    
    
    
    116,558
    
    
    
    133,607Total revenues
    
    
    1,629,897
    
    
    
    1,770,260
    
    
    
    4,478,656
    
    
    
    5,035,951Cost of Sales:New vehicles
    
    
    (840,173
    )
    
    
    (877,691
    )
    
    
    (2,207,435
    )
    
    
    (2,440,097
    )Used vehicles
    
    
    (347,187
    )
    
    
    (418,576
    )
    
    
    (986,355
    )
    
    
    (1,231,720
    )Wholesale vehicles
    
    
    (36,216
    )
    
    
    (49,053
    )
    
    
    (108,275
    )
    
    
    (112,270
    )Total vehicles
    
    
    (1,223,576
    )
    
    
    (1,345,320
    )
    
    
    (3,302,065
    )
    
    
    (3,784,087
    )Parts, service and collision repair
    
    
    (132,018
    )
    
    
    (143,141
    )
    
    
    (400,328
    )
    
    
    (421,711
    )Total cost of sales
    
    
    (1,355,594
    )
    
    
    (1,488,461
    )
    
    
    (3,702,393
    )
    
    
    (4,205,798
    )Gross profit
    
    
    274,303
    
    
    
    281,799
    
    
    
    776,263
    
    
    
    830,153Selling, general and administrative expenses
    
    
    (214,140
    )
    
    
    (226,331
    )
    
    
    (619,560
    )
    
    
    (672,542
    )Impairment charges
    
    
    (620
    )
    
    
    (87
    )
    
    
    (5,707
    )
    
    
    (132
    )Depreciation and amortization
    
    
    (8,131
    )
    
    
    (8,731
    )
    
    
    (23,865
    )
    
    
    (25,729
    )Operating income
    
    
    51,412
    
    
    
    46,650
    
    
    
    127,131
    
    
    
    131,750Other income (expense):Interest expense, floor plan
    
    
    (4,533
    )
    
    
    (5,430
    )
    
    
    (14,925
    )
    
    
    (15,615
    )Interest expense, other, net
    
    
    (18,277
    )
    
    
    (15,226
    )
    
    
    (57,998
    )
    
    
    (48,024
    )Interest expense, non-cash, convertible debt
    
    
    7,818
    
    
    
    (1,768
    )
    
    
    1,556
    
    
    
    (5,175
    )Interest expense, non-cash, cash flow swaps
    
    
    (2,180
    )
    
    
    (1,484
    )
    
    
    (5,359
    )
    
    
    (5,402
    )Other income (expense), net
    
    
    2,449
    
    
    
    (351
    )
    
    
    2,519
    
    
    
    (7,522
    )Total other expense
    
    
    (14,723
    )
    
    
    (24,259
    )
    
    
    (74,207
    )
    
    
    (81,738
    )Income from continuing operations before taxes
    
    
    36,689
    
    
    
    22,391
    
    
    
    52,924
    
    
    
    50,012Income tax provision
    
    
    (16,510
    )
    
    
    (8,442
    )
    
    
    (23,816
    )
    
    
    (19,905
    )Income from continuing operations
    
    
    20,179
    
    
    
    13,949
    
    
    
    29,108
    
    
    
    30,107Discontinued operations:Loss from operations and the sale of discontinued franchises
    
    
    (8,551
    )
    
    
    (633
    )
    
    
    (19,203
    )
    
    
    (6,149
    )Income tax benefit (expense)
    
    
    3,966
    
    
    
    (331
    )
    
    
    7,393
    
    
    
    1,617Loss from discontinued operations
    
    
    (4,585
    )
    
    
    (964
    )
    
    
    (11,810
    )
    
    
    (4,532
    )Net income
    
    $
    15,594
    
    
    $
    12,985
    
    
    $
    17,298
    
    
    $
    25,575Basic earnings per share:Earnings per share from continuing operations
    
    $
    0.47
    
    
    $
    0.26
    
    
    $
    0.70
    
    
    $
    0.57Loss per share from discontinued operations
    
    
    (0.10
    )
    
    
    (0.01
    )
    
    
    (0.28
    )
    
    
    (0.09
    )Earnings per share
    
    $
    0.37
    
    
    $
    0.25
    
    
    $
    0.42
    
    
    $
    0.48Weighted average common shares outstanding
    
    
    42,305
    
    
    
    52,311
    
    
    
    41,130
    
    
    
    52,151Diluted earnings per share:Earnings per share from continuing operations
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.48
    
    
    $
    0.56Loss per share from discontinued operations
    
    
    (0.07
    )
    
    
    (0.02
    )
    
    
    (0.22
    )
    
    
    (0.07
    )Earnings per share
    
    $
    0.17
    
    
    $
    0.23
    
    
    $
    0.26
    
    
    $
    0.49Weighted average common shares outstanding
    
    
    63,195
    
    
    
    65,851
    
    
    
    52,529
    
    
    
    65,711
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands)
 (Unaudited)December 31,
    
    
    September 30,2009

    
    2010ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    30,035
    
    
    $
    10,623Receivables, net
    
    
    232,969
    
    
    
    166,546Inventories
    
    
    795,275
    
    
    
    863,917Assets held for sale
    
    
    12,167
    
    
    
    13,548Other current assets
    
    
    14,937
    
    
    
    15,582Total Current Assets
    
    
    1,085,383
    
    
    
    1,070,216Property and Equipment, net
    
    
    382,085
    
    
    
    392,173Goodwill
    
    
    469,482
    
    
    
    468,516Other Intangible Assets, net
    
    
    80,806
    
    
    
    79,563Other Assets
    
    
    51,099
    
    
    
    61,633Total Assets
    
    $
    2,068,855
    
    
    $
    2,072,101LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Notes
payable - floor plan - trade
    
    $
    214,871
    
    
    $
    436,444Notes
payable - floor plan - non-trade
    
    
    548,493
    
    
    
    339,117Trade accounts payable
    
    
    55,345
    
    
    
    47,968Accrued interest
    
    
    16,146
    
    
    
    10,035Other accrued liabilities
    
    
    144,709
    
    
    
    145,447Liabilities
associated with assets held for sale - non-trade
    
    
    3,346
    
    
    
    -Current maturities of long-term debt
    
    
    23,991
    
    
    
    23,704Total Current Liabilities
    
    
    1,006,901
    
    
    
    1,002,715Long-Term Debt
    
    
    552,150
    
    
    
    529,632Other Long-Term Liabilities
    
    
    141,052
    
    
    
    143,631Stockholders 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; 55,635,206 shares issued and 40,657,683 shares outstanding at
September 30, 2010
    
    
    550
    
    
    
    556Class B common stock; $.01 par value; 30,000,000 shares authorized;
12,029,375 shares outstanding at December 31, 2009 and September 30,
2010
    
    
    121
    
    
    
    121Paid-in capital
    
    
    662,186
    
    
    
    666,401Accumulated deficit
    
    
    (35,180
    )
    
    
    (9,604
    )Accumulated other comprehensive income (loss)
    
    
    (22,350
    )
    
    
    (23,703
    )Treasury stock, at cost (14,887,316 Class A shares held at December 31, 2009
and 14,977,523 Class A shares held at September 30, 2010)
    
    
    (236,575
    )
    
    
    (237,648
    )Total Stockholders Equity
    
    
    368,752
    
    
    
    396,123Total Liabilities and Stockholders Equity
    
    $
    2,068,855
    
    
    $
    2,072,101
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (Dollars and shares in thousands)
 (Unaudited)
 AccumulatedClass A
    
    
    Class B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Total
    
    
    Compre-Common Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Treasury
    
    
    Comprehensive
    
    
    Stockholders
    
    
    hensiveShares

    
    Amount

    
    Shares

    
    Amount

    
    Capital

    
    Deficit

    
    Stock

    
    Income (Loss)

    
    Equity

    
    IncomeBALANCE AT DECEMBER 31, 2009
    
    
    54,987
    
    
    
    550
    
    
    
    12,029
    
    
    
    121
    
    
    
    662,186
    
    
    
    (35,180
    )
    
    
    (236,575
    )
    
    
    (22,350
    )
    
    
    368,752Shares awarded under stock compensation plans
    
    
    292
    
    
    
    3
    
    
    
    -
    
    
    
    -
    
    
    
    1,185
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    1,188
    
    
    
    -Purchases of treasury stock
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (1,073
    )
    
    
    -
    
    
    
    (1,073
    )
    
    
    -Income tax benefit associated with stock compensation plans
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    636
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    636
    
    
    
    -Income tax benefit associated with convertible note hedge
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    205
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    205
    
    
    
    -Fair value of interest rate swap agreements, net of tax
benefit of $830
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (1,353
    )
    
    
    (1,353
    )
    
    
    (1,353
    )Stock-based compensation expense
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    419
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    419
    
    
    
    -Restricted stock amortization, net of forfeitures
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    1,773
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    1,773
    
    
    
    -Net income
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    25,575
    
    
    
    -
    
    
    
    -
    
    
    
    25,575
    
    
    
    25,575Other
    
    
    356
    
    
    
    3
    
    
    
    -
    
    
    
    -
    
    
    
    (3
    )
    
    
    1
    
    
    
    -
    
    
    
    -
    
    
    
    1
    
    
    
    -BALANCE AT SEPTEMBER 30, 2010
    
    
    55,635
    
    
    
    556
    
    
    
    12,029
    
    
    $
    121
    
    
    $
    666,401
    
    
    $
    (9,604
    )
    
    $
    (237,648
    )
    
    $
    (23,703
    )
    
    $
    396,123
    
    
    $
    24,222
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2009

    
    2010CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    17,298
    
    
    $
    25,575Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of property, plant and equipment
    
    
    24,905
    
    
    
    25,938Provision for bad debt expense
    
    
    1,255
    
    
    
    756Other amortization
    
    
    1,242
    
    
    
    1,242Debt issuance cost amortization
    
    
    9,909
    
    
    
    2,702Debt discount amortization, net of premium amortization
    
    
    9,957
    
    
    
    3,872Stock - based compensation expense
    
    
    437
    
    
    
    419Amortization of restricted stock
    
    
    1,802
    
    
    
    1,773Restricted stock forfeiture
    
    
    (182
    )
    
    
    -Deferred income taxes
    
    
    (2,390
    )
    
    
    (656
    )Equity interest in earnings of investees
    
    
    (501
    )
    
    
    (585
    )Asset impairment charges
    
    
    9,116
    
    
    
    132Loss (gain) on disposal of franchises and property and equipment
    
    
    (226
    )
    
    
    (978
    )Loss on exit of leased dealerships
    
    
    7,511
    
    
    
    2,321Loss (gain) on retirement of debt
    
    
    (2,095
    )
    
    
    7,665Derivative fair value adjustments
    
    
    (11,300
    )
    
    
    -Changes in assets and liabilities that relate to operations:Receivables
    
    
    68,535
    
    
    
    65,667Inventories
    
    
    383,205
    
    
    
    (82,768
    )Other assets
    
    
    (24,362
    )
    
    
    (14,706
    )Notes payable - floor plan - trade
    
    
    (92,597
    )
    
    
    221,573Trade accounts payable and other liabilities
    
    
    41,207
    
    
    
    (21,886
    )Total adjustments
    
    
    425,428
    
    
    
    212,481Net cash provided by operating activities
    
    
    442,726
    
    
    
    238,056CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (36,048
    )
    
    
    (44,039
    )Proceeds from sales of property and equipment
    
    
    1,797
    
    
    
    979Proceeds from sale of franchises
    
    
    22,839
    
    
    
    24,644Distributions from equity investees
    
    
    300
    
    
    
    600Net cash used in investing activities
    
    
    (11,112
    )
    
    
    (17,816
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net (repayments) borrowings on notes payable floor plan - non-trade
    
    
    (369,726
    )
    
    
    (212,722
    )Borrowings on revolving credit facilities
    
    
    534,585
    
    
    
    40,000Repayments on revolving credit facilities
    
    
    (584,854
    )
    
    
    (40,000
    )Proceeds from long-term debt
    
    
    167,039
    
    
    
    209,977Principal payments on long-term debt
    
    
    (162,948
    )
    
    
    (4,673
    )Increase in restricted cash
    
    
    (106,913
    )
    
    
    -Settlement of cash flow swaps
    
    
    (16,454
    )
    
    
    -Repurchase of debt securities
    
    
    -
    
    
    
    (233,190
    )Purchase of treasury stock
    
    
    (61
    )
    
    
    (1,073
    )Income tax benefit associated with stock compensation plans
    
    
    -
    
    
    
    636Income tax benefit associated with convertible hedge
    
    
    4,442
    
    
    
    205Issuance of shares under stock compensation plans
    
    
    -
    
    
    
    1,188Issuance of common stock related to private placement
    
    
    101,812
    
    
    
    -Dividends paid
    
    
    (4,893
    )
    
    
    -Net cash used in financing activities
    
    
    (437,971
    )
    
    
    (239,652
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (6,357
    )
    
    
    (19,412
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    6,971
    
    
    
    30,035CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    614
    
    
    $
    10,623SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:Change in fair value of cash flow hedging instruments (net of tax expense of $5,859 and tax
benefit of $830 for the nine-month period ended September 30, 2009 and 2010, respectively)
    
    $
    9,728
    
    
    $
    (1,353
    )Issuance of shares related to debt refinance
    
    $
    3,947
    
    
    $
    -SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid (received) during the year for:Interest, net of amount capitalized
    
    $
    90,116
    
    
    $
    74,778Income taxes
    
    $
    (21,229
    )
    
    $
    (15,289
    )
  6




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Summary of Significant Accounting Policies
 Basis of Presentation
 Recent Developments
 Reclassifications
 Lease Exit Accruals
 (dollars in thousands)Balance, December 31, 2009
    
    $
    47,825Lease exit expense
    
    
    2,321Payments
    
    
    (6,567
    )Balance, September 30, 2010
    
    $
    43,579
 Income Tax Expense
 Discontinued Operations
 Dispositions
 7




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (dollars in thousands)December 31,

    
    September 30,2009

    
    2010Inventories
    
    $
    4,528
    
    
    $
    -Property and equipment, net
    
    
    4,838
    
    
    
    13,548Goodwill
    
    
    2,801
    
    
    
    -Assets held for sale
    
    $
    12,167
    
    
    $
    13,548
  (dollars in thousands)Third Quarter Ended September 30,

    
    Nine Months Ended September 30,2009

    
    2010

    
    2009

    
    2010Loss from operations
    
    $
    (3,302
    )
    
    $
    (1,773
    )
    
    $
    (8,548
    )
    
    $
    (5,920
    )Gain (loss) on disposal of franchises
    
    
    (103
    )
    
    
    829
    
    
    
    (572
    )
    
    
    2,182Lease exit charges
    
    
    (5,146
    )
    
    
    311
    
    
    
    (6,675
    )
    
    
    (2,411
    )Property impairment charges
    
    
    -
    
    
    
    -
    
    
    
    (1,822
    )
    
    
    -Goodwill impairment charges
    
    
    -
    
    
    
    -
    
    
    
    (1,586
    )
    
    
    -Pre-tax loss
    
    $
    (8,551
    )
    
    $
    (633
    )
    
    $
    (19,203
    )
    
    $
    (6,149
    )Total Revenues
    
    $
    74,018
    
    
    $
    9,473
    
    
    $
    245,935
    
    
    $
    55,127
   Inventories
  (dollars in thousands)December 31,

    
    September 30,2009

    
    2010New vehicles
    
    $
    557,319
    
    
    $
    607,742Used vehicles
    
    
    138,401
    
    
    
    149,890Parts and accessories
    
    
    51,470
    
    
    
    50,702Other
    
    
    52,613
    
    
    
    55,583$
    799,803
    
    
    $
    863,917Less inventories classified as assets held for sale
    
    
    (4,528
    )
    
    
    -Inventories
    
    $
    795,275
    
    
    $
    863,917
 8




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Property and Equipment
  (dollars in thousands)December 31,

    
    September 30,2009

    
    2010Land
    
    $
    61,886
    
    
    $
    64,870Building and improvements
    
    
    322,632
    
    
    
    320,389Office equipment and fixtures
    
    
    75,801
    
    
    
    77,939Parts and service equipment
    
    
    54,981
    
    
    
    55,910Company vehicles
    
    
    8,440
    
    
    
    8,151Construction in progress
    
    
    40,000
    
    
    
    51,557Total, at cost
    
    
    563,740
    
    
    
    578,816Less accumulated depreciation
    
    
    (176,817
    )
    
    
    (173,095
    )Subtotal
    
    
    386,923
    
    
    
    405,721Less assets held for sale
    
    
    (4,838
    )
    
    
    (13,548
    )Property and equipment, net
    
    $
    382,085
    
    
    $
    392,173
  Goodwill And Intangible Assets
 (dollars in thousands)Franchise

    
    
    
    
    
    AccumulatedAgreements

    
    Gross Goodwill

    
    Impairment

    
    Net GoodwillBalance, December 31, 2009
    
    $
    64,835
    
    
    $
    1,266,207
    
    
    $
    (796,725
    )
    
    $
    469,482Reductions from sales of franchises
    
    
    -
    
    
    
    (3,767
    )
    
    
    -
    
    
    
    (3,767
    )Reclassification from assets held for sale, net
    
    
    -
    
    
    
    2,801
    
    
    
    -
    
    
    
    2,801Balance, September 30, 2010
    
    $
    64,835
    
    
    $
    1,265,241
    
    
    $
    (796,725
    )
    
    $
    468,516
   Long-term Debt
  9




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (dollars in thousands)December 31,

    
    September 30,2009

    
    20102010 Revolving Credit Facility (1)
    
    $
    -
    
    
    $
    -Senior Subordinated Notes bearing interest at 9.0%
    
    
    -
    
    
    
    210,000Senior Subordinated Notes bearing interest at 8.625%
    
    
    275,000
    
    
    
    42,855Convertible Senior Notes bearing interest at 5.0%
    
    
    172,500
    
    
    
    172,500Convertible Senior Subordinated Notes bearing interest at 4.25%
    
    
    17,045
    
    
    
    16,000Notes payable to a finance company bearing interest from 9.52% to 10.52% (with
a weighted average of 10.19%)
    
    
    17,778
    
    
    
    16,180Mortgage notes to finance companies-fixed rate, bearing interest from 4.50% to 7.03%
    
    
    78,424
    
    
    
    84,341Mortgage notes to finance companies-variable rate, bearing interest at 1.25 to 3.30 percentage
points above one-month LIBOR
    
    
    38,251
    
    
    
    30,842Net debt discount and premium (2)
    
    
    (29,199
    )
    
    
    (25,506
    )Other
    
    
    6,342
    
    
    
    6,124$
    576,141
    
    
    $
    553,336Less current maturities
    
    
    (23,991
    )
    
    
    (23,704
    )Long-term debt
    
    $
    552,150
    
    
    $
    529,632
   2006 Credit Facility
  2010 Credit Facilities
     10




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Covenants
  CovenantConsolidated
    
    ConsolidatedConsolidated
    
    Fixed Charge
    
    Total SeniorLiquidity
    
    Coverage
    
    Secured Debt toRatio
    
    Ratio
    
    EBITDA RatioThrough March 30, 2011
    
    
    ≥ 1.00
    
    
    
    ≥ 1.10
    
    
    
    ≤ 2.25March 31, 2011 through and including March 30, 2012
    
    
    ≥ 1.05
    
    
    
    ≥ 1.15
    
    
    
    ≤ 2.25March 31, 2012 and thereafter
    
    
    ≥ 1.10
    
    
    
    ≥ 1.20
    
    
    
    ≤ 2.25September 30, 2010 actual
    
    
    1.15
    
    
    
    1.29
    
    
    
    1.12
   9.0% Senior Subordinated Notes (9.0% Notes)
  11




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 RedemptionPriceBeginning on March 15, 2014
    
    
    104.50
    %Beginning on March 15, 2015
    
    
    102.25
    %Beginning on March 15, 2016 and thereafter
    
    
    100.00
    %
     8.625% Senior Subordinated Notes (8.625% Notes)
     12




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   5.0% Convertible Senior Notes (5.0% Convertible Notes)
    4.25% Convertible Senior Subordinated Notes (4.25% Convertible Notes)
   13




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Notes Payable to a Finance Company
  Mortgage Notes
  Derivative Instruments and Hedging Activities
  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$
    3.6
    
    
    
    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$
    11.4
    
    
    
    4.655%
    
    one-month LIBOR
    
    December 10, 2017$
    8.8
    
    
    
    6.860%
    
    one-month LIBOR
    
    August 1, 2017$
    7.0
    
    
    
    4.330%
    
    one-month LIBOR
    
    July 1, 2013$
    100.0
    
    (3)
    
    3.280%
    
    one-month LIBOR
    
    July 1, 2015$
    100.0
    
    (3)
    
    3.300%
    
    one-month LIBOR
    
    July 1, 2015
     14




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Per Share Data and Stockholders Equity
  15




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the Third Quarter Ended September 30, 2009Income
    
    LossFrom Continuing
    
    From DiscontinuedOperations
    
    Operations
    
    Net IncomeClass A & B
    
    
    
    
    
    Per Common
    
    
    
    
    
    Per Common
    
    
    
    
    
    Per CommonShares
    
    Amount
    
    Share Amount
    
    Amount
    
    Share Amount
    
    Amount
    
    Share Amount(dollars in thousands except per share amounts)Earnings (Loss) and Shares
    
    
    42,305
    
    
    $
    20,179
    
    
    
    
    
    
    $
    (4,585
    )
    
    
    
    
    
    $
    15,594Effect of Participating Securities:Unvested Restricted Stock and Stock Units
    
    
    -
    
    
    
    (151
    )
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    (151
    )Basic Earnings (Loss) Per Share
    
    
    42,305
    
    
    $
    20,028
    
    
    $
    0.47
    
    
    $
    (4,585
    )
    
    $
    (0.10
    )
    
    $
    15,443
    
    
    $
    0.37Effect of Dilutive Securities:Contingently Convertible Debt (2009 6.0% Convertibles)
    
    
    19,004
    
    
    
    (4,720
    )
    
    
    
    
    
    
    (196
    )
    
    
    
    
    
    
    (4,916
    )Contingently Convertible Debt (2009 5.0% Convertibles)
    
    
    981
    
    
    
    -
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    -Contingently Convertible Debt (2002 5.25% Convertibles)
    
    
    -
    
    
    
    (15
    )
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    1Equity compensation plans
    
    
    905
    
    
    
    -
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    -Diluted Earnings (Loss) Per Share
    
    
    63,195
    
    
    $
    15,293
    
    
    $
    0.24
    
    
    $
    (4,765
    )
    
    $
    (0.07
    )
    
    $
    10,528
    
    
    $
    0.17For the Third Quarter Ended September 30, 2010Income
    
    LossFrom Continuing
    
    From DiscontinuedOperations
    
    Operations
    
    Net IncomeClass A & B
    
    
    
    
    
    Per Common
    
    
    
    
    
    Per Common
    
    
    
    
    
    Per CommonShares
    
    Amount
    
    Share Amount
    
    Amount
    
    Share Amount
    
    Amount
    
    Share Amount(dollars in thousands except per share amounts)Earnings (Loss) and Shares
    
    
    52,311
    
    
    $
    13,949
    
    
    
    
    
    
    $
    (964
    )
    
    
    
    
    
    $
    12,985Effect of Participating Securities:Unvested Restricted Stock and Stock Units
    
    
    -
    
    
    
    (137
    )
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    (137
    )Basic Earnings (Loss) Per Share
    
    
    52,311
    
    
    $
    13,812
    
    
    $
    0.26
    
    
    $
    (964
    )
    
    $
    (0.01
    )
    
    $
    12,848
    
    
    $
    0.25Effect of Dilutive Securities:Contingently Convertible Debt (2009 5.0% Convertibles)
    
    
    12,890
    
    
    
    2,498
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    2,514Equity compensation plans
    
    
    650
    
    
    
    -
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    -Diluted Earnings (Loss) Per Share
    
    
    65,851
    
    
    $
    16,310
    
    
    $
    0.25
    
    
    $
    (948
    )
    
    $
    (0.02
    )
    
    $
    15,362
    
    
    $
    0.23For the Nine Months Ended September 30, 2009Income
    
    LossFrom Continuing
    
    From DiscontinuedOperations
    
    Operations
    
    Net IncomePer Common
    
    
    
    
    
    Per Common
    
    
    
    
    
    Per CommonShares
    
    Amount
    
    Share Amount
    
    Amount
    
    Share Amount
    
    Amount
    
    Share Amount(amounts in thousands except per share amounts)Earnings (Loss) and Shares
    
    
    41,130
    
    
    $
    29,108
    
    
    
    
    
    
    $
    (11,810
    )
    
    
    
    
    
    $
    17,298Effect of Participating Securities:Unvested Restricted Stock and Stock Units
    
    
    -
    
    
    
    (224
    )
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    (224
    )Basic Earnings (Loss) Per Share
    
    
    41,130
    
    
    $
    28,884
    
    
    $
    0.70
    
    
    $
    (11,810
    )
    
    $
    (0.28
    )
    
    $
    17,074
    
    
    $
    0.42Effect of Dilutive Securities:Contingently Convertible Debt (2009 6.0% Convertibles)
    
    
    10,473
    
    
    
    (3,440
    )
    
    
    
    
    
    
    (149
    )
    
    
    
    
    
    
    (3,589
    )Contingently Convertible Debt (2009 5.0% Convertibles)
    
    
    331
    
    
    
    -
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    -Equity compensation plans
    
    
    595
    
    
    
    -
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    -Diluted Earnings (Loss) Per Share
    
    
    52,529
    
    
    $
    25,444
    
    
    $
    0.48
    
    
    $
    (11,959
    )
    
    $
    (0.22
    )
    
    $
    13,485
    
    
    $
    0.26For the Nine Months Ended September 30, 2010Income
    
    LossFrom Continuing
    
    From DiscontinuedOperations
    
    Operations
    
    Net IncomePer Common
    
    
    
    
    
    Per Common
    
    
    
    
    
    Per CommonShares
    
    Amount
    
    Share Amount
    
    Amount
    
    Share Amount
    
    Amount
    
    Share Amount(amounts in thousands except per share amounts)Earnings (Loss) and Shares
    
    
    52,151
    
    
    $
    30,107
    
    
    
    
    
    
    $
    (4,532
    )
    
    
    
    
    
    $
    25,575Effect of Participating Securities:Unvested Restricted Stock and Stock Units
    
    
    -
    
    
    
    (295
    )
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    (295
    )Basic Earnings (Loss) Per Share
    
    
    52,151
    
    
    $
    29,812
    
    
    $
    0.57
    
    
    $
    (4,532
    )
    
    $
    (0.09
    )
    
    $
    25,280
    
    
    $
    0.48Effect of Dilutive Securities:Contingently Convertible Debt (2009 5.0% Convertibles)
    
    
    12,890
    
    
    
    6,709
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    6,737Equity compensation plans
    
    
    670
    
    
    
    -
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    -Diluted Earnings (Loss) Per Share
    
    
    65,711
    
    
    $
    36,521
    
    
    $
    0.56
    
    
    $
    (4,504
    )
    
    $
    (0.07
    )
    
    $
    32,017
    
    
    $
    0.49
  16




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 8. Contingencies
 Legal and Other Proceedings:
      17




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Guarantees and Indemnification Obligations:
   9. Fair Value Measurements
      18




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Fair Value at Reporting Date Using:SignificantQuoted Prices in
    
    Other
    
    Significant(dollars in millions)
    
    
    
    
    
    Active Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsTotal
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Cash Flow Swaps (1)
    
    $
    40.0
    
    
    
    -
    
    
    $
    40.0
    
    
    
    -Total
    
    $
    40.0
    
    
    $
    -
    
    
    $
    40.0
    
    
    $
    -
 (1)

- Included in Other Long-Term Liabilities in the accompanying Condensed Consolidated
Balance Sheet.
   19




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (dollars in thousands)December 31, 2009
    
    September 30, 2010Fair Value
    
    Carrying Value
    
    Fair Value
    
    Carrying Value9.00% Senior 
Subordinated Notes (1)
    
    $
    -
    
    
    $
    -
    
    
    $
    219,870
    
    
    $
    208,5978.625% Senior 
Subordinated Notes (1)
    
    $
    266,750
    
    
    $
    273,455
    
    
    $
    38,998
    
    
    $
    42,6585.0% Convertible Senior 
Notes (1)
    
    $
    188,072
    
    
    $
    142,743
    
    
    $
    181,125
    
    
    $
    146,5064.25% Convertible Senior 
Subordinated Notes (1)
    
    $
    16,363
    
    
    $
    16,423
    
    
    $
    16,000
    
    
    $
    15,889Mortgage Notes (2)
    
    $
    78,333
    
    
    $
    78,424
    
    
    $
    84,239
    
    
    $
    84,341Notes Payable to a
Finance Company (2)
    
    $
    17,859
    
    
    $
    20,260
    
    
    $
    16,243
    
    
    $
    18,150
 (1)
    
    As determined by market quotations as of September 30, 2010.(2)
    
    As determined by discounted cash flows.
 10. Subsequent Events
   20




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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.
  Overview
     21




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Percentage of New Vehicle Revenue
    
    Percentage of New Vehicle RevenueThird Quarter Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2010
    
    2009
    
    2010Brand (1)BMW
    
    16.0%
    
    17.2%
    
    17.0%
    
    16.6%Honda
    
    16.6%
    
    13.7%
    
    15.9%
    
    14.4%Toyota
    
    12.6%
    
    11.6%
    
    11.7%
    
    11.2%Mercedes
    
    9.2%
    
    9.4%
    
    9.4%
    
    9.9%Ford
    
    8.7%
    
    8.9%
    
    9.7%
    
    8.9%General Motors (2)
    
    6.2%
    
    6.7%
    
    6.5%
    
    6.7%Lexus
    
    6.3%
    
    5.5%
    
    5.9%
    
    5.9%Cadillac
    
    4.0%
    
    5.6%
    
    4.2%
    
    5.3%Other (3)
    
    4.4%
    
    3.8%
    
    4.2%
    
    3.5%Audi
    
    2.6%
    
    3.1%
    
    2.6%
    
    3.1%Volkswagen
    
    2.1%
    
    2.4%
    
    2.2%
    
    2.3%Hyundai
    
    2.2%
    
    2.0%
    
    2.0%
    
    2.1%Land Rover
    
    1.7%
    
    1.7%
    
    1.6%
    
    1.9%Porsche
    
    1.4%
    
    1.8%
    
    1.4%
    
    1.7%Infiniti
    
    1.2%
    
    1.6%
    
    1.2%
    
    1.5%Nissan
    
    1.3%
    
    1.3%
    
    1.0%
    
    1.4%Volvo
    
    1.5%
    
    1.1%
    
    1.3%
    
    1.2%Other Luxury (4)
    
    1.0%
    
    1.3%
    
    1.1%
    
    1.1%Acura
    
    0.7%
    
    1.0%
    
    0.8%
    
    1.0%Chrysler (5)
    
    0.3%
    
    0.3%
    
    0.3%
    
    0.3%Total
    
    100.0%
    
    100.0%
    
    100.0%
    
    100.0%
 (1)
    
    In accordance with the provisions of Presentation of Financial Statements in the Accounting
Standards Codification (the ASC), prior years income statement data reflect reclassifications
to exclude franchises sold, identified for sale, or terminated subsequent to September 30, 2009 which
had not been previously included in discontinued operations, or include previously held for sale
franchises which subsequently were reclassified to held and used. See Notes 1 and 2 to our
accompanying
Unaudited Condensed Consolidated Financial Statements which discuss these and other factors that
affect
the comparability of the information for the periods presented.(2)
    
    Includes Buick, GMC and Chevrolet.(3)
    
    Includes Kia, Mini, Scion and Subaru.(4)
    
    Includes Hummer, Jaguar and Saab.(5)
    
    Includes Chrysler, Dodge and Jeep.
 Results of Operations
  New Vehicles
  22




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 SAAR (in millions of vehicles)2009
    
    2010
    
    % ChangeThird Quarter Ended September 30,
    
    
    11.6
    
    
    
    11.6
    
    
    0.0%Nine Months Ended September 30,
    
    
    10.2
    
    
    
    11.3
    
    
    10.8%
 Source: Bloomberg Financial Markets, via Stephens Inc.
  Third Quarter Ended September 30,
    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeRevenue
    
    $
    903,716
    
    
    $
    937,709
    
    
    $
    33,993
    
    
    
    3.8%Gross profit
    
    $
    63,543
    
    
    $
    60,018
    
    
    $
    (3,525
    )
    
    
    (5.5
    %)Unit sales
    
    
    29,075
    
    
    
    27,800
    
    
    
    (1,275
    )
    
    
    (4.4
    %)Revenue per Unit
    
    $
    31,082
    
    
    $
    33,731
    
    
    $
    2,649
    
    
    
    8.5%Gross profit per unit
    
    $
    2,185
    
    
    $
    2,159
    
    
    $
    (26
    )
    
    
    (1.2
    %)Gross profit as a % of revenue
    
    
    7.0%
    
    
    
    6.4%
    
    
    (60
    )
    
    bpsNine Months Ended September 30,
    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeRevenue
    
    $
    2,367,236
    
    
    $
    2,611,988
    
    
    $
    244,752
    
    
    
    10.3
    %Gross profit
    
    $
    159,801
    
    
    $
    171,891
    
    
    $
    12,090
    
    
    
    7.6
    %Unit sales
    
    
    74,584
    
    
    
    77,851
    
    
    
    3,267
    
    
    
    4.4
    %Revenue per Unit
    
    $
    31,739
    
    
    $
    33,551
    
    
    $
    1,812
    
    
    
    5.7
    %Gross profit per unit
    
    $
    2,143
    
    
    $
    2,208
    
    
    $
    65
    
    
    
    3.0
    %Gross profit as a % of revenue
    
    
    6.8%
    
    
    
    6.6%
    
    
    (20
    )
    
    bps
    23




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
    Used Vehicles
  Third Quarter Ended September 30,
    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeRevenue
    
    $
    379,389
    
    
    $
    453,815
    
    
    $
    74,426
    
    
    
    19.6
    %Gross profit
    
    $
    32,202
    
    
    $
    35,239
    
    
    $
    3,037
    
    
    
    9.4
    %Unit sales
    
    
    20,097
    
    
    
    22,987
    
    
    
    2,890
    
    
    
    14.4
    %Revenue per Unit
    
    $
    18,878
    
    
    $
    19,742
    
    
    $
    864
    
    
    
    4.6
    %Gross profit per unit
    
    $
    1,602
    
    
    $
    1,533
    
    
    $
    (69
    )
    
    
    (4.3
    %)Gross profit as a % of revenue
    
    
    8.5%
    
    
    
    7.8%
    
    
    
    (70
    )
    
    bpsCPO revenue
    
    $
    182,925
    
    
    $
    216,846
    
    
    $
    33,921
    
    
    
    18.5
    %CPO unit sales
    
    
    7,046
    
    
    
    8,171
    
    
    
    1,125
    
    
    
    16.0
    %Nine Months Ended September 30,
    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeRevenue
    
    $
    1,081,855
    
    
    $
    1,339,323
    
    
    $
    257,468
    
    
    
    23.8
    %Gross profit
    
    $
    95,500
    
    
    $
    107,603
    
    
    $
    12,103
    
    
    
    12.7
    %Unit sales
    
    
    57,457
    
    
    
    68,861
    
    
    
    11,404
    
    
    
    19.8
    %Revenue per Unit
    
    $
    18,829
    
    
    $
    19,450
    
    
    $
    621
    
    
    
    3.3
    %Gross profit per unit
    
    $
    1,662
    
    
    $
    1,563
    
    
    $
    (99
    )
    
    
    (6.0
    %)Gross profit as a % of revenue
    
    
    8.8%
    
    
    
    8.0%
    
    
    
    (80
    )
    
    bpsCPO revenue
    
    $
    566,423
    
    
    $
    641,709
    
    
    $
    75,286
    
    
    
    13.3
    %CPO unit sales
    
    
    22,541
    
    
    
    24,124
    
    
    
    1,583
    
    
    
    7.0
    %
   24




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Wholesale Vehicles
  Third Quarter Ended September 30,

    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009

    
    2010

    
    Change

    
    % ChangeRevenue
    
    $
    34,588
    
    
    $
    47,597
    
    
    $
    13,009
    
    
    
    37.6
    %Gross profit
    
    $
    (1,628
    )
    
    $
    (1,456
    )
    
    $
    172
    
    
    
    10.6
    %Unit sales
    
    
    6,929
    
    
    
    7,272
    
    
    
    343
    
    
    
    5.0
    %Revenue per Unit
    
    $
    4,992
    
    
    $
    6,545
    
    
    $
    1,553
    
    
    
    31.1
    %Gross profit per unit
    
    $
    (235
    )
    
    $
    (200
    )
    
    $
    35
    
    
    
    14.9
    %Gross profit as a % of revenue
    
    
    (4.7%
    )
    
    
    (3.1%
    )
    
    
    160
    
    
    bpsNine Months Ended September 30,

    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009

    
    2010

    
    Change

    
    % ChangeRevenue
    
    $
    105,451
    
    
    $
    108,336
    
    
    $
    2,885
    
    
    
    2.7%Gross profit
    
    $
    (2,824
    )
    
    $
    (3,934
    )
    
    $
    (1,110
    )
    
    
    (39.3
    %)Unit sales
    
    
    18,635
    
    
    
    17,627
    
    
    
    (1,008
    )
    
    
    (5.4
    %)Revenue per Unit
    
    $
    5,659
    
    
    $
    6,146
    
    
    $
    487
    
    
    
    8.6%Gross profit per unit
    
    $
    (152
    )
    
    $
    (223
    )
    
    $
    (71
    )
    
    
    (46.7
    %)Gross profit as a % of revenue
    
    
    (2.7%
    )
    
    
    (3.6%
    )
    
    
    (90
    )
    
    bps
  Parts, Service and Collision Repair (Fixed Operations)
  25




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Third Quarter Ended September 30,

    
    Better / (Worse)(in thousands)
    
    2009

    
    2010

    
    Change

    
    % ChangeRevenueParts
    
    $
    144,669
    
    
    $
    150,871
    
    
    $
    6,202
    
    
    
    4.3
    %Service
    
    
    112,517
    
    
    
    120,620
    
    
    
    8,103
    
    
    
    7.2
    %Collision Repair
    
    
    11,615
    
    
    
    12,250
    
    
    
    635
    
    
    
    5.5
    %Total
    
    $
    268,801
    
    
    $
    283,741
    
    
    $
    14,940
    
    
    
    5.6
    %Gross profitParts
    
    $
    50,699
    
    
    $
    50,348
    
    
    $
    (351
    )
    
    
    (0.7
    %)Service
    
    
    79,500
    
    
    
    83,533
    
    
    
    4,033
    
    
    
    5.1
    %Collision Repair
    
    
    6,584
    
    
    
    6,719
    
    
    
    135
    
    
    
    2.1
    %Total
    
    $
    136,783
    
    
    $
    140,600
    
    
    $
    3,817
    
    
    
    2.8
    %Gross profit
as a % of revenueParts
    
    
    35.0
    %
    
    
    33.4
    %
    
    
    (160
    )
    
    bpsService
    
    
    70.7
    %
    
    
    69.3
    %
    
    
    (140
    )
    
    bpsCollision Repair
    
    
    56.7
    %
    
    
    54.8
    %
    
    
    (190
    )
    
    bpsTotal
    
    
    50.9
    %
    
    
    49.6
    %
    
    
    (130
    )
    
    bpsNine Months Ended September 30,

    
    Better / (Worse)(in thousands)
    
    2009

    
    2010

    
    Change

    
    % ChangeRevenueParts
    
    $
    437,433
    
    
    $
    446,060
    
    
    $
    8,627
    
    
    
    2.0
    %Service
    
    
    334,111
    
    
    
    359,683
    
    
    
    25,572
    
    
    
    7.7
    %Collision Repair
    
    
    36,012
    
    
    
    36,954
    
    
    
    942
    
    
    
    2.6
    %Total
    
    $
    807,556
    
    
    $
    842,697
    
    
    $
    35,141
    
    
    
    4.4
    %Gross profitParts
    
    $
    150,197
    
    
    $
    148,857
    
    
    $
    (1,340
    )
    
    
    (0.9
    %)Service
    
    
    236,682
    
    
    
    251,941
    
    
    
    15,259
    
    
    
    6.4
    %Collision Repair
    
    
    20,349
    
    
    
    20,188
    
    
    
    (161
    )
    
    
    (0.8
    %)Total
    
    $
    407,228
    
    
    $
    420,986
    
    
    $
    13,758
    
    
    
    3.4
    %Gross profit as a
% of revenueParts
    
    
    34.3
    %
    
    
    33.4
    %
    
    
    (90
    )
    
    bpsService
    
    
    70.8
    %
    
    
    70.0
    %
    
    
    (80
    )
    
    bpsCollision Repair
    
    
    56.5
    %
    
    
    54.6
    %
    
    
    (190
    )
    
    bpsTotal
    
    
    50.4
    %
    
    
    50.0
    %
    
    
    (40
    )
    
    bps
   26




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
   Finance, Insurance and Other (F&I)
  Third Quarter Ended September 30,
    

    Better / (Worse)(in
thousands except per unit data)
    
    2009
    

    2010
    

    Change
    

    % ChangeRevenue
    
    $
    43,403
    
    
    $
    47,398
    
    
    $
    3,995
    
    
    
    9.2
    %Gross profit per retail unit (excluding fleet)
    
    $
    920
    
    
    $
    972
    
    
    $
    52
    
    
    
    5.7
    %Nine Months Ended September 30,

    
    Better / (Worse)(in
thousands except per unit data)
    
    2009
    

    2010
    

    Change
    

    % ChangeRevenue
    
    $
    116,558
    
    
    $
    133,607
    
    
    $
    17,049
    
    
    
    14.6
    %Gross profit per retail unit (excluding fleet)
    
    $
    931
    
    
    $
    950
    
    
    $
    19
    
    
    
    2.0
    %
   Selling, General and Administrative Expenses
   27




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Third Quarter Ended September 30,

    
    Better / (Worse)(in thousands)

    2009
    

    2010
    

    Change
    

    % ChangeCompensation
    
    $
    125,438
    
    
    $
    132,316
    
    
    $
    (6,878
    )
    
    
    (5.5
    %)Advertising
    
    
    11,345
    
    
    
    12,642
    
    
    
    (1,297
    )
    
    
    (11.4
    %)Rent and Rent Related
    
    
    33,413
    
    
    
    32,743
    
    
    
    670
    
    
    
    2.0
    %Other
    
    
    43,944
    
    
    
    48,630
    
    
    
    (4,686
    )
    
    
    (10.7
    %)Total
    
    $
    214,140
    
    
    $
    226,331
    
    
    $
    (12,191
    )
    
    
    (5.7
    %)SG&A as a % of grossCompensation
    
    
    45.7
    %
    
    
    47.0
    %
    
    
    (130
    )
    
    bpsAdvertising
    
    
    4.1
    %
    
    
    4.5
    %
    
    
    (40
    )
    
    bpsRent and Rent Related
    
    
    12.2
    %
    
    
    11.6
    %
    
    
    60
    
    
    bpsOther
    
    
    16.1
    %
    
    
    17.2
    %
    
    
    (110
    )
    
    bpsTotal
    
    
    78.1
    %
    
    
    80.3
    %
    
    
    (220
    )
    
    bpsNine Months Ended September 30,

    
    Better / (Worse)(in thousands)
    
    2009
    

    2010
    

    Change
    

    % ChangeCompensation
    
    $
    355,238
    
    
    $
    396,067
    
    
    $
    (40,829
    )
    
    
    (11.5
    %)Advertising
    
    
    32,934
    
    
    
    36,445
    
    
    
    (3,511
    )
    
    
    (10.7
    %)Rent and Rent Related
    
    
    97,703
    
    
    
    98,226
    
    
    
    (523
    )
    
    
    (0.5
    %)Other
    
    
    133,685
    
    
    
    141,804
    
    
    
    (8,119
    )
    
    
    (6.1
    %)Total
    
    $
    619,560
    
    
    $
    672,542
    
    
    $
    (52,982
    )
    
    
    (8.6
    %)SG&A as a % of grossCompensation
    
    
    45.8
    %
    
    
    47.7
    %
    
    
    (190
    )
    
    bpsAdvertising
    
    
    4.2
    %
    
    
    4.4
    %
    
    
    (20
    )
    
    bpsRent and Rent Related
    
    
    12.6
    %
    
    
    11.8
    %
    
    
    80
    
    
    bpsOther
    
    
    17.2
    %
    
    
    17.1
    %
    
    
    10
    
    
    bpsTotal
    
    
    79.8
    %
    
    
    81.0
    %
    
    
    (120
    )
    
    bps
      28




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Impairment Charges
  Depreciation and Amortization
  Interest Expense, Floor Plan
   Interest Expense, Other, Net
  Increase / (Decrease) in Interest Expense, OtherThird Quarter Ended

    
    Nine Months EndedSeptember 30, 2010

    
    September 30, 2010(dollars in millions)Debt balances - Decrease in debt balances
    
    $
    (1.1
    )
    
    $
    (3.0
    )Other factors - Increase in capitalized interest
    
    
    (0.8
    )
    
    
    (0.9
    )- Decrease in interest expense related to variable to fixed rate swaps
    
    
    -
    
    
    
    (1.0
    )- Lower deferred loan cost amortization
    
    
    (1.7
    )
    
    
    (7.7
    )- Lower interest allocation to discontinued operations
    
    
    0.6
    
    
    
    1.9- Other
    
    
    (0.1
    )
    
    
    0.7$
    (3.1
    )
    
    $
    (10.0
    )
  29




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Interest Expense, Non-Cash, Convertible Debt
   Interest Expense, Non-Cash, Cash Flow Swaps
   Other Income / (Expense)
  Income Taxes
  30




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Discontinued Operations
  (dollars in thousands)Third Quarter Ended September 30,

    
    Nine Months Ended September 30,2009
    

    2010
    

    2009
    

    2010Loss from operations
    
    $
    (3,302
    )
    
    $
    (1,773
    )
    
    $
    (8,548
    )
    
    $
    (5,920
    )Gain (loss) on disposal of franchises
    
    
    (103
    )
    
    
    829
    
    
    
    (572
    )
    
    
    2,182Lease exit charges
    
    
    (5,146
    )
    
    
    311
    
    
    
    (6,675
    )
    
    
    (2,411
    )Property impairment charges
    
    
    -
    
    
    
    -
    
    
    
    (1,822
    )
    
    
    -Goodwill impairment charges
    
    
    -
    
    
    
    -
    
    
    
    (1,586
    )
    
    
    -Pre-tax loss
    
    $
    (8,551
    )
    
    $
    (633
    )
    
    $
    (19,203
    )
    
    $
    (6,149
    )Total Revenues
    
    $
    74,018
    
    
    $
    9,473
    
    
    $
    245,935
    
    
    $
    55,127
  Liquidity and Capital Resources
   31




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Floor Plan Facilities
   Long-Term Debt and Credit Facilities
  Dealership Dispositions
  Capital Expenditures
  Stock Repurchase Program
  Dividends
  32




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Cash Flows
    Guarantees and Indemnification Obligations
  Future Liquidity Outlook
   Off-Balance Sheet Arrangements
  33




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Seasonality
  34




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 Item 3: Quantitative and Qualitative Disclosures About Market Risk.
 Interest Rate Risk
    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$
    3.6
    
    
    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$
    11.4
    
    
    4.655%
    
    one-month LIBOR
    
    December 10, 2017$
    8.8
    
    
    6.860%
    
    one-month LIBOR
    
    August 1, 2017$
    7.0
    
    
    4.330%
    
    one-month LIBOR
    
    July 1, 2013$
    100.0
    (3)
    
    3.280%
    
    one-month LIBOR
    
    July 1, 2015$
    100.0
    (3)
    
    3.300%
    
    one-month LIBOR
    
    July 1, 2015
 (1)
    
    One-month LIBOR was 0.256% at September 30, 2010.(2)
    
    After December 31, 2009 changes in fair value are recorded through earnings.(3)
    
    The effective date of these forward-starting swaps is July 2, 2012.
 Foreign Currency Risk
  35




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 Item 4: Controls and Procedures.
  36




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 PART II  OTHER INFORMATION
 
 Item 1: Legal Proceedings.
     37




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38




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
RISK FACTORS
 
 Item 1A: Risk Factors
  Our significant indebtedness could materially adversely affect our financial health, limit our
ability to finance future acquisitions and capital expenditures and prevent us from fulfilling our
financial obligations.
  
    
    $775.6 million under the secured new and used inventory floor plan facilities that is
classified as current;
    
    $208.6 million in 9.0% Senior Subordinated Notes due 2018 (the 9.0% Notes),
representing $210.0 million in aggregate principal amount outstanding less unamortized
discount of approximately $1.4 million;
    
    $146.5 million in 5.0% Convertible Senior Notes due 2029 which are redeemable by us
and putable by the holders after October 1, 2014 (the 5.0% Convertible Notes),
representing $172.5 million in aggregate principal amount outstanding less unamortized
discount of approximately $26.0 million;
    
    $15.9 million in 4.25% Convertible Senior Subordinated Notes due 2015 (the 4.25%
Convertible Notes), representing $16.0 million in aggregate principal amount outstanding
less unamortized discount of approximately $0.1 million, all of which is classified as
current;
    
    $42.7 million in 8.625% Senior Subordinated Notes due 2013 (the 8.625% Notes),
representing $42.9 million in aggregate principal amount outstanding less unamortized net
discount of approximately $0.2 million;
    
    $115.4 million of mortgage notes, representing $115.2 million in aggregate principal
amount plus unamortized premium of approximately $0.2 million, due from June 2013 to
December 2029, with a weighted average interest rate of 5.2%;
and
    
    $24.3 million of other secured debt, representing $22.3 million in aggregate
principal amount plus unamortized premium of approximately
$2.0 million.
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
RISK FACTORS
  The outcome of legal and administrative proceedings we are or may become involved in could have a
material adverse effect on our future business, results of operations, financial condition and cash
flows.
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
RISK FACTORS
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Repurchases of Equity Securities
  ( in thousands, except price per share amounts)Total Number of
    
    Approximate DollarShares Purchased as
    
    Value of Shares ThatTotal Number of
    
    Average
    
    
    Part of Publicly
    
    May Yet Be PurchasedShares Purchased
    
    Price Paid
    
    
    Announced Plans or
    
    Under the Plans or(1)
    
    per Share
    
    
    Programs (2)
    
    ProgramsJuly 2010
    
    1
    
    $
    8.64
    
    
    1
    
    $
    43,566August 2010
    
    2
    
    $
    8.85
    
    
    2
    
    $
    43,551September 2010
    
    
    
    $
    
    
    
    
    
    $
    43,551Total
    
    3
    
    $
    8.78
    
    
    3
    
    $
    43,551
     (in thousands)November 1999
    
    $
    25,000February 2000
    
    
    25,000December 2000
    
    
    25,000May 2001
    
    
    25,000August 2002
    
    
    25,000February 2003
    
    
    20,000December 2003
    
    
    20,000July 2004
    
    
    20,000July 2007
    
    
    30,000October 2007
    
    
    40,000April 2008
    
    
    40,000Total
    
    $
    295,000
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Item 6: Exhibits.
 (a) Exhibits:
 ExhibitNo.
    
    Description10.24
    
    Promissory Note, dated August 12, 2010, executed by Sonic in
favor of VW Credit, Inc.,pursuant to the Credit Agreement.31.1
    
    Certification of Mr. David P. Cosper pursuant to rule 13a-14(a)31.2
    
    Certification of Mr. O. Bruton Smith pursuant to rule 13a-14(a)32.1
    
    Certification of Mr. David P. Cosper pursuant to 18 U.S.C.
Section 1350, as adopted pursuant toSection 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Mr. O. Bruton Smith pursuant to 18 U.S.C.
Section 1350, as adopted pursuant toSection 906 of the
Sarbanes-Oxley Act of 2002
 
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 Forward Looking Statements
  
    
    future acquisitions or dispositions;
    
    industry trends;
    
    future liquidity trends or needs;
    
    general economic trends, including employment rates and consumer confidence levels;
    
    vehicle sales rates and same store sales growth;
    
    future covenant compliance;
    
    our financing plans and our ability to repay or refinance existing debt when due; and
    
    our business and growth strategies.
  
    
    the number of new and used cars sold in the United States generally, and as compared
to our expectations and the expectations of the market;
    
    our ability to generate sufficient cash flows or obtain additional financing to
refinance existing debt and to fund acquisitions, capital expenditures, our share
repurchase program, dividends on our Common Stock and general operating activities;
    
    the reputation and financial condition of vehicle manufacturers whose brands we
represent, the financial incentives
vehicle manufacturers offer and their ability to design, manufacture, deliver and market
their vehicles successfully;
    
    our relationships with manufacturers, which may affect our ability to complete
additional acquisitions;
    
    adverse resolutions of one or more significant legal proceedings against us or our
dealerships;
    
    changes in laws and regulations governing the operation of automobile franchises,
accounting standards, taxation requirements, and environmental laws;
    
    general economic conditions in the markets in which we operate, including
fluctuations in interest rates, employment levels, the level of consumer spending and
consumer credit availability;
    
    the terms of any refinancing of our existing indebtedness;
    
    high competition in the automotive retailing industry, which not only creates pricing
pressures on the products and services we offer, but on businesses we seek to acquire;
    
    the timing of our ability to successfully integrate recent and potential future
acquisitions; and
    
    the rate and timing of overall economic recovery or additional decline.
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 SIGNATURES
  SONIC AUTOMOTIVE, INC.Date: October 28, 2010
    
    By:
    
    /s/ O. BRUTON SMITHO. Bruton SmithChairman and Chief Executive OfficerDate: October 28, 2010
    
    By:
    
    /s/ DAVID P. COSPERDavid P. CosperVice Chairman and Chief Financial Officer(Principal Financial Officer)
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
  ExhibitNo.
    
    Description10.24
    
    Promissory Note, dated August 12, 2010, executed by Sonic in favor of
VW Credit, Inc.,pursuant to the Credit Agreement.31.1
    
    Certification of Mr. David P. Cosper pursuant to rule 13a-14(a)31.2
    
    Certification of Mr. O. Bruton Smith pursuant to rule 13a-14(a)32.1
    
    Certification of Mr. David P. Cosper pursuant to 18 U.S.C. Section
1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    Certification of Mr. O. Bruton Smith pursuant to 18 U.S.C. Section
1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 
  46