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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004

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 April 30, 2004, there were 29,285,115 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

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying unaudited financial information for the three months ended March 31, 2004 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 for the year ended December 31, 2003, which were included in Sonic’s Annual Report on Form 10-K.

Stock-Based Compensation - Sonic accounts for 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 in the accompanying unaudited financial statements. Using the Black-Scholes option pricing model for all options granted, the following table illustrates the effect on net 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

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 income taxes of $3.3 million for the three months ended March 31, 2003.

Reclassifications - Loss from operations of discontinued franchises for the three months ended March 31, 2003 reflects reclassifications from the prior year presentation to include additional franchises sold or identified for sale subsequent to March 31, 2003 which had not been classified as held for sale as of March 31, 2003.

Recent Accounting Pronouncements - In July 2003, the EITF reached a consensus on Issue No. 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers.” Issue No. 03-10 requires certain consideration offered directly from manufacturers to consumers to be recorded as a reduction of cost of sales. Issue No. 03-10 was effective January 1, 2004. The adoption of Issue No. 03-10 had no effect on Sonic’s consolidated operating results, financial position or cash flows.

2. BUSINESS ACQUISITIONS AND DISPOSITIONS

Acquisitions:

During the first three months of 2004, Sonic acquired two franchises located in Ontario, California for an aggregate purchase price of approximately $58.6 million in cash, net of cash acquired. The unaudited consolidated balance sheet as of March 31, 2004 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 and adjustments for previously recorded acquisitions, Sonic has recorded the following:

On April 1, 2004, Sonic purchased eight franchises for approximately $68.2 million comprised of $41.7 million in cash on hand and by borrowings under our Revolving Facility and the assumption of $26.6 million in debt.

Dispositions:

During the first three months of 2004, Sonic sold two franchises. These disposals generated cash of $30.5 million. The sale of these franchises resulted in a net gain of $0.7 million, which is included in discontinued operations on the accompanying unaudited consolidated statement of income for the three month period ended March 31, 2004. The gain was net of $25.5 million in goodwill associated with these franchises.

In conjunction with the dispositions in the first three months of 2004, Sonic has agreed to indemnify 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. There is no additional liability associated with current year dispositions related to subleases. However, Sonic’s maximum liability associated with general indemnifications increased by $30.9 million as a result of these dispositions. These indemnifications expire within a period of one to three years following the date of the sale. The estimated fair value of these indemnifications was not material.

In addition to the dispositions described above, as of March 31, 2004, Sonic had approved the sale of 14 dealerships, representing 21 franchises. These dealerships are generally franchises with unprofitable operations. The operating results of these franchises are included in discontinued operations on the accompanying unaudited consolidated statements of income. Long lived

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

assets to be disposed of in connection with franchises not yet sold, consisting primarily of property, equipment, goodwill and other intangible assets, totaled approximately $23.4 million at March 31, 2004 and have been classified in assets held for sale in the accompanying unaudited consolidated balance sheet. Goodwill classified as assets held for sale totaled approximately $9.4 million and $11.2 million at March 31, 2004 and December 31, 2003, respectively. Other assets and liabilities to be disposed in connection with these dispositions include inventories and related notes payable - floor plan. Revenues associated with franchises classified as discontinued operations were $164.1 million and $124.8 million for the three months ended March 31, 2003 and 2004, respectively. The pre-tax loss (before gains or losses on the sale of disposed franchises) associated with franchises classified as discontinued operations were $4.8 and $1.1 million for the three months ended March 31, 2003 and 2004, respectively.

3. INVENTORIES

Inventories consist of the following:

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

In addition to the amounts shown above, Sonic incurred approximately $65.5 million in real estate and construction costs as of December 31, 2003 and $62.3 million as of March 31, 2004 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 unaffiliated third parties and enters into long-term operating leases on the facilities. During the first three months of 2004, Sonic sold $12.8 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:

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 and 1,703,050 shares of Class A common stock were outstanding during the three month periods ended March 31, 2003 and 2004, 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 March 31, 2003 and 2004 were 5,461,693 and 6,975,703, respectively.

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7. CONTINGENCIES

Sonic is involved, and will continue to be involved, in numerous legal proceedings arising in the ordinary course of business, including litigation with customers, employment related lawsuits, contractual disputes, class actions, purported class actions and actions brought by governmental authorities.

Several of Sonic’s Texas dealership subsidiaries have been named in three class action lawsuits brought against the Texas Automobile Dealers Association (“TADA”) and new vehicle dealerships in Texas that are members of the TADA. Approximately 630 Texas dealerships are named as defendants in two of the actions, and approximately 700 Texas dealerships are named as defendants in the other action. The three actions allege that since January 1994, Texas automobile dealerships have deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws. In two of the actions, the Texas state court certified two classes of consumers on whose behalf the actions would proceed. The Texas Court of Appeals has affirmed the trial court’s order of class certification in the state actions. Our dealership subsidiary defendants and the other Texas dealership defendants are appealing that ruling to the Texas Supreme Court. In April 2004, the Texas Supreme Court issued an order stating that it would not hear the merits of the defendants’ appeal. Sonic’s dealership subsidiary defendants and the other Texas dealership defendants intend to file a motion for reconsideration to the Texas Supreme Court by May 10, 2004 asking the Texas Supreme Court to hear the merits of the defendants’ appeal regarding the class certification. The federal court has conditionally certified a class of consumers in the federal antitrust case. Our dealership subsidiary defendants and the other Texas dealership defendants are also appealing that ruling to the U.S. Court of Appeals, Fifth Circuit.

If the TADA matters are not settled, Sonic and its dealership subsidiaries intend to vigorously defend themselves and assert available defenses. In addition, Sonic or its dealership subsidiaries may have rights of indemnification with respect to certain aspects of the TADA matters. However, an adverse resolution of the TADA matters may result in the payment of significant costs and damages, which could have a material adverse effect on Sonic’s future results of operations and cash flows.

In addition to the TADA matters described above, Sonic is involved in numerous other legal proceedings arising out of the conduct of Sonic’s business. Sonic’s management does not believe that the ultimate resolution of these legal proceedings will have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows or prospects. However, the results of these legal proceedings cannot be predicted with certainty, and an unfavorable resolution of one or more of these legal proceedings could have a material adverse effect on Sonic’s business, financial condition, results of operations cash flows and prospects.

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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, 2003 on Form 10-K.

Overview

We are one of the largest automotive retailers in the United States. As of April 30, 2004 we operated 194 dealership franchises, representing 38 different brands of cars and light trucks at 155 locations, and 39 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.

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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 months ended March 31, 2003 and 2004:

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 unaudited 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, 2004. 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Results of Operations

Revenues

New Vehicles:

During the first quarter of 2004, total same store new vehicle unit sales declined slightly. Our domestic dealerships’ unit sales decreased 501 units, or 3.6%, while our import dealerships decreased 275 units, or 1.4%, as compared to the same period last year. The industry experienced an increase of 2.2% at domestic dealerships and an increase of 6.6% at import dealerships. Our strongest performing dealerships were GM (excluding Cadillac) (up 302 units, or 7.1%), BMW (up 252 units, or 10.9%) and Lexus (216 units, or 21.3%) as compared to last year. These increases can be attributed to a higher percentage of truck and sports-utility sales and recently released popular new models. These increases were offset by large declines at Honda (down 959 units, or 13.3%) and Ford (down 791 units, or 14.4%). The declines in both Ford and Honda are due to mature product offerings with relatively fewer new models. In addition, our Honda dealerships experienced increased competition and changes in dealership management in several key markets. The strong performing regions included North Los Angeles (up 403 units, or 26.5%), Birmingham/Tennessee (up 259 units, or 17.1%) and North Bay (up 195 units, or 7.8%), all of which have a high concentration of import brands. The under performing regions were Dallas (down 313 units, or 8.1%), Oklahoma (down 285 units, or 18.0%) and Ohio (down 282 units, or 19.3%), all of which have a significant number of domestic brands. Additionally, Dallas and Oklahoma continued to have unemployment rates that exceed the national average.

All of our dealerships, except Honda, experienced price per unit increases during the first quarter of 2004 as compared to the same period in 2003. Volkswagen, Cadillac, Volvo, Infiniti, Nissan, GM (excluding Cadillac) and Lexus experienced significant increases in price per unit due to an increase in truck and sports-utility sales. Honda’s price per unit decreased due to declining demand for a relatively mature product line and increased competition and changes in dealership management in several key markets.

Used Vehicles:

During the first quarter of 2004, we continued to see challenging economic conditions in the Central Division (Houston, Dallas and Oklahoma regions). The Central Division accounted for 68.5% of the total same store unit decline. The Central Division

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historically depends heavily on used vehicle sales, with a significant number of the used car sales generated from sub-prime credit customers. The availability of credit in the sub-prime category continued to be tight due to certain national lenders reducing their exposure in this area and other lenders increasing credit standards. We are continuing to mitigate the effect of this tightening by utilizing regional finance sources to replace the national lenders. Our strong performing regions in the first quarter of 2004, as compared to the same period last year, included Birmingham/Tennessee (up 259 units, or 33.9%), North Carolina/South Carolina (up 165 units, or 10.2%) and our Las Vegas market (up 124 units, or 36.8%). These increases were offset by decreases in our Colorado market (down 285 units, or 26.1%), Oklahoma (down 275 units, or 20.0%), and Alabama/Atlanta (down 176 units, or 10.9%).

Despite the unit sales decline, both used vehicle revenue and the used vehicle price per unit increased. The increases were due to an increase in higher priced, certified pre-owned sales. Certified pre-owned (“CPO”) sales represented 33.3% of total used unit sales in the first quarter of 2004, as compared to 23.4% in the first quarter of 2003, an increase of 42.3%. From 2003 to 2004, the industry CPO increase was 8.8%.

Wholesale Vehicles: