Sonic Automotive - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

OR

Commission file number 1-13395

SONIC AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

(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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  x  No  ¨

As of May 12, 2003, there were 28,669,980 shares of Class A Common Stock and 12,029,375 shares of Class B Common Stock outstanding.

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INDEX TO FORM 10-Q

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PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars and shares in thousands except per share amounts)

(Unaudited)

See notes to unaudited consolidated financial statements.

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

See notes to unaudited consolidated financial statements.

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Dollars and shares in thousands)

(Unaudited)

See notes to unaudited consolidated financial statements.

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

See notes to unaudited consolidated financial statements.

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SONIC AUTOMOTIVE, INC AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying unaudited financial information for the three months ended March 31, 2003 has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated. These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and the results of operations for the periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the audited consolidated financial statements of Sonic Automotive, Inc. (“Sonic”) for the year ended December 31, 2002 which were included in Sonic’s Annual Report on Form 10-K.

Stock-Based Compensation—Sonic accounts for its stock-based compensation plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. In accordance with those provisions, because the exercise price of all options granted under those plans equaled the market value of the underlying stock at the grant date, no stock-based employee compensation cost is recorded. Using the Black-Scholes option pricing model for all options granted, the following table illustrates the effect on income and earnings per share if Sonic had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:

Derivative Instruments and Hedging Activities—In order to reduce our exposure to market risks from fluctuations in interest rates, we entered into two separate interest rate swap agreements on January 15, 2002 and June 6, 2002 to effectively convert a portion of our LIBOR-based variable rate debt to a fixed rate. The swaps each have a notional principal amount of $100.0 million and mature on October 31, 2004 and June 6, 2006, respectively. Under the terms of the swap agreement entered into on January 15, 2002, we receive interest payments on the notional amount at a rate equal to the one month LIBOR rate, adjusted monthly, and make interest

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SONIC AUTOMOTIVE, INC AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

payments at a fixed rate of 3.88%. Under the terms of the swap agreement entered into on June 6, 2002, we receive interest payments on the notional amount at a rate equal to the one month LIBOR rate, adjusted monthly, and make interest payments at a fixed rate of 4.50%. Incremental interest expense incurred (the difference between interest received and interest paid) as a result of these interest rate swaps was $1.4 million in for the first three months of 2003 and has been included in interest expense, other in the accompanying unaudited consolidated statement of income. The interest rate swaps have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of the interest rate swaps have been recorded in other comprehensive loss, net of related income taxes, in our statement of stockholders’ equity. The fair value of the interest rate swaps as of March 31, 2003 is recorded in other long-term liabilities on the accompanying balance sheet. The change in fair value of the swaps during the three months ended March 31, 2003, recorded in accumulated other comprehensive loss was approximately $128,000 ($78,000 net of tax). Because the critical terms of the interest rate swaps and the underlying debt obligations were the same, no ineffectiveness was recorded.

Cumulative Effect of a Change in Accounting Principle—The Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on Issue No. 02-16, “Accounting by a Customer for Certain Consideration Received from a Vendor.” In accordance with Issue No. 02-16, which was effective January 1, 2003, payments received from manufacturers for floor plan assistance and certain types of advertising allowances should be recorded as a reduction of the cost of inventory and recognized as a reduction of cost of sales when the inventory is sold. Previous practice was to recognize such payments as a reduction of cost of sales at the time of vehicle purchase. The cumulative effect of the adoption of the consensus reached in Issue No. 02-16 resulted in a decrease to income of $5.6 million, net of applicable income taxes of $3.3 million. Had the guidance from Issue No. 02-16 been retroactively applied, results of operations and net income per share for the three months ended March 31, 2002 would not have been materially different from the previously reported results.

Reclassifications—Loss from operations of discontinued dealerships for the three months ended March 31, 2002 reflects reclassifications from the prior year presentation to include additional dealerships sold or identified for sale subsequent to March 31, 2002 which had not been classified as held for sale as of March 31, 2002. In addition, in accordance with the consensus reached in Issue No. 02-16, certain incentives received from manufacturers not intended to reimburse specific, incremental, identifiable costs incurred in selling manufacturers’ products which had previously been classified as a reduction of selling, general and administrative expenses are now recorded as a reduction of inventory cost and are included cost of sales when the associated vehicles are sold.

2. BUSINESS ACQUISITIONS AND DISPOSITIONS

Dealership Acquisitions:

During the first three months of 2003, Sonic acquired three automotive dealerships located in Colma, California, Oklahoma City, Oklahoma, and Denver, Colorado for an aggregate purchase price of approximately $20.0 million in cash. The consolidated balance sheet 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 dates of acquisition and are subject to final adjustment. As a result of these allocations, we have recorded $3.6 million of intangible assets representing rights acquired under franchise agreements, and $13.7 million of goodwill, of which approximately $10.5 million is expected to be tax deductible.

Dealership Dispositions:

In addition to the acquisitions described above, during the first three months of 2003, Sonic sold or otherwise disposed of the assets of two dealership franchises, resulting in the closing of two dealerships. The sale of these dealerships resulted in a net gain of $1.9 million which is included in loss from discontinued operations on the accompanying unaudited consolidated statement of income for the three months ended March 31, 2003.

In conjunction with dealership dispositions in the current quarter, Sonic has indemnified the buyers from certain liabilities and costs arising from operations or events that occurred prior to sale but which may or may not be known at the time of sale, including environmental liabilities and liabilities associated from the breach of representations or warranties made under the agreements. The estimated maximum liability associated with current quarter dispositions was $5.2 million. These indemnifications expire within a period of one year to eighteen months following the date of the sale. The estimated fair value of the guarantees associated with these indemnifications was not material.

In addition to the dispositions described above, as of March 31, 2003, Sonic had approved the sale or disposition of assets of 13 additional dealership franchises, which will result in the closing of 11 dealerships. These franchises are generally smaller franchises with unprofitable operations. Long lived assets to be disposed of in connection with dealerships not yet sold, consisting primarily of

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SONIC AUTOMOTIVE, INC AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

property, equipment and goodwill, totaled approximately $18.8 million at March 31, 2003 and have been classified in other current assets in the accompanying consolidated balance sheet. Other assets and liabilities to be disposed in connection with these dispositions include inventories and related notes payable floor plan.

3. INVENTORIES

Inventories consist of the following:

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

Interest capitalized in conjunction with construction projects was approximately $0.9 million for the three months ended March 31, 2003 and approximately $0.4 million for the three months ended March 31, 2002.

In addition to the amounts shown above, Sonic incurred approximately $61.4 million in real estate and construction costs as of March 31, 2003 and $39.2 million as of December 31, 2002 on facilities that are or were expected to be completed and sold within one year in sale-leaseback transactions. Accordingly, these costs are included in other current assets on the accompanying consolidated balance sheets. Under the terms of the sale-leaseback transactions, Sonic sells the properties to an unaffiliated third party and enters into long-term operating leases on the facilities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

5. LONG-TERM DEBT

Long-term debt consists of the following:

6. PER SHARE DATA

The calculation of diluted net income per share considers the potential dilutive effect of options and shares under Sonic’s stock compensation plans, and Class A common stock purchase warrants. The following table illustrates the dilutive effect of such items:

In addition to the stock options included in the table above, options to purchase 2,725,712 shares of Class A common stock were outstanding during the three months ended March 31, 2003 but were not included in the computation of diluted net income per share because the options were antidilutive. There were no antidilutive options at March 31, 2002.

The total amount of stock options outstanding at March 31, 2002 and 2003 were 4,391,328 and 5,461,693, respectively.

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SONIC AUTOMOTIVE, INC AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

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 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, 2002.

Overview

We are one of the largest automotive retailers in the United States. As of May 12, 2003 we operated 186 dealership franchises, representing 34 different brands of cars and light trucks at 141 locations, and 47 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, warranty, paint and collision repair services, and arrangement of extended warranty contracts, financing and insurance for our 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 dependent upon near-term vehicle sales volume. As a result, we believe the diversity of these products and services reduces the risk of periodic economic downturns.

The following table depicts the breakdown of our new vehicle revenues by brand for the three months ended March 31, 2002 and 2003:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS—(Continued)

We sell similar products and services, use similar processes in selling our products and services and sell our products and services to similar classes of customers. As a result of this and the way we manage our business, we have aggregated our results into a single segment for purposes of reporting financial condition and results of operations.

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 consolidated financial statements the results of operations of these dealerships prior to the date they were acquired. Our consolidated financial statements discussed below reflect the results of operations, financial position and cash flows of each of our dealerships acquired prior to March 31, 2003. 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 which 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

Revenues

New Vehicles:

The decline in same store new vehicle unit sales during the first quarter 2003 was primarily due to decreases in our sales of domestic brands, which are generally more sensitive to economic conditions than import and luxury brands. Sales of new units of domestic brands declined 2,297 units, or 16.5%, while sale of import brands increased by 721 units, or 4.1%. Regional performance continued to be negatively affected by weaker economic conditions in our Northern California region, evidenced by higher unemployment rates compared to the rest of the country. Same store unit sales in that region declined by 284 units, or 4.7%. Our Houston, Oklahoma and Ohio regions experienced same store unit declines of 525 units, or 10.4%, 347 units, or 21.2% and 134 units, or 8.4%, respectively, primarily due to a predominance of domestic brand stores in those markets. In addition, same store new vehicle sales were further impacted by inclement weather in the Dallas, Mid-Atlantic and Carolinas regions. These decreases were partially offset by increases in unit sales in regions whose portfolios are dominated by import brands, primarily San Diego/Nevada, where unit sales increased 216 units, or 12.2%, and South Carolina/Georgia where unit sales increased 162 units, or 11.5%. We expect declines in same store new vehicles sales to continue during the remainder of 2003.

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AND RESULTS OF OPERATIONS—(Continued)

Used Vehicles:

A significant factor negatively impacting same store used vehicle unit sales during the first quarter 2003 compared to the same period last year, has been the withdrawal of certain key lenders, particularly in the sub-prime category, as well as tightened credit standards from remaining lenders which have affected consumers’ ability to finance used vehicle purchases and have thus reduced retail activity. Our Oklahoma region, which has historically been heavily dependent on used vehicle sales, especially the sub-prime market, was particularly affected by these trends. Same store unit sales in that region declined 419 units or 24.8%. Unit sales in our Carolinas region declined 478 units, or 33.8%. These two regions accounted for 47.9% of the total decline in same store unit sales in the first quarter 2003 compared to the same period last year. While we expect same store used vehicle declines to continue, the role of same store vehicle declines has been improving and we expect such declines to continue to improve in subsequent quarters.

Wholesale Vehicles:

The decline in same store wholesale revenues during the first quarter 2003 declined due to a decrease in units sold of 2,673 partially offset by an increase in average price per unit of $488, primarily resulting from wholesaling higher end models in order to liquidate aged units and maintain appropriate inventory levels.

Parts, Service and Collision Repair:

The decline in same store parts, service and collision repair revenues resulted partially from declines in our Ford stores of $3.7 million, or 12.5%. These declines were the result of a combination of factors including a significant decrease in wholesale parts sales in our Houston market resulting from Ford Motor Company’s decision to open a parts depot in that area in the latter half of 2002, as well as unusually high parts and service sales in the first quarter of 2002 generated by the Firestone tire recall. This decrease was partially offset by revenue increases at our BMW stores of $1.6 million, or 6.9%, resulting primarily from warranty sales arising in part from BMW expanding their factory warranty coverage to all new vehicle maintenance and revenue increases at our Honda stores of $0.7 million, or 2.6%, resulting from Honda extending their factory warranty coverage on two models. We believe lower collision revenues in first quarter 2003 are primarily a result of customers choosing not to perform minor repair work that historically would have been covered by lower deductible policies,

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AND RESULTS OF OPERATIONS—(Continued)

as well as a change in insurance company trends whereby vehicles are being declared totaled rather than repaired at a greater percentage than in prior years.

Finance and Insurance:

Same store finance and insurance revenues decreased during the first quarter 2003 primarily due to lower retail vehicle unit sales. Finance and insurance revenues in our Northern California region declined $0.8 million, or 9.5%. Revenues in our Houston, Oklahoma and Ohio regions declined $0.3 million, or 6.4%, $0.3 million, or 11.5%, and $0.1 million, or 6.8%, respectively, compared to the first quarter 2002. These declines were offset by strong performance in our San Diego/Nevada region, driven by a higher import brand mix, where revenues increased $0.6 million, or 20.8%. Despite a decrease in retail vehicle same store sales of approximately 7.2% in the first quarter 2003 compared to the first quarter 2002, same store finance and insurance revenues from those dealerships declined only 4.1%, reflecting an increase in finance and insurance revenues per unit of 3.4%.

Gross Profit and Gross Margins

Our overall gross profit margin and gross profit as a percentage of revenues (“gross margins”) generally vary depending on changes in our revenue mix. Although sales of new vehicles comprise the majority of our total revenues, new vehicles generally carry the lowest margin of any product or service we offer, generally averaging between 7.5% and 8.5%. As a result, sales of new vehicles generate a relatively small portion of total gross profits. Retail sales of used vehicles generally carry a slightly higher gross margin than new vehicles, averaging between 11.0% and 11.5%. Parts, service, and collision repair carry the next highest margins, averaging between 45.0% and 47.0%. Commission revenues from the sale of finance, insurance and extended warranty products carry the highest margin at 100.0%. As our mix of revenues shifts between lower margin products and services to higher margin products and services, overall gross margins fluctuate accordingly.

During the first quarter of 2003, gross margins increased slightly to 15.9% from 15.8% in the first quarter of 2002. We experienced an increase in the percentage of revenues contributed by parts, service and collision repair services to 14.1% in the first quarter 2003 from 13.2% in the first quarter 2002. In addition, the gross profit percentage earned on our parts, service, and collision repair services increased to 48.0% in the first quarter 2003 from 46.7% in the first quarter 2002, primarily attributable to manufacturer’s extending warranty periods on certain models. This was offset by a decline in the gross profit percentage earned on our new vehicles to 7.1% in the first quarter 2003 from 7.8% in the first quarter 2002 primarily as a result of challenging market conditions as well as management’s aggressive effort to maintain market share as part of our long term growth strategy and reduce new vehicle inventory levels.

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Selling, General and Administrative Expenses

Of our total selling, general and administrative expenses, approximately 60.3% were variable, comprised primarily of non-salaried sales compensation and advertising, and approximately 39.7% were fixed, comprised primarily of fixed compensation and rent expense. We manage these variable expenses so that they are generally related to gross profit and can be adjusted in response to changes in gross profit. Salespersons, sales managers, service managers, parts managers, service advisors, service technicians and all other non-clerical dealership personnel are paid either a commission or a modest salary plus commission. In addition, dealership management compensation is tied to individual dealership profitability.

Total selling, general and administrative expenses as a percentage of gross profit increased to 82.6% in the first quarter of 2003 from 77.5% in the first quarter 2002. This resulted from an increase in fixed expenses as a percentage of gross profit to 33.3% in 2003 from 31.4% in 2002 due primarily to significant declines in gross profit at some of our domestic line dealerships which resulted in fewer gross profit dollars to cover fixed expenses. Fixed expenses as a percentage of gross profit also increased as a result of increases in rent and rent related expenses of $7.4 million related to new facilities and completed construction projects sold in sale-leaseback transactions.

Variable expenses as a percentage of gross profit increased to 49.3% in the first quarter 2003 from 46.0% in first quarter of 2002. This was primarily due to increases in compensation expense as a percentage of gross profits to 38.9% in 2003 from 37.0% in 2002. Total gross profits grew 14.3% in first quarter 2003 compared to first quarter 2002. Gross profit from parts, service and collision repair operations increased 25.2%, while gross profits from retail vehicle sales increased only 6.1%. A larger portion of compensation expenses is directly related to parts, service and collision repair operations, therefore compensation as a percentage of total gross profit has grown compared to 2002

Depreciation

Depreciation expense increased as a result of capital expenditures made in the previous 12 months. During the 12 months ending March 31, 2003, the balance of depreciable property and equipment related to continuing operations increased approximately $26.6 million, or 28.9%. As a percentage of total revenues, depreciation expense was 0.1% in both the first quarter 2003 and the first quarter 2002.

Floor Plan Interest Expense

Floor plan interest expense increased by $1.0 million, or 20.8% in the first quarter 2003 compared to the same period last year. The change reflects an increase due to acquisitions of $1.4 million offset by a same store decrease of $0.4 million. The same store average interest rate incurred for the three months ended March 31, 2003 was 2.9% versus 3.6% for the three months ended March 31, 2002. The interest rate decrease was offset by an increase in the average balance on a same store basis from $516.2 million for the three months ended March 31, 2002 to $580.5 million for the three months ended March 31, 2003.

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Other Interest Expense

Other interest expense increased by $1.7 million, or 20.9% in the first quarter 2003 compared to the same period last year. Interest expense increased $1.8 million as a result of the issuance of $149.5 million in 5.25% convertible senior subordinated notes in May 2002 and increased $1.0 million from the conversion of $100.0 million of our variable rate debt to fixed rates through interest rate swap agreements entered into June 6, 2002. These increases in interest expense were partially offset by a decrease of interest expense of $0.6 million on our senior subordinated notes resulting primarily from a decrease in average balance from $200 million to $182.4 million as a result of debt repurchases. In addition, the increase in interest expense was partially offset by an increase in the capitalization of interest on construction projects of $0.5 million in the first quarter 2003 compared to the same period last year.

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 subsidiaries, the majority of our cash flows from operations is generated by these subsidiaries. As a result, our cash flow and ability to service debt depends to a substantial degree on the results of operations of these subsidiaries and their ability to provide us with cash. Uncertainties in the economic environment as well as uncertainties associated with the ultimate resolution of geopolitical conflicts may therefore affect our overall liquidity.

Floor Plan Facilities:

The weighted average interest rate for our floor plan facilities was 3.2% for the three months ended March 31, 2003 and 3.5% for the three months ended March 31, 2002. Our floor plan interest expense is substantially offset by amounts received from manufacturers, in the form of floor plan assistance. Prior to January 1, 2003, floor plan assistance was recorded as a reduction of cost of sales when received. In accordance with guidance from Emerging Issues Task Force Issue No. 02-16, beginning January 1, 2003, floor plan assistance received is capitalized in inventory and charged against cost of sales when the associated inventory is sold. In the first three months of 2003, we received approximately $8.3 million in manufacturer assistance, which resulted in an effective borrowing rate under our floor plan facilities of 0%. 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, 2003.

Long-Term Debt and Credit Facilities:

At March 31, 2003, the outstanding balance and additional borrowing availability on our credit facilities were as follows:

We were in compliance with all of the restrictive and financial covenants under all our credit facilities at March 31, 2003.

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AND RESULTS OF OPERATIONS—(Continued)

Dealership Acquisitions and Dispositions:

In the first three months of 2003, we acquired three dealerships for a combined purchase price of $20.0 million in cash. The total purchase price for acquisitions was based on out internally determined valuation of the dealerships and their assets. The purchase price was financed by cash generated from operations and by borrowings under our Revolving Credit Facility.

Sale-Leaseback Transactions:

In an effort to generate additional cash flow, we typically seek to structure our operations to minimize the ownership of real property. As a result, facilities either constructed by us or obtained in acquisitions are typically sold to third parties in sale-leaseback transactions. The resulting leases generally have initial terms of 10-15 years and include a series of five-year renewal options. We have no continuing obligations under these arrangements other than lease payments. The majority of our sale-leaseback transactions are done with Capital Automotive REIT. During the first quarter of 2003, we sold $0.5 million in dealership properties in sale-leaseback transactions.

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 2003 were approximately $18.1 million, of which approximately $15.7 million related to the construction of new dealerships and collision repair centers. Once completed, these new dealership and collision repair center facilities are generally sold in sale-leaseback transactions. After considering proceeds from real estate sales and sale-leaseback transactions, as well as the balance of projects in progress expected to be sold in sale-leaseback transactions, capital expenditures were $6.7 million for the first quarter of 2003. We do not expect any significant gains or losses from these sales.

Stock Repurchase Program:

Our Board of Directors has authorized Sonic to expend up to $145.0 million to repurchase shares of its Class A common stock or redeem securities convertible into Class A common stock. In the first three months of 2003, we repurchased 524,000 shares for approximately $7.9 million. At March 31, 2003, we had $30.1 million remaining under the board authorization.

Cash Flows:

For the three month period ended March 31, 2003, net cash provided by operating activities was approximately $26.5 million, which was generated primarily by net income plus non-cash items such as depreciation, amortization and deferred income taxes. A decrease in receivables of $30.0 million was partially offset by a decrease in floor plan notes payable of $16.3 million. Cash used for investing activities in the first three months of 2003 was approximately $30.3 million, the majority of which was related to dealership acquisitions and capital expenditures on construction in progress projects. In the first three months of 2003, net cash provided by financing activities was approximately $9.8 million and primarily related to net borrowings on our revolving credit facilities of approximately $17.4 million which was used primarily to finance acquisitions during the quarter, offset by repurchases of Class A common stock of $7.9 million.

Future Liquidity Outlook:

We believe our best source of liquidity for future growth remains cash flows generated from operations combined with our availability of borrowings under our floor plan financing (or any replacements thereof) and other credit arrangements. 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 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, as market conditions warrant.

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Guarantees:

In conjunction with dealership dispositions in the current quarter, we have indemnified the buyers from certain liabilities and costs arising from operations or events that occurred prior to sale but which may or may not be known at the time of sale, including environmental liabilities and liabilities associated from the breach of representations or warranties made under the agreements. The estimated maximum liability associated with current quarter dispositions was $5.2 million. These indemnifications expire within a period of one year to eighteen months following the date of the sale. The estimated fair value of the guarantees associated with these indemnifications was not material.

Seasonality:

Our operations are subject to seasonal variations. The first and fourth quarters generally contribute less revenue and operating profits 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.

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QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk. Our variable rate floor plan notes payable, revolving credit facility 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 $1.0 billion at March 31, 2003 and approximately $1.1 billion at March 31, 2002. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $2.6 million in the first quarter 2003 and approximately $2.1 million in the first quarter 2002. Of the total change in interest expense, approximately $2.0 million in the first quarter 2003 and approximately $1.3 million in first quarter 2002 would have resulted from floor plan notes payable.

Our exposure with respect to floor plan notes payable 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, 2003, the amounts we received from manufacturer floor plan assistance exceeded our floor plan interest expense by approximately $1.2 million. As a result, the effective rate incurred under our floor plan financing arrangements was reduced to 0% after considering these incentives. A change in interest rates of 100 basis points would have had an estimated impact on floor plan assistance of approximately $2.0 million in the first quarter 2003.

In addition to our variable rate debt, we also have lease agreements on a portion of our dealership facilities where the monthly lease payment fluctuates 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.

In order to reduce our exposure to market risks from fluctuations in interest rates, we entered into two separate interest rate swap agreements on January 15, 2002 and June 6, 2002 to effectively convert a portion of our LIBOR-based variable rate debt to a fixed rate. The swaps each have a notional principal amount of $100.0 million and mature on October 31, 2004 and June 6, 2006, respectively. Under the terms of the swap agreement entered into on January 15, 2002, we receive interest payments on the notional amount at a rate equal to the one month LIBOR rate, adjusted monthly, and make interest payments at a fixed rate of 3.88%. Under the terms of the swap agreement entered into on June 6, 2002, we receive interest payments on the notional amount at a rate equal to the one month LIBOR rate, adjusted monthly, and make interest payments at a fixed rate of 4.50%. Incremental interest expense incurred (the difference between interest received and interest paid) as a result of these interest rate swaps was $1.4 million in for the first three months of 2003 and has been included in interest expense, other in the accompanying unaudited consolidated statement of income. The interest rate swaps have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of the interest rate swaps have been recorded in other comprehensive loss, net of related income taxes, in our statement of stockholders’ equity.

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 within 90 days of the filing date of 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 are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date the evaluation was completed.

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Forward Looking Statements

The following 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:

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 Exhibit 99.1 to this quarterly report on Form 10-Q and elsewhere in this report, as well as:

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OTHER INFORMATION

PART II—OTHER INFORMATION

Item 6: Exhibits and Reports on Form 8-K.

(a) Exhibits:

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(b) Reports on Form 8-K

On February 10, 2003, we filed a Current Report on Form 8-K with the SEC to announce pursuant to Item 5 of Form 8-K an amendment to our revolving credit facility. A copy of the press release issued in connection with this announcement was attached as an exhibit to the Current Report on Form 8-K.

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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.

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CERTIFICATION

I, O. Bruton Smith, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sonic Automotive, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003

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CERTIFICATION

I, Theodore M. Wright, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sonic Automotive, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003

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