UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

o		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		(I.R.S. Employer
incorporation or organization)		Identification No.)
6415 Idlewild Road, Suite 109, Charlotte, North Carolina		28212
(Address of principal executive offices)		(Zip 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 þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such file).
Yes o     No o

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

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

As of October 28, 2009, there were 40,099,559 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			3
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)			3
Condensed Consolidated Statements of Income — Third Quarter and Nine-month period ended September 30, 2008 and September 30, 2009			3
Condensed Consolidated Balance Sheets — December 31, 2008 and September 30, 2009			4
Condensed Consolidated Statement of Stockholders’ Equity — Nine-month period ended September 30, 2009			5
Condensed Consolidated Statements of Cash Flows — Nine-month period ended September 30, 2008 and September 30, 2009			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			47
ITEM 4. Controls and Procedures			48
PART II — OTHER INFORMATION			49
ITEM 1. Legal Proceedings			49
ITEM 1A. Risk Factors			50
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			65
ITEM 4. Submission of Matters to a Vote of Security Holders			66
ITEM 6. Exhibits			67
SIGNATURES			70
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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)

		Third Quarter Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Revenues:
New vehicles		$	942,471			$	825,367			$	2,978,886			$	2,169,646
Used vehicles			308,158				365,501				994,906				1,034,444
Wholesale vehicles			64,995				33,220				216,378				97,478
Total vehicles			1,315,624				1,224,088				4,190,170				3,301,568
Parts, service and collision repair			256,867				255,372				787,928				768,003
Finance, insurance and other			43,259				41,302				139,355				110,663
Total revenues			1,615,750				1,520,762				5,117,453				4,180,234
Cost of Sales:
New vehicles			(878,485	)			(765,116	)			(2,777,201	)			(2,017,510	)
Used vehicles			(282,275	)			(336,949	)			(906,709	)			(948,463	)
Wholesale vehicles			(66,249	)			(35,003	)			(220,417	)			(100,741	)
Total vehicles			(1,227,009	)			(1,137,068	)			(3,904,327	)			(3,066,714	)
Parts, service and collision repair			(129,381	)			(126,226	)			(396,778	)			(383,793	)
Total cost of sales			(1,356,390	)			(1,263,294	)			(4,301,105	)			(3,450,507	)
Gross profit			259,360				257,468				816,348				729,727
Selling, general and administrative expenses			(220,413	)			(203,694	)			(656,799	)			(588,834	)
Impairment charges			(25,476	)			(339	)			(25,809	)			(4,164	)
Depreciation and amortization			(8,286	)			(8,080	)			(23,562	)			(24,523	)
Operating income			5,185				45,355				110,178				112,206
Other income (expense):
Interest expense, floor plan			(8,987	)			(4,324	)			(31,591	)			(14,368	)
Non-cash interest expense, convertible debt			(2,696	)			7,818				(7,991	)			1,556
Interest expense, other, net			(15,859	)			(19,305	)			(40,803	)			(57,496	)
Other income (expense), net			(9	)			2,442				88				2,504
Total other expense			(27,551	)			(13,369	)			(80,297	)			(67,804	)
Income from continuing operations before taxes			(22,366	)			31,986				29,881				44,402
Income tax provision			7,301				(13,506	)			(13,598	)			(19,093	)
Income from continuing operations			(15,065	)			18,480				16,283				25,309
Discontinued operations:
Loss from operations and the sale of discontinued franchises			(17,878	)			(3,848	)			(30,581	)			(10,681	)
Income tax (provision) benefit			5,977				962				9,174				2,670
Loss from discontinued operations			(11,901	)			(2,886	)			(21,407	)			(8,011	)
Net income		$	(26,966	)		$	15,594			$	(5,124	)		$	17,298
Basic earnings per share:
Earning (loss) per share from continuing operations		$	(0.38	)		$	0.43			$	0.40			$	0.61
Loss per share from discontinued operations			(0.29	)			(0.06	)			(0.53	)			(0.19	)
Earning (loss) per share		$	(0.67	)		$	0.37			$	(0.13	)		$	0.42
Weighted average common shares outstanding			40,138				42,305				40,447				41,130
Diluted earnings per share:
Earnings (loss) per share from continuing operations		$	(0.38	)		$	0.22			$	0.40			$	0.42
Loss per share from discontinued operations			(0.29	)			(0.05	)			(0.53	)			(0.16	)
Earnings (loss) per share		$	(0.67	)		$	0.17			$	(0.13	)		$	0.26
Weighted average common shares outstanding			40,138				63,195				40,626				52,529
Dividends declared per common share		$	0.12			$	—			$	0.36			$	—

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

		December 31,				September 30,
		2008 (1)				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	6,971			$	614
Restricted cash			—				106,913
Receivables, net			247,025				163,161
Inventories			916,837				657,475
Assets held for sale			406,576				176,128
Other current assets			16,822				16,900
Total Current Assets			1,594,231				1,121,191
Property and Equipment, net			369,892				378,170
Goodwill			327,007				403,048
Other Intangible Assets, net			82,328				79,685
Other Assets			32,087				22,674
Total Assets		$	2,405,545			$	2,004,768
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable — floor plan — trade		$	208,438			$	156,743
Notes payable — floor plan — non-trade			712,585				448,316
Trade accounts payable			53,215				51,977
Accrued interest			17,096				9,456
Other accrued liabilities			207,627				162,944
Liabilities associated with assets held for sale — trade			65,405				24,503
Liabilities associated with assets held for sale — non-trade			134,077				28,620
Current maturities of long-term debt			738,447				105,750
Total Current Liabilities			2,136,890				988,309
Long-Term Debt			—				556,243
Other Long-Term Liabilities			71,132				109,562
Commitments and Contingencies
Stockholders’ Equity:
Class A convertible preferred stock, none issued			—				—
Class A common stock, $.01 par value; 100,000,000 shares authorized; 42,922,557 shares issued and 28,063,141 shares outstanding at December 31, 2008; 54,986,875 shares issued and 40,099,559 shares outstanding at September 30, 2009			429				550
Class B common stock; $.01 par value; 30,000,000 shares authorized; 12,400,000 shares issued and 12,029,375 shares outstanding at December 31, 2008 and September 30, 2009			121				121
Paid-in capital			537,022				662,895
Accumulated deficit			(66,900	)			(49,430	)
Accumulated other comprehensive income			(36,635	)			(26,907	)
Treasury stock, at cost (14,859,416 Class A shares held at December 31, 2008 and 14,887,317 Class A shares held at September 30, 2009)			(236,514	)			(236,575	)
Total Stockholders’ Equity			197,523				350,654
Total Liabilities and Stockholders’ Equity		$	2,405,545			$	2,004,768

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)

																														Accumulated
		Class A								Class B																				Other				Total				Compre-
		Common Stock								Common Stock								Paid-In				Accumulated				Treasury				Comprehensive				Stockholders’				hensive
		Shares				Amount				Shares				Amount				Capital				Deficit				Stock				Income				Equity				Income
BALANCE AT DECEMBER 31, 2008			42,923			$	429				12,029			$	121			$	502,985			$	(40,597	)		$	(236,514	)		$	(36,635	)		$	189,789
ASC 470 adoption			—				—				—				—				34,037				(26,303	)			—				—				7,734
BALANCE AT DECEMBER 31, 2008 (1)			42,923				429				12,029				121				537,022				(66,900	)			(236,514	)			(36,635	)			197,523
Shares awarded under stock compensation plans			104				—				—				—				—				—				—				—				—				—
Purchases of treasury stock			—				—				—				—				—				—				(61	)			—				(61	)			—
Income tax benefit associated with convertible note hedge			—				—				—				—				4,442				—				—				—				4,442				—
Fair value of interest rate swap agreements, net of tax expense of $5,859			—				—				—				—				—				—				—				9,728				9,728				9,728
Issuance of Common Stock			11,699				117				—				—				105,642				—				—				—				105,759				—
ASC 470 derecognition – 4.25% Convertible Notes			—				—				—				—				(5,500	)			—				—				—				(5,500	)			—
ASC 470 – 5.0% Convertible Notes			—				—				—				—				19,235				—				—				—				19,235				—
Stock-based compensation expense			—				—				—				—				437				—				—				—				437				—
Restricted stock amortization, net of forfeitures			—				—				—				—				1,620				—				—				—				1,620				—
Net income			—				—				—				—				—				17,298				—				—				17,298				17,298
Other			261				4				—				—				(3	)			172				—				—				173				—
BALANCE AT SEPTEMBER 30, 2009			54,987			$	550				12,029			$	121			$	662,895			$	(49,430	)		$	(236,575	)		$	(26,907	)		$	350,654			$	27,026

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2008 (1)				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	(5,124	)		$	17,298
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment			26,418				24,905
Provision for bad debt expense			2,072				1,255
Other amortization			966				1,242
Debt issuance cost amortization			909				9,909
Debt discount amortization, net of premium amortization			8,710				9,957
Stock — based compensation expense			2,102				437
Amortization of restricted stock			4,206				1,802
Restricted stock forfeiture			(106	)			(182	)
Deferred income taxes			(23,728	)			(2,390	)
Equity interest in earnings of investees			(279	)			(501	)
Asset impairment charges			41,721				9,116
(Gain) Loss on disposal of franchises and property and equipment			2,579				(226	)
Gain on retirement of debt			—				(2,095	)
Loss on exit of leased dealerships			16,440				7,511
Derivative liability – 6.0% Convertible Notes, fair value adjustments			—				(11,300	)
Changes in assets and liabilities that relate to operations:
Receivables			130,612				68,535
Inventories			54,156				383,205
Other assets			2,325				(24,362	)
Notes payable — floor plan — trade			(77,668	)			(92,597	)
Trade accounts payable and other liabilities			(27,964	)			41,207
Total adjustments			163,471				425,428
Net cash provided by operating activities			158,347				442,726
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired			(22,929	)			—
Purchases of property and equipment			(122,312	)			(36,048	)
Proceeds from sales of property and equipment			2,156				1,797
Proceeds from sale of franchises			23,851				22,839
Distributions from equity investees			600				300
Net cash used in investing activities			(118,634	)			(11,112	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes payable floor plan — non-trade			(62,095	)			(369,726	)
Borrowings on revolving credit facilities			703,132				534,585
Repayments on revolving credit facilities			(703,961	)			(584,854	)
Proceeds from long-term debt			56,913				167,039
Payments on long-term debt			(7,807	)			(162,948	)
Increase in restricted cash			—				(106,913	)
Settlement of cash flow swaps			—				(16,454	)
Purchases of treasury stock			(28,636	)			(61	)
Income tax benefit associated with stock compensation plans			1,195				—
Income tax benefit associated with convertible hedge			1,625				4,442
Issuance of shares under stock compensation plans			5,147				—
Issuance of common stock			—				101,812
Dividends paid			(14,399	)			(4,893	)
Net cash provided used in financing activities			(48,886	)			(437,971	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(9,173	)			(6,357	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			16,514				6,971
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	7,341			$	614
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Change in fair value of cash flow hedging instruments (net of tax (benefit) / expense of $216 and $5,859 for the nine month period ended September 30, 2008 and 2009, respectively)		$	(352	)		$	9,728
Issuance of shares related to debt refinance		$	—			$	3,947
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest, net of amount capitalized		$	87,590			$	90,116
Income taxes		$	12,804			$	(21,229	)

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation — The accompanying unaudited condensed consolidated financial information for the third quarter and nine-month periods ended September 30, 2008 and 2009 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, 2008, which were included in Sonic’s Current Report on Form 8-K furnished to the SEC on August 21, 2009.

     Recent Developments — On September 23, 2009, Sonic issued $172.5 million in principal of 5.0% Convertible Senior Notes due 2029 (the “5.0% Convertible Notes”) and 10,350,000 shares of Class A common stock. Net proceeds received from the issuance of the 5.0% Convertible Notes were $167.0 million and net proceeds received from the issuance of 10,350,000 shares of Class A common stock were $99.4 million. Proceeds from these issuances have been used to repurchase $143.0 million of 4.25% Convertible Senior Subordinated Notes due 2015 (the “4.25% Convertible Notes”), plus accrued interest, and to repay approximately $15.0 million of amounts outstanding on Sonic’s 2006 Credit Facility (as defined herein) during the third quarter ended September 30, 2009. Subsequent to the end of the third quarter, on October 28, 2009, we used certain of the remaining proceeds to redeem the 6.0% Convertible Notes pursuant to a redemption notice issued to note holders in September 2009. The remaining proceeds will be used to repurchase the remaining $17.0 million in principal balance of the 4.25% Convertible Notes outstanding and/or applied to further reduce Sonic’s borrowings under its 2006 Credit Facility.

     On June 1, 2009, General Motors Corp. and certain of its subsidiaries (“General Motors”) filed for Chapter 11 bankruptcy protection. On July 10, 2009, General Motors emerged from bankruptcy as the new General Motors Company, with the former General Motors Corp. henceforth known as Motors Liquidation Company. With the exception of the sale of the Hummer and the discontinuation of the Saturn brand discussed below, the new General Motors expects to continue its current brand portfolio going forward. However, Sonic is unable to predict what impact the discontinuation or sale of additional brands in the future will have on its operations. As of September 30, 2009, Sonic operated 33 General Motors franchises (under the Cadillac, Chevrolet, Hummer, Saab, Buick and Saturn nameplates) at 26 physical dealerships. Six of Sonic’s General Motors dealerships, representing twelve franchises, including three Hummer franchises at multi-franchise dealerships, two Saab franchises at multi-franchise dealerships and one additional General Motors franchise at a multi-franchise dealership received letters stating that the franchise agreements between General Motors and Sonic will not be continued by General Motors on a long-term basis. General Motors has offered assistance with winding down the operations of these franchises in exchange for Sonic’s execution of termination agreements. Sonic executed all of the termination agreements. Total assistance to be received from General Motors totals $3.3 million, of which $0.7 million was received as of September 30, 2009. The remaining assistance has not been recorded as a receivable from General Motors as of September 30, 2009 as certain conditions required for the payments to occur had not yet been satisfied. The termination agreements provide for the following:

	•		The termination of the franchise agreement no earlier than January 1, 2010 and no later than October 31, 2010;
	•		The assignment and assumption of the franchise agreement by the new General Motors Company;
	•		The payment of financial assistance to the franchisee in installments in connection with the orderly winding down of the franchise operations;
	•		The waiver of any other termination assistance of any kind that may have been required under the franchise agreement;
	•		The release of claims against Motors Liquidation Company or the new General Motors Company and their related parties;
	•		The continuation of franchise operations pursuant to the franchise agreement, as supplemented by the termination

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

			agreement, through the effective date of termination of the franchise agreement, except that Sonic shall not be entitled to order any new vehicles from Motors Liquidation Company or the new General Motors Company; and
	•		A restriction on Sonic’s ability to transfer the franchise agreement to another party.

     For the remaining General Motors franchises Sonic executed “continuation agreements” which require, among other things, that existing franchise agreements will expire no later than October 31, 2010. In consideration of the execution of the “continuation agreements” General Motors recommended to the bankruptcy court the continuation or assumption of Sonic’s existing franchise agreements, as amended by the “continuation agreements”. All of Sonic’s franchises that executed “continuation agreements” were assumed by the post-bankruptcy new General Motors Company. Sonic expects its franchises which executed “continuation agreements” to be renewed after October 31, 2010 by the new General Motors Company.

     With the exception of: (1) product liability indemnifications; (2) amounts owed to Sonic through incentive programs; (3) amounts currently owed to Sonic’s franchises under their open accounts with General Motors and; (4) warranty claims occurring within 90 days prior to June 1, 2009, all amounts owed to Sonic from General Motors were extinguished as a result of the execution of the termination and continuation agreements. A motion was made by General Motors to the bankruptcy court and the motion was granted by the bankruptcy court allowing General Motors to pay the claims noted in (1) — (4) above. As a result, Sonic has received payments related to all pre-bankruptcy claims.

     On June 2, 2009, General Motors announced that Chinese equipment manufacturer Sichuan Tengzhong Heavy Industrial Machinery Co. (“STHIMC”) will buy its Hummer brand. On October 9, 2009, the two parties signed a definitive purchase agreement. As of September 30, 2009, Sonic operated three Hummer franchises at three dealership locations. It is uncertain whether STHIMC will continue supporting the Hummer brand or whether STHIMC’s ownership of the Hummer brand will have a positive or negative impact on Sonic’s Hummer franchises’ operations.

     On June 5, 2009, General Motors announced that Penske Automotive Group (“PAG”) would buy its Saturn brand. However, on September 30, 2009 General Motors announced PAG will not purchase the Saturn brand and they plan to discontinue the Saturn brand. As of September 30, 2009, Sonic operated one Saturn franchise at one dealership location.

     Results of operations of the General Motors franchises that received termination letters or otherwise will be shut down are classified in continuing operations and will continue to be classified in continuing operations until the related business operations are wound down. Revenues associated with the General Motors franchises that received termination letters or otherwise will be shut down for the third quarter ended September 30, 2008 and 2009 were approximately $44.2 million and $31.1 million, respectively. Revenues associated with the General Motors franchises that received termination letters for the nine-month periods ended September 30, 2008 and 2009 were approximately $138.1 million and $94.9 million, respectively.

     As Sonic’s operations at the affected franchises that will not be renewed or will be discontinued wind down, Sonic may be required to accelerate depreciation expenses and record impairment charges related to, but not limited to, lease obligations, fixed assets, franchise assets, accounts receivable and inventory.

     On April 30, 2009, Chrysler LLC filed for bankruptcy protection and submitted a plan of reorganization. On June 10, 2009, Fiat SpA purchased a substantial portion of Chrysler’s assets which include rights related to Sonic’s franchise agreements. It is uncertain whether Fiat will continue supporting the Chrysler brand or whether Fiat’s ownership of the Chrysler brand will have a positive or negative impact on Sonic’s Chrysler franchises’ operations. In conjunction with Chrysler’s reorganization efforts in the second quarter of 2009, three franchise agreements associated with one of Sonic’s dealership locations were terminated. The result of these franchise terminations was not material to Sonic’s results of operations, balance sheet or cash flows for the third quarter ended September 30, 2009. As of September 30, 2009, Sonic owned six Chrysler franchises at two dealership locations.

     Reclassifications — The statement of income for the third quarter and nine-month period ended September 30, 2008 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 September 30, 2008. The statement of income for the third quarter and nine-month period ended September 30, 2008 also reflects the reclassification of balances from discontinued operations to continuing operations for franchises identified for sale as of September 30, 2008, but which Sonic has decided to retain and operate as of September 30, 2009.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     Recent Accounting Pronouncements — Effective July 1, 2009, the Accounting Standards Codification (“ASC”) has become the sole source of authoritative U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The ASC only affects the referencing of financial accounting standards and does not change or alter existing U.S. GAAP.

     Sonic adopted the provisions of ASC 470, “Debt”, as of January 1, 2009. ASC 470 applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under ASC 815, “Derivatives and Hedging”. ASC 470 requires that the issuer of a convertible debt instrument within its scope separately account for the liability and equity components in a manner that reflects the issuer’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The excess of the principal amount of the liability component over its initial fair value must be amortized to interest cost using the effective interest method.

     The provisions of ASC 470 apply to Sonic’s 4.25% Convertible Senior Subordinated Notes due 2015 (the “4.25% Convertible Notes”), 5.0% Convertible Senior Subordinated Notes due October 2029 (the “5.0% Convertible Notes”) and 5.25% Senior Subordinated Convertible Notes due May 2009 (the “5.25% Convertible Notes”). In conjunction with the adoption of ASC 470, Sonic estimated the nonconvertible borrowing rates related to its 4.25% Convertible Notes and 5.25% Convertible Notes to be 8.0% and 10.0%, respectively. Accordingly, the fair value of the equity component of the 4.25% Convertible Notes was $25.1 million ($15.1 million, net of tax) at the date of issuance of the 4.25% Convertible Notes and the fair value of the equity component of the 5.25% Convertible Notes was $31.6 million ($19.0 million, net of tax) at the date of the issuance of the 5.25% Convertible Notes. ASC 470 requires retrospective treatment of its provisions to all periods presented. Therefore, previously reported balances (prior to January 1, 2009), have been adjusted to effectively record a debt discount equal to the fair value of the equity component, a deferred tax liability for the tax effect of the recorded debt discount and an increase to paid-in capital for the tax-effected fair value of the equity component as of the date of issuance of the underlying notes. Previously reported balances have also been adjusted to provide for the amortization of the debt discount through interest expense and the associated decrease in the deferred tax liability recorded through income tax expense.

     As of December 31, 2008, the unamortized debt discount associated with ASC 470 related to the 4.25% Convertible Notes and the 5.25% Convertible Notes was $10.8 million and $2.1 million, respectively. As of September 30, 2009, the unamortized debt discount associated with ASC 470 related to the 4.25% Convertible Notes was $0.6 million and the debt discount associated with the 5.25% Convertible Notes had been fully amortized as a result of the restructuring of the notes on May 7, 2009. The unamortized discount at September 30, 2009 will be amortized through interest expense into earnings over the remaining expected term of the convertible notes, which is through November 2010 for the 4.25% Convertible. A summary of the effect of applying these provisions on our prior and current period consolidated statements of income is as follows:

																														(dollars in thousands)								(dollars in thousands)
		(dollars in thousands)																												Third Quarter Ended								Nine Month Period Ended
		Twelve Months Ended December 31,																												September 30,								September 30,
		2002				2003				2004				2005				2006				2007				2008				2008				2009				2008				2009
Increase in Interest Expense			(2,108	)			(3,530	)			(3,899	)			(4,656	)			(9,044	)			(9,898	)			(10,704	)			(2,696	)			(1,379	)			(7,991	)			(6,115	)
Tax Benefit			843				1,412				1,560				1,862				3,617				3,959				4,282				1,078				552				3,196				2,446
Effect on Net Income			(1,265	)			(2,118	)			(2,339	)			(2,794	)			(5,427	)			(5,939	)			(6,422	)			(1,618	)			(827	)			(4,795	)			(3,669	)

     In June 2008, the FASB issued ASC 260, “Earnings Per Share”, under which unvested share-based payment awards that contain rights to receive nonforfeitable dividends or dividend equivalents (whether paid or unpaid) are participating securities, and thus, should be included in the two-class method of computing earnings per share. This pronouncement is effective for fiscal years beginning after December 31, 2008 and interim periods within those years and requires that all prior period earnings per share disclosures be adjusted retroactively to apply the two-class method of computing earnings per share. The adoption of this standard resulted in no material changes in the prior period or the current year period presentation of earnings per share.

     In March 2008, the FASB issued ASC 815, “Derivatives and Hedging”, which changes the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under ASC 815, and how derivative instruments and related hedged items affect an entity’s operating results, financial position and cash flows. This pronouncement is effective for fiscal years beginning after November 15, 2008. Sonic’s adoption did not have a material impact on its consolidated operating results, financial position or cash flows.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     In December 2007, the FASB issued ASC 805, “Business Combinations”, which provides guidance regarding the allocation of purchase price in business combinations, measurement of assets acquired and liabilities assumed as well as other intangible assets acquired. Also in December 2007, the FASB issued ASC 810, “Consolidation”, which provides accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary if certain conditions exist. These pronouncements are effective for fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. Sonic’s adoption of these standards did not materially impact its consolidated operating results, financial position and cash flows.

     Sonic’s adoption of the provisions of ASC 820, “Fair Value Measurements and Disclosures”, on January 1, 2008, related to fair value measurements and related disclosures of financial assets and liabilities, did not have a material impact on its financial statements. Sonic’s adoption of the provisions of this pronouncement related to nonfinancial assets and liabilities on January 1, 2009, affects, among other items, the valuation of goodwill, franchise assets and fixed assets when assessing for impairments and the valuation of assets acquired and liabilities assumed in business combinations.

     Sonic adopted ASC 855, “Subsequent Events”, in the second quarter of 2009. ASC 855 establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. See Note 11 for the related disclosures. The adoption of this standard did not have a material impact on Sonic’s financial statements.

     Restricted Cash — As of September 30, 2009, we had approximately $106.9 million of restricted cash available to extinguish existing debt. We used $88.1 million to redeem the 6.0% Convertible Notes on October 28, 2009. The remaining $18.8 million will either be used to repurchase the remaining 4.25% Convertible Notes and/or repay balances outstanding under our 2006 Credit Facility.

     Derivative Instruments and Hedging Activities — Sonic utilizes derivative financial instruments to manage its capital structure and interest rate risk. The types of risks hedged are primarily related to the variability of cash flows caused by movements in LIBOR-based interest rates. Sonic documents its risk management strategy and assesses hedge effectiveness and the fair value of the derivatives at the inception and during the term of each hedge. Derivatives are reported at fair value on the accompanying Condensed Consolidated Balance Sheets. The changes in fair value of the effective portion of the cash flow hedges are reported as a component of accumulated other comprehensive loss.

     At September 30, 2009, Sonic had interest rate swap agreements (the “Fixed Swaps”) to effectively convert a portion of its LIBOR-based variable rate debt to a fixed rate. The fair value of these positions at September 30, 2009 was a liability of $33.5 million and the effect is recorded, net of tax of $12.3 million, in accumulated other comprehensive income in the accompanying Condensed Consolidated Balance Sheets (see Note 10). Under the terms of the Fixed Swaps, Sonic will receive and pay interest based on the following:

Notional				Pay Rate				Receive Rate (1)				Maturing Date
(in millions)
$	200.0				4.935	%		one-month LIBOR				May 1, 2012
$	100.0				5.265	%		one-month LIBOR				June 1, 2012
$	3.9				7.100	%		one-month LIBOR				July 10, 2017
$	25.0				5.160	%		one-month LIBOR				September 1, 2012
$	15.0				4.965	%		one-month LIBOR				September 1, 2012
$	25.0				4.885	%		one-month LIBOR				October 1, 2012
$	12.1				4.655	%		one-month LIBOR				December 10, 2017
$	9.0				6.860	%		one-month LIBOR				August 1, 2017
$	7.4				4.330	%		one-month LIBOR				July 1, 2013

     Measurements of hedge effectiveness for the Fixed Swaps are based on comparisons between the gains or losses of the actual interest rate swaps and the gains or losses of hypothetical interest rate swaps, which have the exact same critical terms

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

of the defined hedged items. To the extent that the hedge becomes ineffective, amounts in accumulated other comprehensive loss are reclassified to interest expense in the accompanying Condensed Consolidated Statements of Income. During the third quarter and nine-month period ending September 30, 2009, certain cash flow swaps were ineffective due to temporary reductions in LIBOR-based debt balances, resulting in a charge of $0.3 million to interest expense in the third quarter and nine-month period ending September 30, 2009.

     All the Fixed Swaps, with the exception of one with a notional amount of $9.0 million, have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of these swaps have been recorded in accumulated other comprehensive income, net of related income taxes, in the Condensed Consolidated Statement of Stockholders’ Equity. The net interest payment amounts related to the Fixed Swaps reclassified out of accumulated other comprehensive income into results of operations for the third quarter and nine-month period ended September 30, 2008 were $5.0 million and $9.2 million, compared to $6.6 million and $19.5 million for the third quarter and nine-month period ended September 30, 2009, respectively. The amount expected to be reclassified out of accumulated other comprehensive income into earnings (through interest expense, other) in the next twelve months is approximately $16.4 million.

     The effect of the mark-to-market adjustment related to the $9.0 million swap for which hedge accounting was not applied resulted in an increase in expense of $0.3 million in the third quarter ended September 30, 2009 and a decrease in expense of $1.8 million in the nine-month period ended September 30, 2009. The mark-to-market effect on expense is included in selling general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.

     In conjunction with the May 7, 2009 debt restructuring, Sonic was required to record a derivative liability associated with embedded features in its 6.0% Convertible Notes. These embedded features included a convertible feature and a series of puts. The derivative liability was originally recorded at fair value of $11.3 million at inception; however as of September 30, 2009, the derivative liability had been extinguished as a result of Sonic’s redemption notice delivered to holders of the 6.0% Convertible Notes, obligating Sonic to repay the 6.0% Convertible Notes at 100% of par during the fourth quarter of 2009. The change in fair value during the third quarter of $11.4 million was recorded as a benefit to non-cash interest expense in the accompanying consolidated statements of income for the third quarter and nine-month period ending September 30, 2009.

     Operating Lease Accruals — Operating lease accruals relate to facilities Sonic has ceased using in its operations. The accruals represent the present value of the lease payments, net of estimated sublease proceeds, for the remaining life of the operating leases and other accruals necessary to satisfy the lease commitment to the landlord. A summary of the activity of these operating lease accruals consists of the following:

		(dollars in
		thousands)
Balance, December 31, 2008		$	19,882
Lease exit expense			7,511
Payments			(3,759	)
Balance, September 30, 2009		$	23,634

     Income Tax Expense — The overall effective tax rates for the quarter and nine-month periods ended September 30, 2008 and 2009 are higher than statutory rates due to the effect of state income taxes.

2. DISCONTINUED OPERATIONS

     Dispositions — The operating results of franchises held for sale are included in the loss from discontinued operations in Sonic’s statements of income. Assets to be disposed of in connection with franchises held for sale but 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:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		(dollars in thousands)
		December 31,				September 30,
		2008				2009
Inventories		$	207,308			$	68,543
Property and equipment, net			39,094				32,769
Goodwill			154,940				71,082
Franchise assets			5,234				3,734
Assets held for sale		$	406,576			$	176,128

     Liabilities to be disposed in connection with these dispositions are comprised primarily of notes payable — floor plan and are classified as liabilities associated with assets held for sale on Sonic’s balance sheets. Revenues and other activities associated with franchises classified as discontinued operations were as follows:

						(dollars in thousands)
		Third Quarter Ended September 30,								Nine Months Ended September 30,
		2008				2009				2008				2009
Income from operations		$	528			$	1,707			$	543			$	1,593
Loss on disposal of franchises			(137	)			(103	)			(3,080	)			(572	)
Lease exit charges			(10,927	)			(5,171	)			(12,444	)			(6,751	)
Property impairment charges			(4,842	)			(74	)			(6,897	)			(2,271	)
Goodwill impairment charges			—				(207	)			—				(2,680	)
Franchise agreement and other impairments			(2,500	)			—				(6,800	)			—
Favorable lease asset impairment charges			—				—				(1,903	)			—
Pre-tax loss		$	(17,878	)		$	(3,848	)		$	(30,581	)		$	(10,681	)
Total Revenues		$	244,947			$	183,153			$	845,569			$	544,357

     Lease exit charges recorded for the third quarter and nine-month period ended September 30, 2008 and 2009 relate to the revision of estimates and establishment of lease exit accruals. The lease exit accruals are calculated by either discounting the remaining lease payments, net of estimated sublease proceeds or estimating the amount necessary to satisfy the lease commitment to the landlord. For a discussion of property impairment charges, see Note 4 and for a discussion of goodwill impairment charges and favorable lease asset impairment charges see Note 5.

     Sonic allocates corporate level interest expense to discontinued operations based on the net assets of the discontinued operations group. Interest allocated to discontinued operations for the third quarter ended September 30, 2008 and 2009 was $1.5 million and $1.8 million, respectively. Interest allocated to discontinued operations for the nine-month period ended September 30, 2008 and 2009 was $4.8 million and $8.1 million, respectively.

3. Inventories

     Inventories consist of the following:

		(dollars in thousands)
		December 31,				September 30,
		2008				2009
New vehicles		$	910,462			$	457,882
Used vehicles			87,895				161,710
Parts and accessories			57,057				52,104
Other			68,731				54,322
		$	1,124,145			$	726,018
Less inventories classified as assets held for sale			(207,308	)			(68,543	)
Inventories		$	916,837			$	657,475

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. Property and Equipment

     Property and equipment consists of the following:

		(dollars in thousands)
		December 31,				September 30,
		2008				2009
Land		$	63,153			$	62,162
Building and improvements			308,530				318,608
Office equipment and fixtures			68,054				75,107
Parts and service equipment			54,577				55,063
Company vehicles			8,700				8,358
Construction in progress			30,989				37,977
Total, at cost			534,003				557,275
Less accumulated depreciation			(125,017	)			(146,336	)
Subtotal			408,986				410,939
Less assets held for sale			(39,094	)			(32,769	)
Property and equipment, net		$	369,892			$	378,170

     Property and equipment impairment charges of approximately $0.4 million and $4.3 million were recorded in the third quarter and nine-month period ended September 30, 2009. In the third quarter ended September 30, 2009, $0.1 million was included in discontinued operations and $0.3 million was included within impairment charges in the accompanying Condensed Consolidated Statements of Income. Of the $4.3 million recorded in the nine-month period ended September 30, 2009, $2.3 million was included in discontinued operations and $2.0 million was included within impairment charges in the accompanying Condensed Consolidated Statements of Income.

     Property and equipment impairment charges of approximately $18.4 million and $20.8 million were recorded in the third quarter and nine-month period ended September 30, 2008. In the third quarter ended September 30, 2008, $4.8 million was included in discontinued operations and $13.6 million was included in continuing operations in the accompanying Condensed Consolidated Statements of Income. Of the $20.8 million recorded in the nine-month period ended September 30, 2008, $6.9 million was included in discontinued operations and $13.9 million was included within impairment charges in the accompanying Condensed Consolidated Statements of Income.

     The impairment charges recorded in discontinued operations in all periods discussed above were recorded based on the estimated fair value of the property and equipment to be sold in connection with the disposal of associated franchises and recorded values. The impairment charges (significantly related to dealership franchises to be discontinued in future periods based on notifications from General Motors) recorded in continuing operations during the third quarter and nine-month period ended September 30, 2009 were recorded based on Sonic’s belief that the value of the impaired property and equipment would not be recovered through operations or through the ultimate sale of the assets. The impairment charges recorded in continuing operations during the third quarter and nine-month period ended September 30, 2008 were recorded based on Sonic’s decision to abandon certain facility construction projects and Sonic’s belief that the value of the impaired property and equipment would not be recovered through operations or through the ultimate sale of the assets.

5. Goodwill And Intangible Assets

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		(dollars in thousands)
		Franchise
		Agreements				Goodwill
Balance, December 31, 2008		$	64,701			$	327,007
Impairment of import dealerships			—				(1,751	)
Impairment of domestic dealerships			(2,100	)			(929	)
Reductions from sales of franchises			(800	)			(5,137	)
Reclassification from assets held for sale, net			1,500				83,858
Balance, September 30, 2009		$	63,301			$	403,048

     During the fourth quarter of 2008, Sonic recorded an estimated goodwill impairment charge of $786.5 million in continuing operations in accordance with the provisions of ASC 350, “Intangibles — Goodwill and Other”. An estimate was recorded because Sonic had not finalized the valuation of certain assets and liabilities that were necessary to complete its evaluation at December 31, 2008. During the first quarter ended March 31, 2009, Sonic completed the valuation of these certain assets and liabilities. Based on the completion of its evaluation of the goodwill impairment charge during the current year no adjustment to the estimate that was recorded at December 31, 2008 was required.

     During the third quarter and nine-month period ended September 30, 2009, Sonic determined that a portion of the goodwill allocated to franchises held for sale was not recoverable based on estimated proceeds. Accordingly, Sonic recorded a goodwill impairment charge of $0.2 million and $2.7 million in discontinued operations for the third quarter and nine-month period ended September 30, 2009, respectively.

     In the nine-month period ended September 30, 2009, Sonic recorded franchise asset impairment charges of $2.1 million within continuing operations. In the third quarter and nine-month period ended September 30, 2008, Sonic recorded franchise asset impairment charges of $11.9 million within continuing operations. Sonic also recorded franchise asset impairment charges of $2.5 million and $3.8 million in the third quarter and nine-month period ended September 30, 2008, respectively, within discontinued operations. The impairment charges were recorded based on management’s estimate that the recorded values would not be recoverable either through operating cash flows or through an eventual sale of the franchise. Additionally, the 2009 impairment charges recorded in continuing operations relate to dealership franchises to be discontinued in future periods based on notifications from General Motors.

     At December 31, 2008, Sonic had $17.6 million of definite life intangibles recorded relating to favorable lease agreements. After the effect of amortization of the definite life intangibles, the balance recorded at September 30, 2009 was $16.4 million and was included in Other Intangible Assets, net, in the accompanying Condensed Consolidated Balance Sheets. In the nine-month period ended September 30, 2008, Sonic recorded an impairment charge of $1.9 million within discontinued operations related to its definite life intangibles. The impairment charge was recorded based on management’s estimate that sublease income from certain properties would not allow Sonic to recover the recorded value of favorable lease assets related to the properties.

6.

Long-Term Debt

     Long-term debt consists of the following:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		(dollars in thousands)
		December 31,				September 30,
		2008				2009
2006 Revolving Credit Sub-Facility (1)		$	70,842			$	20,573
Senior Subordinated Notes bearing interest at 8.625%			275,000				275,000
Senior Secured Second Lien Convertible Notes bearing interest at 6.0%			—				85,627
Convertible Senior Subordinated Notes bearing interest at 5.25%			105,250				—
Convertible Senior Notes bearing interest at 5.0%			—				172,500
Convertible Senior Subordinated Notes bearing interest at 4.25%			160,000				17,045
Notes payable to a finance company bearing interest from 9.52% to 10.52% (with a weighted average of 10.19%)			19,726				18,285
Mortgage notes to finance companies-fixed rate, bearing interest from 5.80% to 7.03%			80,622				78,990
Mortgage notes to finance companies-variable rate, bearing interest at 1.25 to 2.65 percentage points above one-month LIBOR			33,505				32,384
Total debt discount/premium/associated derivative liabilities (2)			(13,127	)			(44,919	)
Other			6,629				6,508
		$	738,447			$	661,993
Less current maturities (3)			(738,447	)			(105,750	)
Long-term debt		$	—			$	556,243

     As a result of the adoption of ASC 470, “Debt”, (discussed in Note 1) debt discount was required to be recorded related to Sonic’s 4.25% Convertible Notes and 5.25% Convertible Notes at the date of the issuance of the Notes. Accordingly, the balances in the table above include unamortized debt discount related to the adoption of ASC 470 of $10.8 million and $0.6 million related to Sonic’s 4.25% Convertible Notes as of December 31, 2008 and September 30, 2009, respectively, and $2.1 million related to Sonic’s 5.25% Convertible Notes as of December 31, 2008. The debt discount associated with the 5.25% Convertible Notes was fully amortized as a result of the restructuring of the notes on May 7, 2009.

2006 Credit Facility

     In connection with the amendment to the 2006 Credit Facility executed March 31, 2009, Sonic agreed to increase the interest rates for amounts outstanding and the quarterly commitment fees payable by it on the unused portion. Before April 1, 2009, the 2006 Credit Facility bore interest at a specified percentage above LIBOR according to a performance-based pricing grid determined by the Total Senior Secured Debt to EBITDA Ratio as of the last day of the immediately preceding fiscal quarter. The quarterly commitment fees were also determined according to a performance-based pricing grid determined by the Total Senior Secured Debt to EBITDA Ratio as of the last day of the immediately preceding fiscal quarter. On April 1, 2009, but before May 7, 2009, the 2006 Credit Facility bore interest as follows: 2.50% above LIBOR for amounts outstanding under the revolving credit sub-facility under the 2006 Credit Facility; 1.75% above LIBOR for amounts outstanding under the new vehicle floor plan sub-facility under the 2006 Credit Facility; and 2.00% above LIBOR for amounts outstanding under the used vehicle floor plan sub-facility under the 2006 Credit Facility. The quarterly commitment fee on and after April 1, 2009 will be 0.75% on the unused portion of the revolving credit sub-facility under the 2006 Credit Facility, 0.25% on the unused portion of the new vehicle floor plan sub-facility under the 2006 Credit Facility, 0.30% on the unused portion of the used vehicle floor plan sub-facility under the 2006 Credit Facility, and 2.50% letter of credit fee.

     There were also certain other concessions Sonic provided to the lenders under the 2006 Credit Facility in connection with the March 31, 2009 amendment, which include the following. Sonic agreed to limit its borrowing under the 2006 Credit Facility to ordinary course of business operating expenditures, and in any event, not for the repayment of certain indebtedness, including the 5.25% Convertible Notes, the 4.25% Convertible Notes and the 8.625% Notes. In addition, Sonic

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

was prohibited from making any acquisitions and Sonic agreed that net proceeds from certain asset sales until May 4, 2009 would be used to permanently reduce the amount available under the 2006 Revolving Credit Sub-Facility.

     On May 4, 2009, Sonic executed an additional amendment to the 2006 Credit Facility. The amendment allowed for borrowings of $15.0 million to be used in the restructuring of the 5.25% Convertible Notes and increased the interest rates related to outstanding borrowings under the Revolving Credit Sub-Facility to 3.50% above LIBOR, and increased the letter of credit fee to 3.50%. The interest rates for amounts outstanding under the new and used vehicle floor plan sub-facilities did not change from 1.75% above LIBOR and 2.00% above LIBOR, respectively. In addition the commitments under the 2006 Credit Facility were reduced to $635.0 million related to new vehicle floor plan financing, $100.0 million related to used vehicle floor plan financing and $225.0 million related to general use revolving credit financing. The amendment included a change to the borrowing base which restricts the effect of twelve-month EBITDA on the borrowing base to 50% prior to September 30, 2009 and 25% beginning October 1, 2009.

     The amendment executed on May 4, 2009 permanently extended the provision in the amendment executed March 31, 2009, requiring Sonic to apply 100% of the net cash proceeds received in conjunction with certain dispositions of assets to balances outstanding under the revolving credit sub-facility. However, under certain circumstances, if after giving pro forma effect to the disposition of assets, Sonic’s borrowings under the revolving credit sub-facility do not exceed $25.0 million and Sonic’s borrowing availability is at least $75.0 million, then Sonic is required to apply not less than 50% of the net cash proceeds received in conjunction with the disposition of the assets to balances outstanding under the revolving credit sub-facility. The remaining 50% is required to be used to pay down the 6.0% Convertible Notes as discussed below. The revolving commitment under the 2006 Credit Facility will be permanently reduced in the amount of such mandatory prepayments until the revolving commitment is reduced to $185.0 million. As of September 30, 2009, the revolving commitment had been reduced to approximately $216.0 million as a result of the application of proceeds from disposition of certain assets.

     Sonic agreed to limit its borrowings to ordinary course of business operating expenses, and in any event, not the repayment of certain indebtedness, including the 4.25% Convertible Notes, the 6.0% Convertible Notes and the 8.625% Notes. The May 4, 2009 amendment restricts the payment by Sonic of cash interest with respect to the 6.0% Convertible Notes and debt to be issued in respect of Sonic’s 4.25% Convertible Notes to a certain aggregate amount. This amendment also restricts the amount, including any refinancings, of the 4.25% Convertible Notes, the 8.625% Notes and the 5.25% Convertible Notes to the aggregate principal amount of such indebtedness existing as of the date of the May 4, 2009 amendment. The May 4, 2009 amendment also adjusted certain financial covenant ratios. The minimum required consolidated liquidity ratio was adjusted from 1.15 to 1.10 and the minimum required consolidated fixed charge coverage ratio was adjusted from 1.20 to 1.15.

5.0% Convertible Notes

     On September 23, 2009, Sonic issued $172.5 million in principal of its 5.0% Convertible Notes and 10,350,000 shares of Sonic’s Class A common stock. Net proceeds received from the issuance of the 5.0% Convertible Notes were $167.0 million. Proceeds from these issuances have been used to repurchase $143.0 million of 4.25% Convertible Notes, plus accrued interest, and to repay approximately $15.0 million of amounts outstanding on Sonic’s 2006 Credit Facility during the third quarter ended September 30, 2009. Subsequent to the end of the third quarter, on October 28, 2009, Sonic used certain of the remaining proceeds to redeem the 6.0% Convertible Notes pursuant to a redemption notice issued to note holders in September 2009. The remaining proceeds will be used to repurchase the remaining $17.0 million in principal balance of the 4.25% Convertible Notes outstanding and/or applied to further reduce Sonic’s borrowings under its 2006 Credit Facility.

     The 5.0% Convertible Notes bear interest at a rate of 5.0% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2010. The 5.0% Convertible Notes mature on October 1, 2029. Sonic may redeem some or all of the 5.0% Convertible Notes for cash at any time subsequent to October 1, 2014 at a repurchase price equal to 100% of the principal amount of the Notes. Holders have the right to require Sonic to purchase the 5.0% Convertible Notes on each of October 1, 2014, October 1, 2019 and October 1, 2024 or in the event of a change in control for cash at a purchase price equal to 100% of the principal amount of the notes.

     Holders of the 5.0% Convertible Notes may convert their notes at their option prior to the close of business on the business day immediately preceding July 1, 2029 only under the following circumstances: (1) during any fiscal quarter commencing after December 31, 2009, if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price (as defined below) per $1,000 principal amount of notes for each day of that measurement period was less than 98% of the product of the last reported sale price of our Class A common stock and the applicable conversion rate on each such day; (3) if we call any or all of the notes for redemption, at any time prior to the close of business on the third scheduled trading day prior to the redemption date; or (4) upon the occurrence of specified corporate events. On and after July 1, 2029 to (and including) the close of business on the third scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. The conversion rate is 74.7245 shares of Class A common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $13.38 per share of Class A common stock.

     In accordance with the provisions of ASC 470, “Debt”, upon issuance of the 5.0% Convertible Notes in September 2009, Sonic recorded a debt discount of $37.5 million, which included $5.5 million of cash discount paid to the underwriters in the offering. The debt discount will be amortized through October 2014, the earliest scheduled redemption date. Sonic recorded a corresponding equity component related to the 5.0% Convertible Notes of $32.0 million ($19.2 million, net of taxes) at the date of the issuance of the Notes.

6.0% Convertible Notes

     On May 7, 2009, Sonic paid the holders of its 5.25% Convertible Notes $15.7 million in cash, issued $85.6 million in aggregate principal of 6.0% Convertible Notes and issued 860,723 shares of its Class A common stock in private placements exempt from registration requirements in full satisfaction of its obligations under certain of the 5.25% Convertible Notes. The remaining 5.25% Convertible Notes were repaid in cash. Interest on the 6.0% Convertible Notes is payable semi-annually on May 1 and November 1 of each year, beginning November 1, 2009. The 6.0% Convertible Notes mature on May 15, 2012. The redemption of the 5.25% Convertible Notes with the issuance of the 6.0% Convertible Notes was accounted for as a debt modification and required the 6.0% Convertible Notes to be recorded at face value of $85.6 million less a discount of $11.3 million (net of $74.3 million). A corresponding $11.3 million derivative liability was also recorded which represents the fair value of the embedded derivatives (put and conversion features) contained in the 6.0% Convertible Notes.

     During the third quarter of 2009, Sonic delivered a redemption notice to the holders of the 6.0% Convertible Notes obligating Sonic to repay the 6.0% Convertible Notes at 100% of par during the fourth quarter of 2009. As a result of Sonic’s redemption notice delivered to all of the holders of the 6.0% Convertible Notes, the derivative liability associated with the 6.0% Convertible Notes has been extinguished. The change in fair value related to the extinguishment of the derivative liability resulted in a benefit to non-cash interest expense, convertible debt for the third quarter and the nine-month period ended September 30, 2009, of $11.4 million and $11.3 million, respectively, in the accompanying consolidated statements of income. The 6.0% Convertible Notes were repurchased on October 28, 2009 and Sonic expects to record a loss on the repurchase of the 6.0% Convertible Notes of approximately $7.9 million in the fourth quarter of 2009. This loss represents the write-off of the remaining unamortized discount at the redemption date.

4.25% Convertible Notes

     In September 2009, Sonic repurchased $143.0 million of principal of 4.25% Convertible Notes using proceeds from the issuance of the 5.0% Convertible Notes and shares of Class A common stock discussed above. The repurchase of the 4.25% Convertible Notes resulted in the recognition of a gain on debt extinguishment of $2.1 million, as reported in other income in the accompanying consolidated statements of income for the third quarter and nine-month period ended September 30, 2009.

     Interest expense and amortization of debt discount are summarized in the table below:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		Third Quarter Ended								Nine Months Ended
		September 30,								September 30,
(dollars in millions)		2008				2009				2008				2009
Interest Expense, Other
Revolver		$	1.1			$	0.5			$	3.7			$	1.7
8.625% Convertible Notes			6.2				5.9				18.0				18.0
6.0% Convertible Notes			—				1.3				—				2.1
5.25% Convertible Notes			1.8				—				5.6				2.1
4.25% Convertible Notes			1.9				1.8				5.8				5.6
Interest Rate Swaps			4.7				6.6				8.2				19.5
Mortgage Interest			1.0				1.5				2.6				4.3
Deferred Loan Cost — Revolver			0.3				1.9				0.7				4.1
Deferred Loan Cost — Other			0.1				0.5				0.2				5.5
Other (1)			(1.2	)			(0.7	)			(4.0	)			(5.4	)
Total Interest Expense, Other		$	15.9			$	19.3			$	40.8			$	57.5
Non-Cash Interest Expense, Convertible Debt
6.0% Convertible Notes, Discount Amortization		$	—			$	2.0			$	—			$	3.4
6.0% Convertible Notes, Derivative Mark-to-Market			—				(11.4	)			—				(11.3	)
5.25% Convertible Notes, Discount Amortization			1.4				—				4.3				2.1
4.25% Convertible Notes, Discount Amortization			1.3				1.4				3.7				4.0
4.25% Convertible Notes, Deferred Loan Cost			—				0.2				—				0.2
Total Non-Cash Interest Expense, Convertible Debt		$	2.7			$	(7.8	)		$	8.0			$	(1.6	)

     Sonic agreed under the 2006 Credit Facility not to pledge any assets to any third party (other than those explicitly allowed under the amended terms of the facility), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2006 Credit Facility contains certain negative covenants, including covenants which could restrict or prohibit the payment of dividends, capital expenditures and material dispositions of assets as well as other customary covenants and default provisions. Financial covenants related to outstanding indebtedness and certain operating leases include required specified ratios of:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

				September 30, 2009
Covenant		Required		Actual
Consolidated liquidity ratio		≥ 1.10			1.37
Consolidated fixed charge coverage ratio		≥ 1.15			1.40
Consolidated total senior secured debt to EBITDA ratio		≦ 2.25			1.18
EBTDAR to rent ratio		≥ 1.50			1.61

     Availability under the Revolving Credit Sub-Facility is subject to a borrowing base calculation and is reduced on a dollar for dollar basis by any outstanding letters of credit. The borrowing base was $199.9 million, letters of credit outstanding were $77.0 million and availability of additional borrowings was $102.4 million at September 30, 2009. On October 1, 2009, in accordance with Amendment No. 5 to the Credit Agreement, the borrowing base calculation was adjusted to weight the EBITDA component 25% (adjusted from 50%), and as a result, the borrowing base was reduced to $170.9 million and the availability of additional borrowings was $73.3 million going into the fourth quarter of 2009.

     None of the conversion features on the 6.0% Convertible Notes, the 5.25% Convertible Notes, the 5.0% Convertible Notes or the 4.25% Convertible Notes were satisfied during the third quarter and/or nine-month period ended September 30, 2009. Sonic was in compliance with all financial covenants under the above long-term debt and credit facilities as of September 30, 2009.

7. Stock-Based Compensation

     Sonic currently has two active stock compensation plans, the Sonic Automotive, Inc. 2004 Stock Incentive Plan (the “2004 Plan”) and the 2005 Formula Restricted Stock Plan for Non-Employee Directors (the “2005 Formula Plan”), and three inactive stock compensation plans which only have grants outstanding, the Sonic Automotive, Inc. Formula Stock Option Plan for Independent Directors, the Sonic Automotive, Inc. 1997 Stock Option Plan and the First America Automotive, Inc. 1997 Stock Option Plan (collectively, the “Stock Plans”). See Sonic’s Current Report on Form 8-K furnished to the SEC on August 21, 2009 for a more detailed description of the Stock Plans. A summary of the status of the stock options related to the Stock Plans is presented below:

														Weighted Average
		Options				Exercise Price				Weighted Average				Remaining				Aggregate
		Outstanding				Per Share				Exercise Price				Contractual Term				Intrinsic Value
		(in thousands)												(in years)				(in thousands)
Balance — December 31, 2008			3,339			$	7.80 - 37.50			$	21.90				4.6			$	—
Granted			1,398			$	1.81 - $2.99				1.81
Forfeited			(602	)		$	1.81 - $37.50				19.32
Balance — September 30, 2009			4,135			$	1.81 - $37.50			$	15.49				6.0			$	12,558
Exercisable			2,711			$	7.80 - $37.50			$	22.33				4.2			$	492

		Nine Months Ended
(dollars in thousands, except per option amounts)		September 30, 2009
Weighted Average Grant-Date Fair Value Per Option of Options Granted		$	0.99
Fair Value of Options Vested		$	132

     The weighted average fair value of options granted in the third quarter and nine-month period ended September 30, 2009 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		2009
Stock Option Plans
Dividend yield			0.00	%
Risk free interest rate			1.67 - 1.87	%
Expected life		5 years
Volatility			64.13	%

     Sonic used an expected term of five years for current year option grants based on observations of past grants and exercises. The historical exercise experience indicates that the expected term is at least three years (consistent with the three year graded vesting period attached to the majority of these options). Expected volatility was estimated using Sonic’s stock price over the last five years.

     Sonic recognized compensation expense related to stock options within selling, general and administrative expenses of $0.3 million and $0.1 million in the third quarter ended September 30, 2008 and 2009, respectively. Sonic recognized stock option expense of $2.1 million and $0.4 million in the nine-month period ended September 30, 2008 and 2009, respectively. Tax benefits recognized related to the compensation expenses were $0.1 million for both the third quarter ended September 30, 2008 and 2009. Tax benefits recognized related to the compensation expenses were $0.8 and $0.2 million for the nine-month period ended September 30, 2008 and 2009, respectively. The total compensation cost related to unvested options not yet recognized at September 30, 2009 was $1.2 million and is expected to be recognized over a weighted average period of 2.3 years.

     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				Weighted Average
		Restricted Stock				Grant Date Fair
		Units				Value
		(in thousands)
Balance — December 31, 2008			348			$	22.99
Granted			79				7.24
Forfeited			(10	)			21.44
Vested			(104	)			27.60
Balance — September 30, 2009			313			$	17.45

     In the nine-month period ended September 30, 2009, 78,600 restricted shares of Class A common stock were awarded to Sonic’s Board of Directors under the 2005 Formula Plan. Awards to the Board of Directors cliff-vest one year from the date of grant. Sonic recognized compensation expense related to restricted stock and restricted stock units of $1.7 million and $0.5 million in the third quarter ended September 30, 2008 and 2009, respectively. Sonic recognized expense of $4.1 million and $1.6 million in the nine-month period ended September 30, 2008 and 2009, respectively. Sonic recognized $0.7 million and $0.2 million of tax benefit related to the compensation expenses for the third quarter ended September 30, 2008 and 2009. Sonic recognized $1.6 million and $0.6 million of tax benefit related to the compensation expenses for the nine-month period ended September 30, 2008 and 2009, respectively. Total compensation cost related to unvested restricted stock and restricted stock units not yet recognized at September 30, 2009 was $1.2 million, and is expected to be recognized over a weighted average period of 0.6 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. Due to a net loss in the third quarter ended September 30, 2008, there was no dilutive impact of options, shares or warrants as their effect would be anti-dilutive on a loss per share basis. The following table illustrates the dilutive effect of such items on earnings per share for the third quarter ended September 30, 2009 and the nine-month period ended September 30, 2008 and 2009:

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		For the Third Quarter Ended September 30, 2009
						Income								Loss
						From Continuing								From Discontinued
						Operations								Operations								Net Income
										Per Common								Per Common								Per Common
		Shares				Amount				Share Amount				Amount				Share Amount				Amount				Share Amount
	(dollars in thousands except per share amounts)
Earnings (Loss) and Shares			42,305			$	18,480							$	(2,886	)						$	15,594
Effect of Participating Securities:
Unvested Restricted Stock and Stock Units			—				(136	)							—								(136	)
Basic Earnings (Loss) Per Share			42,305			$	18,344			$	0.43			$	(2,886	)		$	(0.06	)		$	15,458			$	0.37
Effect of Dilutive Securities:
Contingently Convertible
Debt (2009 6.0% Convertibles)			19,004				(4,223	)							(693	)							(4,916	)
Contingently Convertible
Debt (2009 5.0% Convertibles)			981				—								—								—
Stock Plans			905				—								—								—
Diluted Earnings (Loss) Per Share			63,195			$	14,121			$	0.22			$	(3,579	)		$	(0.05	)		$	10,542			$	0.17

		For Nine Months Ended September 30, 2008
						Income								Loss
						From Continuing								From Discontinued
						Operations								Operations								Net Income
										Per Common								Per Common								Per Common
		Shares				Amount				Share Amount				Amount				Share Amount				Amount				Share Amount
	(amounts in thousands except per share amounts)
Earnings (Loss) and Shares			40,447			$	16,283							$	(21,407	)						$	(5,124	)
Effect of Participating Securities:
Unvested Restricted Stock and Stock Units			—				(230	)							—								(230	)
Basic Earnings (Loss) Per Share			40,447			$	16,053			$	0.40			$	(21,407	)		$	(0.53	)		$	(5,354	)		$	(0.13	)
Effect of Dilutive Securities:
Stock Plans			179				—								—								—
Diluted Earnings (Loss) Per Share			40,626			$	16,053			$	0.40			$	(21,407	)		$	(0.53	)		$	(5,354	)		$	(0.13	)