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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2003

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 August 11, 2003, there were 28,896,526 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 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

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying unaudited financial information for the six months ended June 30, 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 and furnished in Current Report on Form 8-K filed on August 4, 2003 in order to reflect the subsequent reclassifications of dealership franchises between discontinued and continuing operations in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

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 No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation:

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SONIC AUTOMOTIVE, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 (the “Swaps”) to effectively convert a portion of our LIBOR-based variable rate debt to a fixed rate. The Swaps have a notional principal amount of $100.0 million each and mature on October 31, 2004 and June 6, 2006, respectively. Incremental interest expense incurred (the difference between interest received and interest paid) as a result of the Swaps was $3.8 million for the first six months of 2003 and has been included in interest expense, other in the accompanying unaudited consolidated statement of income. The Swaps have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of the Swaps have been recorded in other comprehensive loss, net of related income taxes, in our statement of stockholders’ equity. The fair value of the Swaps as of June 30, 2003 is recorded in other long-term liabilities on the accompanying balance sheet. The change in fair value of the Swaps during the six months ended June 30, 2003, recorded in accumulated other comprehensive loss, was approximately $0.7 million ($0.4 million, net of tax). Because the critical terms of the 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 Issue No. 02-16 resulted in a decrease to income of $5.6 million, net of applicable income taxes of $3.3 million for the six months ended June 30, 2003. Had the guidance from Issue No. 02-16 been retroactively applied, results of operations and net income per share for the six months ended June 30, 2002 would not have been materially different from the previously reported results.

Reclassifications—Loss from operations of discontinued dealerships for the six months ended June 30, 2002 reflects reclassifications from the prior year presentation to include additional dealerships sold or identified for sale subsequent to June 30, 2002 which had not been classified as held for sale as of June 30, 2002. In addition, in accordance with 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 in cost of sales when the associated vehicles are sold.

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SONIC AUTOMOTIVE, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements—In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133 generally entered into or modified after June 30, 2003 and hedging relationships designated after June 30, 2003. We do not expect SFAS No. 149 to have a material effect in our consolidated operating results, financial position, or cash flows.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not expect SFAS No. 150 to have a material effect on our consolidated operating results, financial position, or cash flows.

2. BUSINESS ACQUISITIONS AND DISPOSITIONS

Dealership Acquisitions:

During the first six months of 2003, Sonic acquired five automotive dealerships located in Colma, California; Oklahoma City, Oklahoma; Denver, Colorado and Calabasas, California and three collision centers for an aggregate purchase price of approximately $30.1 million in cash. The unaudited 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 $5.4 million of intangible assets representing rights acquired under franchise agreements, and $17.3 million of goodwill, of which approximately $14.1 million is expected to be tax deductible.

Dealership Dispositions:

During the first six months of 2003, Sonic disposed of nine franchises, resulting in the closing of seven dealerships and six collision centers. These disposals generated cash of $24.2 million. The sale of these dealerships resulted in a net gain of $5.7 million, which is included in loss from discontinued operations on the accompanying unaudited consolidated statement of income for the six months ended June 30, 2003. The net gain included a disposal of $15.0 million in goodwill.

In conjunction with dealership dispositions in the first six months of 2003, 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 year dispositions was $43.3 million. These indemnifications expire within a period of one to two years 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 June 30, 2003, Sonic had approved the sale of four additional dealership franchises, which will result in the closing of two 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 property, equipment, goodwill and other intangible assets, totaled approximately $1.8 million at June 30, 2003 and have been classified in other current assets in the accompanying unaudited consolidated balance sheet. Other assets and liabilities to be disposed in connection with these dispositions include inventories and related notes payable—floor plan.

Subsequent Acquisitions:

Subsequent to June 30, 2003, we have closed on three dealership acquisitions for approximately $17.2 million in cash. In addition, we have entered into an agreement to purchase fifteen dealerships. The acquisitions of the fifteen dealerships are expected to close in the third and fourth quarters of 2003 and will be paid for in cash and shares of Sonic’s Class A common stock.

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SONIC AUTOMOTIVE, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 $0.7 million and $1.6 million for the three and six months ended June 30, 2003, respectively, and approximately $0.5 million and $0.9 million for the three and six months ended June 30, 2002, respectively.

In addition to the amounts shown above, Sonic incurred approximately $67.4 million in real estate and construction costs as of June 30, 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 assets held for sale on the accompanying unaudited 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. During the first six months of 2003, Sonic sold $1.3 million in dealership properties in sale-leaseback transactions.

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SONIC AUTOMOTIVE, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5. LONG-TERM DEBT

Long-term debt consists of the following:

On August 12, 2003, Sonic issued $200.0 million in aggregate principal amount of 8.625% senior subordinated notes (the “8.625% Notes”) with net proceeds, before expenses, of approximately $196.7 million. The net proceeds will be used to redeem Sonic’s 11% senior subordinated notes (the “11% Notes”) plus accrued but unpaid interest and the redemption premium of 5.5% in the third quarter of 2003. The 8.625% Notes are unsecured obligations that rank equal in right of payment to all of Sonic’s existing and future senior subordinated indebtedness, mature on August 15, 2013 and are redeemable at Sonic’s option after August 15, 2008. In addition, up to 35% of the aggregate principal amount of the 8.625% Notes may be redeemed on or before August 15, 2006 with net cash proceeds from certain equity offerings. Sonic’s obligations under the 8.625% Notes are guaranteed by Sonic’s operative domestic subsidiaries.

The 11% Notes may not be redeemed prior to a 30-day notice period. Sonic issued a 30-day redemption notice to holders of the 11% Notes promptly after the closing of the sale of the 8.625% Notes to the initial purchasers. Before the 11% Notes are redeemed, both the 8.625% Notes and the 11% Notes will be outstanding. Pending our redemption of the 11% Notes, Sonic intends to apply the net proceeds from the sale of the 8.625% Notes that will be used to redeem the 11% Notes to repay temporarily amounts outstanding under our revolving credit facility and/or to invest in short-term fixed income securities.

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SONIC AUTOMOTIVE, INC AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 962,550 shares and 1,119,050 shares of Class A common stock were outstanding during the six months ended June 30, 2002 and 2003, respectively, but were not included in the computation of diluted net income per share because the options were antidilutive.

The total amount of stock options outstanding at June 30, 2002 and 2003 were 5,563,032 and 7,316,058, respectively.

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SONIC AUTOMOTIVE, INC AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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

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 for the year ended December 31, 2002 on Form 10-K and furnished in Current Report filed on Form 8-K dated August 4, 2003 in order to reflect the subsequent reclassifications of dealership franchises between discontinued and continuing operations in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

Overview

We are one of the largest automotive retailers in the United States. As of August 14, 2003 we operated 190 dealership franchises, representing 36 different brands of cars and light trucks at 145 locations, and 42 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 and six months ended June 30, 2002 and 2003: