UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-31420
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CARMAX, INC.
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(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-1821055
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(State of Incorporation) (I.R.S. Employer
Identification No.)
4900 COX ROAD, GLEN ALLEN, VIRGINIA 23060
-----------------------------------------
(Address of Principal Executive Offices and Zip Code)
(804) 747-0422
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(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 No X(1)
----- ------
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 31, 2002(2)
- ------------------------------------------ ---------------------------------
CarMax, Inc. common stock, par value $0.50 1,000
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 26.
(1) CarMax, Inc. became a 1934 Act registered company on August 5, 2002.
(2) At October 1, 2002, the Registrant had 103,059,679 shares outstanding of
CarMax common stock. See Note 10 of the company's consolidated financial
statements.
CARMAX, INC. AND SUBSIDIARIES
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INDEX
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Page
No.
PART I. FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -
August 31, 2002, and February 28, 2002 3
Consolidated Statements of Earnings -
Three Months and Six Months Ended August 31, 2002 and 2001 4
Consolidated Statements of Cash Flows -
Six Months Ended August 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. CarMax, Inc. Controls and Procedures 20
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 23
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SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER 24
- --------------------------------------------------------
SECTION 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER 25
- --------------------------------------------------------
EXHIBIT INDEX 26
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Page 2 of 26
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARMAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands)
Aug. 31, 2002 Feb. 28, 2002
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 74,690 $ 3,286
Accounts receivable, net 80,774 52,585
Retained interests in securitized receivables 131,121 120,683
Inventory 360,846 399,084
Prepaid expenses and other current assets 3,563 2,065
------------ -----------
Total current assets 650,994 577,703
Property and equipment, net 152,946 120,976
Other assets 21,982 21,543
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TOTAL ASSETS $ 825,922 $ 720,222
============ ===========
LIABILITIES AND EQUITY CURRENT LIABILITIES:
Accounts payable $ 97,388 $ 87,160
Accrued expenses and other current liabilities 33,206 25,775
Deferred income taxes 23,017 22,009
Short-term debt 5,206 9,840
Current installments of long-term debt 826 78,608
------------ -----------
Total current liabilities 159,643 223,392
Long-term debt, excluding current installments 100,000 -
Deferred revenue and other liabilities 10,286 8,416
Deferred income taxes 1,841 2,935
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TOTAL LIABILITIES 271,770 234,743
EQUITY 554,152 485,479
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TOTAL LIABILITIES AND EQUITY $ 825,922 $ 720,222
============ ===========
See accompanying notes to consolidated financial statements.
Page 3 of 26
CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Six Months Ended
August 31 August 31
2002 2001 2002 2001
------------ ----------- ----------- ------------
Net sales and operating revenues $ 1,076,083 $ 938,911 $ 2,077,647 $ 1,817,911
Cost of sales 951,870 830,385 1,835,531 1,605,425
------------- ----------- ------------- -------------
Gross profit 124,213 108,526 242,116 212,486
------------- ----------- ------------- -------------
Selling, general and administrative expenses
(net of finance income of $26,708 for the
three months ended August 31, 2002,
$22,766 for the three months ended
August 31, 2001, $50,785 for the six
months ended August 31, 2002, and
$42,276 for the six months ended
August 31, 2001) 70,836 62,262 139,386 120,812
Interest expense 957 2,086 1,983 4,637
------------- ----------- ------------- -------------
Total expenses 71,793 64,348 141,369 125,449
------------- ----------- ------------- -------------
Earnings before income taxes 52,420 44,178 100,747 87,037
Provision for income taxes 20,706 16,787 39,795 33,074
------------- ----------- ------------- -------------
Net earnings $ 31,714 $ 27,391 $ 60,952 $ 53,963
============= =========== ============= =============
Pro Forma Weighted average common shares:
Basic 102,988 102,058 102,936 101,715
============= =========== ============= =============
Diluted 104,542 104,206 104,647 103,674
============= =========== ============= =============
Pro Forma Net Earnings Per Share:
Basic $ 0.31 $ 0.27 $ 0.59 $ 0.53
============ =========== ============= ============
Diluted $ 0.30 $ 0.26 $ 0.58 $ 0.52
============ =========== ============= ============
See accompanying notes to consolidated financial statements.
Page 4 of 26
CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Six Months Ended
August 31
2002 2001
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Operating Activities:
- --------------------
Net earnings $ 60,952 $ 53,963
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 8,424 9,305
Amortization of restricted stock awards 23 56
Loss on disposition of property and equipment 68 -
Provision for deferred income taxes (86) 3,096
Changes in operating assets and liabilities:
Increase in accounts receivable, net and retained
interests in securitized receivables (38,627) (25,962)
Decrease (increase) in inventory 38,238 (39,766)
(Increase) decrease in prepaid expenses and other current assets (1,498) 348
(Increase) decrease in other assets (845) 716
Increase in accounts payable, accrued expenses and other
current liabilities 24,613 28,034
Increase in deferred revenue and other liabilities 1,870 135
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Net cash provided by operating activities 93,132 29,925
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Investing Activities:
- --------------------
Purchases of property and equipment (40,062) (8,730)
Proceeds from sales of property and equipment, net 6 96,344
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Net cash (used in) provided by investing activities (40,056) 87,614
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Financing Activities:
- --------------------
(Decrease) increase in short-term debt, net (4,634) 372
Issuance of long-term debt 100,000 -
Payments on long-term debt (77,782) (102,600)
Equity issuances, net 744 444
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Net cash provided by (used in) financing activities 18,328 (101,784)
------------ -----------
Increase in cash and cash equivalents 71,404 15,755
Cash and cash equivalents at beginning of year 3,286 8,802
------------ -----------
Cash and cash equivalents at end of period $ 74,690 $ 24,557
============ ===========
See accompanying notes to consolidated financial statements.
Page 5 of 26
CARMAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
On September 10, 2002, the Circuit City Stores, Inc. shareholders approved
the separation of the CarMax Group from Circuit City Stores, Inc. and the
Circuit City Stores, Inc. board of directors authorized the redemption of
the Circuit City Stores, Inc. CarMax Group Common Stock and the
distribution of CarMax, Inc. common stock to effect the separation. In
addition, CarMax approved the one-time special dividend payment of $28.4
million to Circuit City Stores on the separation date. The separation was
effective October 1, 2002. As a result of the separation, all of the
businesses, assets and liabilities of the CarMax group are now held in
CarMax, Inc. ("CarMax") which, following the separation, is an independent
separately traded public company. These consolidated financial statements
are presented as if CarMax existed as an entity separate from the remaining
businesses of Circuit City Stores during the periods presented.
Circuit City Stores has contributed to CarMax all of the subsidiaries,
assets and liabilities that constituted the CarMax Group. CarMax includes
the same businesses, assets and liabilities the financial performance of
which was intended to be reflected by the CarMax Group Common Stock. The
assets of CarMax will be accounted for at the historical values carried by
Circuit City Stores prior to the separation.
The accompanying consolidated financial statements include the historical
operations of certain subsidiaries of Circuit City Stores. Accordingly,
Circuit City Stores' net investment in CarMax is shown as equity on the
accompanying consolidated financial statements. Equity transactions with
parent reflect amounts allocated to CarMax based on equity transactions of
the CarMax Group Common Stock.
In conjunction with the separation, all outstanding CarMax group stock
options and restricted stock was replaced with CarMax stock options and
restricted stock with the same terms and conditions, exercise price and
restrictions as the CarMax group stock options and restricted stock they
replaced.
CarMax's financial statements reflect the application of the management and
allocation policies adopted by Circuit City Stores' board of directors.
These policies may be modified or rescinded, or new policies may be
adopted, at the sole discretion of the board of directors, although the
board of directors has no present plans to do so.
2. Accounting Policies
The consolidated financial statements of CarMax conform to accounting
principles generally accepted in the United States of America. The interim
period financial statements are unaudited; however, in the opinion of
management, all adjustments, which consist only of normal, recurring
adjustments, necessary for a fair presentation of the interim consolidated
financial statements have been included. The fiscal year-end balance sheet
data was derived from the audited financial statements included in the Form
S-4 Registration Statement (S-4) dated August 5, 2002.
3. Net Earnings per Share
CarMax was a wholly-owned subsidiary of Circuit City Stores, Inc. during
the periods presented. Therefore, historical earnings per share has not
been presented in the consolidated financial statements. Unaudited pro
forma earnings per share has been presented to reflect the capital
structure effective with the separation of CarMax from Circuit City Stores,
Inc.
Pro forma earnings per share calculations have been computed by dividing
the net earnings of CarMax by the weighted average shares outstanding as if
the separation had occurred at the beginning of the periods presented. Pro
forma diluted net earnings per share calculations have been computed by
dividing the net
Page 6 of 26
earnings of CarMax by the sum of the weighted average shares outstanding
and dilutive potential CarMax common stock.Weighted average common shares
are calculated by adding the weighted average CarMax Group common shares
outstanding to the weighted average CarMax Group common shares reserved for
the Circuit City Group or for issuance to holders of Circuit City Group
common stock. The separation agreement provides for a one-to-one issuance
of CarMax, Inc. options or restricted stock for holders of CarMax Group
options or restricted stock.
Reconciliations of the numerator and denominator of the pro forma basic and
diluted net earnings per share calculations are presented below.
Three Months Ended Six Months Ended
(Amounts in thousands August 31, August 31,
except per share data) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------
Weighted average CarMax Group
common shares........................................... 37,065 29,877 37,013 27,905
Weighted average common shares reserved
for issuance to holders of Circuit Group
common shareholders..................................... 65,923 72,181 65,923 73,810
-------------------------- --------------------------
Pro forma weighted average CarMax, Inc.
common shares........................................... 102,988 102,058 102,936 101,715
Dilutive potential common shares:
Options................................................. 1,549 2,121 1,699 1,917
Restricted stock........................................ 5 27 12 42
--------------------------- ---------------------------
Pro forma weighted average common shares
and dilutive potential common shares.................... 104,542 104,206 104,647 103,674
=========================== ===========================
Net earnings available to common shareholders.............. $ 31,714 $ 27,391 $ 60,952 $ 53,963
Pro forma basic net earnings per share..................... $ 0.31 $ 0.27 $ 0.59 $ 0.53
Pro forma diluted net earnings per share................... $ 0.30 $ 0.26 $ 0.58 $ 0.52
In a public offering completed during the second quarter of fiscal 2002,
Circuit City Stores, Inc. sold 9,516,800 CarMax Group shares that had
previously been reserved for the Circuit City Group. This sale reduced the
shares originally reserved from 75,440,000 shares to 65,923,200 shares
which was distributed on October 1, 2002, to Circuit City Group common
shareholders of record at September 16, 2002.
Certain options were outstanding and not included in the computation of pro
forma diluted net earnings per share because the options' exercise prices
were greater than the average market price of the shares. For the
three-month period ended August 31, 2002, options to purchase 1,030,207
shares of CarMax Group Common Stock at prices ranging from $20.00 to $26.83
per share were outstanding and not included in the calculation. For the
three-month period ended August 31, 2001, options to purchase 7,899 shares
of CarMax Group Common Stock at $16.31 per share were outstanding and not
included in the calculation.
4. Debt
On May 17, 2002, CarMax entered into a $200 million credit agreement
secured by vehicle inventory. The credit agreement includes a $100 million
revolving loan commitment and a $100 million term loan. Principal is due in
full at maturity with interest payable monthly at a LIBOR-based rate. The
agreement is scheduled to terminate in May 2004. The termination date of
the agreement will be automatically extended one year on May 17, 2003, and
on each May 17 thereafter unless CarMax or any lender elects, prior to the
next extension date, not to extend the agreement. The value of CarMax's
eligible motor vehicle inventory must be at least 150 percent of the
aggregate principal amount outstanding under the credit facility on any
date. As of August 31, 2002, the amount outstanding under this credit
agreement was $105.2 million. Under this agreement, CarMax
Page 7 of 26
must meet financial covenants relating to minimum current ratio, maximum
total liabilities to tangible net worth ratio and minimum fixed charge
coverage ratio. CarMax was in compliance with these covenants at August 31,
2002.
5. Supplemental Financial Statement Information
For the three- and six-month periods ended August 31, 2002 and 2001, pretax
finance income, which is recorded as a reduction to selling, general and
administrative expenses, was as follows:
Three Months Ended Six Months Ended
August 31, August 31,
(Amounts in millions) 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------
Finance operation:
Securitization income........................ $ 25.8 $ 21.4 $ 49.1 $ 39.8
Payroll and fringe benefit expenses.......... 1.7 1.3 3.4 2.6
Other direct expenses........................ 2.0 1.5 3.7 2.9
--------------------------------------------------------
Finance operation income........................ 22.1 18.6 42.0 34.3
Third-party financing fees...................... 4.6 4.2 8.8 8.0
--------------------------------------------------------
Total finance income............................ $ 26.7 $ 22.8 $ 50.8 $ 42.3
========================================================
Finance operation income does not include any allocation of indirect costs
or income. CarMax presents this information on a direct basis to avoid
making arbitrary decisions regarding the periodic indirect benefit or costs
that could be attributed to this operation. Examples of indirect costs not
included are retail store expenses and corporate expenses such as human
resources, administrative services, marketing, information systems,
accounting, legal, treasury and executive payroll.
6. Securitizations
CarMax enters into securitization transactions to finance automobile loan
receivables originated by its finance operation. CarMax's finance operation
sells its automobile loan receivables to a special purpose subsidiary,
which, in turn, transfers those receivables to a group of third-party
investors. These transfers of receivables qualify as sales; therefore,
CarMax recognizes gains or losses as a component of the finance operation's
profits, which are recorded as a reduction to selling, general and
administrative expenses. See Note 4. The special purpose subsidiary retains
a subordinated interest in the transferred receivables. CarMax's finance
operation continues to service securitized receivables for a fee. The
unused capacity of this program was $361.0 million at August 31, 2002, and
$211.0 million at February 28, 2002. The automobile loan securitization
agreements do not provide for recourse to CarMax for credit losses on the
securitized receivables. CarMax employs a risk-based pricing strategy that
increases the stated annual percentage rate for accounts that have a higher
predicted risk of default. Under certain of these securitization
transactions, CarMax must meet financial guidelines relating to maximum
total liabilities to tangible net worth ratio, minimum debt to net worth,
minimum tangible net worth to managed assets, minimum current ratio,
minimum cash balance or borrowing capacity and minimum fixed charge
coverage ratio. The securitized receivables must meet performance levels
relating to portfolio yield, default rates and delinquency rates. CarMax
was in compliance with these guidelines and performance levels at August
31, 2002, and February 28, 2002.
The total principal amount of automobile loan receivables managed was $1.75
billion at August 31, 2002, and $1.55 billion at February 28, 2002. Of the
total principal amounts managed, the principal amount of automobile loan
receivables securitized was $1.72 billion at August 31, 2002, and $1.54
billion at February 28, 2002, and the principal amount of automobile loan
receivables held for sale or investment was $25.1 million at August 31,
2002, and $13.9 million at February 28, 2002. During the second quarter of
fiscal 2003, CarMax completed an asset securitization transaction totaling
$512.6 million of automobile loan receivables. No new public securitization
transactions were completed in the first half of fiscal 2002.
The aggregate principal amount of managed automobile loans that were 31
days or more delinquent was $26.1 million at August 31, 2002, $22.3 million
at February 28, 2002 and $18.8 million at August 31,
Page 8 of 26
2001. The principal amount of defaults net of recoveries on automobile loan
receivables managed totaled $4.1 million for the quarter ended August 31,
2002, and $2.6 million for the quarter ended August 31, 2001. The principal
amount of defaults net of recoveries on automobile loan receivables managed
totaled $7.3 million for the six months ended August 31, 2002, and $4.5
million for the six months ended August 31, 2001.
CarMax receives annual servicing fees approximating 1 percent of the
outstanding principal balance of the securitized automobile loan
receivables and retains the rights to future cash flows available after the
investors in the asset-backed securities have received the return for which
they contracted. The servicing fees specified in the automobile loan
securitization agreements adequately compensate the finance operation for
servicing the securitized receivables. Accordingly, no servicing asset or
liability has been recorded.
The table below summarizes certain cash flows received from and paid to the
automobile loan securitizations.
Three Months Ended Six Months Ended
August 31, August 31,
(Amounts in millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------
Proceeds from new securitizations.......................... $ 266.6 $ 181.0 $ 487.6 $ 376.0
Proceeds from collections reinvested
in previous automobile loan securitizations.............. $ 124.1 $ 126.9 $ 258.6 $ 218.4
Servicing fees received.................................... $ 3.9 $ 3.5 $ 7.8 $ 6.7
Other cash flows received on retained interests*........... $ 24.1 $ 16.5 $ 44.1 $ 29.0
*This amount represents cash flows received from retained interests by the
transferor other than servicing fees, including cash flows from
interest-only strips and cash above the minimum required level in cash
collateral accounts.
When determining the fair value of retained interests, CarMax estimates
future cash flows using management's projections of key factors, such as
finance charge income, default rates, payment rates and discount rates
appropriate for the type of asset and risk.
The amount by which the estimated future finance income from securitized
automobile loan receivables exceeds the sum of the contractually specified
investor returns and servicing fees, referred to as interest-only strips,
is carried at fair value and amounted to $84.2 million at August 31, 2002,
and $74.3 million at February 28, 2002. These amounts are included in
retained interests in securitized receivables on the consolidated balance
sheets. Gains of $18.1 million on sales of automobile loan receivables were
recorded for the three months ended August 31, 2002; gains of $14.7 million
on sales of automobile loan receivables were recorded for the three months
ended August 31, 2001. Gains of $33.7 million on sales of automobile loan
receivables were recorded for the six months ended August 31, 2002; gains
of $27.8 million on sales of automobile loan receivables were recorded for
the six months ended August 31, 2001.
At August 31, 2002, the fair value of retained interests was $131.1
million, with a weighted-average life of 1.6 years. At February 28, 2002,
the fair value of retained interests was $120.7 million, with a
weighted-average life of 1.6 years. The following table shows the key
economic assumptions used in measuring the fair value of retained interests
at August 31, 2002, and a sensitivity analysis showing the hypothetical
effect on the fair value of those interests when there are unfavorable
variations from the assumptions used. Key economic assumptions at August
31, 2002, are not materially different from assumptions used to measure the
fair value of retained interests at the time of securitization. These
sensitivities are hypothetical and should be used with caution. In this
table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in actual circumstances, changes in one factor may result in
changes in another, which might magnify or counteract the sensitivities.
Impact on Fair Impact on Fair
Assumptions Value of 10% Value of 20%
(Dollar amounts in millions) Used Adverse Change Adverse Change
-----------------------------------------------------------------------------------------
Prepayment rate................... 1.5%-1.6% $ 4.4 $ 8.8
Annual default rate............... 1.0%-1.2% $ 2.3 $ 4.5
Annual discount rate.............. 12.0% $ 1.6 $ 3.1
Page 9 of 26
7. Financial Derivatives
CarMax enters into amortizing swaps relating to automobile loan receivable
securitizations to convert variable-rate financing costs to fixed-rate
obligations to better match funding costs to the receivables being
securitized. During the second quarter of fiscal 2003, CarMax entered into
three 40-month amortizing interest rate swaps with an initial notional
amount totaling approximately $226.0 million. The current amortized
notional amount of all outstanding swaps related to the automobile loan
receivable securitizations was approximately $388.4 million at August 31,
2002, and $413.3 million at February 28, 2002. At August 31, 2002, the fair
value of swaps totaled a net liability of $4.6 million and were included in
accounts payable. At February 28, 2002, the fair value of swaps totaled a
net liability of $841,000 and were included in accounts payable.
The market and credit risks associated with interest rate swaps are similar
to those relating to other types of financial instruments. Market risk is
the exposure created by potential fluctuations in interest rates. The
company does not anticipate significant market risk from swaps as they are
used on a monthly basis to match funding costs to the use of the funding.
Credit risk is the exposure to nonperformance of another party to an
agreement. CarMax mitigates credit risk by dealing with highly rated bank
counterparties.
8. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets," effective for fiscal years beginning after December 15,
2001. Under the provisions of SFAS No. 142, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but instead are
subject to annual impairment tests in accordance with the pronouncement.
Other intangible assets that are identified to have finite useful lives
continue to be amortized in a manner that reflects the estimated decline in
the economic value of the intangible asset and are subject to review when
events or circumstances which indicate impairment arise. CarMax has
performed the first of the required impairment tests of goodwill and
indefinite-lived intangible assets, as outlined in the pronouncement. Based
on the results of tests performed, as well as ongoing periodic assessments
of goodwill, CarMax did not recognize any impairment losses. Application of
the nonamortization provisions of SFAS No. 142 in the first half of fiscal
2003 did not have a material impact on the financial position, results of
operations or cash flows of CarMax.
In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees.
This standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period incurred. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. CarMax has not
yet determined the impact, if any, of adopting this standard.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." It applies to costs associated with an exit activity that
does not involve an entity newly acquired in a business combination and
costs associated with a disposal activity covered by SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
146 requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value when
the liability is incurred, rather than at the date of commitment to an exit
or disposal plan. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. CarMax has not yet determined the
impact, if any, of adopting this standard.
Page 10 of 26
9. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
presentation. For the three- and six-month periods ended August 31, 2001,
wholesale sales have been reclassified and reported in net sales and
operating revenues. In previous periods, wholesale sales were recorded as a
reduction to cost of sales. The reclassification of wholesale sales to
sales increased sales and cost of sales by $90.0 million for the quarter
ended August 31, 2001, and by $174.6 million for the six months ended
August 31, 2001. An additional reclassification between sales and cost of
sales made to conform to the current presentation decreased sales and cost
of sales by $2.5 million for the quarter ended August 31, 2001, and by $4.8
million for the six months ended August 31, 2001. These reclassifications
had no impact on CarMax's net earnings.
10. Subsequent Event
CarMax was formerly a wholly owned subsidiary of Circuit City Stores, Inc.
On September 10, 2002, the Circuit City Stores, Inc. shareholders approved
the separation of the CarMax Group from Circuit City Stores, Inc. and the
Circuit City Stores, Inc. board of directors authorized the redemption of
the Circuit City Stores, Inc. CarMax Group Common Stock and the
distribution of CarMax, Inc. common stock to effect the separation. The
separation was effective October 1, 2002. Each outstanding share of CarMax
Group Common Stock was redeemed in exchange for one share of new CarMax,
Inc. common stock. In addition, each holder of Circuit City Group Common
Stock received as a tax-free distribution 0.313879 of a share of CarMax,
Inc. common stock for each share of Circuit City Group Common Stock owned
as of September 16, 2002, the record date for the distribution. Following
the separation, the Circuit City Group Common Stock was renamed Circuit
City common stock, representing an ownership interest only in the Circuit
City business, and CarMax, Inc. became an independent, separately traded
public company.
Page 11 of 26
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this discussion, "we" and "our" refer to CarMax and our wholly owned
subsidiaries, unless the context requires otherwise All references to "quarter"
and "year" refer to our fiscal year periods rather than calendar year periods
unless stated otherwise.
CarMax was formerly a wholly owned subsidiary of Circuit City Stores, Inc. On
September 10, 2002, the Circuit City Stores, Inc. shareholders approved the
separation of the CarMax Group from Circuit City Stores, Inc. and the Circuit
City Stores, Inc. board of directors authorized the redemption of the Circuit
City Stores, Inc. CarMax Group Common Stock and the distribution of CarMax, Inc.
common stock to effect the separation. The separation was effective October 1,
2002. Each outstanding share of CarMax Group Common Stock was redeemed in
exchange for one share of new CarMax, Inc. common stock. In addition, each
holder of Circuit City Group Common Stock received as a tax-free distribution
0.313879 of a share of CarMax, Inc. common stock for each share of Circuit City
Group Common Stock owned as of September 16, 2002, the record date for the
distribution. Following the separation, the Circuit City Group Common Stock was
renamed Circuit City common stock, representing an ownership interest only in
the Circuit City business, and CarMax, Inc. became an independent, separately
traded public company.
CRITICAL ACCOUNTING POLICIES
See the discussion of critical accounting policies included in the Form S-4
dated August 5, 2002. These policies relate to the calculation of the value of
retained interests in securitization transactions.
RESULTS OF OPERATIONS
Effective in the first quarter of fiscal 2003, CarMax classifies revenue from
the sale of wholesale vehicles in net sales and operating revenues. Previously,
CarMax wholesale vehicle sales were recorded as reductions to cost of sales. The
reclassification of wholesale sales to sales increased sales and cost of sales
by $90.0 million for the quarter ended August 31, 2001, and $174.6 million for
the six months ended August 31, 2001. An additional reclassification between
sales and cost of sales made to conform to the current presentation decreased
sales and cost of sales by $2.5 million for the quarter ended August 31, 2001,
and $4.8 for the six months ended August 31, 2001. These reclassifications had
no impact on CarMax's net earnings.
CarMax's operations, in common with other retailers in general, are subject to
seasonal influences. Historically, the CarMax business has experienced more of
its net sales in the first half of the fiscal year. The net earnings of any
quarter are seasonally disproportionate to net sales since administrative and
certain operating expenses remain relatively constant during the year.
Therefore, quarterly results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
Net Sales and Operating Revenues
Total sales for the second quarter of fiscal 2003 increased 15 percent to $1.08
billion from $938.9 million in last year's second quarter. For the six months
ended August 31, 2002, total sales increased 14 percent to $2.08 billion from
$1.82 billion in last year's first half.
Page 12 of 26
Retail Vehicle Sales. Retail vehicle sales increased 15 percent to $936.7
million in the second quarter of fiscal 2003 from $813.1 million in the second
quarter of fiscal 2002. In the second quarter of fiscal 2003, used vehicle sales
increased 18 percent to $784.8 million from $662.4 million for the same period
last year, and new vehicle sales increased 1 percent to $151.9 million from
$150.7 million for the same period last year. For the six months ended August
31, 2002, retail vehicle sales increased 15 percent to $1.81 billion from $1.57
billion in the prior year. For the six months ended August 31, 2002, used
vehicle sales increased 19 percent to $1.52 billion from $1.28 billion last
year, and new vehicle sales decreased 4 percent to $284.2 million from $296.4
million in the same period last year.
A CarMax store is included in comparable store retail sales after the store has
been open for a full year. Comparable store retail vehicle dollar and unit sales
for the second quarter and the first six months of fiscal years 2003 and 2002
were as follows:
================================ ============================== =============================
Comparable Store Three Months Ended Six Months Ended
Retail Vehicle August 31, August 31,
------------------------------ -----------------------------
Sales Change 2002 2001 2002 2001
-------------------------------- -------------- --------------- -------------- --------------
Vehicle units:
-------------------------------- -------------- --------------- -------------- --------------
Used vehicles 12% 22% 12% 21%
-------------------------------- -------------- --------------- -------------- --------------
New vehicles 5% 12% 1% 15%
-------------------------------- -------------- --------------- -------------- --------------
Total 11% 21% 10% 20%
-------------------------------- -------------- --------------- -------------- --------------
Vehicle dollars:
-------------------------------- -------------- --------------- -------------- --------------
Used vehicles 12% 30% 13% 29%
-------------------------------- -------------- --------------- -------------- --------------
New vehicles 8% 14% 2% 18%
-------------------------------- -------------- --------------- -------------- --------------
Total 11% 27% 11% 27%
================================ ============== =============== ============== ==============
For the second quarter of fiscal 2003, the overall increase in retail sales is
attributed to the 12 percent growth in comparable store used-unit sales, the
three CarMax stores opened since February 2002 and the slight increase in the
average retail selling price for used vehicles. For the three-month period ended
August 31, 2002, the comparable store new-unit sales were in line with the
new-car industry's performance as the industry benefited from the
re-introduction of zero-percent financing incentives in July. This
second-quarter performance more than offset the weakness in new car sales
experienced in the first quarter, which also was in line with the industry,
delivering comparable store new-unit growth of 1 percent for the six-month
period ended August 31, 2002.
================================== ================================ ================================
Average Retail Three Months Ended Six Months Ended
Selling Prices August 31, August 31,
-------------------------------- --------------------------------
2002 2001 2002 2001
---------------------------------- --------------- ---------------- --------------- ----------------
Used vehicles $15,400 $15,300 $15,400 $15,200
---------------------------------- --------------- ---------------- --------------- ----------------
New vehicles $23,400 $22,800 $23,200 $23,000
---------------------------------- --------------- ---------------- --------------- ----------------
Blended average $16,300 $16,300 $16,300 $16,200
================================== =============== ================ =============== ================
Page 13 of 26
================================== ================================ ===============================
Retail Vehicle Three Months Ended Six Months Ended
Sales Mix August 31, August 31,
-------------------------------- -------------------------------
2002 2001 2002 2001
---------------------------------- --------------- ---------------- --------------- ---------------
Vehicle units:
---------------------------------- --------------- ---------------- --------------- ---------------
Used vehicles 89% 87% 89% 87%
---------------------------------- --------------- ---------------- --------------- ---------------
New vehicles 11 13 11 13
---------------------------------- --------------- ---------------- --------------- ---------------
Total 100% 100% 100% 100%
---------------------------------- --------------- ---------------- --------------- ---------------
---------------------------------- --------------- ---------------- --------------- ---------------
Vehicle dollars:
---------------------------------- --------------- ---------------- --------------- ---------------
Used vehicles 84% 81% 84% 81%
---------------------------------- --------------- ---------------- --------------- ---------------
New vehicles 16 19 16 19
---------------------------------- --------------- ---------------- --------------- ---------------
Total 100% 100% 100% 100%
================================== =============== ================ =============== ===============
Wholesale Vehicle Sales. CarMax's operating strategy is to build customer
confidence and satisfaction by offering only high-quality vehicles; therefore,
fewer than half of the vehicles acquired through the appraisal process meet the
CarMax retail standard. Those vehicles that do not meet CarMax's standards are
sold at its own on-site wholesale auctions. Wholesale vehicle sales totaled
$97.7 million in the second quarter of fiscal 2003, compared with $90.0 million
in the same period last year. For the six months ended August 31, 2002,
wholesale vehicle sales totaled $190.1 million, compared with $174.6 million in
the same period last year. These increases were consistent with increased
traffic at CarMax stores, the impact of which was partially offset by lower
average wholesale sale prices.
Other Sales and Revenues. Other sales and revenues include extended warranty
revenues, service department sales and processing fees collected from consumers
for the purchase of their vehicles at a CarMax retail location and totaled $41.7
million in the second quarter of fiscal 2003, compared with $35.8 million in the
same period last year. For the six months ended August 31, 2002, other sales and
revenues totaled $80.7 million, compared with $69.3 million in the same period
last year.
CarMax sells extended warranties on behalf of unrelated third parties who are
the primary obligors. Under these third-party warranty programs, CarMax has no
contractual liability to the customer. Extended warranty revenue was $18.1
million in the second quarter of fiscal 2003 and $14.4 million in the second
quarter of fiscal 2002. For the six months ended August 31, 2002, extended
warranty revenue was $34.8 million, compared with $27.9 in the same period last
year. These increases in warranty revenue reflect improved penetration, a result
in part of continuing enhancement of CarMax's extended warranty offer, and
strong sales growth for used cars, which achieve a higher extended warranty
penetration rate than new cars.
Service sales were $15.9 million in the second quarter of fiscal 2003, compared
with $14.7 million in the same period last year. For the six months ended August
31, 2002, service sales were $31.4 million compared with $28.6 million in the
same period last year. These increases in service sales reflect the overall
increase in CarMax's customer base.
Processing fees were $7.7 million in the second quarter of fiscal 2003, compared
with $6.7 million in the same period last year. For the six months ended August
31, 2002, processing fees were $14.5 million, compared with $12.8 million in the
same period last year. Consumers are assessed a processing fee when selling a
vehicle to a CarMax retail location after the appraisal process. These increases
in processing fee revenue resulted from increased traffic and increased consumer
response to CarMax's vehicle purchase program.
Retail Stores. In September 2002, CarMax opened a satellite superstore in
Charlotte, N.C. During the second half of the year, CarMax also plans to enter
the Knoxville, Tenn., market and add satellite superstores in the Chicago, Ill.,
and Atlanta, Ga., markets. CarMax also has announced that it plans to enter the
Las Vegas, Nev., market in early March 2003, shortly after the end of fiscal
2003.
Page 14 of 26
The following table provides detail on the CarMax retail stores:
===================================== ==================== =================== ================== ====================
Estimate
Store Mix Aug. 31, 2002 Aug. 31, 2001 Feb. 28, 2003 Feb. 28, 2002
------------------------------------- -------------------- ------------------- ------------------ --------------------
Mega superstores 13 13 13 13
------------------------------------- -------------------- ------------------- ------------------ --------------------
Standard superstores 18 16 19 17
------------------------------------- -------------------- ------------------- ------------------ --------------------
Prototype satellite stores 5 4 8 5
------------------------------------- -------------------- ------------------- ------------------ --------------------
Co-located new-car stores 2 2 2 2
------------------------------------- -------------------- ------------------- ------------------ --------------------
Stand-alone new-car stores 2 5 2 3
------------------------------------- -------------------- ------------------- ------------------ --------------------
Total 40 40 44 40
===================================== ==================== =================== ================== ====================
Cost of Sales
The total gross profit margin was 11.5 percent of sales in the second quarter of
fiscal 2003 and 11.6 percent for the second quarter of fiscal 2002. For the six
months ended August 31, 2002 and 2001, the total gross profit margin was 11.7
percent of sales.
Retail Vehicle Gross Profit Margin. The retail vehicle gross profit margin was
9.8 percent of sales in the second quarter of fiscal 2003 versus 9.9 percent for
the same period last year. For the six months ended August 31, 2002, the retail
gross profit margin was 9.8 percent compared with 10.0 percent for the same
period last year. In the second quarter, CarMax experienced a slight shortfall
in its used average gross-margin-dollars-per-unit target partly as a result of
taking selective markdowns in response to the July resumption of broad-based,
zero-percent financing incentives on new cars. The slight shortfall was
partially offset by the higher mix of used- to new-unit sales. Used vehicles
carry a higher margin than new vehicles. The result was a retail vehicle gross
profit margin that slightly declined in relation to the first six months of last
fiscal year.
Wholesale Vehicle Gross Profit Margin. The wholesale vehicle gross profit margin
was 4.4 percent of sales in the second quarter of fiscal 2003, compared with 4.6
percent for the same period last year. The slight decline in the wholesale gross
profit margin during the second quarter of fiscal 2003, compared with the second
quarter of fiscal 2002 is due to pricing adjustments in the wholesale
marketplace. For the six months ended August 31, 2002, the wholesale vehicle
gross profit margin was 5.5 percent, compared with 5.1 percent for the same
period last year. Both the average wholesale cost and average wholesale sales
price declined compared with the first six months of fiscal 2002; however, the
decrease in the average wholesale sales price was less than the decrease in the
average wholesale cost.
Other Gross Profit Margin. The gross profit margin for other sales and revenues
was 68.0 percent of sales in the second quarter of fiscal 2003, compared with
66.6 percent for the same period last year. For the six months ended August 31,
2002 and 2001, the gross profit margin for other sales and revenues was 67.3
percent.
Selling, General and Administrative Expenses
The selling, general and administrative expense ratio was 6.6 percent of sales
in the second quarter of both fiscal 2003 and 2002. For the six months ended
August 31, 2002, the ratio was 6.7 percent of sales, compared with 6.6 percent
in the same period last year. The expense ratio in this year's first six months
includes a higher level of expenses associated with geographic expansion,
compared with last year's first six months, and $3.1 million of one-time
separation costs, offset by continued above-expectation income from the finance
operation. Interest income is recorded as a reduction to selling, general and
administrative expenses.
Page 15 of 26
Finance Income. For the second quarter and first six months of fiscal 2003 and
2002, pretax finance income, which is recorded as a reduction to selling,
general and administrative expenses, was as follows:
Three Months Ended Six Months Ended
August 31, August 31,
(Amounts in millions) 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------
Finance operation:
Securitization income.................. $25.8 $21.4 $49.1 $39.8
Payroll and fringe benefit expenses.... 1.7 1.3 3.4 2.6
Other direct expenses.................. 2.0 1.5 3.7 2.9
--------------------------------------------------------
Finance operation income................. 22.1 18.6 42.0 34.3
Third-party financing fees............... 4.6 4.2 8.8 8.0
--------------------------------------------------------
Total finance income..................... $ 26.7 $22.8 $50.8 $42.3
========================================================
Receivables generated by the CarMax finance operation are sold through
securitization transactions. CarMax continues to service these receivables in
exchange for a contractually specified servicing fee. For the quarter ended
August 31, 2002, serviced receivables averaged $1.65 billion compared with $1.37
billion for the quarter ended August 31, 2001. For the six months ended August
31, 2002, serviced receivables averaged $1.60 billion, compared with $1.32
billion for the same period last year. The principal amount of defaults net of
recoveries on managed receivables totaled $4.1 million for the quarter ended
August 31, 2002, and $2.6 million for the quarter ended August 31, 2001. The
principal amount of defaults net of recoveries totaled $7.3 million for the six
months ended August 31, 2002, and $4.5 million for the six months ended August
31, 2001. Despite the weak economic environment, the managed receivables
continue to perform in-line with our initial gain assumptions.
Securitization income includes the gain on sale of receivables and other income
related to servicing these receivables. CarMax recorded gains on the sales of
receivables totaling $18.1 million for the quarter ended August 31, 2002,
compared with gains of $14.7 million for the period ended August 31, 2001. For
the six months ended August 31, 2002, gains on the sales of receivables totaled
$33.7 million, compared with $27.8 million for the same period last year. The
increased gains on sale of receivables resulted from an increase in loan
origination volume driven by increased sales. In addition, the cost of funds for
the CarMax finance operation declined in the second quarter of this fiscal year
compared with the first quarter of this year and the same period last year. This
decline was partially offset by the decline in the interest rates for auto loans
to consumers. In recording these gains, management estimates key assumptions
such as finance charge income, default rates, payment rates and discount rates
appropriate for the type of asset and risk. If these assumptions were to change,
or the actual results were to differ from the projected results, securitization
income would be affected.
Finance operation income does not include any allocation of indirect costs or
income. Examples of indirect costs not included are retail store expenses and
corporate expenses such as human resources, administrative services, marketing,
information systems, accounting, legal, treasury and executive payroll. Payroll,
fringe benefit expenses and other direct expenses increased proportionately to
the average managed receivable balance. Other direct expenses include collection
expenses, rent and facility expenses and loan processing costs.
Fees received from arranging customer automobile financing through third parties
were $0.4 million higher in the second quarter of fiscal 2003 than the same
period last year. For the six months ended August 31, 2002, fees were $0.8
million higher than the same period last year. The increase in customer fees was
a result of the total increase in retail vehicle sales.
Interest Expense
Interest expense declined to $1.0 million for the second quarter of fiscal 2003
from $2.1 million in the same period last year. For the six months ended August
31, 2002, interest expense was $2.0 million, compared with
Page 16 of 26
$4.6 million in the same period last year. The decline in interest expense is a
result of lower average debt levels.
Income Taxes
The effective income tax rate increased to 39.5 percent for the second quarter
of fiscal 2003 from 38.0 percent for the second quarter of fiscal 2002. For the
six months ended August 31, 2002, the effective income tax rate was 39.5
percent, compared with 38.0 percent for the same period last year. The increase
in the fiscal 2003 effective tax rate reflects CarMax's non-tax deductible
separation costs of $1.3 million in the second quarter and $3.1 million in the
first half of the year.
Net Earnings
Second quarter fiscal 2003 net earnings increased 16 percent to $31.7 million
from $27.4 million in the second quarter of fiscal 2002. Second quarter fiscal
2003 earnings include $1.3 million of one-time, non-tax-deductible costs
associated with the separation of CarMax from Circuit City Stores. Excluding the
one-time separation costs, net earnings were 20 percent higher in the second
quarter of fiscal 2003 than the same period last year. For the six months ended
August 31, 2002, net earnings increased 13 percent to $61.0 million from $54.0
million. Earnings for the six months ended August 31, 2002, include $3.1 million
of one-time, non-tax-deductible costs associated with the separation. Excluding
the one-time separation costs, net earnings increased 19 percent to $64.1
million in the first six months of fiscal 2003 compared with $54.0 million in
the same period last year.
Operations Outlook
For more than two years, CarMax has demonstrated that its consumer offer and
business model can produce strong sales and earnings growth. At the beginning of
fiscal 2002, CarMax announced that it would resume geographic growth, opening
two superstores in fiscal 2002, four to six superstores in fiscal 2003 and six
to eight stores in each of fiscal years 2004, 2005 and 2006. This expansion is
proceeding as planned with three more used-car superstores scheduled to open
during the second half of the fiscal year, bringing the total number of stores
opened in fiscal 2003 to five.
Comparable store used-unit sales growth is a primary driver of CarMax's
profitability. Given CarMax's performance in the first half of the fiscal year,
it now expects second half used-unit comparable store growth in the mid- to
high-single digit range.
CarMax anticipates pro forma net earnings of 95 cents to $1.00 per CarMax share,
excluding approximately 8 cents per share of one-time, non-tax-deductible costs
associated with the separation. Fiscal 2003 is a year of transition for CarMax
as it ramps up its growth pace and assumes additional expenses related to the
separation from Circuit City. The expense leverage that CarMax would expect from
the used-unit comparable store growth during this fiscal year will be partially
offset by increased expenses in the second half of fiscal 2003 resulting from
diseconomies of scale and incremental expenses due to the separation from
Circuit City and growth related costs. Increases in benefit plans, insurance and
management are examples of cost increases resulting from the separation. Growth
related costs include the development of a management bench for store expansion
for the next two fiscal years store openings and pre-opening expenses for stores
opening over the second half of the fiscal year and the first quarter of next
year. In addition, other growth related costs such as training, recruiting and
employee relocation for new stores also moderate the expense leverage that
CarMax would expect from used unit comparable store growth this year.
For fiscal 2003, CarMax initially had anticipated that interest rates would rise
above the low levels experienced in fiscal 2002 resulting in reduced yield
spreads from the CarMax finance operation throughout fiscal 2003. If the current
favorable interest rate environment continues, CarMax may not experience the
reduction in yield spreads originally anticipated.
Page 17 of 26
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
effective for fiscal years beginning after December 15, 2001. Under the
provisions of SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but instead are subject to annual
impairment tests in accordance with the pronouncement. Other intangible assets
that are identified to have finite useful lives continue to be amortized in a
manner that reflects the estimated decline in the economic value of the
intangible asset and are subject to review when events or circumstances which
indicate impairment arise. CarMax has performed the first of the required
impairment tests of goodwill and indefinite-lived intangible assets, as outlined
in the pronouncement. Based on the results of tests performed, as well as
ongoing periodic assessments of goodwill, CarMax did not recognize any
impairment losses. Application of the nonamortization provisions of SFAS No. 142
in the first half of fiscal 2003 did not have a material impact on the financial
position, results of operations or cash flows of CarMax.
In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. This standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period incurred. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. CarMax has not yet determined the impact, if any, of adopting this
standard.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." It applies to costs associated with an exit activity that
does not involve an entity newly acquired in a business combination and costs
associated with a disposal activity covered by SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred, rather than
at the date of commitment to an exit or disposal plan. SFAS No. 146 is effective
for exit or disposal activities initiated after December 31, 2002. CarMax has
not yet determined the impact, if any, of adopting this standard.
Financial Condition
Liquidity and Capital Resources
Operating Activities. For the first six months of fiscal 2003, CarMax generated
cash from operating activities of $93.1 million. In the same period last year,
CarMax generated cash from operating activities of $29.9 million. The
improvement was primarily the result of CarMax's ability to better manage its
inventory levels to meet sales demands.
Investing Activities. Net cash used in investing activities was $40.1 million in
the six months ended August 31, 2002. In the first six months of last fiscal
year, CarMax generated $87.6 million from investing activities.
CarMax capital expenditures increased to $40.1 million in the first six months
of fiscal 2003, compared with $8.7 million in the first six months of fiscal
2002. The increase in CarMax capital expenditures resulted from the resumption
of geographic growth, with three superstores opening since August 2001, and the
planned openings of four superstores in the second half of fiscal 2003.
Proceeds from the sale of property and equipment declined to $6,000 in the first
half of fiscal 2003, compared with $96.3 million in the first half of last year.
Proceeds from sales of property and equipment in the first half of last year
included amounts received from a sale-leaseback transaction covering nine CarMax
superstore properties.
Page 18 of 26
Financing Activities. Net cash provided by financing activities was $18.3
million in the first six months of fiscal 2003, compared with net cash used of
$101.8 million in the first six months of last fiscal year. In the first quarter
of fiscal 2003, CarMax entered into a $200 million credit agreement with
DaimlerChrysler Services North America, LLC and Toyota Financial Services. This
agreement, which is secured by vehicle inventory, includes a $100 million
revolving loan commitment and a $100 million term loan. The terms for both
commitments are LIBOR-based and have initial two-year terms. As of August 31,
2002, the amounts outstanding under this credit agreement were $5.2 million for
the revolver and $100 million for the term loan.
The CarMax credit agreement contains covenants that, in the event of default,
could trigger the acceleration of principal and interest payments and, in some
events, the termination of the credit agreement, unless a waiver of such
requirements is agreed to by the lenders. These covenants are similar to those
found in comparable loan agreements and include: minimum current ratio, maximum
total liabilities to tangible net worth ratio and minimum fixed charge coverage
ratio; and covenants restricting additional debt or liens; payment of dividends;
mergers or consolidations with, or the acquisition of all or substantially all
of the assets of, another person; and making loans or other investments in
excess of certain minimums. The events of default under the credit agreement
include customary provisions such as failure to pay principal or interest when
due and cross-default to other loan agreements, as well as a cross-default with
other material agreements of CarMax where the default under such other agreement
would have a material adverse effect on CarMax and a change in control of
CarMax.
An $8.5 million secured promissory due in August 2002 was repaid using existing
working capital. At August 31, 2002, Circuit City Stores, Inc. allocated cash
and cash equivalents of $74.7 million and debt of $106.0 million to CarMax.
At August 31, 2002, the aggregate principal amount of securitized automobile
loan receivables totaled $1.72 billion. During the second quarter of fiscal
2003, CarMax completed an asset securitization transaction totaling $512.6
million of automobile loan receivables. At August 31, 2002, the unused capacity
of the automobile loan variable funding program was $361.0 million. At August
31, 2002, there were no provisions providing recourse to the company for credit
losses on the securitized automobile loan receivables. CarMax anticipates that
it will be able to expand or enter into new securitization arrangements to meet
the future needs of the automobile loan finance operation.
In September 2002, CarMax used a portion of the proceeds from the term loan for
the repayment of debt allocated by Circuit City Stores, the payment of a
one-time special dividend to Circuit City Stores of $28.4 million, the payment
of transaction expenses incurred in connection with the separation and general
corporate purposes. Additionally, in September 2002, CarMax entered into a
sale-leaseback transaction involving three properties valued at approximately
$37.6 million. The transaction was entered into at competitive rates and
structured with an initial lease term of 15 years with two 10-year renewal
options.
CarMax expects that proceeds from the credit agreement secured by vehicle
inventory, additional credit facilities if needed, sale-leaseback transactions
and cash generated by operations will be sufficient to fund capital expenditures
and working capital of the CarMax business for the foreseeable future.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains "forward-looking statements," which are
subject to risks and uncertainties, including, but not limited to, risks
associated with the separation of the CarMax business from Circuit City Stores,
Inc. Additional discussion of factors that could cause actual results to differ
materially from management's projections, forecasts, estimates and expectations
is contained in the company's SEC filings, including the Circuit City Stores,
Inc. Annual Report on Form 10-K/A for the year ended February 28, 2002, and the
Circuit City Stores, Inc. proxy statement included in the Form S-4 (File No.
333-85240) related to the separation.
Page 19 of 26
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Receivables Risk
CarMax manages the market risk associated with the automobile installment loan
portfolio of its finance operation. A portion of this portfolio has been
securitized in transactions accounted for as sales in accordance with SFAS No.
140 and, therefore, is not presented on the consolidated balance sheets.
Automobile Installment Loan Receivables. At August 31, 2002, and February 28,
2002, all loans in the portfolio of automobile loan receivables were fixed-rate
installment loans. Financing for these automobile loan receivables is achieved
through asset securitization programs that, in turn, issue both fixed- and
floating-rate securities. Interest rate exposure relating to floating rate
securitizations is managed through the use of interest rate swaps. Receivables
held for investment or sale are financed with working capital.
The total principal amount of receivables securitized or held for investment or
sale as of August 31, 2002, and February 28, 2002, was as follows:
(Amounts in millions) August 31 February 28
-------------------------------------------------------------------------
Fixed-rate securitizations........... $1,333 $1,122
Floating-rate securitizations
synthetically altered to fixed.... 388 413
Floating-rate securitizations........ 1 1
Held for investment (1).............. 11 12
Held for sale (1).................... 14 2
-------------------------------
Total................................ $1,747 $1,550
===============================
(1) Held by a bankruptcy-remote special purpose subsidiary.
Interest Rate Exposure. Interest rate exposure relating to the securitized
automobile loan receivables represents a market risk exposure that we manage
with matched funding and interest rate swaps matched to projected payoffs.
CarMax does not anticipate market risk from swaps because they are used on a
monthly basis to match funding costs to the use of the funding. Market risk is
the exposure created by potential fluctuations in interest rates. Generally,
changes only in interest rates do not have a material impact on CarMax's results
of operations.
Credit risk is the exposure to nonperformance of another party to an agreement.
Credit risk is mitigated by dealing with highly rated bank counterparties. The
market and credit risks associated with financial derivatives are similar to
those relating to other types of financial instruments. Refer to Note 6 to the
CarMax, Inc. consolidated financial statements for a description of these items.
ITEM 4.
CONTROLS AND PROCEDURES
CarMax's principal executive officer and principal financial officer have
evaluated the effectiveness of CarMax's "disclosure controls and procedures," as
such term is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934,
as amended, within 90 days of the filing date of this Quarterly Report on Form
10-Q. Based upon their evaluation, the principal executive officer and principal
financial officer concluded that CarMax's disclosure controls and procedures are
effective. There were no significant changes in CarMax's internal controls or in
other factors that could significantly affect these controls, since the date the
controls were evaluated.
Page 20 of 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
CarMax is subject to various legal proceedings, claims and liabilities
that arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to these
actions will not materially affect the financial position or results
of operations of CarMax.
Item 4. Submission of Matters to a Vote of Security Holders
On September 27, 2002, by written consent in lieu of a meeting,
Circuit City Stores, Inc., the sole shareholder of all of the common
stock of the Company, designated three classes of directors and
elected the following persons to serve in each class:
Class 1 Directors to serve for terms that shall expire at the annual
meeting of shareholders to be held in 2003: Jeffrey E. Garten and
William R. Tiefel;
Class 2 Directors to serve for terms that shall expire at the annual
meeting of shareholders to be held in 2004: Keith D. Browning, Hugh G.
Robinson and Richard L. Sharp; and
Class 3 Directors to serve for terms that shall expire at the annual
meeting of shareholders to be held in 2005: W. Austin Ligon and John
W. Snow.
The above elections took effect on October 1, 2002.
Item 5. Other Information
At a meeting of the Board of Directors of the Company held on October
1, 2002, Beth A. Stewart was elected to serve as a Class 1 Director of
the Company for a term that shall expire at the annual meeting of
shareholders to be held in 2003.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) (i) Articles of Incorporation
(a) CarMax, Inc. Amended and Restated Articles of
Incorporation, effective June 6, 2002, filed as
Exhibit 3.1 to CarMax's Current Report on Form 8-K,
filed on October 3, 2002 (File No. 1-31420),
expressly incorporated herein by this reference.
(b) CarMax, Inc. Articles of Amendment, to the Amended
and Restated Articles of Incorporation, effective
June 6, 2002, filed as Exhibit 3.2 to CarMax's
Current Report on Form 8-K, filed on October 3, 2002
(File No. 1-31420), expressly incorporated herein by
this reference.
Page 21 of 26
(3) (ii) Bylaws
(a) CarMax, Inc. Bylaws, as amended and restated October
1, 2002, filed as Exhibit 3.3 to CarMax's Current
Report on Form 8-K, filed on October 3, 2002 (File
No. 1-31420), expressly incorporated herein by this
reference.
(99) (i) Certification of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(99) (ii) Certification of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
CarMax filed a Form 8-K on October 3, 2002, announcing its
separation from Circuit City Stores, Inc. effective 9:00 am on
October 1, 2002. Included in this filing were the Amendments to
the Articles of Incorporation and Bylaws.
Page 22 of 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CARMAX, INC.
By: /s/ W. Austin Ligon
--------------------------------------
W. Austin Ligon
President and
Chief Executive Officer
By: /s/ Keith D. Browning
--------------------------------------
Keith D. Browning
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
October 15, 2002
Page 23 of 26
I, W. Austin Ligon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CarMax, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ W. Austin Ligon
-----------------------
W. Austin Ligon
President and
Chief Executive Officer
Page 24 of 26
I, Keith D. Browning, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CarMax, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 15, 2002
/s/ Keith D. Browning
-----------------------
Keith D. Browning
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
Page 25 of 26
EXHIBIT INDEX
(3) (i) Articles of Incorporation
(a) CarMax, Inc. Amended and Restated Articles
of Incorporation, effective June 6, 2002,
filed as Exhibit 3.1 to CarMax's Current
Report on Form 8-K, filed on October 3,
2002 (File No. 1-31420), expressly
incorporated herein by this reference.
(b) CarMax, Inc. Articles of Amendment, to the
Amended and Restated Articles of
Incorporation, effective June 6, 2002,
filed as Exhibit 3.2 to CarMax's Current
Report on Form 8-K, filed on October 3,
2002 (File No. 1-31420), expressly
incorporated herein by this reference.
(3) (ii) Bylaws
(a) CarMax, Inc. Bylaws, as amended and
restated October 1, 2002, filed as Exhibit
3.3 to CarMax's Current Report on Form
8-K, filed on October 3, 2002 (File No.
1-31420), expressly incorporated herein by
this reference.
(99) (i) Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(99) (ii) Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Page 26 of 26