Edgar Filing: SONIC AUTOMOTIVE INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2007

¨	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

56-2010790

(State or other jurisdiction of

incorporation or organization)

(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)

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 x No ¨

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

Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨

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

As of April 30, 2007, there were 31,021,432 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

ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Statements of Income – Three-month periods ended March 31, 2006 and March 31, 2007	3

	Condensed Consolidated Balance Sheets – December 31, 2006 and March 31, 2007	4

	Condensed Consolidated Statement of Stockholders’ Equity – Three-month period ended March 31, 2007	5

	Condensed Consolidated Statements of Cash Flows – Three-month periods ended March 31, 2006 and March 31, 2007	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	24

ITEM 4.	Controls and Procedures	24

PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings	25

ITEM 1A.	Risk Factors	26

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

ITEM 6.	Exhibits	39

SIGNATURES		41

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)


	Three Months Ended March 31,
	2006			2007
Revenues:
New vehicles	$	1,123,786		$	1,164,522
Used vehicles		310,208			331,032
Wholesale vehicles		132,476			115,156

Total vehicles		1,566,470			1,610,710
Parts, service and collision repair		273,728			294,852
Finance, insurance and other		45,879			48,846

Total revenues		1,886,077			1,954,408
Cost of sales		1,588,008			1,643,945

Gross profit		298,069			310,463
Selling, general and administrative expenses		233,451			240,288
Depreciation and amortization		4,818			5,794

Operating income		59,800			64,381
Other income / (expense):
Interest expense, floor plan		(12,297	)		(16,291	)
Interest expense, other, net		(11,949	)		(9,277	)
Other income / (expense), net		(665	)		6

Total other expense		(24,911	)		(25,562	)

Income from continuing operations before taxes		34,889			38,819
Provision for income taxes		13,357			15,140

Income from continuing operations		21,532			23,679
Discontinued operations:
Loss from operations and the sale of discontinued franchises		(7,171	)		(5,269	)
Income tax benefit		2,721			1,581

Loss from discontinued operations		(4,450	)		(3,688	)

Net income	$	17,082		$	19,991

Basic earnings (loss) per share:
Earnings per share from continuing operations	$	0.51		$	0.55
Loss per share from discontinued operations		(0.10	)		(0.08	)

Earnings per share	$	0.41		$	0.47

Weighted average common shares outstanding		42,161			42,871

Diluted earnings (loss) per share:
Earnings per share from continuing operations	$	0.49		$	0.52
Loss per share from discontinued operations		(0.10	)		(0.08	)

Earnings per share	$	0.39		$	0.44

Weighted average common shares outstanding		46,205			47,938

Dividends declared per common share	$	0.12		$	0.12

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	December 31, 2006			March 31, 2007 (Unaudited)


ASSETS
Current Assets:
Cash and cash equivalents	$	12,696		$	14,001
Receivables, net		385,849			334,097
Inventories		991,984			1,069,693
Assets held for sale		160,571			152,340
Construction in progress expected to be sold in sale-leaseback transactions		26,198			32,294
Other current assets		35,834			41,825

Total current assets		1,613,132			1,644,250
Property and Equipment, net		220,551			230,639
Goodwill, net		1,155,428			1,162,562
Other Intangible Assets, net		94,136			97,770
Other Assets		41,517			44,774

Total Assets	$	3,124,764		$	3,179,995

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable—floor plan—trade	$	377,943		$	245,163
Notes payable—floor plan—non-trade		686,515			852,085
Trade accounts payable		68,016			71,063
Accrued interest		19,336			15,980
Other accrued liabilities		180,884			178,565
Liabilities associated with assets held for sale—trade		54,229			55,309
Liabilities associated with assets held for sale—non-trade		42,063			38,908
Current maturities of long-term debt		2,707			2,696

Total current liabilities		1,431,693			1,459,769
Long-Term Debt		598,627			601,272
Other Long-Term Liabilities		190,604			199,959
Commitments and Contingencies
Stockholders’ Equity:
Class A convertible preferred stock, none issued		—			—
Class A common stock, $.01 par value; 100,000,000 shares authorized; 41,890,540 shares issued and 30,691,576 shares outstanding at December 31, 2006; 42,292,612 shares issued and 31,033,648 shares outstanding at March 31, 2007		416			422
Class B common stock; $.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at December 31, 2006 and March 31, 2007		121			121
Paid-in capital		464,011			474,674
Retained earnings (March 31, 2007 balance includes ($8,582) related to the adoption of FIN 48)		598,293			604,489
Treasury stock, at cost (11,198,964 Class A shares held at December 31, 2006 and 11,258,964 Class A shares held at March 31, 2007)		(159,001	)		(160,711	)

Total stockholders’ equity		903,840			918,995

Total Liabilities and Stockholders’ Equity	$	3,124,764		$	3,179,995

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)


	Class A Common Stock			Class B Common Stock			Paid-In Capital			Retained Earnings			Treasury Stock			Total Stockholders’ Equity			Comprehensive Income
	Class A Common Stock			Class B Common Stock
	Shares	Amount		Shares	Amount
BALANCE AT DECEMBER 31, 2006	41,890	$	416	12,029	$	121	$	464,011		$	598,293		$	(159,001	)	$	903,840
Adoption of FIN 48	—		—	—		—		—			(8,582	)		—			(8,582	)		—
Shares awarded under stock compensation plans	403		6	—		—		7,852			—			—			7,858			—
Purchases of treasury stock			—	—		—					—			(1,710	)		(1,710	)		—
Income tax benefit associated with stock compensation plans	—		—	—		—		2,122			—			—			2,122			—
Income tax benefit associated with convertible note hedge	—		—	—		—		457			—			—			457			—
Stock-based compensation expense								1,058									1,058			—
Restricted stock amortization								702									702			—
Restricted stock forfeiture								(1,528	)								(1,528	)		—
Net income	—		—	—		—		—			19,991			—			19,991			19,991
Dividends ($0.12 per share)	—		—	—		—		—			(5,213	)		—			(5,213	)		—

BALANCE AT March 31, 2007	42,293	$	422	12,029	$	121	$	474,674		$	604,489		$	(160,711	)	$	918,995		$	19,991

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Three Months Ended March 31,
	2006			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	17,082		$	19,991
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of property, plant and equipment		5,183			6,015
Provision for bad debt expense		3,405			2,410
Other amortization		72			266
Debt issuance cost amortization		212			282
Debt discount amortization, net of premium amortization		158			178
Stock—based compensation expense		1,293			1,058
Amortization of Restricted Stock		315			702
Restricted stock forfeiture		—			(1,528	)
Deferred income taxes		(455	)		(88	)
Equity interest in earnings of investees		(187	)		(159	)
Impairment of franchise agreements		925			1,250
Impairment of property and equipment		2,577			253
(Gain)/Loss on disposal of franchises and property and equipment		148			(25	)
Loss/(Gain) on exit of leased dealerships		1,057			(40	)
Changes in assets and liabilities that relate to operations:
Receivables		45,849			49,342
Inventories		(99,933	)		(65,316	)
Other assets		(9,018	)		(11,243	)
Notes payable—floor plan—trade		(121,488	)		(131,700	)
Trade accounts payable and other liabilities		(20,695	)		(782	)

Total adjustments		(190,582	)		(149,125	)

Net cash used in operating activities		(173,500	)		(129,134	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired		(69,265	)		(16,599	)
Purchases of property and equipment		(23,744	)		(21,580	)
Proceeds from sales of property and equipment		9,096			261
Proceeds from sale of franchises		5,349			—
Distributions from equity investees		600			900

Net cash used in investing activities		(77,964	)		(37,018	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes payable floor plan—non-trade		273,354			162,416
Borrowings on revolving credit facilities		386,132			261,445
Repayments on revolving credit facilities		(409,559	)		(259,444	)
Debt issuance costs		(2,776	)		—
Payments on long-term debt		(466	)		(477	)
Purchases of treasury stock		(1,503	)		(1,710	)
Income tax benefit associated with stock compensation plans		2,404			2,122
Income tax benefit associated with convertible hedge		420			457
Issuance of shares under stock compensation plans		7,820			7,858
Dividends paid		(5,017	)		(5,210	)

Net cash provided by financing activities		250,809			167,457

NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS		(655	)		1,305
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		7,566			12,696

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	6,911		$	14,001

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Change in accrual for purchases of property and equipment	$	368		$	(809	)
Adoption of FIN No. 48	$	—		$	8,582
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Change in fair value of cash flow hedging instruments (net of tax expense of $21 for the three months ended March 31, 2006)	$	35		$	—
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized	$	29,481		$	31,642
Income taxes	$	16,796		$	6,877

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 three months ended March 31, 2007 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 for the year ended December 31, 2006, which were included in Sonic’s Annual Report on Form 10-K.

Adoption of FASB Interpretation No. 48 (FIN 48) – In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. FIN 48 prescribes financial statement recognition and measurement criteria for a tax position taken or expected to be taken in a tax return. Sonic was required to apply the provisions of FIN 48 beginning January 1, 2007. As allowed in the initial year of adoption, Sonic recorded a charge of $8.6 million to 2007 beginning retained earnings resulting from its initial application of the provisions of FIN 48. At January 1, 2007, Sonic had liabilities of $23.4 million recorded related to unrecognized tax benefits. Included in the liabilities related to unrecognized tax benefits is $4.7 million related to interest and penalties which Sonic has estimated may be paid as a result of its tax positions. It is Sonic’s policy to classify the expense related to interest to be paid on underpayments of income taxes within income tax expense. In addition, substantially all of the unrecognized tax benefits existing as of the date of adoption would affect the income tax rate if ultimately recognized.

Sonic and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Sonic’s 2003 through 2006 U.S. federal income tax returns remain open to examination by the Internal Revenue Service (IRS). Sonic and its subsidiaries’ state income tax returns are open for examination by state taxing authorities for years ranging from 2001 to 2006.

Reclassifications – The statement of income for the three month period ended March 31, 2006 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, 2006. The statement of income for the three month period ended March 31, 2006 also reflects the reclassification of balances from discontinued operations to continuing operations for franchises identified for sale as of March 31, 2006 but which Sonic has decided to retain and operate as of March 31, 2007.

Recent Accounting Pronouncements – In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, the year beginning January 1, 2008 for Sonic. Sonic is currently reviewing the provisions of SFAS No. 157 to determine the impact on its consolidated operating results, financial position and cash flows.

In February 2007, the FASB issued Statements of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the year beginning January 1, 2008 for Sonic. Sonic is currently reviewing the provisions of SFAS No. 159 to determine the impact on its consolidated operating results, financial position and cash flows.

Operating Lease Accruals – During the year ended December 31, 2006, Sonic’s management decided to cease using several dealership properties which are leased under operating leases. Accordingly, operating lease exit accruals in the amount of $8.7 million were recorded at December 31, 2006. These operating lease accruals represent the present value of the lease payments, net of estimated sublease rentals, 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 operating lease accruals consists of the following:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	(dollars in thousands)
Balance, December 31, 2006	$	8,731
Lease exit expense		413
Lease exit expense recovery		(453	)
Payments		(484	)

Balance, March 31, 2007	$	8,207

2. BUSINESS ACQUISITIONS AND DISPOSITIONS

Acquisitions – The aggregate purchase price for franchises acquired during the first three months of 2007 totaled approximately $16.6 million in cash, net of cash acquired, and was funded by cash from operations, borrowings under our revolving credit facility and borrowings under our floor plan facilities. The balance sheet as of March 31, 2007 includes preliminary allocations of the purchase price of these acquisitions to the assets and liabilities acquired based on their estimated fair market values at the date of acquisition and are subject to final adjustment. As a result of these allocations, Sonic has recorded the following:

•

$10.9 million of net assets relating to dealership operations;

•

$1.6 million of intangible assets representing rights acquired under franchise agreements; and

•

$4.1 million of goodwill, all of which is expected to be tax deductible.

Dispositions – In the quarter ended March 31, 2007, Sonic identified three additional franchises to be held for sale and Sonic decided to retain and operate two franchises which were held for sale as of December 31, 2006. These three additional franchises have been identified as held for sale because of unprofitable operations or various strategic considerations. All franchises held for sale are expected to be sold within one year from March 31, 2007. The operating results of these franchises are included in the loss from discontinued operations in Sonic’s statements of income. Assets to be disposed of in connection with franchises 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, 2006		March 31, 2007
	December 31, 2006		March 31, 2007
Inventories	$	106,581	$	104,195
Property and equipment, net		32,665		33,346
Goodwill		12,325		9,349
Franchise assets		9,000		5,450

Assets held for sale	$	160,571	$	152,340

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)
	Three Months Ended March 31,
	2006			2007
Revenues	$	197,418		$	132,160
Franchise agreement impairments		925			1,250
Lease exit charges		—			184
Property impairment charges		2,094			253
Gain / (Loss) on disposal of franchises		(214	)		—
Pre-tax losses		7,171			5,269

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Sonic allocates corporate level interest to discontinued operations based on the net assets of the discontinued operations group. Interest allocated to discontinued operations for the three months ended March 31, 2006 and 2007 was $0.4 million and $0.2 million, respectively.

Property and equipment impairment charges of $0.3 million were recorded during the first quarter of 2007 in loss from discontinued operations in connection with the franchises to be sold. These impairment charges were recorded based on the estimated fair value of the property and equipment to be sold in connection with the disposal of the associated franchises and recorded values. Franchise asset impairment charges were also recorded in the first quarter of 2007 in the amount of $1.3 million. These impairment charges were related to revising the estimated fair value of franchises held for sale. A charge of $0.2 million was recorded during the first quarter of 2007 in loss from discontinued operations related to the revision of estimates related to lease exit accruals. The accruals are calculated by discounting the remaining lease payments, net of estimated sublease proceeds, as of March 31, 2007.

3. INVENTORIES

Inventories consist of the following:


	(dollars in thousands)
	December 31, 2006			March 31, 2007
	December 31, 2006			March 31, 2007
New vehicles	$	827,630		$	885,947
Used vehicles		145,028			159,149
Parts and accessories		57,266			58,455
Other		68,641			70,337

	$	1,098,565		$	1,173,888
Less inventories classified as assets held for sale		(106,581	)		(104,195	)

Inventories	$	991,984		$	1,069,693

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:


	(dollars in thousands)
	December 31, 2006			March 31, 2007
	December 31, 2006			March 31, 2007
Land	$	25,016		$	30,921
Building and improvements		143,345			165,611
Office equipment and fixtures		65,621			63,663
Parts and service equipment		44,778			49,021
Company vehicles		9,519			9,941
Construction in progress		70,594			61,523

Total, at cost		358,873			380,680
Less accumulated depreciation		(79,459	)		(84,401	)

Subtotal		279,414			296,279
Less assets held for sale		(32,665	)		(33,346	)
Less construction in progress expected to be sold in sale-leaseack transactions		(26,198	)		(32,294	)

Property and equipment, net	$	220,551		$	230,639

Other current assets – construction in progress held for sale represent dealership facilities that are or were expected to be completed and sold within one year in sale-leaseback transactions. These assets have been classified as other current assets in Sonic’s balance sheets. Under the terms of the sale-leaseback transactions, Sonic sells the properties to third party entities and enters into long-term operating leases on the facilities. Sonic did not enter into any sale-leaseback transactions during the three month period ended March 31, 2007.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of franchise agreements and goodwill for the three months ended March 31, 2007 were as follows:


	Franchise Agreements			Goodwill
Balance, December 31, 2006	$	79,700		$	1,155,428

Additions through current year acquisitions		1,600			4,112
Prior year acquisition allocations		—			46
Impairment expense (discontinued operations)		(1,250	)		—
Reclassification from assets held for sale		3,550			2,976

Balance, March 31, 2007	$	83,600		$	1,162,562

Franchise agreements and definite life intangible assets ($97.8 million and $94.1 million at March 31, 2007 and December 31, 2006, respectively) are classified as other intangible assets, net in Sonic’s balance sheets.

6. LONG-TERM DEBT

Long-term debt consists of the following:


	(dollars in thousands)
	December 31, 2006			March 31, 2007
$350 million 2006 Revolving Credit Sub-Facility (1) bearing interest at 2.00 percentage points above LIBOR	$	20,086		$	22,087
Senior Subordinated Notes bearing interest at 8.625% maturing August 15, 2013, net of net discount of $2,470 and $2,414, respectively		272,530			272,586
Convertible Senior Subordinated Notes bearing interest at 5.25%, maturing May 7, 2009, net of discount of $1,489 and $1,340, respectively		128,611			128,760
Convertible Senior Subordinated Notes bearing interest at 4.25%, maturing November 30, 2015, redeemable on or after October 31, 2010, net of discount of $3,202 and $3,018, respectively		156,798			156,982
Notes payable to a finance company bearing interest from 9.52% to 10.52% (with a weighted average of 10.19%), with combined monthly principal and interest payments of $325, maturing November 1, 2015 through September 1, 2016, and collateralized by letters of credit, including premium of $4,840 and $4,629, respectively		27,905			27,304
Fair value of Variable Swaps		(4,710	)		(3,788	)
Other notes payable (primarily equipment notes)		114			37

	$	601,334		$	603,968
Less current maturities		(2,707	)		(2,696	)

Long-term debt	$	598,627		$	601,272

(1)	– As defined in Sonic’s annual report on Form 10-K for the year ended December 31, 2006

Neither of the conversion features on the 5.25% or 4.25% convertible senior subordinated notes were satisfied during the three months ended March 31, 2007. Sonic was in compliance with all financial covenants under the above long-term debt and credit facilities as of March 31, 2007.

Subsequent to March 31, 2007, Sonic entered into an interest rate swap agreement to effectively convert a portion of its LIBOR-based variable rate debt to a fixed rate. Under the terms of this swap, Sonic will receive interest payments on a $200 million notional amount at a rate equal to the one month LIBOR rate, adjusted monthly, and will make interest payments at a fixed rate of 4.935% until the swap matures on May 1, 2012. The swap has been designated and qualifies as a cash flow hedge and, as a result, changes in the fair value of the swap will be recorded in other comprehensive (loss)/income, net of related income taxes in the Consolidated Statements of Stockholders’ Equity.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. STOCK-BASED COMPENSATION

Sonic currently has four stock compensation plans, the Sonic Automotive, Inc. 2004 Stock Incentive Plan (the “2004 Plan”), the Sonic Automotive, Inc. 1997 Stock Option Plan (the “1997 Plan”), the First America Automotive, Inc. 1997 Stock Option Plan (the “First America Plan”), and the 2005 Formula Restricted Stock Plan for Non-Employee Directors (the “2005 Formula Plan”) (collectively, the “Stock Plans”). See Sonic’s Annual Report on Form 10-K as of December 31, 2006 for a more detailed description of the Stock Plans. Subsequent to March 31, 2007, Sonic’s stockholders approved amendments to the 2004 Plan and the 2005 Formula Plan to increase the number of shares issuable under these plans to 3,000,000 and 90,000, respectively.

A summary of the status of the options related to the Stock Plans is presented below:


	Options Outstanding		Exercise Price Per Share		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(in thousands)						(in years)	(in thousands)
Balance - December 31, 2006	4,734		$	7.01 - 37.50	$	20.24

Granted	116			28.04		28.04
Exercised	(455	)		7.01 - 26.92		17.28
Forfeited	(79	)		18.88 - 26.42		21.39

Balance - March 31, 2007	4,316		$	7.25 - 37.50	$	20.74	6.0	$	47,599

Exercisable	3,056		$	7.25 - 37.50	$	19.92	4.9	$	30,301


(amounts in thousands, except per option data)	Three Months Ended March 31, 2007
Weighted Average Grant-Date Fair Value Per Option of Options Granted	$	8.74
Intrinsic Value of Options Exercised		5,584
Fair Value of Options Vested		1,034

The weighted average fair value of options granted in the three month period ended March 31, 2007 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:


Stock Option Plans	2007
Dividend yield	1.71	%
Risk free interest rates	4.50	%
Expected lives	5 years
Volatility	33.10	%

Sonic used an expected term of five years for current year option grants based on observations of past grants and exercises. The historical exercise experience indicates that the expected term is at least three years (consistent with the three year graded vesting period attached to the majority of these options) and the grants that make up this experience are in the early to middle stages of their contractual terms of ten years.

Expected volatility was estimated using Sonic’s stock price over the last four years. Prior to this four year period, Sonic was a fast growing, new company in an un-established retail sector of the equity market. As such, the volatility of the stock between 1997 and 2002 was higher than what is expected in the future due to a change in strategy that includes a slower pace of acquisitions, the payment of quarterly dividends and the establishment of the retail automotive sector of the equity market. Sonic recognized compensation expense within selling, general and administrative expenses related to stock options of $1.3 million and $1.1 million in the years ended March 31, 2006 and 2007, respectively. Tax benefits recognized related to the compensation expenses were $0.5 million and $0.4 million for the years ended March 31, 2006 and 2007, respectively. The total compensation cost related to unvested options not yet recognized at March 31, 2007 was $6.0 million and is expected to be recognized over a weighted average period of

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.2 years. Sonic received $7.9 million in cash from the exercise of stock options during the first quarter of 2007. Sonic’s tax benefit associated with these stock option exercises was $2.1 million during the first quarter of 2007.

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


	Unvested Restricted Stock and Restricted Stock Units		Weighted Average Grant Date Fair Value
	(in thousands)
Balance - December 31, 2006	265		$	25.52
Granted	199			30.03
Forfeited	(99	)		22.46
Vested	(2	)		29.04

Balance - March 31, 2007	363		$	28.80

In the first quarter of 2007, 199,000 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. All awards made in 2007 cliff-vest in three years. The shares and units granted in conjunction with 2007 incentive compensation for executive officers are subject to forfeiture, in whole or in part, based upon specified measures of Sonic’s earnings per share performance for the 2007 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 restricted stock granted in prior years to certain executive officers, except that the restricted stock units do not have voting rights and that dividends on the restricted stock units are paid to the holders in the year subsequent to the dividend declarations. In the first quarter of 2007, certain associates forfeited approximately 99,000 restricted shares of Class A common stock. As a result, previously recognized compensation expense relating to these shares was reversed, resulting in a reduction of selling, general and administrative expenses of $1.5 million. Including the effect of the forfeitures in 2007, Sonic recognized income of $0.8 million in the first quarter of 2007 as compared to expense of $0.3 million in the first quarter of 2006. Tax expense realized in the first quarter of 2007 was $0.3 million compared to tax benefit of $0.1 million for the first quarter of 2006. Total compensation cost related to unvested restricted stock not yet recognized at March 31, 2007 was $8.2 million, and is expected to be recognized over a weighted average period of 2.4 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 to purchase shares of Class A common stock under the Stock Plans. The following table illustrates the dilutive effect of such items:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	For the Three Months Ended March 31, 2006
		Income From Continuing Operations				Loss From Discontinued Operations						Net Income
	Shares	Amount		Per Share Amount		Amount			Per Share Amount			Amount		Per Share Amount
	(amounts in thousands except per share amounts)
Basic Earnings Per Share	42,161	$	21,532	$	0.51	$	(4,450	)	$	(0.10	)	$	17,082	$	0.41
Effect of Dilutive Securities:
Contingently Convertible Debt (2002 Convertibles)	2,776		1,112				39						1,151
Contingently Convertible Debt (2005 Convertibles)	299
Stock Compensation Plans	969

Diluted Earnings (Loss) Per Share	46,205	$	22,644	$	0.49	$	(4,411	)	$	(0.10	)	$	18,233	$	0.39


	For the Three Months Ended March 31, 2007
		Income From Continuing Operations				Loss From Discontinued Operations						Net Income
	Shares	Amount		Per Share Amount		Amount			Per Share Amount			Amount		Per Share Amount
	Shares	Amount		Per Share Amount		Amount			Per Share Amount			Amount		Per Share Amount
	(amounts in thousands except per share amounts)
Basic Earnings Per Share	42,871	$	23,679	$	0.55	$	(3,688	)	$	(0.08	)	$	19,991	$	0.47
Effect of Dilutive Securities:
Contingently Convertible Debt (2002 Convertibles)	2,776		1,088				30						1,118
Contingently Convertible Debt (2005 Convertibles)	1,307		—				—						—
Stock Compensation Plans	984

Diluted Earnings (Loss) Per Share	47,938	$	24,767	$	0.52	$	(3,658	)	$	(0.08	)	$	21,109	$	0.44

In addition to the stock options included in the table above, options to purchase 0.7 million shares and 0.4 million shares of Class A common stock were outstanding during the three month periods ended March 31, 2006 and 2007, respectively, but were not included in the computation of diluted earnings per share because the options were antidilutive.

9. CONTINGENCIES

Legal 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 Sonic’s 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. Sonic intends to continue its vigorous 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.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Sonic is involved, and expects to continue to be involved, in numerous legal and administrative proceedings arising out of the conduct of Sonic’s 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, 2006 and March 31, 2007 were $2.0 million and $2.2 million, respectively, in reserves that Sonic has provided for pending proceedings.

Guarantees and Indemnifications:

In accordance with the terms of Sonic’s operating lease agreements, Sonic’s dealership subsidiaries, acting as lessees, generally agree to indemnify the lessor from certain exposure arising as a result of the use of the leased premises, including environmental exposure and repairs to leased property upon termination of the lease. In addition, Sonic has generally agreed to indemnify the lessor in the event of a breach of the lease by the lessee.

In connection with franchise dispositions, certain of Sonic’s dealership subsidiaries have assigned or sublet to the buyer their 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 sublessee does not perform. The total estimated rent payments remaining under such leases as of March 31, 2007 was approximately $133.4 million. However, in accordance with the terms of the assignment and sublease agreements, the assignees and sublessees have generally agreed to indemnify Sonic and its subsidiaries in the event of non-performance. Additionally, in connection with certain dispositions, Sonic has obtained indemnifications from the parent company or owners of these assignees and sublessees in the event of non-performance.

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 $26.4 million at March 31, 2007. 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.

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, 2006.

Overview

We are one of the largest automotive retailers in the United States. As of April 30, 2007, we owned dealership subsidiaries that operated 175 dealership franchises, representing 36 different brands of cars and light trucks at 150 locations, and 38 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 (collectively, “F&I”) for our automotive customers. Our brand diversity allows us to offer a broad range of products at a wide range of prices from lower priced, or economy vehicles, to luxury vehicles. We believe that this diversity reduces the risk of changes in customer preferences, product supply shortages and aging products. In addition, although vehicle sales are cyclical and are affected by many factors, including general economic conditions, consumer confidence, levels of discretionary personal income, interest rates and available credit, our parts, service and collision repair services are not closely tied to vehicle sales and are not as dependent upon near-term vehicle sales volume.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

The following is a detail of our new vehicle revenues by brand for the three month periods ended March 31, 2006 and 2007:


	Percentage of New Vehicle Revenue
	Three Months Ended March 31,
	2006		2007
Brand (1)
Honda	15.7	%	15.8	%
Toyota	10.3	%	13.1	%
BMW	14.4	%	13.0	%
Mercedes	9.5	%	9.2	%
Cadillac	8.6	%	8.6	%
General Motors (2)	8.6	%	8.2	%
Ford	8.5	%	8.0	%
Lexus	6.9	%	6.6	%
Other Luxury (3)	3.4	%	3.2	%
Other (4)	2.2	%	2.6	%
Volvo	2.6	%	2.6	%
Nissan	2.1	%	1.9	%
Porsche	1.6	%	1.3	%
Audi	1.4	%	1.4	%
Acura	1.3	%	1.1	%
Chrysler (5)	1.1	%	1.0	%
Hyundai	1.0	%	1.6	%
Volkswagen	0.8	%	0.8	%

Total	100.0	%	100.0	%

(1)

In accordance with the provisions of SFAS No. 144, prior years’ income statement data reflect reclassifications to exclude additional franchises sold, identified for sale, or terminated subsequent to March 31, 2006 which had not been previously included in discontinued operations. See Notes 1 and 2 to our accompanying Consolidated Financial Statements which discusses these and other factors that affect the comparability of the information for the periods presented.

(2)	Includes Buick, Chevrolet, GMC, Pontiac and Saturn

(3)	Includes Hummer, Infiniti, Jaguar, Land Rover and Saab

(4)	Includes Isuzu, KIA, Mini, Mitsubishi, Scion and Subaru

(5)	Includes Chrysler, Dodge and Jeep

We have accounted for all of our dealership acquisitions using the purchase method of accounting and, as a result, we do not include in our financial statements the results of operations of these dealerships prior to the date they were acquired. Our financial statements discussed below reflect the results of operations, financial position and cash flows of each of our dealerships acquired prior to March 31, 2007. As a result of the effects of our acquisitions and other potential factors in the future, the historical consolidated financial information described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is not necessarily indicative of the results of operations, financial position and cash flows that would have resulted had such acquisitions occurred at the beginning of the periods presented, nor is it indicative of future results of operations, financial position and cash flows.

Results of Operations

Except where otherwise noted, the following discussions are on a same store basis.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Revenues

New Vehicles:


	Three Months Ended				Units or $			%
	3/31/2006		3/31/2007		Change			Change
Total New Vehicle Units

Same Store		34,942		34,789		(153	)	(0.4	%)
Acquisitions and Other		702		1,099		397		56.6	%

Total as Reported		35,644		35,888		244		0.7	%

Total New Vehicle Revenues (in thousands)

Same Store	$	1,104,924	$	1,128,650	$	23,726		2.1	%
Acquisitions and Other		18,862		35,872		17,010		90.2	%

Total as Reported	$	1,123,786	$	1,164,522	$	40,736		3.6	%

Total New Vehicle Unit Price

Same Store	$	31,622	$	32,443	$	821		2.6	%
Total Dealerships as Reported	$	31,528	$	32,449	$	921		2.9	%

New unit sales at our import dealerships increased by 729 units, or 3.0%, for the three months ended March 31, 2007, as compared to the same period last year. Reported industry-wide new unit sales of import brands increased 7.1% for the same period. Our domestic new unit sales decreased by 882 units, or 8.3%, over the same three month period last year, compared to the industry’s domestic unit sales decline of 7.8% during the same time period. Our top performing import stores during the first quarter of 2007 were Toyota, Mercedes and Honda, which posted unit volume increases of 11.6%, 4.8% and 1.5%, respectively. Our Toyota stores continued to benefit from increased sales related to new and redesigned car models. On the domestic side, our Cadillac stores’ unit volume benefited from strong fleet sales in the first quarter of 2007, which increased by 174 units when compared to the same period in 2006. Of the remaining domestic brands, our Ford stores experienced the largest decline in new unit sales, decreasing by 14.2%, as compared to the same period last year. This compares to the industry-wide new retail unit decline for Ford dealerships of 15.2% in the first quarter of 2007.

Our import dealerships’ average price per unit increased $515, or 1.6%, for the three month period ended March 31, 2007. The price increases were primarily due to the change in sales mix for the current quarter compared to the same period in 2006. Our Mercedes and BMW stores experienced the most significant improvement in average price per unit due to a greater percentage of higher priced SUV and crossover sales. Despite the decline in new unit volume, our domestic dealerships’ average new unit price increased $1,340, or 4.5%, for the three months ended March 31, 2007. In particular, our Cadillac and GM stores continued to benefit from the redesign of SUV models. Of the domestic brands, our Ford stores posted the most considerable increase in price per unit as compared to the first quarter of 2006, due primarily to an increase in fleet prices.

Used Vehicles:


	Three Months Ended				Units or $		%
	3/31/2006		3/31/2007		Change		Change
Total Used Vehicle Units

Same Store		15,884		16,546		662	4.2	%
Acquisitions and Other		260		462		202	77.7	%

Total as Reported		16,144		17,008		864	5.4	%

Total Used Vehicle Revenues (in thousands)

Same Store	$	305,600	$	321,299	$	15,699	5.1	%
Acquisitions and Other		4,608		9,733		5,125	111.2	%

Total as Reported	$	310,208	$	331,032	$	20,824	6.7	%

Total Used Vehicle Unit Price

Same Store	$	19,239	$	19,419	$	180	0.9	%
Total Dealerships as Reported	$	19,215	$	19,463	$	248	1.3	%

Our used vehicle volume increase of 4.2% compares to an industry-wide decrease at franchised dealerships. We believe our results exceed the industry average due to the continued implementation of a standardized used vehicle

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

merchandising process at our dealerships. The overall increase in used price per unit of $179, or 0.9%, for the three months ended March 31, 2007 can be mainly attributed to a continuing shift in our dealership mix towards more import and luxury dealerships. Certified pre-owned vehicle (“CPO”) unit volume was relatively flat, while CPO sales as a percentage of total used vehicle sales decreased from 48.3% to 44.9% during the three month period ended March 31, 2007, as compared to the same period in 2006. This change in our sales mix was due to our merchandising initiative, which tends to emphasize traditional used vehicles.

Wholesale Vehicles:


	Three Months Ended				Units or $			%
	3/31/2006		3/31/2007		Change			Change
Total Wholesale Vehicle Units

Same Store		12,508		11,946		(562	)	(4.5	%)
Acquisitions and Other		869		915		46		5.3	%

Total as Reported		13,377		12,861		(516	)	(3.9	%)

Total Wholesale Vehicle Revenues (in thousands)

Same Store	$	121,215	$	104,525	$	(16,690	)	(13.8	%)
Acquisitions and Other		11,261		10,631		(630	)	(5.6	%)

Total as Reported	$	132,476	$	115,156	$	(17,320	)	(13.1	%)

Total Wholesale Unit Price

Same Store	$	9,691	$	8,750	$	(941	)	(9.7	%)
Total Dealerships as Reported	$	9,903	$	8,954	$	(949	)	(9.6	%)

Lower wholesale vehicle revenues realized in the first quarter of 2007 were driven by a decrease in unit sales combined with a 9.7% price per unit decrease. The decline in our wholesale business can be mainly attributed to the implementation of our merchandising and inventory management process. We believe this improved process allowed us to retail used vehicles we historically would have disposed of through the wholesale market.

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


	Three Months Ended				$		%
	3/31/2006		3/31/2007		Change		Change
Total Parts, Service and Collision Repair (in thousands)

Same Store	$	268,457	$	282,919	$	14,462	5.4	%
Acquisitions and Other		5,271		11,933		6,662	126.4	%

Total as Reported	$	273,728	$	294,852	$	21,124	7.7	%

Customer pay increases of $10.9 million, or 8.5%, were primarily responsible for the increase in Fixed Operations revenue. Import and luxury import brands drove the majority of these increases in customer pay for the three month period ended March 31, 2007. Our BMW, Mercedes, Lexus, Honda and Toyota stores accounted for $8.9 million, or 81.9%, of the customer pay increase. Warranty revenues decreased $2.7 million, or 5.0%, in the three month period ended March 31, 2007, compared to the same period last year.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Finance, Insurance and Other (“F&I”):


	Three Months Ended				$		%
	3/31/2006		3/31/2007		Change		Change
Total Finance, Insurance and Other Revenue (in thousands)

Same Store	$	44,306	$	47,115	$	2,809	6.3	%
Acquisitions and Other		1,573		1,731		158	10.0	%

Total as Reported	$	45,879	$	48,846	$	2,967	6.5	%

Total F&I per Unit (excluding fleet)

Same Store	$	945	$	989	$	44	4.7	%
Total Dealerships as Reported	$	959	$	994	$	35	3.6	%

Increases in overall retail unit volume and increased penetration resulted in higher F&I revenue for the quarter ended March 31, 2007, as compared to the same period last year. We believe the increase in penetration rates is due to the continued implementation of an electronic F&I menu which allows for a more consistent presentation of our product offerings to each of our customers.

Gross Profit and Gross Margins

Our same store gross margin percentage was flat for the three month period ended March 31, 2007, when compared to 2006. This can be partly attributed to a change in revenue mix as shown in the table below. Specifically, we experienced increases in our used vehicle, Fixed Operations and F&I activities, which generate higher gross margins. This revenue shift helped to offset the gross margin percentage declines experienced by all of our product lines. The 30 basis point decrease in the new vehicle gross margin rate can be attributed to brand mix.


	Three Months Ended
	3/31/2006				3/31/2007				Basis Point Change
	Revenues as a Percentage of Total Revenues		Gross Profit as a Percentage of Total Gross Profit		Revenues as a Percentage of Total Revenues		Gross Profit as a Percentage of Total Gross Profit		Revenues as a Percentage of Total Revenues		Gross Profit as a Percentage of Total Gross Profit
New Vehicles	59.9	%	28.0	%	59.9	%	26.6	%	—		(140	)
Used Vehicles	16.6	%	11.3	%	17.0	%	11.1	%	40		(20	)
Wholesale Vehicles	6.6	%	0.1	%	5.5	%	0.0	%	(110	)	(10	)
Fixed Operations	14.6	%	45.5	%	15.0	%	46.6	%	40		110
Finance, Insurance and Other	2.3	%	15.1	%	2.6	%	15.7	%	30		60

Total same store	100.0	%	100.0	%	100.0	%	100.0	%	—		—

The gross margin rates on our various revenue lines on a same store basis were as follows:


	Three Months Ended				Basis Point
	3/31/2006		3/31/2007		Change
New vehicles	7.4	%	7.1	%	(30	)
Used vehicles	10.8	%	10.3	%	(50	)
Wholesale vehicles	0.2	%	0.0	%	(20	)
Parts, service and collision repair	49.5	%	49.4	%	(10	)
Finance and insurance	100.0	%	100.0	%	—
Total same store gross margin	15.9	%	15.9	%	—

Selling, General and Administrative Expenses (“SG&A”)

For the three month period ended March 31, 2007, reported SG&A expenses increased $6.8 million, or 2.9%, as compared to the same period last year due primarily to increases associated with gross profit growth and acquisitions. As a percentage of reported gross profit, SG&A expenses decreased 90 basis points, mainly due to decreases in total compensation expense partially offset by increases in employee benefits cost.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Reported advertising expense increased by $1.1 million, or 7.4%, during the three month period ended March 31, 2007, when compared with the same period last year. Total compensation expense decreased $0.7 million during the same three month period, mainly due to a $1.5 million benefit recorded in the first quarter of 2007 related to restricted stock forfeitures. As a percentage of reported gross profit, total compensation expense decreased by 210 basis points, as compared to the first quarter of 2006. Rent expense increased by $3.3 million due to the completion of sale leaseback transactions for new facilities and the effect of rising consumer-price-indices and interest rates on certain dealership leases. As a percentage of gross profit, rent and rent related expenses increased 60 basis points. Additionally, other SG&A expenses increased $3.1 million compared with the first quarter of last year. As a percentage of gross profit, other expenses increased 30 basis points, mainly due to impairment charges recorded in the prior year.

Depreciation and Amortization

Reported depreciation and amortization expense increased for the three month period ended March 31, 2007 over the comparable three month period in 2006 by $1.0 million, or 20.3%. This increase was due to acquisitions, the completion of leasehold improvement projects and other general capital expenditures.

Interest Expense, Floor Plan

The weighted average floor plan interest rate for new vehicle floor plan financing incurred by continuing operations dealerships was 6.4% for the quarter ended March 31, 2007, compared to 5.3% for the quarter ended March 31, 2006, which increased new vehicle floor plan interest expense by approximately $2.4 million. The average of the new vehicle notes payable-floor plan balance from continuing dealerships increased to $949.0 million during the first quarter of 2007 from $900.1 million during the first quarter of 2006, resulting in increased new vehicle floor plan interest expense of approximately $0.8 million.

Our new vehicle floor plan interest expenses are partially offset by amounts received from manufacturers in the form of floor plan assistance. These payments are credited against cost of sales upon the sale of the vehicle. During the three months ended March 31, 2007 and 2006, our new vehicle floor plan interest exceeded the amounts we recognized in our income statement (for continuing operations dealerships) from floor plan interest assistance by approximately $6.1 million and $3.4 million, respectively, primarily due to the effect of higher interest rates in the first quarter of 2007 compared to the first quarter of 2006.

Interest expense on our used vehicle floor plan facility was approximately $1.4 million for the first quarter of 2007 compared to $0.6 million in the same period in 2006. Interest expense in 2006 was lower than 2007 primarily due to the used floor plan facility existing for only a portion of time in the first quarter of 2006.

Interest Expense, Other

Interest expense, other for first quarter 2007 compared to 2006 is summarized in the table below:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS


	Three Months Ended March 31, 2007
	Three Months Ended March 31, 2007
	Increase/(Decrease) in Interest Expense
	Increase/(Decrease) in Interest Expense
	(in millions)
Interest rates –
- Changes in the average interest rate on the revolving facilities (from 7.0% in 2006 to 6.3% in 2007)	$	(0.4	)

Debt balances –
- Increase/(Decrease) in debt balances		(2.8	)

Other factors –
- Decrease/(increase) in capitalized interest		(0.1	)
- Incremental interest expense related to the Old and New Variable Swaps (1)		0.5
- Increase in other expense, net		0.1

	$	(2.7	)

(1)	– As defined in our Annual Report on Form 10-K for the year ended December 31, 2006

Other Income/(Expense)

Other expense for the three months ended March 31, 2006 is primarily comprised of costs incurred related to the termination of our then existing revolving credit facility.

Income Taxes

The overall effective tax rate of 40.4% in the first quarter of 2007 increased over the comparable prior year period effective rate of 38.4% primarily due to the adoption of FIN 48 and the shift of the distribution of taxable income to states with higher overall tax rates.

Liquidity and Capital Resources

We require cash to finance acquisitions and fund debt service and working capital requirements. We rely on cash flows from operations, borrowings under our various credit facilities and offerings of debt and equity securities to meet these requirements.

Because the majority of our consolidated assets are held by our dealership subsidiaries, the majority of our cash flows from operations is generated by these subsidiaries. As a result, our cash flows and ability to service debt depend to a substantial degree on the results of operations of our subsidiaries and their ability to provide us with cash. Uncertainties in the economic environment may affect our overall liquidity.

Floor Plan Facilities

The weighted average interest rate for all of our new vehicle floor plan facilities (both continuing operations and discontinued operations) was 6.4% and 5.4% for the three months ended March 31, 2007 and 2006, respectively. In the first quarter of 2007, we received approximately $9.7 million in manufacturer assistance, which was approximately $8.4 million less than the amount we paid for floor plan interest. Interest payments under each of our floor plan facilities are due monthly, and we are generally not required to make principal repayments prior to the sale of the vehicles. We were in compliance with all restrictive covenants as of March 31, 2007.

The weighted average interest rate for our used vehicle floor plan facility (whose interest expense is allocated to discontinued and continuing operations) was 6.6% for the three months ended March 31, 2007 compared to 5.7% for the three months ended March 31, 2006.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Long-Term Debt and Credit Facilities

2006 Revolving Credit Sub-Facility: At March 31, 2007, our 2006 Revolving Credit Sub-Facility (as defined in our Annual Report on Form 10-K for the year ended December 31, 2006) had a borrowing limit of $350.0 million, subject to a borrowing base calculated on the basis of our receivables, inventory and equipment and a pledge of certain additional collateral by one of our affiliates (the borrowing base was approximately $415.3 million at March 31, 2007). The amount available to be borrowed under the 2006 Revolving Credit Sub-Facility is reduced on a dollar-for-dollar basis by the cumulative face amount of outstanding letters of credit. At March 31, 2007, we had $82.8 million in letters of credit outstanding and $245.1 million of borrowing availability.

At March 31, 2007, the outstanding balance on our long-term debt and credit facilities were as follows (in thousands):


	Interest Rate (1)		Outstanding Balance
	Interest Rate (1)		Outstanding Balance
2006 Revolving Credit Sub-Facility (matures February 2010)	LIBOR + 2.00	% (2)	$	22.1

Senior Subordinated Notes (mature August 2013)	8.625	%	$	272.6

5.25% Convertible Senior Subordinated Notes (mature May 2009) (3)	5.25	%	$	128.8

4.25% Convertible Senior Subordinated Notes (mature November 2015 and are redeemable on or after October 2010) (3)	4.25	%	$	157.0

Notes Payable to a Finance Company (mature November 2015 through September 2016)	10.19	%(4)	$	27.3

(1)	Six-month LIBOR was 5.33% at March 31, 2007.

(2)	Interest rate on the revolving Credit Facility is based on a perfomance—based grid that ranges from 1.75% to 2.75% above LIBOR.

(3)	Notes were not convertible at any time during the three months ended March 31, 2007.

(4)	Weighted average rate.

We were in compliance with all of the restrictive and financial covenants under all our long-term debt and credit facilities as of March 31, 2007.

Dealership Acquisitions

In the first three months of 2007, we acquired two franchises for an aggregate purchase price of $16.6 million in cash, net of cash acquired, using cash from operations, borrowings under the 2006 Revolving Credit Sub-Facility and borrowings under our floor plan facilities.

Capital Expenditures

Our capital expenditures include the construction of new dealerships and collision repair centers, building improvements and equipment purchased for use in our dealerships. Capital expenditures in the first three months of 2007 were approximately $23.2 million, of which approximately $8.1 million related to the construction of new dealership facilities and collision repair centers. Once completed, these new dealership facilities and collision repair centers are generally sold in sale-leaseback transactions. Capital expenditures incurred during the first three months of 2007 expected to be sold within a year in sale-leaseback transactions were $1.4 million. We do not expect any significant gains or losses from these sales. As of March 31, 2007, commitments for facilities construction projects totaled approximately $10.7 million. We expect $6.0 million of this amount to be financed through future sale-leaseback transactions.

Stock Repurchase Program

As of March 31, 2007, pursuant to previous authorizations from our Board of Directors, we had approximately $10.5 million available to repurchase shares of our Class A common stock or redeem securities convertible into Class A common stock. In the first three months of 2007, we repurchased 60,000 shares for approximately $1.7 million, which was offset by proceeds received from the exercise of stock options under stock compensation plans of $7.9 million. As of April 30, 2007, we had approximately $8.4 million remaining to repurchase shares under our Board authorization.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Dividends

During the first quarter of 2007, our Board of Directors approved a quarterly cash dividend of $0.12 per share for shareholders of record on March 15, 2007, which was paid on April 15, 2007. Subsequent to March 31, 2007, our Board of Directors approved a quarterly cash dividend of $0.12 per share for stockholders of record on June 15, 2007, which will be paid on July 15, 2007.

Cash Flows

For the three months ended March 31, 2007, net cash used by operating activities was approximately $129.1 million. This use of cash was comprised of cash out flows for inventories and notes payable-floor plan-trade somewhat offset by a reduction of receivables. Net cash used in investing activities for the first three months of 2006 was $37.0 million, which consisted mostly of capital expenditures and dealership acquisitions. Net cash provided by financing activities for the three months ended March 31, 2007 was $167.5 million, comprised mostly of the increase of notes payable-floor plan – non-trade and proceeds from the issuance of stock under stock compensation plans.

Guarantees and Indemnifications

In connection with the operation and disposition of dealership franchises, we have entered into various guarantees and indemnifications. See Note 9 to the accompanying financial statements.

Future Liquidity Outlook

We believe our best source of liquidity for future growth remains cash flows from operations combined with the availability of borrowings under our new and used floor plan financing (or any replacements thereof) and our revolving credit facility. Though uncertainties in the economic environment as well as uncertainties associated with geopolitical conflicts may affect our ability to generate cash from operations, we expect to generate more than sufficient cash flow to fund our debt service, quarterly cash dividends and working capital requirements and any seasonal operating requirements, including our currently anticipated internal growth for our existing businesses, for the foreseeable future. Once these needs are met, we may use remaining cash flow to support our acquisition strategy or repurchase shares of our Class A common stock or publicly-traded debt securities, based on market conditions.

Off-Balance Sheet Arrangements

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements” in our Annual Report on Form 10-K for the year ended December 31, 2006 for a description of our off-balance sheet arrangements.

Seasonality

Our operations are subject to seasonal variations. The first and fourth quarters generally contribute less revenue, operating profits and cash flows than the second and third quarters. Weather conditions, the timing of manufacturer incentive programs and model changeovers cause seasonality in new vehicle demand. Parts and service demand remains more stable throughout the year.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

Item 3:

Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

Our variable rate notes payable–floor plan, 2006 Credit Facility (as defined herein) borrowings and other variable rate notes expose us to risks caused by fluctuations in the underlying interest rates. The total outstanding balance of such instruments was approximately $1,363.9 million at March 31, 2007. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $3.3 million in the first three months of 2007. Of the total change in interest expense, approximately $2.6 million would have resulted from notes payable–floor plan.

Our exposure to notes payable–floor plan is mitigated by floor plan assistance payments received from manufacturers that are generally based on rates similar to those incurred under our floor plan financing arrangements. These payments are capitalized as inventory and charged against cost of sales when the associated inventory is sold. During the three months ended March 31, 2007, the amounts we paid for floor plan interest expense for both our continuing and discontinued operations exceeded manufacturer floor plan assistance received by approximately $8.4 million.

In addition to our variable rate debt, approximately 28% of our dealership facility lease agreements’ monthly lease payments fluctuate based on LIBOR interest rates. Many of our lease agreements have interest rate floors whereby our lease expense would not fluctuate significantly in periods when LIBOR is relatively low.

We have five separate interest rate swaps with a total notional amount of $150.0 million (collectively, the “Variable Swaps”) to effectively convert a portion of our fixed rate debt to a LIBOR-based variable rate debt. Under the Variable Swaps’ agreements, we receive 8.625% on the respective notional amounts and pay interest payments on the respective notional amounts at a rate equal to the forward six month LIBOR (fixed on February 15 and August 15 of each year) plus a spread ranging from 3.825% to 3.85% with a weighted average spread of 3.83%. The Variable Swaps expire on August 15, 2013.

Subsequent to March 31, 2007, we entered into an interest rate swap agreement to effectively convert a portion of our LIBOR-based variable rate debt to a fixed rate. Under the terms of this swap, we will receive interest payments on a $200 million notional amount at a rate equal to the one month LIBOR rate, adjusted monthly, and will make interest payments at a fixed rate of 4.935% until the swap matures on May 1, 2012. The swap has been designated and qualifies as a cash flow hedge and, as a result, changes in the fair value of the swap will be recorded in other comprehensive (loss)/income, net of related income taxes in the Consolidated Statements of Stockholders’ Equity.

Foreign Currency Risk

We purchase certain of our new vehicle and parts inventories from foreign manufacturers. Although we purchase our inventories in U.S. Dollars, our business is subject to foreign exchange rate risk, which may influence automobile manufacturers’ ability to provide their products at competitive prices in the United States. To the extent this volatility negatively impacts consumer demand through higher retail prices for our products, this volatility could adversely affect our future operating results.

Item 4:

Controls and Procedures.

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. During our last fiscal quarter, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

PART II – OTHER INFORMATION

Item 1:

Legal Proceedings.

We are 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 we and our 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 our 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. We 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. We intend to continue vigorous 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 our future results of operations, financial condition and cash flows.

We are involved, and expect to continue to be involved, in numerous legal and administrative proceedings arising out of the conduct of our 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 we vigorously defend ourselves in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out of the conduct of our 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 our business, financial condition, results of operations, cash flows or prospects.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

ITEM 1A:

Risk Factors

Risks Related to Our Indebtedness

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.

As of March 31, 2007, our total outstanding indebtedness was $1,795.4 million, including the following:

•

$22.1 million under the revolving credit line of our four-year syndicated credit facility (the “2006 Revolving Credit Sub-Facility”);

•

$1,191.5 million under the secured new and used inventory floor plan facilities, including $94.2 million classified as liabilities associated with assets held for sale;

•

$128.8 million in 5.25% convertible senior subordinated notes due 2009 (the “2002 Convertibles”) representing $130.1 million in aggregate principal amount outstanding less unamortized discount of approximately $1.3 million;

•

$157.0 million in 4.25% convertible senior subordinated notes due 2015, redeemable on or after November 30, 2010, (the “2005 Convertibles”) representing $160.0 million in aggregate principal amount outstanding less unamortized discount of approximately $3.0 million;

•

$272.6 million in 8.625% senior subordinated notes due 2013 (the “8.625% Notes”) representing $275.0 million in aggregate principal amount outstanding less unamortized net discount of approximately $2.4 million; and

•

$23.4 million of other secured debt, representing $22.6 million in aggregate principal amount plus unamortized premium of approximately $4.6 million and less $3.8 million for the fair value of fixed to variable interest rate swaps.

As of March 31, 2007, we had $245.1 million available for additional borrowings under the 2006 Revolving Credit Sub-Facility. We also have significant additional capacity under new and used floor plan facilities. In addition, the indentures relating to our 8.625% Notes, 2002 Convertibles and 2005 Convertibles and our other debt instruments allow us to incur additional indebtedness, including secured indebtedness. Our 2006 Revolving Credit Sub-Facility, up to $700.0 million in borrowing availability for new vehicle inventory floor plan financing and up to $150.0 million in borrowing availability for used vehicle inventory floor plan financing are collectively referred to as our “2006 Credit Facility”.

In addition, the majority of our dealership properties are leased under long-term operating lease arrangements (which many view as debt financing) that generally have initial terms of fifteen to twenty years with one or two five-year renewal options. These operating leases require monthly payments of rent that may fluctuate based on interest rates and local consumer price indices. The total future minimum lease payments related to these operating leases and certain equipment leases are significant and are disclosed in the notes to our financial statements under the heading “Commitments and Contingencies” in our Annual Report on Form 10-K for the year ended December 31, 2006.

The degree to which we are leveraged could have important consequences to the holders of our securities, including the following:

•

our ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes may be impaired in the future;

•

a substantial portion of our current cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for our operations and other purposes;

•

some of our borrowings and facility leases are and will continue to be at variable rates of interest, which exposes us to the risk of increasing interest rates;

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

•

the indebtedness outstanding under our 2006 Credit Facility and other floor plan facilities are secured by a pledge of substantially all the assets of our dealerships; and

•

we may be substantially more leveraged than some of our competitors, which may place us at a relative competitive disadvantage and make us more vulnerable to changing market conditions and regulations.

In addition, our debt agreements contain numerous covenants that limit our discretion with respect to business matters, including mergers or acquisitions, paying dividends, incurring additional debt, making capital expenditures or disposing of assets.

An acceleration of our obligation to repay all or a substantial portion of our outstanding indebtedness or lease obligations would have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our 2006 Credit Facility, the indenture governing our 8.625% Notes and many of our facility operating leases contain numerous financial and operating covenants. A breach of any of these covenants could result in a default under the applicable agreement or indenture. If a default were to occur, we may be unable to adequately finance our operations and the value of our common stock would be materially adversely affected. In addition, a default under one agreement or indenture could result in a default and acceleration of our repayment obligations under the other agreements or indentures, including the indentures governing our outstanding 2002 Convertibles, 2005 Convertibles and 8.625% Notes, under the cross default provisions in those agreements or indentures. If a cross default were to occur, we may not be able to pay our debts or borrow sufficient funds to refinance them. Even if new financing were available, it may not be on terms acceptable to us. As a result of this risk, we could be forced to take actions that we otherwise would not take, or not take actions that we otherwise might take, in order to comply with the covenants in these agreements and indentures.

Our ability to make interest and principal payments when due to holders of our debt securities depends upon the receipt of sufficient funds from our subsidiaries.

Substantially all of our consolidated assets are held by our subsidiaries and substantially all of our consolidated cash flow and net income are generated by our subsidiaries. Accordingly, our cash flow and ability to service debt depends to a substantial degree on the results of operations of subsidiaries and upon the ability of our subsidiaries to provide us with cash. We may receive cash from our subsidiaries in the form of dividends, loans or otherwise. We may use this cash to service our debt obligations or for working capital. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to distribute cash to us or to make funds available to service debt. In addition, the ability of our subsidiaries to pay dividends or make loans to us are subject to contractual limitations under the floor plan facilities, minimum net capital requirements under manufacturer franchise agreements and laws of the state in which a subsidiary is organized and depend to a significant degree on the results of operations of our subsidiaries and other business considerations.

Risks Related to Our Relationships with Vehicle Manufacturers

Our operations may be adversely affected if one or more of our manufacturer franchise agreements is terminated or not renewed.

Each of our dealerships operates under a franchise agreement with the applicable automobile manufacturer or distributor. Without a franchise agreement, we cannot obtain new vehicles from a manufacturer. As a result, we are significantly dependent on our relationships with these manufacturers.

Manufacturers exercise a great degree of control over the operations of our dealerships through the franchise agreements. The franchise agreements govern, among other things, our ability to purchase vehicles from the manufacturer and to sell vehicles to customers. Each of our franchise agreements provides for termination or non-renewal for a variety of causes, including any unapproved change of ownership or management. Manufacturers may also have a right of first refusal if we seek to sell dealerships.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

Actions taken by manufacturers to exploit their superior bargaining position in negotiating the terms of franchise agreements or renewals of these agreements or otherwise could also have a material adverse effect on our results of operations, financial condition and cash flows. We cannot guarantee you that any of our existing franchise agreements will be renewed or that the terms and conditions of such renewals will be favorable to us.

Our sales volume and profit margin on each sale may be materially adversely affected if manufacturers discontinue or change their incentive programs.

Our dealerships depend on the manufacturers for certain sales incentives, warranties and other programs that are intended to promote and support dealership new vehicle sales. Manufacturers routinely modify their incentive programs in response to changing market conditions. Some of the key incentive programs include:

•

customer rebates or below market financing on new vehicles;

•

employee pricing;

•

dealer incentives on new vehicles;

•

manufacturer floor plan interest and advertising assistance;

•

warranties on new and used vehicles; and

•

sponsorship of used vehicle sales by authorized new vehicle dealers.

Manufacturers frequently offer incentives to potential customers. A reduction or discontinuation of a manufacturer’s incentive programs may materially adversely impact vehicle demand and affect our profitability.

We depend on manufacturers to supply us with sufficient numbers of popular and profitable new models.

Manufacturers typically allocate their vehicles among dealerships based on the sales history of each dealership. Supplies of popular new vehicles may be limited by the applicable manufacturer’s production capabilities. Popular new vehicles that are in limited supply typically produce the highest profit margins. We depend on manufacturers to provide us with a desirable mix of popular new vehicles. Our operating results may be materially adversely affected if we do not obtain a sufficient supply of these vehicles.

Adverse conditions affecting one or more key manufacturers may negatively impact our profitability.

During the three months ended March 31, 2007, approximately 89.8% of our new vehicle revenue was derived from the sale of new vehicles manufactured by Ford, Honda, General Motors (including Cadillac), BMW, Mercedes and Toyota. Our success depends to a great extent on these manufacturers’:

•

financial condition;

•

marketing;

•

vehicle design;

•

publicity concerning a particular manufacturer or vehicle model;

•

production capabilities;

•

management;

•

reputation; and

•

labor relations.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

Events such as labor strikes that may adversely affect a manufacturer may also adversely affect us. In particular, labor strikes at a manufacturer that continue for a substantial period of time could have a material adverse effect on our business. Similarly, the delivery of vehicles from manufacturers at a time later than scheduled, which may occur particularly during periods of new product introductions, could limit sales of those vehicles during those periods. This has been experienced at some of our dealerships from time to time. Adverse conditions affecting these and other important aspects of manufacturers’ operations and public relations may adversely affect our ability to sell their automobiles and, as a result, significantly and detrimentally affect our profitability.

Since 2005, the financial condition and operating results of both Ford and General Motors have deteriorated significantly. As of March 31, 2007, we owned 28 Ford franchises (including Volvo, Jaguar, Land Rover, Lincoln and Mercury) and 38 General Motors franchises (including Cadillac, Saab, Saturn, Chevrolet, Buick, GMC, Hummer and Pontiac). Should the financial condition and operating results of either Ford or General Motors continue to significantly deteriorate, it is possible that the particular manufacturer could file for bankruptcy protection. Such a bankruptcy filing by either Ford or General Motors could have a material adverse effect on our future results of operations, financial condition or cash flows.

Manufacturer stock ownership restrictions may impair our ability to maintain or renew franchise agreements or issue additional equity.

Some of our franchise agreements prohibit transfers of any ownership interests of a dealership and, in some cases, its parent, without prior approval of the applicable manufacturer. A number of manufacturers impose restrictions on the transferability of our Class A common stock and our ability to maintain franchises if a person acquires a significant percentage of the voting power of our common stock. Our existing franchise agreements could be terminated if a person or entity acquires a substantial ownership interest in us or acquires voting power above certain levels without the applicable manufacturer’s approval. Violations of these levels by an investor are generally outside of our control and may result in the termination or non-renewal of existing franchise agreements or impair our ability to negotiate new franchise agreements for dealerships we acquire. In addition, if we cannot obtain any requisite approvals on a timely basis, we may not be able to issue additional equity or otherwise raise capital on terms acceptable to us. These restrictions may also prevent or deter a prospective acquiror from acquiring control of us. This could adversely affect the market price of our Class A common stock.

The current holders of our Class B common stock maintain voting control over us. However, we are unable to prevent our stockholders from transferring shares of our common stock, including transfers by holders of the Class B common stock. If such transfer results in a change in control, it could result in the termination or non-renewal of one or more of our existing franchise agreements, the triggering of provisions in our agreements with certain manufacturers requiring us to sell our dealerships franchised with such manufacturers and/or a default under our credit arrangements.

Our dealers depend upon vehicle sales and, therefore, their success depends in large part upon customer demand for the particular vehicles they carry.

The success of our dealerships depends in large part on the overall success of the vehicle lines they carry. New vehicle sales generate the majority of our total revenue and lead to sales of higher-margin products and services such as finance, insurance, vehicle protection products and other aftermarket products, and parts and service operations. Although we have sought to limit our dependence on any one vehicle brand and our parts and service operations and used vehicle sales may serve to offset some of this risk, we have focused our new vehicle sales operations in mid-line import and luxury brands.

Our failure to meet a manufacturer’s customer satisfaction, financial and sales performance requirements may adversely affect our ability to acquire new dealerships and our profitability.

Many manufacturers attempt to measure customers’ satisfaction with their sales and warranty service experiences through manufacturer-determined consumer satisfaction index (“CSI”) scores. The components of CSI vary from manufacturer to manufacturer and are modified periodically. Franchise agreements also may impose financial and sales performance standards. Under our agreements with certain manufacturers, a dealership’s CSI scores, sales and financial performance may be considered a factor in evaluating applications for additional dealership acquisitions. From time to time, some of our dealerships have had difficulty meeting various manufacturers’ CSI requirements or performance standards. We cannot assure you that our dealerships will be able to comply with these requirements in the future. A manufacturer may refuse to consent to an acquisition of one of its franchises if it determines our dealerships do not comply with its CSI requirements or performance standards, which could impair the execution of our acquisition strategy. In addition, we receive incentive payments from the manufacturers based, in part, on CSI scores, which could be materially adversely affected if our CSI scores decline.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, non-renewal or renegotiation of their franchise agreements.

State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a franchise agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or nonrenewal. Some state dealer laws allow dealers to file protests or petitions or attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or nonrenewal. Though unsuccessful to date, manufacturers’ lobbying efforts may lead to the repeal or revision of state dealer laws. If dealer laws are repealed in the states in which we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of state dealer laws, it may also be more difficult for our dealers to renew their franchise agreements upon expiration.

In addition, these laws restrict the ability of automobile manufacturers to directly enter the retail market in the future. However, the ability of a manufacturer to grant additional franchises is based on several factors which are not within our control. If manufacturers grant new franchises in areas near or within our existing markets, this could significantly impact our revenues and/or profitability. Further, if manufacturers obtain the ability to directly retail vehicles and do so in our markets, such competition could have a material adverse effect on us.

Risks Related to Our Acquisition Strategy

Manufacturers’ restrictions on acquisitions could limit our future growth.

We are required to obtain the approval of the applicable manufacturer before we can acquire an additional dealership franchise of that manufacturer. In determining whether to approve an acquisition, manufacturers may consider many factors such as our financial condition and CSI scores. Obtaining manufacturer approval of acquisitions also takes a significant amount of time, typically three to five months. We cannot assure you that manufacturers will approve future acquisitions or do so on a timely basis, which could impair the execution of our acquisition strategy.

Certain manufacturers also limit the number of its dealerships that we may own, our national market share of that manufacturer’s products or the number of dealerships we may own in a particular geographic area. In addition, under an applicable franchise agreement or under state law, a manufacturer may have a right of first refusal to acquire a dealership that we seek to acquire.

A manufacturer may condition approval of an acquisition on the implementation of material changes in our operations or extraordinary corporate transactions, facilities improvements or other capital expenditures. If we are unable or unwilling to comply with these conditions, we may be required to sell the assets of that manufacturer’s dealerships or terminate our franchise agreement.

Failure to effectively integrate acquired dealerships with our existing operations could adversely affect our future operating results.

Our future operating results depend on our ability to integrate the operations of recently acquired dealerships, as well as dealerships we acquire in the future, with our existing operations. In particular, we need to integrate our management information systems, procedures and organizational structures, which can be difficult. Our growth strategy has focused on the pursuit of strategic acquisitions that either expand or complement our business.

We cannot assure you that we will effectively and profitably integrate the operations of these dealerships without substantial costs, delays or operational or financial problems, due to:

•

the difficulties of managing operations located in geographic areas where we have not previously operated;

•

the management time and attention required to integrate and manage newly acquired dealerships;

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

•

the difficulties of assimilating and retaining employees;

•

the challenges of keeping customers; and

•

the challenge of retaining or attracting appropriate dealership management personnel.

These factors could have a material adverse effect on our financial condition and results of operations.

We may not adequately anticipate all of the demands that growth through acquisitions will impose.

The automobile retailing industry is considered a mature industry in which minimal growth is expected in total unit sales. Accordingly, our ability to generate higher revenue and earnings in future periods depends in large part on our ability to acquire additional dealerships, manage geographic expansion, control costs in our operations and consolidate both past and future dealership acquisitions into our existing operations. In pursuing a strategy of acquiring other dealerships, we face risks commonly encountered with growth through acquisitions. These risks include, but are not limited to:

•

incurring significantly higher capital expenditures and operating expenses;

•

failing to assimilate the operations and personnel of acquired dealerships;

•

entering new markets with which we are unfamiliar;

•

potential undiscovered liabilities and operational difficulties at acquired dealerships;

•

disrupting our ongoing business;

•

diverting our management resources;

•

failing to maintain uniform standards, controls and policies;

•

impairing relationships with employees, manufacturers and customers as a result of changes in management;

•

increased expenses for accounting and computer systems, as well as integration difficulties;

•

failure to obtain a manufacturer’s consent to the acquisition of one or more of its dealership franchises or renew the franchise agreement on terms acceptable to us; and

•

incorrectly valuing entities to be acquired.

We may not adequately anticipate all of the demands that growth will impose on our systems, procedures and structures.

We may not be able to capitalize on acquisition opportunities because our financial resources available for acquisitions are limited.

We intend to finance our acquisitions with cash generated from operations, through issuances of our stock or debt securities and through borrowings under credit arrangements. We may not be able to obtain additional financing by issuing stock or debt securities due to the market price of our Class A common stock, overall market conditions or the need for manufacturer consent to the issuance of equity securities. Using cash to complete acquisitions could substantially limit our operating or financial flexibility. If we are unable to obtain financing on acceptable terms, we may be required to reduce the scope of our presently anticipated expansion, which could materially adversely affect our overall growth strategy.

In addition, we are dependent to a significant extent on our ability to finance our new vehicle inventory with “floor plan financing.” Floor plan financing arrangements allow us to borrow money to buy a particular vehicle from the manufacturer and pay off the loan when we sell that particular vehicle. We must obtain new floor plan financing or obtain consents to assume existing floor plan financing in connection with our acquisition of dealerships.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

Substantially all the assets of our dealerships are pledged to secure the indebtedness under the 2006 Credit Facility and our separate floor plan indebtedness with the respective captive finance subsidiaries of BMW, DaimlerChrysler, Ford and General Motors. Three of the lenders under the 2006 Credit Facility are the respective captive finance subsidiaries of BMW, Nissan and Toyota. These pledges may impede our ability to borrow from other sources. Moreover, because the identified manufacturer captive finance subsidiaries are either owned or affiliated with BMW, DaimlerChrysler, Ford, General Motors, Nissan and Toyota, respectively, any deterioration of our relationship with the particular captive finance subsidiary could adversely affect our relationship with the affiliated manufacturer, and vice-versa.

We may not be able to continue executing our acquisition strategy without the costs of future acquisitions escalating.

We have grown our business primarily through acquisitions. We may not be able to consummate any future acquisitions at acceptable prices and terms or identify suitable candidates. In addition, increased competition for acquisition candidates could result in fewer acquisition opportunities for us and higher acquisition prices. The magnitude, timing, pricing and nature of future acquisitions will depend upon various factors, including:

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the availability of suitable acquisition candidates;

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competition with other dealer groups for suitable acquisitions;

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the negotiation of acceptable terms;

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our financial capabilities;

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our stock price; and

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the availability of skilled employees to manage the acquired companies.

We may not be able to determine the actual financial condition of dealerships we acquire until after we complete the acquisition and take control of the dealerships.

The operating and financial condition of acquired businesses cannot be determined accurately until we assume control. Although we conduct what we believe to be a prudent level of investigation regarding the operating and financial condition of the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual operating condition of these businesses. Similarly, many of the dealerships we acquire, including our largest acquisitions, do not have financial statements audited or prepared in accordance with generally accepted accounting principles. We may not have an accurate understanding of the historical financial condition and performance of our acquired entities. Until we actually assume control of business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations.

Although O. Bruton Smith, our chairman and chief executive officer, and his affiliates have previously assisted us with obtaining financing, we cannot assure you that he or they will be willing or able to do so in the future.

Our obligations under the 2006 Credit Facility are secured with a pledge of shares of common stock of Speedway Motorsports, Inc., a publicly traded owner and operator of automobile racing facilities. These shares of Speedway Motorsports common stock are beneficially owned by Sonic Financial Corporation (“SFC”), an entity controlled by Mr. Smith. Presently, the $350 million borrowing limit of our 2006 Revolving Credit Sub-Facility is subject to a borrowing base calculation that is based, in part, on the value of the Speedway Motorsports shares pledged by SFC. Consequently, a withdrawal of this pledge by SFC or a significant decrease in the value of Speedway Motorsports common stock could reduce the amount we can borrow under the 2006 Revolving Credit Sub-Facility.

Mr. Smith has also guaranteed additional indebtedness incurred to complete certain dealership acquisitions. Mr. Smith may not be willing or able to provide similar guarantees or credit support in the future. This could impair our ability to obtain acquisition financing on favorable terms.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

Risks Related to the Automotive Retail Industry

Increasing competition among automotive retailers reduces our profit margins on vehicle sales and related businesses. Further, the use of the Internet in the car purchasing process could materially adversely affect us.

Automobile retailing is a highly competitive business. Our competitors include publicly and privately owned dealerships, some of which are larger and have greater financial and marketing resources than we do. Many of our competitors sell the same or similar makes of new and used vehicles that we offer in our markets at competitive prices. We do not have any cost advantage in purchasing new vehicles from manufacturers due to economies of scale or otherwise. In addition, the popularity of short-term vehicle leasing in the past few years has resulted, as these leases expire, in a large increase in the number of late model used vehicles available in the market, which puts added pressure on new and used vehicle margins. We typically rely on advertising, merchandising, sales expertise, service reputation and dealership location to sell new vehicles. Our revenues and profitability could be materially adversely affected if manufacturers decide to enter the retail market directly.

Our financing, insurance, vehicle protection product and other aftermarket product (“F&I”) business and other related businesses, which have higher margins than sales of new and used vehicles, are subject to strong competition from various financial institutions and other third parties.

The Internet has become a significant part of the sales process in our industry. Customers are using the Internet to compare pricing for cars and related F&I services, which may further reduce margins for new and used cars and profits for related F&I services. If Internet new vehicle sales are allowed to be conducted without the involvement of franchised dealers, our business could be materially adversely affected. In addition, other franchise groups have aligned themselves with services offered on the Internet or are investing heavily in the development of their own Internet capabilities, which could materially adversely affect our business.

Our franchise agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. Our revenues or profitability could be materially adversely affected if any of our manufacturers award franchises to others in the same markets where we operate or if existing franchised dealers increase their market share in our markets.

As we seek to acquire dealerships in new markets, we may face increasingly significant competition as we strive to gain market share through acquisitions or otherwise. Our operating margins may decline over time as we expand into markets where we do not have a leading position.

Our business will be harmed if overall consumer demand suffers from a severe or sustained downturn.

Our business is heavily dependent on consumer demand and preferences. Our revenues will be materially and adversely affected if there is a severe or sustained downturn in overall levels of consumer spending. Retail vehicle sales are cyclical and historically have experienced periodic downturns characterized by oversupply and weak demand. These cycles are often dependent on general economic conditions and consumer confidence, as well as the level of discretionary personal income and credit availability. Future recessions may have a material adverse effect on our retail business, particularly sales of new and used automobiles.

In addition, severe or sustained increases in gasoline prices may lead to a reduction in automobile purchases or a shift in buying patterns from luxury and sport utility vehicle models (which typically provide high margins to retailers) to smaller, more economical vehicles (which typically have lower margins).

A decline of available financing in the sub-prime lending market has, and may continue to, adversely affect our sales of used vehicles.

A significant portion of vehicle buyers, particularly in the used car market, finance their purchases of automobiles. Sub-prime lenders have historically provided financing for consumers who, for a variety of reasons including poor credit histories and lack of down payment, do not have access to more traditional finance sources. Our recent experience suggests that sub-prime lenders have tightened their credit standards and may continue to apply these higher standards in the future. This has adversely affected our used vehicle sales. If sub-prime lenders continue to apply these higher standards or if there is any further tightening of credit standards used by sub-prime lenders or if there is any additional decline in the overall availability of credit in the sub-prime lending market, the ability of these consumers to purchase vehicles could be limited which could have a material adverse effect on our used car business, revenues and profitability.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

Our business may be adversely affected by import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably.

A significant portion of our new vehicle business involves the sale of vehicles, parts or vehicles composed of parts that are manufactured outside the United States. As a result, our operations are subject to customary risks of importing merchandise, including fluctuations in the relative values of currencies, import duties, exchange controls, trade restrictions, work stoppages and general political and socio-economic conditions in other countries. The United States or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs, which may affect our operations and our ability to purchase imported vehicles and/or parts at reasonable prices.

The seasonality of our business magnifies the importance of second and third quarter operating results.

Our business is subject to seasonal variations in revenues. In our experience, demand for automobiles is generally lower during the first and fourth quarters of each year. We therefore receive a disproportionate amount of revenues generally in the second and third quarters and expect our revenues and operating results to be generally lower in the first and fourth quarters. Consequently, if conditions surface during the second and third quarters that impair vehicle sales, such as higher fuel costs, depressed economic conditions or similar adverse conditions, our revenues for the year could be disproportionately adversely affected.

General Risks Related to Investing in Our Securities

Concentration of voting power and anti-takeover provisions of our charter, bylaws, Delaware law and our dealer agreements may reduce the likelihood of any potential change of control.

Our common stock is divided into two classes with different voting rights. This dual class stock ownership allows the present holders of the Class B common stock to control us. Holders of Class A common stock have one vote per share on all matters. Holders of Class B common stock have 10 votes per share on all matters, except that they have only one vote per share on any transaction proposed or approved by the Board of Directors or a Class B common stockholder or otherwise benefiting the Class B common stockholders constituting a:

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“going private” transaction;

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disposition of substantially all of our assets;

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transfer resulting in a change in the nature of our business; or

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merger or consolidation in which current holders of common stock would own less than 50% of the common stock following such transaction.

The holders of Class B common stock currently hold less than a majority of our outstanding common stock, but a majority of our voting power. This may prevent or discourage a change of control of us even if the action was favored by holders of Class A common stock.

Our charter and bylaws make it more difficult for our stockholders to take corporate actions at stockholders’ meetings. In addition, options under our 1997 Stock Option Plan and 2004 Stock Incentive Plan become immediately exercisable upon a change in control. Delaware law also makes it difficult for stockholders who have recently acquired a large interest in a company to consummate a business combination transaction with the company against its directors’ wishes. Finally, restrictions imposed by our dealer agreements may impede or prevent any potential takeover bid. Generally, our franchise agreements allow the manufacturers the right to terminate the agreements upon a change of control of our company and impose restrictions upon the transferability of any significant percentage of our stock to any one person or entity who may be unqualified, as defined by the manufacturer, to own one of its dealerships. The inability of a person or entity to qualify with one or more of our manufacturers may prevent or seriously impede a potential takeover bid. In addition, provisions of our lending arrangements create an event of default on a change in control. These agreements, corporate governance documents and laws may have the effect of delaying or preventing a change in control or preventing stockholders from realizing a premium on the sale of their shares if we were acquired.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

The outcome of legal and administrative proceedings we are or may become involved in could have an adverse effect on our business, results of operations and profitability.

Several private civil actions have been filed against Sonic Automotive, Inc. and several of our 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 our South Carolina subsidiaries. We have been advised that the plaintiffs’ attorneys in this South Carolina private civil action intend to file private civil class actions against Sonic Automotive, Inc. and certain of its subsidiaries in other states. This group of plaintiffs’ attorneys has filed another one of these private civil class action lawsuits 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 action have since been consolidated into a single proceeding in private arbitration. Another one of these private civil actions has been filed in Tennessee state court against Sonic Automotive, Inc. and one of our Tennessee subsidiaries. Additionally, a private civil action has also been filed against one of our dealerships in Los Angeles County stating allegations of deceptive sales practices by that dealership. The plaintiffs in this private civil action purport to represent a class of customers as potential plaintiffs, although no motion for class certification has been filed. Additionally, our South Carolina dealerships and numerous other South Carolina dealerships have been named as defendants in a lawsuit alleging improper practices related to the imposition of document preparation and/or administrative service fees. The plaintiffs’ attorneys in this lawsuit are seeking relief on behalf of a large group of consumers, although the lawsuit currently does not seek class action treatment.

The outcomes of the civil actions brought by plaintiffs purporting to represent a class of customers, as well as other pending and future legal proceedings arising out of the conduct of our 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 our business, financial condition, results of operations, cash flows or prospects.

Our company 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 we and our 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 our 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. We have 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. We intend to continue our vigorous 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 our future results of operations, financial condition and cash flows.

Our business may be adversely affected by claims alleging violations of laws and regulations in our advertising, sales and finance and insurance activities.

Our business is highly regulated. In the past several years, private plaintiffs and state attorney generals have increased their scrutiny of advertising, sales, and finance and insurance activities in the sale and leasing of motor vehicles. The conduct of our business is subject to numerous federal, state and local laws and regulations regarding unfair, deceptive and/or fraudulent trade practices (including advertising, marketing, sales, insurance, repair and promotion practices), truth-in-lending, consumer leasing, fair credit practices, equal credit opportunity, privacy, insurance, motor vehicle finance, installment finance, closed-end credit, usury and other installment sales. Claims arising out of actual or alleged violations of law may be asserted against us or any of our dealers by individuals, either individually or through class actions, or by governmental entities in civil or criminal investigations and proceedings. Such actions may expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including suspension or revocation of our licenses and franchises to conduct dealership operations.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

Our business may be adversely affected by unfavorable conditions in our local markets, even if those conditions are not prominent nationally.

Our performance is subject to local economic, competitive, weather and other conditions prevailing in geographic areas where we operate. For example, our current results of operations depend substantially on general economic conditions and consumer spending habits in our Northern California and Houston markets. Revenues in our Northern California and Houston markets represented approximately 31.6% of our total revenues for the three months ended March 31, 2007. We may not be able to expand geographically and any geographic expansion may not adequately insulate us from the adverse effects of local or regional economic conditions. In addition, due to the provisions and terms contained in our operating lease agreements, we may not be able to relocate a dealership operation to a more favorable location without incurring significant costs or penalties.

The loss of key personnel and limited management and personnel resources could adversely affect our operations and growth.

Our success depends to a significant degree upon the continued contributions of our management team, particularly our senior management, and service and sales personnel. Additionally, manufacturer franchise agreements may require the prior approval of the applicable manufacturer before any change is made in franchise general managers. We do not have employment agreements with certain members of our senior management team, our dealership managers and other key dealership personnel. Consequently, the loss of the services of one or more of these key employees could have a material adverse effect on our results of operations.

In addition, as we expand we may need to hire additional managers. The market for qualified employees in the industry and in the regions in which we operate, particularly for general managers and sales and service personnel, is highly competitive and may subject us to increased labor costs during periods of low unemployment. The loss of the services of key employees or the inability to attract additional qualified managers could have a material adverse effect on our results of operations. In addition, the lack of qualified management or employees employed by potential acquisition candidates may limit our ability to consummate future acquisitions.

Governmental regulation and environmental regulation compliance costs may adversely affect our profitability.

We are subject to a wide range of federal, state and local laws and regulations, such as local licensing requirements, retail financing and consumer protection laws and regulations, and wage-hour, anti-discrimination and other employment practices laws and regulations. Our facilities and operations are also subject to federal, state and local laws and regulations relating to environmental protection and human health and safety, including those governing wastewater discharges, air emissions, the operation and removal of underground and aboveground storage tanks, the use, storage, treatment, transportation, release, recycling and disposal of solid and hazardous materials and wastes and the cleanup of contaminated property or water. The violation of these laws and regulations can result in administrative, civil or criminal penalties against us or in a cease and desist order against our operations that are not in compliance. Our future acquisitions may also be subject to regulation, including antitrust reviews. We believe that we comply in all material respects with all laws and regulations applicable to our business, but future regulations may be more stringent and require us to incur significant additional compliance costs.

Our past and present business operations are subject to environmental laws and regulations. We may be required by these laws to pay the full amount of the costs of investigation and/or remediation of contaminated properties, even if we are not at fault for disposal of the materials or if such disposal was legal at the time. Like many of our competitors, we have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with these laws and regulations. In addition, soil and groundwater contamination exists at certain of our properties. We cannot assure you that our other properties have not been or will not become similarly contaminated. In addition, we could become subject to potentially material new or unforeseen environmental costs or liabilities because of our acquisitions.

Potential conflicts of interest between us and our officers or directors could adversely affect our future performance.

O. Bruton Smith serves as the chairman and chief executive officer of Speedway Motorsports. Accordingly, we compete with Speedway Motorsports for the management time of Mr. Smith.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

We have in the past and will likely in the future enter into transactions with Mr. Smith, entities controlled by Mr. Smith or our other affiliates. We believe that all of our existing arrangements with affiliates are as favorable to us as if the arrangements were negotiated between unaffiliated parties, although the majority of these transactions have neither been verified by third parties in that regard nor are likely to be so verified in the future. Potential conflicts of interest could arise in the future between us and our officers or directors in the enforcement, amendment or termination of arrangements existing between them.

We may be subject to substantial withdrawal liability assessments in the future related to a multi-employer pension plan to which certain of our dealerships make contributions pursuant to collective bargaining agreements.

Seven of our dealership subsidiaries in Northern California currently make fixed-dollar contributions to the Automotive Industries Pension Plan pursuant to collective bargaining agreements between our subsidiaries and the International Association of Machinists. The AI Pension Plan is a “multi-employer pension plan” as defined under the Employee Retirement Income Security Act of 1974, as amended, and our seven dealership subsidiaries are among approximately 120 automobile dealerships that make contributions to the AI Pension Plan pursuant to collective bargaining agreements with the IAM. In June 2006, we received information that the AI Pension Plan was substantially underfunded as of December 31, 2005. Under applicable federal law, any employer contributing to a multiemployer pension plan that completely ceases participating in the plan while the plan is underfunded is subject to payment of such employer’s assessed share of the aggregate unfunded vested benefits of the plan. In certain circumstances, an employer can be assessed withdrawal liability for a partial withdrawal from a multi-employer pension plan. In addition, if the financial condition of the AI Pension Plan were to continue to deteriorate to the point that the Plan is forced to terminate and be assumed by the Pension Benefit Guaranty Corporation, the participating employers could be subject to assessments by the PBGC to cover the participating employers’ assessed share of the unfunded vested benefits. If any of these adverse events were to occur in the future, it could result in a substantial withdrawal liability assessment that could have a material adverse effect on our business, financial condition, results of operations or cash flows.

A change in historical experience and/or assumptions used to estimate reserves could have a material impact on our earnings.

As described in Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Use of Estimates and Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2006, our estimates for finance, insurance and service contracts, insurance reserves and Cornerstone Acceptance allowance for credit losses is based on historical experience. Differences between actual results and our historical experiences and/or our assumptions could have a material impact on our earnings in the period of the change and in periods subsequent to the change.

An impairment of our goodwill could have a material adverse impact on our earnings.

Pursuant to applicable accounting pronouncements, we test goodwill for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We describe the process for testing goodwill more thoroughly in our Annual Report on Form 10-K for the year ended December 31, 2006 in Item 7 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Use of Estimates and Critical Accounting Policies.” If we determine that the amount of our goodwill is impaired at any point in time, we will be required to reduce goodwill on our balance sheet. As of March 31, 2007, our balance sheet reflected a carrying amount of approximately $1,171.9 million in goodwill (including goodwill classified as assets held for sale), which was allocated between three geographic reporting units. If the goodwill in any of our reporting units is impaired, we will record a significant non-cash impairment charge that would likely have a material adverse effect on our earnings for the period in which the impairment of goodwill occurred.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table sets forth information about the shares of Class A Common Stock we repurchased during the quarter ended March 31, 2007.


	(amounts in thousands, except per share amounts)
	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
January 2007	0	$	-	0	$	12,198

February 2007	0	$	-	0	$	12,198

March 2007	60,000	$	28.51	60,000	$	10,487

Total	60,000	$	28.51	60,000	$	10,487

(1)	All shares repurchased were part of publicly announced share repurchase programs

(2)	Our publicly announced Class A Common Stock repurchase authorizations occurred as follows:


	(Amounts in Thousands)

November 1999	$	25,000

February 2000		25,000

December 2000		25,000

May 2001		25,000

August 2002		25,000

February 2003		20,000

December 2003		20,000

July 2004		20,000

Total	$	185,000

See Note 6 to our annual consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2006 for a description of restrictions on the payment of dividends.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

Item 6:

Exhibits.

(a) Exhibits:


Exhibit No.		Description
10.1*		Sonic Automotive, Inc. 2004 Incentive Plan, Amended and Restated as of February 13, 2007 (incorporated by reference to Exhibit 4 to Sonic’s Registration Statement on Form S-8 (Reg. No. 333-142435) (1)

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 to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Mr. O. Bruton Smith pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed previously.

(1)	Indicates a management contract or compensatory plan or arrangement

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

Forward Looking Statements

This Quarterly Report on Form 10-Q contains numerous “forward-looking statements” within the meaning of the Private Litigation Securities Reform Act of 1995. These forward-looking statements address our future objectives, plans and goals, as well as our intent, beliefs and current expectations regarding future operating performance, and can generally be identified by words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee” and other similar words or phrases. Specific events addressed by these forward-looking statements include, but are not limited to:

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future acquisitions or dispositions;

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industry trends;

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general economic trends, including employment rates and consumer confidence levels;

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vehicle sales rates and same store sales growth;

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our financing plans; and

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our business and growth strategies.

These forward-looking statements are based on our current estimates and assumptions and involve various risks and uncertainties. As a result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projected in these forward-looking statements. Factors which may cause actual results to differ materially from our projections include those risks described in Item 1A of this Form 10-Q and elsewhere in this report, as well as:

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our ability to generate sufficient cash flows or obtain additional financing to support acquisitions, capital expenditures, our share repurchase program, dividends on our Common Stock and general operating activities;

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the reputation and financial condition of vehicle manufacturers whose brands we represent, the financial incentives they offer and their ability to design, manufacture, deliver and market their vehicles successfully;

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our relationships with manufacturers, which may affect our ability to complete additional acquisitions;

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changes in laws and regulations governing the operation of automobile franchises, accounting standards, taxation requirements, and environmental laws;

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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;

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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; and

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the timing of and our ability to successfully integrate recent and potential future acquisitions.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	SONIC AUTOMOTIVE, INC.

Date: May 10, 2007	By:	/s/ O. Bruton Smith
		O. Bruton Smith
		Chairman and Chief Executive Officer

Date: May 10, 2007	By:	/s/ David P. Cosper
		David P. Cosper
		Vice Chairman and Chief Financial Officer (Principal Financial Officer)

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

EXHIBIT INDEX


Exhibit No.		Description

10.1*		Sonic Automotive, Inc. 2004 Incentive Plan, Amended and Restated as of February 13, 2007 (incorporated by reference to Exhibit 4 to Sonic’s Registration Statement on Form S-8 (Reg. No. 333-142435) (1)

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 to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Mr. O. Bruton Smith pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Previously filed.

(1)	Indicates a management contract or compensatory plan or arrangement