Mail Stop 0308
April 5, 2005
VIA U.S. MAIL AND FACSIMILE
Mr. E. Lee Wyatt, Jr.
Executive Vice President, Chief Financial Officer and Treasurer
Sonic Automotive, Inc.
6415 Idlewood Road
Charlotte, NC 28212
RE: Form 10-K for the Year Ended December 31, 2004
File No. 1-13395
Dear Mr. Wyatt:
We have reviewed your filing and have the following
comments which should be complied with in future filings. We have
limited our review to your financial statements and related
disclosures and will make no further review of your documents. If
you disagree with a comment, we will consider your explanation as
to
why our comment is inapplicable or a revision is unnecessary.
Please
be as detailed as necessary in your explanation. In some of our
comments, we may ask you to provide us with supplemental
information
so we may better understand your disclosure. After reviewing this
information, we may or may not raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for the Year Ended December 31, 2004
General
1. Where a comment below requests additional disclosures or other
revisions to be made, please include the additional disclosures
and
revisions in your future filings.
Item 6. Selected Financial Data, page 13
2. Briefly describe, or cross-reference to a discussion of,
business
combinations and other factors that materially affect the
comparability of the information for the periods presented. In
addition, please disclose the amounts of amortization of goodwill
for
periods prior to adoption of SFAS 142 in footnote (3) to the
table.
See Instruction 2 of Item 301 of Regulation S-K.
Item 7. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations
Results of Operations, page 19
3. Please disclose the types of expenses that you include in the
cost
of sales line item. Please quantify and provide an analysis of
material changes in cost of products and/or expenses included in
cost
of sales for each of the years presented. Please also provide an
analysis of each of the changes in selling, general and
administrative expenses you identify. For example, discuss why
accounting and legal costs increased $5.9 million and other
operating
expenses increased $11.6 million in 2004 as compared to 2003. In
addition, please discuss the results of your finance subsidiary
classified in selling, general and administrative expenses for
each
period presented. Please refer to SEC Release No. 33-8350.
Future Liquidity Outlook, page 34
4. Please disclose the significant covenants of your revolving and
floor plan facilities and the indenture governing your senior
subordinated notes. Please also disclose the effects of
noncompliance with covenants and the existence of cross-default
provisions contained in your debt agreements. In addition, please
discuss the extent of headroom in the financial covenants of your
credit facilities and the likelihood of your compliance for the
foreseeable future.
5. Please include scheduled interest payments in your table of
contractual obligations. Estimates of future variable rate
interest
payments may be included or excluded provided you include
appropriate
disclosure in a footnote to the table. Refer to Item 303(5) of
Regulation S-K.
Consolidated Financial Statements
Consolidated Statements of Cash Flows, page F-5
6. Please tell us the items and their amounts included in the
gain/loss on disposal of assets line item for each of the years
presented.
Notes to Consolidated Financial Statements
General
7. We note that the ability of your subsidiaries to pay dividends
or
make loans to you is subject to contractual limitations under your
floor plan facilities and minimum net capital requirements under
manufacturer franchise agreements. Please tell us if the
restricted
net assets of your consolidated subsidiaries and your equity in
the
undistributed earnings of 50% or less owned persons accounted for
by
the equity method together exceed 25% of consolidated net assets
as
of the end of your most recently completed year. If so, please
describe the restrictions on the ability of your consolidated
subsidiaries to transfer funds to you in the form of cash
dividends,
loans or advances and disclose the amounts of such restricted net
assets as of the date of the most recent balance sheet provided.
See
Rule 4-08(e)(3) of Regulation S-X. Please also discuss the
effects
of such restrictions on your liquidity in Management`s Discussion
and
Analysis of Financial Condition and Results of Operations.
Note 1. Description of Business and Summary of Significant
Accounting Policies
Principles of Consolidation, page F-6
8. Please indicate, if so, that your subsidiaries are wholly-
owned.
Also, describe the principles followed in determining whether to
include or exclude subsidiaries in your consolidated financial
statements. See Rule 3A-03 of Regulation S-X.
Reclassifications, page F-6
9. You disclose that a portion of bad debt expense from
Cornerstone`s
finance contracts has been reclassified from cost of sales to
selling, general and administrative expenses. Please tell us the
portion of bad debt expense that is classified as cost of sales
for
each year presented and why such amounts are classified as cost of
sales as opposed to selling, general and administrative expenses.
Revenue Recognition, page F-6
10. Please disclose the information required by Rule 12-09 of
Regulation S-X with respect to your allowances for doubtful
accounts
receivable and commission chargebacks either in the notes to your
financial statements or in Schedule II as required by Rule 5-
04(a)(2)
of Regulation S-X. If you file Schedule II, please include an
opinion from your independent accountants covering the schedule.
Property and Equipment, page F-8
11. Please disclose the facts and circumstances leading to the
impairment charges included in continuing and discontinued
operations
for each of the years presented and the caption in your income
statement that includes impairment charges classified in
continuing
operations. Please refer to paragraph 26 of SFAS 144. Tell us
whether the impairment charges include impairment expense related
to
franchise agreements disclosed in Note 5. We note that you
separately disclosed impairment of franchise agreements in your
statements of cash flows. Please tell us how you classified
impairment charges on other long-lived assets in your statements
of
cash flows.
Goodwill, page F-9
12. Please tell us how you allocate goodwill of divisions to
dealerships and franchises classified as assets held for sale.
Please refer to paragraph 30 of SFAS 142.
Advertising, page F-12
13. Please disclose the amount of earned manufacturer credits that
are reimbursements for specific, identifiable and incremental
costs
credited against advertising costs for each of the years
presented.
Consider discussing the variability of earned manufacturer credits
in
your discussion of advertising expense in Management`s Discussion
and
Analysis of Financial Condition and Results of Operations.
Note 2. Business Acquisitions and Dispositions, page F-14
14. Please tell us and disclose the factors you consider in
reaching
your determination that the operations and cash flows of
franchises
reported in discontinued operations have been or will be
eliminated
from your on-going operations as a result of the dispositions. In
doing so, please specifically discuss the likelihood of the
migration
of customers of the franchises sold and held for sale to similar
franchises that you own in the same geographic markets.
15. Please disclose the carrying amounts of the major classes of
assets and liabilities of franchises classified as held for sale
for
each year presented either on the face of your consolidated
balance
sheets or in the notes to your financial statements. See
paragraphs
46 and 47(a) of SFAS 144. Please tell us whether you recognized a
loss for any initial write-down to fair value less cost to sell of
the franchises held for sale. If so, please disclose the amount
of
the loss recognized as required by paragraph 47(b) of SFAS 144.
Please also tell us why the other assets and liabilities of
dealerships approved for sale are not presented separately in your
consolidated balance sheets in accordance with paragraph 46 of
SFAS
144.
Note 4. Property and Equipment, page F-16
16. Please disclose depreciation expense for each period presented
as
required by paragraph 5 of APB 12. You may do so in the
statements
of cash flows to the extent you separately state amortization
expense.
17. Please tell us how you determined the carrying amount of real
estate and construction costs on facilities that are or were
expected
to be completed and sold in sale-leaseback transactions within one
year and whether you recognized a loss for any write-down to fair
value less cost to sell. Please explain to us why you meet each
of
the criteria in paragraph 30 of SFAS 144 for both facilities
completed and facilities not completed. In doing so, please
explain
why it is probable that each of the criteria in paragraph 30,
other
than the one-year requirement in paragraph 30(d), not met at the
acquisition date will be met within a short period following
acquisition.
18. Please tell us how you account for gains and losses on the
sale-
leaseback of dealership equipment. Please confirm to us that your
sale-leaseback transactions do not contain any residual value
guarantees and purchase options at other than fair value.
Note 6. Long-Term Debt
19. Please describe the covenants that could restrict or prohibit
the
payment of dividends contained in your debt agreements and the
amount
of retained earnings or net income restricted or free of
restriction
as required by Rule 4-08(e)(1) of Regulation S-X.
Note 11. Commitments and Contingencies, page F-28
20. You disclose that your facility lease agreements do not
contain
provisions for contingent rent. However, in Management`s
Discussion
and Analysis of Financial Condition and Results of Operations you
disclose that lease payments vary based on interest rates.
Increases
or decreases in lease payments that result from changes in the
interest rates subsequent to the inception of a lease are
contingent
rentals as defined in SFAS 29. Please tell us how you determine
the
amounts of future minimum lease payments and clarify your
disclosure.
Please disclose the amounts of rent expense related to contingent
rentals for each period presented as required by paragraph 16(c)
of
SFAS 13.
Note 12. Summary of Selected Financial Data (Unaudited), page F-
30
21. Please disclose the effect of adopting EITF 04-08 on diluted
earnings per share for each quarterly period where the amounts
differ
from amounts previously reported. Please also describe the effect
of
discontinued operations recognized in each quarter. See
paragraphs
(a)(2) and (a)(3) of Item 302 of Regulation S-K.
* * * * * *
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
Please respond to these comments within 10 business
days,
or tell us when you will provide us with a response. Please
provide
us with a supplemental response letter that keys your responses to
our comments and provides any requested supplemental information.
Detailed letters greatly facilitate our review. Please file your
supplemental response on EDGAR as a correspondence file. Please
understand that we may have additional comments after reviewing
your
responses to our comments.
If you have any questions regarding these comments, please
direct them to Bill Thompson at (202) 942-1935 or Donna Di Silvo
at
202-942-1852, or in their absence, to the undersigned at (202)
942-
2823.
Sincerely,
Mike Moran
Accounting Branch Chief
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April 5, 2005
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