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 June 30, 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 July 31, 2007, there were 30,825,012 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 – Quarter and Six-month period ended June 30, 2006 and June 30, 2007	3

		Condensed Consolidated Balance Sheets – December 31, 2006 and June 30, 2007	4

		Condensed Consolidated Statement of Stockholders’ Equity – Six-month period ended June 30, 2007	5

		Condensed Consolidated Statements of Cash Flows – Six-month periods ended June 30, 2006 and June 30, 2007	6

	Notes to Unaudited Condensed Consolidated Financial Statements		7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		27

ITEM 4.	Controls and Procedures		27

PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings		28

ITEM 1A.	Risk Factors		29

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41

ITEM 4.	Submission of Matters to a Vote of Security Holders		42

ITEM 6.	Exhibits		43

SIGNATURES			45

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)


	Quarter Ended June 30,						Six Months Ended June 30,
	2006			2007			2006			2007
Revenues:
New vehicles	$	1,270,617		$	1,273,184		$	2,394,403		$	2,434,366
Used vehicles		346,424			364,062			656,632			694,297
Wholesale vehicles		131,250			107,828			263,725			222,619

Total vehicles		1,748,291			1,745,074			3,314,760			3,351,282
Parts, service and collision repair		280,100			290,916			553,828			584,819
Finance, insurance and other		45,502			54,360			91,381			103,118

Total revenues		2,073,893			2,090,350			3,959,969			4,039,219
Cost of sales		1,762,138			1,765,117			3,352,849			3,406,193

Gross profit		311,755			325,233			607,120			633,026
Selling, general and administrative expenses		248,771			241,244			481,366			479,236
Depreciation and amortization		6,806			8,626			11,604			14,389

Operating income		56,178			75,363			114,150			139,401
Other income / (expense):
Interest expense, floor plan		(15,832	)		(17,348	)		(28,130	)		(33,586	)
Interest expense, other, net		(9,909	)		(8,912	)		(20,706	)		(17,606	)
Other income / (expense), net		(3	)		86			(665	)		96

Total other expense		(25,744	)		(26,174	)		(49,501	)		(51,096	)

Income from continuing operations before taxes		30,434			49,189			64,649			88,305
Provision for income taxes		12,586			19,210			25,666			34,439

Income from continuing operations		17,848			29,979			38,983			53,866
Discontinued operations:
Loss from operations and the sale of discontinued franchises		(8,780	)		(5,159	)		(15,277	)		(10,725	)
Income tax benefit		3,120			1,548			5,564			3,218

Loss from discontinued operations		(5,660	)		(3,611	)		(9,713	)		(7,507	)

Net income	$	12,188		$	26,368		$	29,270		$	46,359

Basic earnings (loss) per share:
Earnings per share from continuing operations	$	0.42		$	0.70		$	0.92		$	1.26
Loss per share from discontinued operations		(0.13	)		(0.09	)		(0.23	)		(0.18	)

Earnings per share	$	0.29		$	0.61		$	0.69		$	1.08

Weighted average common shares outstanding		42,414			42,902			42,288			42,886

Diluted earnings (loss) per share:
Earnings per share from continuing operations	$	0.41		$	0.65		$	0.89		$	1.17
Loss per share from discontinued operations		(0.12	)		(0.08	)		(0.21	)		(0.16	)

Earnings per share	$	0.29		$	0.57		$	0.68		$	1.01

Weighted average common shares outstanding		46,270			47,987			46,238			47,963

Dividends declared per common share	$	0.12		$	0.12		$	0.24		$	0.24

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	December 31, 2006			June 30, 2007 (Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	12,696		$	12,157
Receivables, net		385,849			318,827
Inventories		991,984			1,109,214
Assets held for sale		160,571			176,536
Construction in progress expected to be sold in sale-leaseback transactions		26,198			4,516
Other current assets		35,834			31,474

Total current assets		1,613,132			1,652,724
Property and Equipment, net		220,551			270,036
Goodwill, net		1,155,428			1,247,721
Other Intangible Assets, net		94,136			102,299
Other Assets		41,517			36,312

Total Assets	$	3,124,764		$	3,309,092

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Notes payable - floor plan - trade	$	377,943		$	257,765
Notes payable - floor plan - non-trade		686,515			875,832
Trade accounts payable		68,016			68,048
Accrued interest		19,336			18,281
Other accrued liabilities		180,884			181,098
Liabilities associated with assets held for sale - trade		54,229			48,338
Liabilities associated with assets held for sale - non-trade		42,063			36,325
Current maturities of long-term debt		2,707			3,224

Total current liabilities		1,431,693			1,488,911
Long-Term Debt		598,627			672,196
Other Long-Term Liabilities		190,604			200,562
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; 42,334,134 shares issued and 30,915,170 shares outstanding at June 30, 2007		416			423
Class B common stock; $.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at December 31, 2006 and June 30, 2007		121			121
Paid-in capital		464,011			483,338
Retained earnings		598,293			625,552
Accumulated other comprehensive income		—			3,364
Treasury stock, at cost (11,198,964 Class A shares held at December 31, 2006 and 11,418,964 Class A shares held at June 30, 2007)		(159,001	)		(165,375	)

Total stockholders’ equity		903,840			947,423

Total Liabilities and Stockholders’ Equity	$	3,124,764		$	3,309,092

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			Accumulated Other Comprehensive Income		Total Stockholders’ Equity			Comprehensive Income
	Shares	Amount		Shares	Amount		Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income		Total Stockholders’ Equity			Comprehensive Income
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	444		7	—		—		12,356			—			—			—		12,363
Purchases of treasury stock	—		—	—		—		—			—			(6,374	)		—		(6,374	)
Income tax benefit associated with stock compensation plans	—		—	—		—		3,097			—			—			—		3,097
Income tax benefit associated with convertible note hedge	—		—	—		—		929			—			—			—		929
Stock-based compensation expense	—		—	—		—		2,578			—			—			—		2,578
Restricted stock amortization	—		—	—		—		1,911			—			—			—		1,911
Restricted stock forfeiture	—		—	—		—		(1,544	)		—			—			—		(1,544	)

Fair value of interest rate swap agreements, net of tax expense of $2,062	—		—	—		—		—			—			—			3,364		3,364			3,364
Net income	—		—	—		—		—			46,359			—			—		46,359			46,359
Dividends ($0.12 per share)	—		—	—		—		—			(10,518	)		—			—		(10,518	)

BALANCE AT June 30, 2007	42,334	$	423	12,029	$	121	$	483,338		$	625,552		$	(165,375	)	$	3,364	$	947,423		$	49,723

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Six Months Ended June 30,
	2006			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	29,270		$	46,359
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of property, plant and equipment		12,151			14,659
Provision for bad debt expense		557			1,885
Other amortization		189			537
Debt issuance cost amortization		508			567
Debt discount amortization, net of premium amortization		327			377
Stock - based compensation expense		3,329			2,578
Amortization of Restricted Stock		—			1,911
Restricted stock forfeiture		—			(1,544	)
Deferred income taxes		(1,266	)		(1,119	)
Equity interest in earnings of investees		(464	)		(314	)
Impairment of franchise agreements		2,525			1,250
Impairment of property and equipment		10,077			512
(Gain)/Loss on disposal of franchises and property and equipment		(625	)		(39	)
Loss/(Gain) on exit of leased dealerships		4,914			542
Changes in assets and liabilities that relate to operations:
Receivables		55,587			32,822
Inventories		(129,981	)		(68,578	)
Other assets		(7,472	)		(1,416	)
Notes payable - floor plan - trade		(81,038	)		(126,069	)
Trade accounts payable and other liabilities		(11,894	)		12,680

Total adjustments		(142,576	)		(128,759	)

Net cash used in operating activities		(113,306	)		(82,400	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired		(78,264	)		(160,109	)
Purchases of property and equipment		(55,019	)		(39,817	)
Proceeds from sales of property and equipment		26,811			16,383
Proceeds from sale of franchises		12,385			5,374
Distributions from equity investees		600			900

Net cash used in investing activities		(93,487	)		(177,269	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes payable floor plan - non-trade		289,459			183,579
Borrowings on revolving credit facilities		590,392			541,899
Repayments on revolving credit facilities		(651,918	)		(482,354	)
Debt issuance costs		(2,776	)		—
Proceeds from issuance of long-term debt		—			17,335
Payments on long-term debt		(987	)		(907	)
Purchases of treasury stock		(12,037	)		(6,374	)
Income tax benefit associated with stock compensation plans		3,057			3,097
Income tax benefit associated with convertible hedge		709			929
Issuance of shares under stock compensation plans		11,779			12,363
Dividends paid		(10,109	)		(10,437	)

Net cash provided by financing activities		217,569			259,130

NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS		10,776			(539	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		7,566			12,696

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	18,342		$	12,157


SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Change in accrual for purchases of property and equipment	$	3,384		$	(933	)
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 benefit of $13 and tax expense of $2,062 for the six months ended June 30, 2006 and 2007, respectively)	$	(20	)	$	3,364
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized	$	57,090		$	58,980
Income taxes	$	28,980		$	19,072

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The accompanying unaudited condensed consolidated financial information for the quarter and six months ended June 30, 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 adopted the provisions of FIN 48 effective 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 and penalties to be paid on underpayments of income taxes within income tax expense. In addition, approximately $6.1 million 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 quarter and six month period ended June 30, 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 June 30, 2006. The statement of income for the quarter and six month period ended June 30, 2006 also reflects the reclassification of balances from discontinued operations to continuing operations for franchises identified for sale as of June 30, 2006 but which Sonic has decided to retain and operate as of June 30, 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 – Accruals are established when the decision is made to cease using properties related to operating leases and the operating leases are no longer being utilized in Sonic’s operations. 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. For the second quarter and six month period ended June 30, 2006, Sonic recorded accruals totaling $3.8 million and $4.9 million, respectively. Of the $3.8 million accrual established in the second quarter ended June 30, 2006, $3.6 million was recorded in selling, general and administrative expenses and $0.2 million was recorded within discontinued operations. Of the $4.9 million established in the six months ended June 30, 2006, $4.6 million was recorded in selling, general and administrative expenses and $0.3 million

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

was recorded in discontinued operations. For the second quarter and six month period ended June 30, 2007, Sonic recorded accruals totaling $0.6 million and $1.1 million, respectively. Of the $0.6 million accrual established in the second quarter ended June 30, 2007, $0.2 million was recorded in selling, general and administrative expenses and $0.4 million was recorded within discontinued operations. Of the $1.1 million established in the six months ended June 30, 2007, $0.5 million was recorded in selling, general and administrative expenses and $0.6 million was recorded in discontinued operations.

A summary of the activity of these operating lease accruals consists of the following:


	(dollars in thousands)
Balance, December 31, 2006	$	8,731
Lease exit expense		1,056
Lease exit expense recovery		(514	)
Payments		(1,108	)

Balance, June 30, 2007	$	8,165

2. BUSINESS ACQUISITIONS AND DISPOSITIONS

Acquisitions – The aggregate purchase price for franchises acquired during the first six months of 2007 totaled approximately $160.1 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 June 30, 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:

•

$63.7 million of net assets relating to dealership operations;

•

$6.4 million of intangible assets representing rights acquired under franchise agreements; and

•

$90.0 million of goodwill, all of which is expected to be tax deductible.

Dispositions – In the six month period ended June 30, 2007, Sonic identified four 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 four 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 June 30, 2007. The operating results of these franchises are included in the loss from discontinued operations in Sonic’s statements of income. Included within assets held for sale are finance notes receivable from Sonic’s wholly-owned finance subsidiary, Cornerstone Acceptance Corporation (“Cornerstone”). These notes receivable are expected to be sold to a third party by the end of 2007 in connection with the sale of our Cornerstone business.

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		June 30, 2007
Notes receivable	$	—	$	32,316
Inventories		106,581		95,384
Property and equipment, net		32,665		33,544
Goodwill		12,325		9,842
Franchise assets		9,000		5,450

Assets held for sale	$	160,571	$	176,536

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:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	(dollars in thousands)					(dollars in thousands)
	Quarter Ended June 30,					Six Months Ended June 30,
	2006		2007			2006		2007
Revenues	$	193,210	$	136,245		$	390,628	$	273,945
Franchise agreement impairments		1,600		—			2,525		1,250
Lease exit charges		278		414			345		598
Property impairment charges		3,945		259			6,074		512
Gain / (Loss) on disposal of franchises		240		(13	)		26		(13	)
Pre-tax losses		8,780		5,159			15,277		10,725

Property impairment charges recorded above were determined 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 agreement impairments above were related to revising the estimated fair value of franchises held for sale. Lease exit charges above are discussed in footnote 1.

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 second quarter ended June 30, 2006 and 2007 was $0.9 million and $0.6 million, respectively, and for the six months ended June 30, 2006 and 2007 was $1.8 million and $1.1 million, respectively.

3. INVENTORIES

Inventories consist of the following:


	(dollars in thousands)
	December 31, 2006			June 30, 2007
New vehicles	$	827,630		$	880,303
Used vehicles		145,028			176,886
Parts and accessories		57,266			60,604
Other		68,641			86,805

	$	1,098,565		$	1,204,598
Less inventories classified as assets held for sale		(106,581	)		(95,384	)

Inventories	$	991,984		$	1,109,214

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	(dollars in thousands)
	December 31, 2006			June 30, 2007
Land	$	25,016		$	29,821
Building and improvements		143,345			183,906
Office equipment and fixtures		65,621			66,150
Parts and service equipment		44,778			50,428
Company vehicles		9,519			9,879
Construction in progress		70,594			58,431

Total, at cost		358,873			398,615
Less accumulated depreciation		(79,459	)		(90,519	)

Subtotal		279,414			308,096
Less assets held for sale		(32,665	)		(33,544	)
Less construction in progress expected to be sold in sale-leaseack transactions		(26,198	)		(4,516	)

Property and equipment, net	$	220,551		$	270,036

Construction in progress expected to be sold in sale-leaseback transactions represent dealership facilities that are expected to be completed and sold within one year. 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. In the first six months of 2007, Sonic sold $10.5 million in dealership facilities in sale-leaseback transactions. Sonic has no continuing obligations under these arrangements other than lease payments.

5. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of franchise agreements and goodwill for the six months ended June 30, 2007 were as follows:


	(dollars in thousands)
	Franchise Agreements			Goodwill
Balance, December 31, 2006	$	79,700		$	1,155,428
Additions through current year acquisitions		6,400			89,964
Prior year acquisition allocations		—			54
Impairment expense (discontinued operations)		(1,250	)		—
Reductions from sales of franchises		—			(208	)
Reclassification from assets held for sale		3,550			2,483

Balance, June 30, 2007	$	88,400		$	1,247,721

Franchise agreements and definite life intangible assets ($102.3 million and $94.1 million at June 30, 2007 and December 31, 2006, respectively) are classified as other intangible assets, net in Sonic’s balance sheets.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. LONG-TERM DEBT

Long-term debt consists of the following:


	(dollars in thousands)
	December 31, 2006			June 30, 2007
$350 million 2006 Revolving Credit Sub-Facility (1) bearing interest at 2.00 percentage points above LIBOR	$	20,086		$	79,632
Senior Subordinated Notes bearing interest at 8.625% maturing August 15, 2013, net of net discount of $2,470 and $2,346, respectively		272,530			272,654
Convertible Senior Subordinated Notes bearing interest at 5.25%, maturing May 7, 2009, net of discount of $1,489 and $1,188, respectively		128,611			128,912
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 $2,829, respectively		156,798			157,171
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 $4,421, respectively		27,905			26,709
Mortgage notes to finance companies, bearing interest from 6.75% to 6.82% (with a weighted average of 6.77%) with combined monthly principal and interest payments of $130, maturing July 2017 through May 2027		—			17,335
Fair value of Variable Swaps		(4,710	)		(6,952	)
Other		114			(41	)

	$	601,334		$	675,420
Less current maturities		(2,707	)		(3,224	)

Long-term debt	$	598,627		$	672,196

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

During the second quarter of 2007 Sonic entered into two notes payable which are secured by a mortgage on the underlying properties. Proceeds received were used to repay borrowings under our 2006 Revolving Credit Sub-Facility.

Neither of the conversion features on the 5.25% or 4.25% convertible senior subordinated notes were satisfied during the six months ended June 30, 2007. Sonic was in compliance with all financial covenants under the above long-term debt and credit facilities as of June 30, 2007.

During the second quarter of 2007, Sonic entered into interest rate swap agreements to effectively convert a portion of its LIBOR-based variable rate debt, which includes notes payable floor plan, to a fixed rate. Under the terms of the swaps, Sonic will receive and pay interest based on the following:


(in millions)
Notional	Pay Rate	Receive Rate	Maturing Date
$200.0	4.935%	one month LIBOR	May 1, 2012
$100.0	5.002%	one month LIBOR	June 1, 2012
$100.0	5.265%	one month LIBOR	June 1, 2012
$100.0	5.319%	one month LIBOR	July 1, 2010

These swaps have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of the swaps will be recorded in other comprehensive (loss)/income, net of related income taxes in the Consolidated Statements of Stockholders’ Equity.

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

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. During the second quarter of 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	331			28.04 - 30.07		29.36
Exercised	(692	)		7.01 - 26.92		17.86
Forfeited	(151	)		18.73 - 37.50		26.46

	4,222		$	7.25 -37.50	$	21.12	5.9	$	36,850

Exercisable	3,176		$	7.25 -37.50	$	20.06	4.9	$	31,802


(amounts in thousands, except per option data)	Six Months Ended June 30, 2007
Weighted Average Grant-Date Fair Value Per Option of Options Granted	$	8.31
Intrinsic Value of Options Exercised		8,150
Fair Value of Options Vested		4,003

The weighted average fair value of options granted in the six month period ended June 30, 2007 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:


		2007
Stock Option Plans
Dividend yield		1.60 - 1.71%
Risk free interest rates		4.50 - 4.61%
Expected lives		3.5 - 5 years
Volatility		33.10%

Sonic used an expected term of 3.5 to 5 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 the options in the Stock Plans of $1.5 million and $2.6 million in the second quarter and six month period ended June 30, 2007, respectively. Tax benefits recognized related to the compensation expenses were $0.6 million and $1.0 million for the second quarter and six month period ended June 30, 2007, respectively. Sonic recognized expenses of $1.1 million and $2.4 million in the second quarter and six month period ended June 30, 2006, respectively. Tax benefits recognized related to the compensation expenses were $0.4 million and $0.9 million for the second quarter and six month period ended June 30, 2006, respectively. The total compensation cost related to unvested options not yet recognized at June 30, 2007 was $5.8 million

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

and is expected to be recognized over a weighted average period of 1.0 years. Sonic received $12.4 million in cash from the exercise of stock options during the second quarter of 2007. Sonic’s tax benefit associated with these stock option exercises was $3.1 million during the first half 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	315			30.29
Forfeited	(100	)		22.57
Vested	(15	)		27.49

Balance - June 30, 2007	465		$	29.33

In the first half of 2007, 315,449 restricted shares of Class A common stock and restricted stock units were awarded to Sonic’s Board of Directors, executive officers and certain other executives under the 2004 Plan. Awards to the Board of Directors cliff-vest in one year, all other 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 half of 2007, certain associates forfeited approximately 100,000 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 expense of $1.2 million and $0.4 million in the second quarter and six month period ended June 30, 2007, respectively, and $0.6 million and $0.9 million in the second quarter and six month period ended June 30, 2006. Tax benefits recognized related to the compensation expenses were $0.5 million and $0.1 million for the second quarter and six month period ended June 30, 2007, and $0.2 million and $0.4 million for the second quarter and six month period ended June 30, 2006, respectively. Total compensation cost related to unvested restricted stock not yet recognized at June 30, 2007 was $10.5 million, and is expected to be recognized over a weighted average period of 2.3 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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	Quarter Ended June 30, 2006
	Shares		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	42,414	$	17,848	$	0.42	$	(5,660	)	$	(0.13	)	$	12,188	$	0.29
Effect of Dilutive Securities:
Contingently Convertible Debt (2002 Convertibles)	2,776		978				86						1,064
Contingently Convertible Debt (2005 Convertibles)	251
Stock Compensation Plans	829

Diluted Earnings (Loss) Per Share	46,270	$	18,826	$	0.41	$	(5,574	)	$	(0.12	)	$	13,252	$	0.29


	Quarter Ended June 30, 2007
	Shares	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	42,902	$	29,979	$	0.70	$	(3,611	)	$	(0.09	)	$	26,368	$	0.61
Effect of Dilutive Securities:
Contingently Convertible Debt (2002 Convertibles)	2,776		1,062				64						1,126
Contingently Convertible Debt (2005 Convertibles)	1,227
Stock Compensation Plans	1,082

Diluted Earnings (Loss) Per Share	47,987	$	31,041	$	0.65	$	(3,547	)	$	(0.08	)	$	27,494	$	0.57


	For the Six Months Ended June 30, 2006
	Shares	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	42,288	$	38,983	$	0.92	$	(9,713	)	$	(0.23	)	$	29,270	$	0.69
Effect of Dilutive Securities:
Contingently Convertible Debt (2002 Convertibles)	2,776		2,042				173						2,215
Contingently Convertible Debt (2005 Convertibles)	275
Stock Compensation Plans	899

Diluted Earnings (Loss) Per Share	46,238	$	41,025	$	0.89	$	(9,540	)	$	(0.21	)	$	31,485	$	0.68


	For the Six Months Ended June 30, 2007
	Shares	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	42,886	$	53,866	$	1.26	$	(7,507	)	$	(0.18	)	$	46,359	$	1.08
Effect of Dilutive Securities:
Contingently Convertible Debt (2002 Convertibles)	2,776		2,115				129						2,244
Contingently Convertible Debt (2005 Convertibles)	1,267
Stock Compensation Plans	1,034

Diluted Earnings (Loss) Per Share	47,963	$	55,981	$	1.17	$	(7,378	)	$	(0.16	)	$	48,603	$	1.01

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In addition to the stock options included in the table above, options to purchase 1.1 million shares and 0.8 million shares of Class A common stock were outstanding at June 30, 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

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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 June 30, 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 June 30, 2007 and December 31, 2006 were approximately $129.6 million and $136.7 million, respectively. 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 $25.2 million and $32.3 million at June 30, 2007 and December 31, 2006, respectively. 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 June 30, 2007, we owned dealership subsidiaries that operated 174 dealership franchises, representing 35 different brands of cars and light trucks at 151 locations, and 37 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 continuing operations new vehicle revenues by brand for the second quarter and six month periods ended June 30, 2006 and 2007:


	Percentage of New Vehicle Revenue Quarter Ended June 30,		Percentage of New Vehicle Revenue Six Months Ended June 30,
	2006	2007	2006	2007
Brand (1)

BMW	12.6%	15.2%	13.3%	15.0%
Honda	15.9%	14.4%	15.6%	14.6%
Toyota	13.3%	13.8%	12.7%	13.4%
Mercedes	9.3%	8.8%	9.3%	9.4%
General Motors (2)	8.6%	8.9%	8.6%	8.6%
Cadillac	9.0%	8.3%	8.9%	8.6%
Ford	8.0%	7.9%	8.1%	7.6%
Lexus	6.4%	6.7%	6.6%	6.7%
Other Luxury (3)	3.3%	3.4%	3.3%	3.7%
Volvo	2.5%	2.1%	2.5%	2.3%
Other (4)	2.5%	2.1%	2.4%	1.9%
Nissan	1.9%	1.5%	1.9%	1.6%
Audi	1.2%	1.5%	1.4%	1.5%
Hyundai	1.6%	1.5%	1.5%	1.4%
Porsche	1.4%	1.5%	1.4%	1.4%
Acura	1.1%	1.2%	1.2%	1.2%
Volkswagen	0.9%	0.8%	0.8%	0.7%
Chrysler (5)	0.5%	0.4%	0.5%	0.4%

Total	100.0%	100.0%	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 June 30, 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 June 30, 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.

On July 19, 2006, we issued a press release describing charges recorded during the second quarter of 2006 in connection with the decision to exit certain facility leases and cancel various facility improvement projects, asset impairments and other asset write-offs, finance chargeback reserves, litigation matters and an adjustment of certain tax strategies. These charges are discussed in more detail in the respective areas under the subsequent heading “Results of Operations”. The amount and location of the charges in the accompanying condensed consolidated statements of income for the second quarter and the six month period ended June 30, 2006 are presented in the following table:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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

OPERATIONS


	Continuing Operations
	Finance, insurance and other revenue		Cost of sales		Selling, general and administrative expenses		Depreciation and amortization		Provision for income taxes		Loss from operations and sale of discontinued franchises		Total
	(amounts in millions)
Real estate and other asset impairments / write-offs and lease exit costs	$	0.4	$	0.3	$	10.1	$	2.1	$	—	$	5.8	$	18.7

Finance chargeback reserves		6.2		—		—		—		—		—		6.2

Legal accruals		—		—		1.2		—		—		0.5		1.7

Effective income tax rate adjustment		—		—		—		—		1.0		—		1.0

	$	6.6	$	0.3	$	11.3	$	2.1	$	1.0	$	6.3	$	27.6

Results of Operations

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

Revenues

New Vehicles:


	Quarter Ended				Units or $ Change			% Change		Six Months Ended				Units or $ Change			% Change
	6/30/2006		6/30/2007		Units or $ Change			% Change		6/30/2006		6/30/2007		Units or $ Change			% Change
Total New Vehicle Units

Same Store		41,693		39,756		(1,937	)	(4.6	)%		76,635		74,545		(2,090	)	(2.7	)%
Acquisitions and Other		—		365		365		0.0	%		702		1,332		630		89.7	%

Total as Reported		41,693		40,121		(1,572	)	(3.8	)%		77,337		75,877		(1,460	)	(1.9	)%

Total New Vehicle Revenues (in thousands)

Same Store	$	1,270,617	$	1,254,958	$	(15,659	)	(1.2	)%	$	2,375,540	$	2,383,607	$	8,067		0.3	%
Acquisitions and Other		—		18,226		18,226		0.0	%		18,863		50,759		31,896		169.1	%

Total as Reported	$	1,270,617	$	1,273,184	$	2,567		0.2	%	$	2,394,403	$	2,434,366	$	39,963		1.7	%

Total New Vehicle Unit Price

Same Store	$	30,476	$	31,567	$	1,091		3.6	%	$	30,998	$	31,975	$	977		3.2	%
Total Dealerships as Reported	$	30,476	$	31,734	$	1,258		4.1	%	$	30,961	$	32,083	$	1,122		3.6	%

New unit sales at our import dealerships decreased 1,101 units, or 3.7%, and 372 units, or 0.7%, for the second quarter and six month period ended June 30, 2007,respectively, as compared to the same periods last year. Import new unit sales declines are largely attributable to lower demand for Honda Accords resulting from the anticipated introduction of a redesigned model in the third quarter of 2007 and soft market conditions in the California market where we have a strong Honda presence. The combination of these unfavorable market conditions led to a decline in new vehicle unit sales in our Honda stores of 7.6% and 3.6% for the second quarter and the six month period, respectively. This decrease was partially offset by our BMW stores which experienced improvements in unit volume, increasing by 11.8% and 6.6%, over the second quarter and six month period, respectively. Domestic dealerships posted unit volume decreases of 836 units, or 6.9%, for the second quarter and 1,718 units, or 7.5%, for the six month period, which was consistent with the industry’s domestic new unit sales decreases of 6.2% and 6.9% during the same periods. All of our domestic brands experienced declines in new unit sales volume with Cadillac posting the largest decline in unit volume, decreasing by 17.9% and 11.1%, when compared to the

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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

OPERATIONS

second quarter and six month period of 2006, respectively. Our Cadillac decline was driven by a new vehicle unit decline in our Michigan market.

The increase in new vehicle price per unit was primarily due to the change in brand mix for the period compared to the same period in 2006. Import brands experienced the most significant increase in price per unit when compared to the same periods last year with increases in unit price of $1,270, or 4.1%, and $942, or 3.0%, for the second quarter and six month periods, respectively. The increases were driven by a shift in sales away from high-volume, lower priced import brands such as Honda and Toyota and into luxury import brands, specifically BMW. Our domestic dealerships had an average new unit price increase of $594, or 2.0%, and $938, or 3.2%, respectively, for the second quarter and six month period ended June 30, 2007. Cadillac and Ford drove the domestic increase with individual new vehicle price per unit improvements of 6.0% and 3.5% for the second quarter of 2007 and 3.5% and 4.6% for the six month period of 2007, respectively.

Used Vehicles:


	Quarter Ended				Units or $ Change		% Change		Six Months Ended				Units or $ Change		% Change
	6/30/2006		6/30/2007		Units or $ Change		% Change		6/30/2006		6/30/2007		Units or $ Change		% Change
Total Used Vehicle Units
Same Store		17,866		17,972		106	0.6	%		33,750		34,518		768	2.3	%
Acquisitions and Other		—		214		214	0.0	%		260		629		369	141.9	%

Total as Reported		17,866		18,186		320	1.8	%		34,010		35,147		1,137	3.3	%

Total Used Vehicle Revenues (in thousands)
Same Store	$	346,424	$	358,178	$	11,754	3.4	%	$	652,024	$	679,477	$	27,453	4.2	%
Acquisitions and Other		—		5,884		5,884	0.0	%		4,608		14,820		10,212	221.6	%

Total as Reported	$	346,424	$	364,062	$	17,638	5.1	%	$	656,632	$	694,297	$	37,665	5.7	%

Total Used Vehicle Unit Price
Same Store	$	19,390	$	19,930	$	540	2.8	%	$	19,319	$	19,685	$	366	1.9	%
Total Dealerships as Reported	$	19,390	$	20,019	$	629	3.2	%	$	19,307	$	19,754	$	447	2.3	%

Increases in used vehicle unit sales are attributable to the implementation of our standardized used vehicle merchandising process at our dealerships. The process allowed us to retail used vehicles we historically would have disposed of through the wholesale market. Import dealership unit increases as compared to last year were 4.6% and 6.0%, respectively. Import dealership unit increases were partially offset by domestic dealership unit decreases of 7.8% and 4.9% for the second quarter and six month period ended June 30, 2007, as compared to the same periods last year. The overall increase in used vehicle unit price is consistent with The Manheim Used Vehicle Value Index which increased 1.8% from the year-ago level. The expansion of import and luxury dealerships in our dealership mix has driven the increase in our used vehicle per unit price. Certified pre-owned vehicle (“CPO”) unit volume and sales as a percentage of total used vehicle sales were relatively flat for the second quarter and six month period ended June 30, 2007, as compared to the same periods last year.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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

OPERATIONS

Wholesale Vehicles:


	Quarter Ended				Units or $ Change			% Change		Six Months Ended				Units or $ Change			% Change
	6/30/2006		6/30/2007		Units or $ Change			% Change		6/30/2006		6/30/2007		Units or $ Change			% Change
Total Wholesale Vehicle Units

Same Store		13,282		11,254		(2,028	)	(15.3	)%		25,790		23,200		(2,590	)	(10.0	)%
Acquisitions and Other		650		553		(97	)	(14.9	)%		1,519		1,426		(93	)	(6.1	)%

Total as Reported		13,932		11,807		(2,125	)	(15.3	)%		27,309		24,626		(2,683	)	(9.8	)%

Total Wholesale Vehicle Revenues (in thousands)

Same Store	$	121,316	$	99,940	$	(21,376	)	(17.6	)%	$	242,531	$	204,464	$	(38,067	)	(15.7	)%
Acquisitions and Other		9,934		7,888		(2,046	)	(20.6	)%		21,194		18,155		(3,039	)	(14.3	)%

Total as Reported	$	131,250	$	107,828	$	(23,422	)	(17.8	)%	$	263,725	$	222,619	$	(41,106	)	(15.6	)%

Total Wholesale Unit Price

Same Store	$	9,134	$	8,880	$	(254	)	(2.8	)%	$	9,404	$	8,813	$	(591	)	(6.3	)%
Total Dealerships as Reported	$	9,421	$	9,133	$	(288	)	(3.1	)%	$	9,657	$	9,040	$	(617	)	(6.4	)%

The decline in our wholesale vehicle revenues and volume was largely due to the implementation of our standardized used vehicle merchandising process discussed above. The wholesale price per unit decrease can also be attributed to the merchandising process. This process allowed us to retail vehicles that historically would have had a positive effect on the wholesale per unit price.

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


	Quarter Ended				$ Change		% Change		Six Months Ended				$ Change		% Change
	6/30/2006		6/30/2007		$ Change		% Change		6/30/2006		6/30/2007		$ Change		% Change
Total Parts, Service and Collision Repair (in thousands)
Same Store	$	279,920	$	284,830	$	4,910	1.8	%	$	548,377	$	567,749	$	19,372	3.5	%
Acquisitions and Other		180		6,086		5,906	3281.1	%		5,451		17,070		11,619	213.2	%

Total as Reported	$	280,100	$	290,916	$	10,816	3.9	%	$	553,828	$	584,819	$	30,991	5.6	%

During the second quarter and the six month period ended June 30, 2007, customer pay increased $8.7 million, or 7.0%, and $18.1 million, or 7.5%, respectively. The increase during the quarter was partially offset by decreases in warranty revenue of $3.0 million, or 5.6%. The increase during the six month period was partially offset by a decrease in wholesale parts revenues of $1.9 million, or 2.6%. Import and luxury import brands were primarily responsible for the majority of increases in customer pay revenue for the second quarter and six month period ended June 30, 2007.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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

OPERATIONS

Finance, Insurance and Other (“F&I”):


	Quarter Ended				$ Change		% Change		Six Months Ended				$ Change		% Change
	6/30/2006		6/30/2007		$ Change		% Change		6/30/2006		6/30/2007		$ Change		% Change
Total Finance, Insurance and Other Revenue (in thousands)
Same Store	$	45,278	$	53,134	$	7,856	17.4	%	$	89,583	$	100,250	$	10,667	11.9	%
Acquisitions and Other		224		1,226		1,002	447.3	%		1,798		2,868		1,070	59.5	%

Total as Reported	$	45,502	$	54,360	$	8,858	19.5	%	$	91,381	$	103,118	$	11,737	12.8	%

Total F&I per Unit (excluding fleet)
Same Store	$	822	$	1,001	$	179	21.8	%	$	879	$	995	$	116	13.2	%
Total Dealerships as Reported	$	826	$	1,013	$	187	22.6	%	$	888	$	1,005	$	117	13.2	%

Included in F&I revenue for second quarter and six month period ended June 30, 2006 is a $6.2 million charge related to an increase in our allowance for estimated finance chargebacks. Excluding the effect of this charge, F&I revenue in the second quarter and six month period ended June 30, 2007 would have increased 3.3% and 4.7%, respectively. The increases were primarily due to a higher new and used retail unit sales volume and higher penetration rates on finance and service contracts.

Gross Profit and Gross Margins

Our gross margin percentage increased for the second quarter and six month period ended June 30, 2007, as compared to the same periods last year. The increases are largely attributed to the revenue growth in our Fixed Operations and F&I activities, which generate higher gross margins. The increase in the gross margin percentage was also driven by the shift of revenues from wholesale vehicles to used vehicles.


	Quarter Ended												Six Months Ended
	6/30/2006				6/30/2007				Basis Point Change				6/30/2006				6/30/2007				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		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	61.6	%	30.0	%	61.2	%	27.1	%	(40	)	(290	)	60.8	%	29.1	%	60.6	%	26.9	%	(20	)	(220	)
Used Vehicles	16.8	%	10.8	%	17.5	%	10.7	%	70		(10	)	16.7	%	10.6	%	17.3	%	10.6	%	60		0
Wholesale Vehicles	5.9	%	(0.6	)%	4.9	%	(0.4	)%	(100	)	20		6.2	%	(0.3	)%	5.2	%	(0.2	)%	(100	)	10
Fixed Operations	13.6	%	45.3	%	13.9	%	45.9	%	30		60		14.0	%	45.6	%	14.4	%	46.4	%	40		80
Finance, Insurance and Other	2.1	%	14.5	%	2.5	%	16.7	%	40		220		2.3	%	15.0	%	2.5	%	16.3	%	20		130

Total same store	100.0	%	100.0	%	100.0	%	100.0	%					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:


	Quarter Ended				Basis Point Change		Six Months Ended				Basis Point Change
	6/30/2006		6/30/2007		Basis Point Change		6/30/2006		6/30/2007		Basis Point Change
New vehicles	7.3	%	6.9	%	(40	)	7.4	%	7.0	%	(40	)
Used vehicles	9.7	%	9.5	%	(20	)	9.8	%	9.6	%	(20	)
Wholesale vehicles	(1.5	)%	(1.2	)%	30		(0.7	)%	(0.6	)%	10
Parts, service and collision repair	50.2	%	51.3	%	110		49.9	%	50.4	%	50
Finance and insurance	100.0	%	100.0	%	—		100.0	%	100.0	%	—
Total same store gross margin	15.1	%	15.5	%	40		15.4	%	15.7	%	30

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

For the second quarter and six month period ended June 30, 2007, continuing operations SG&A expenses decreased $7.5 million, or 3.0%, and $2.1 million, or 0.4%, respectively, as compared to the same periods last year. Continuing

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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

OPERATIONS

operations SG&A expenses as a percentage of gross profit were 74.2% and 75.7% for the second quarter and six month period ended June 30, 2007, respectively, compared to 79.8% and 79.3% for the second quarter and six month period ended June 30, 2006. Charges recorded in SG&A expenses in the second quarter of 2006 totaled $11.4 million and primarily relate to asset impairments, lease exit charges and legal charges. Absent these charges, and others that affected gross profit in the amount of $6.9 million (most of which is discussed in the F&I section above), SG&A expenses as a percentage of gross profit would have been 74.5% and 76.6% for the second quarter and six month period ended June 30, 2006, respectively. The 30 and 80 basis point decrease in the second quarter and six month period, respectively, compared to the adjusted prior year periods is primarily attributed to lower insurance and employee compensation costs slightly offset by higher rent expenses.

Depreciation and Amortization

Continuing operations depreciation and amortization expense increased for the second quarter and six month periods ended June 30, 2007 over the comparable periods in 2006 by $1.8 million, or 26.7%, and $2.8 million, or 24.0% respectively. Additional depreciation expense of $2.1 million was recorded during the second quarter ended June 30, 2006 related to projects no longer held for sale. Excluding the prior year charge, continuing operations depreciation and amortization expense increased for the second quarter and six month periods ended June 30, 2007 over the comparable periods in 2006 by $3.9 million, or 82.7%, and $4.9 million, or 51.7%, respectively. The increase in depreciation expense in the second quarter and six month period was primarily due to our decision to continue to own and hold dealership properties rather than recover our investment in these properties through sale-leaseback transactions.

Interest Expense, Floor Plan

The weighted average floor plan interest rate for new vehicles incurred by continuing dealerships was 6.30% for the second quarter ended June 30, 2007, compared to 5.78% for the second quarter ended June 30, 2006, which increased new vehicle floor plan interest expense by $1.3 million. The average new vehicle floor plan notes payable balance from continuing dealerships increased to $1.0 billion during the second quarter of 2007 from $996.7 million during the second quarter of 2006, resulting in increased new vehicle floor plan interest expense of $0.2 million.

The weighted average floor plan interest rate for new vehicles incurred by continuing dealerships was 6.35% for the six month period ended June 30, 2007, compared to 5.54% for the six month period ended June 30, 2006, which increased new vehicle floor plan interest expense by $3.8 million. The average new vehicle floor plan notes payable balance from continuing dealerships increased to $974.6 million during the six month period ended June 30, 2007 from $947.8 million during the six month period ended June 30, 2006, resulting in increased new vehicle floor plan interest expense of $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 second quarter of 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 $8.3 million and $4.9 million, respectively, primarily due to the effect of higher interest rates in the second quarter of 2007 compared to the second quarter of 2006. During the six months ended June 30, 2006 and 2007, 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 $12.8 million and $7.9 million, respectively. We expect the gap between floor plan interest expense incurred and floor plan assistance received to continue to widen as our portfolio of brands shifts more toward luxury and import brands which pay less floor plan assistance compared to domestic brands.

Interest expense on our used vehicle floor plan facility was approximately $1.5 million for the second quarter of 2007 and 2006. Interest expense on our used vehicle floor plan facility was approximately $2.9 million for the six month period ending June 30, 2007 compared to $2.1 million in the same period in 2006. Interest expense in the first six months of 2006 was lower than 2007 primarily due to the used floor plan facility existing for only a portion of time in the six month period of 2006.

Interest Expense, Other

Interest expense, other for the second quarter and six months ended June 30, 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


	Quarter Ended June 30, 2007			Six Months Ended June 30, 2007
	Increase/(Decrease) in Interest Expense (in millions)			Increase/(Decrease) in Interest Expense (in millions)
Interest rates –
- Changes in the average interest rate on the revolving facilities (from 7.1% and 7.0% in the second quarter and six months ended June 30, 2006 to 7.4% and 6.9% in the three and six months ended June 30, 2007)	$	(0.1	)	$	(0.4	)
Debt balances –
- Decrease in debt balances		(2.1	)		(4.7	)
Other factors –
- Decrease in capitalized interest		0.2			0.1
- Incremental interest expense related to the Old and New Variable Swaps (1)		0.2			0.7
- Interest allocation to discontinued operations		0.3			0.7
- Increase in other expense, net		0.5			0.5

	$	(1.0	)	$	(3.1	)

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

Other Income/(Expense)

Other income for both the second quarter and six months ended June 30, 2007 was approximately $0.1 million compared to zero and ($0.7) million for the second quarter and six months ended June 30, 2006, respectively. Expenses in the six months ended June 30, 2006 primarily relate to termination of our then existing revolving credit facility.

Income Taxes

The overall effective tax rates of 40.1% and 40.2% for the second quarter and six month period ended June 30, 2007, respectively, decreased over the prior year’s comparable prior period effective rate of 43.7% and 40.7% for the second quarter and six month period ended June 30, 2006, respectively, primarily due to the shift in the distribution of taxable income between states in which we operate. We expect the rate for the remainder of 2007 to range from 39.0% to 40.5%.

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 and discontinued operations) was 6.4% and 5.9% for the second quarter ended June 30, 2007 and 2006, respectively, and 6.4% and 5.7% for the six month periods ended June 30, 2007 and 2006, respectively. In the second quarter ended June 30, 2007, we received approximately $9.8 million in manufacturer assistance, which was approximately $9.3 million less than the amount we paid for floor plan interest. In the six month period ended June 30, 2007, we received approximately $19.5 million in manufacturer assistance, which was approximately $17.7 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 June 30, 2007.

The weighted average interest rate for our used vehicle floor plan facility (whose interest expense is allocated to discontinued and continuing operations) was 6.4% and 6.5% for the second quarter and six month period ended June 30, 2007, respectively.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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

OPERATIONS

Long-Term Debt and Credit Facilities

Mortgage Notes: During the second quarter of 2007, we obtained mortgage financing on two of our dealership properties. These mortgages require monthly payments of principal and interest through maturity which is between July 2017 and May 2027 and are secured by the underlying properties. Proceeds received were used to repay borrowings under our 2006 Revolving Credit Sub-Facility (as defined in our Annual Report on Form 10-K for the year ended December 31, 2006).

2006 Revolving Credit Sub-Facility: At June 30, 2007, our 2006 Revolving Credit Sub-Facility 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 $443.2 million at June 30, 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 June 30, 2007, we had $78.9 million in letters of credit outstanding and $191.5 million of borrowing availability.

At June 30, 2007, the outstanding balance on our long-term debt and credit facilities were as follows (in thousands):


	Interest Rate (1)		Outstanding Balance
2006 Revolving Credit Sub-Facility (matures February 2010)	LIBOR + 2.00	% (2)	$	79.6
Senior Subordinated Notes (mature August 2013)	8.625	%	$	272.7
5.25% Convertible Senior Subordinated Notes (mature May 2009) (3)	5.25	%	$	128.9
4.25% Convertible Senior Subordinated Notes (mature November 2015 and are redeemable on or after October 2010) (3)	4.25	%	$	157.2
Mortgage notes to finance companies (mature July 2017 through May 2027)	6.77	%(4)	$	17.3
Notes payable to a finance company (mature November 2015 through September 2016)	10.19	%(4)	$	26.7

(1)	Six-month LIBOR was 5.32% at June 30, 2007.

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

(3)	Notes were not convertible at any time during the six months ended June 30, 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 June 30, 2007.

Dealership Acquisitions and Dispositions

In the first six months of 2007, we acquired six franchises for an aggregate purchase price of $160.1 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. During the first six months of 2007, we disposed of four franchises. These disposals generated cash of $5.4 million.

Sale-Leaseback Transactions

In the first six months of 2007, we sold $10.5 million in dealership facilities in sale-leaseback transactions. We have no continuing obligations under these arrangements other than lease payments.

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 six months of 2007 were approximately $39.8 million. Capital expenditures incurred during the first six months of 2007 expected to be sold within a year in sale-leaseback transactions were $0.9 million. We do not expect any significant gains or losses from these sales.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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

OPERATIONS

Share Repurchase Program

As of June 30, 2007, pursuant to previous authorizations from our Board of Directors, we had approximately $5.8 million available to repurchase shares of our Class A common stock or redeem securities convertible into Class A common stock. In the first six months of 2007, we repurchased 220,000 shares for approximately $6.4 million, which was offset by proceeds received from the exercise of stock options under stock compensation plans of $12.4 million.

Subsequent to June 30, 2007, the Board authorized an additional $30.0 million to be used in the share repurchase program. As of July 30, 2007, we had approximately $34.5 million remaining to repurchase shares under our Board authorization.

Dividends

During the second quarter of 2007, our Board of Directors approved a quarterly cash dividend of $0.12 per share for stockholders of record on June 15, 2007, which was paid on July 15, 2007. Subsequent to June 30, 2007, our Board of Directors approved a quarterly cash dividend of $0.12 per share for stockholders of record on September 15, 2007, which will be paid on October 15, 2007.

Cash Flows

For the six months ended June 30, 2007, net cash used by operating activities was approximately $82.4 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 six months of 2006 was $177.3 million, which consisted mostly of capital expenditures and dealership acquisitions. Net cash provided by financing activities for the six months ended June 30, 2007 was $259.1 million, comprised mostly of the increase of notes payable-floor plan – non-trade, net borrowings under the revolving credit facilities and mortgage notes.

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 in our Annual Report on Form 10-K for the year ended December 31, 2006) 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 $965.5 million at June 30, 2007. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $6.2 million in the first six months of 2007. Of the total change in interest expense, approximately $5.8 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 six months ended June 30, 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 $14.1 million.

In addition to our variable rate debt, approximately 25% 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.

During the second quarter of 2007, we entered into interest rate swap agreements (collectively, the “Cash Flow Swaps”) to effectively convert a portion of our LIBOR-based variable rate debt to a fixed rate. Under the terms of these swaps, we will receive interest payments on an aggregate $500 million notional amount at a rate equal to the one month LIBOR rate, adjusted monthly, and will make interest payments at fixed rates ranging from 4.935% to 5.319% (with a weighted average rate of 5.091%) until the swaps mature. All of the swaps mature between May 2012 and June 2012 except one swap with a notional amount of $100.0 million and a pay rate of 5.319% which matures July 1, 2010. The swaps have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of the swaps 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.

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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 June 30, 2007, our total outstanding indebtedness was $1,893.7 million, including the following:

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$79.6 million under the revolving credit line of our four-year syndicated credit facility (the “2006 Revolving Credit Sub-Facility”);

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$1,218.3 million under the secured new and used inventory floor plan facilities, including $84.7 million classified as liabilities associated with assets held for sale;

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$128.9 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 $1.2 million;

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$157.2 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 $2.8 million;

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$272.7 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 $2.3 million;

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$17.3 million of mortgage notes due from May 2027 to August 2027 with a weighted average rate of 6.77%; and

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$19.7 million of other secured debt, representing $22.3 million in aggregate principal amount plus unamortized premium of approximately $4.4 million and less $7.0 million for the fair value of fixed to variable interest rate swaps.

As of June 30, 2007, we had $191.5 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:

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

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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;

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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;

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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

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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, our mortgage 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, our mortgage notes 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.

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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:

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customer rebates or below market financing on new vehicles;

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employee pricing;

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dealer incentives on new vehicles;

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manufacturer floor plan interest and advertising assistance;

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warranties on new and used vehicles; and

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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 six months ended June 30, 2007, approximately 90.1% 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’:

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financial condition;

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marketing;

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vehicle design;

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publicity concerning a particular manufacturer or vehicle model;

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production capabilities;

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management;

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reputation; and

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labor relations.

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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 June 30, 2007, we owned 21 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

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incentive payments from the manufacturers based, in part, on CSI scores, which could be materially adversely affected if our CSI scores decline.

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:

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

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

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the difficulties of assimilating and retaining employees;

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the challenges of keeping customers; and

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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:

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incurring significantly higher capital expenditures and operating expenses;

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failing to assimilate the operations and personnel of acquired dealerships;

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entering new markets with which we are unfamiliar;

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potential undiscovered liabilities and operational difficulties at acquired dealerships;

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disrupting our ongoing business;

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diverting our management resources;

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failing to maintain uniform standards, controls and policies;

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

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

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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

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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.

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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.

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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.

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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

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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.

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, 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 31.7% of our total revenues for the six months ended June 30, 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.

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

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

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 2007, we received information that the AI Pension Plan was substantially underfunded as of December 31, 2006. 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 June 30, 2007, our balance sheet reflected a carrying amount of approximately $1,257.6 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 June 30, 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
April 2007	70,000	$	29.28	70,000	$	8,438
May 2007	30,000	$	27.88	30,000	$	7,600
June 2007	60,000	$	29.60	60,000	$	5,824

Total	160,000	$	29.15	160,000	$	5,824

(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.

Item 4:

Submission of Matters to a Vote of Security Holders

At the annual meeting of stockholders held April 19, 2007, Mr. O. Bruton Smith, Mr. B. Scott Smith, Mr. Jeffrey C. Rachor, Mr. William I. Belk, Mr. William P. Benton and Mr. William R. Brooks were voted on and elected by Sonic’s stockholders for the position of Director. Directors whose terms continued after the meeting were Mr. H. Robert Heller, Mr. Victor H. Doolan and Mr. Robert L. Rewey.


	Votes For	Votes Withheld
Election of O. Bruton Smith	146,824,393	1,504,353
Election of B. Scott Smith	146,045,614	2,283,132
Election of Jeffrey C. Rachor	146,036,121	2,292,625
Election of William I. Belk	146,814,273	1,504,171
Election of William P. Benton	146,812,226	1,506,218
Election of William R. Brooks	146,038,571	2,290,175

In addition to the election of the six directors, the stockholders approved:

•

an Amended and Restated Sonic Automotive, Inc. Incentive Compensation Plan;

•

an Amended and Restated Sonic Automotive, Inc. 2004 Stock Incentive Plan to increase the shares issuable thereunder from 2,000,0000 to 3,000,000 and approve other revisions;

•

an amendment to the Sonic Automotive, Inc. 2005 Formula Restricted Stock Plan for Non-Employee Directors to increase the shares issuable thereunder from 60,000 to 90,000; and

•

the appointment of Deloitte & Touche as Sonic’s independent registered public accounting firm for the fiscal year ending December 31, 2007.


	Votes For	Votes Against	Votes Abstained	Broker Non-Votes
Amended and Restated Sonic Automotive, Inc. Incentive Compensation Plan	143,796,736	1,588,733	165,302	—
Amended and Restated Sonic Automotive, Inc. 2004 Stock Incentive Plan	130,108,812	15,946,192	152,277	—
Amendment to the Sonic Automotive, Inc. 2005 Formula Restricted Stock Plan for Non-Employee Directors	130,551,977	15,492,602	162,702	—
Ratification of Deloitte & Touche as the independent registered public accounting firm	147,722,052	573,212	23,179	—

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

Item 6:

Exhibits.

(a) Exhibits:


Exhibit No.		Description
10.1*		Sonic Automotive, Inc. 2005 Formula Restricted Stock Plan for Non-Employee Directors, Amended and Restated as of April 19, 2007 (incorporated by reference to Exhibit 4 to Sonic’s Registration Statement on Form S-8 (Reg. No. 333-142436)) (1)

10.2*		Sonic Automotive, Inc. 2004 Stock 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)

10.3		Amended and Restated Sonic Automotive, Inc. Incentive Compensation Plan, Amended and Restated as of April 19, 2007 (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 Securities Litigation 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:

•

future acquisitions or dispositions;

•

industry trends;

•

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

•

vehicle sales rates and same store sales growth;

•

our financing plans; and

•

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:

•

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;

•

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;

•

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

•

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

•

general economic conditions in the markets in which we operate, including fluctuations in interest rates, employment levels, the level of consumer spending and consumer credit availability;

•

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

•

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: August 2, 2007	By:	/s/ O. Bruton Smith
		O. Bruton Smith
		Chairman and Chief Executive Officer

Date: August 2, 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. 2005 Formula Restricted Stock Plan for Non-Employee Directors, Amended and Restated as of April 19, 2007 (incorporated by reference to Exhibit 4 to Sonic’s Registration Statement on Form S-8 (Reg. No. 333-142436))(1)

10.2*		Sonic Automotive, Inc. 2004 Stock 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)

10.3		Amended and Restated Sonic Automotive, Inc. Incentive Compensation Plan, Amended and Restated as of April 19, 2007 (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