CarMax 1999 Annual Report Download - page 78

8. INCOME TAXES
The components of the income tax benefit on loss before income
tax benefit are as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
Current:
Federal................................ $(23,773) $(17,101) $(6,976)
State.................................... (2,546) (2,913) (1,301)
(26,319) (20,014) (8,277)
Deferred:
Federal................................ 10,945 (1,259) 1,689
State.................................... 339 (608) (23)
11,284 (1,867) 1,666
Income tax benefit ................... $(15,035) $(21,881) $(6,611)
The effective income tax rate differed from the Federal statu-
tory income tax rate as follows:
Years Ended February 28
1999 1998 1997
Federal statutory income
tax rate.................................... 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit .............. 4.0%4.0%6.5%
Effective income tax rate.............. 39.0% 39.0% 41.5%
In accordance with SFAS No. 109, the tax effects of tempo-
rary differences that give rise to a significant portion of the
deferred tax assets and liabilities at February 28, 1999 and 1998
are as follows:
(Amounts in thousands) 1998 1997
Deferred tax assets:
Deferred revenue ................................... $ 130 $ 231
Accrued expenses................................... 2,970 6,106
Other ..................................................... 184 –
Total gross deferred tax assets ........... 3,284 6,337
Deferred tax liabilities:
Depreciation.......................................... 4,435 1,488
Inventory capitalization......................... 4,620 2,807
Gain on sales of receivables.................... 4,653 1,950
Other ..................................................... 1,375 607
Total gross deferred tax liabilities...... 15,083 6,852
Net deferred tax liability ............................. $ 11,799 $ 515
In assessing the realizability of deferred tax assets, manage-
ment considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies. Based
on these considerations, management believes that it is more
likely than not that the gross deferred tax assets at February 28,
1999 and 1998, will be realized by the CarMax Group; therefore,
no valuation allowance is necessary.
9. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) PREFERRED STOCK: In conjunction with the Company’s
Shareholders Rights Plan as amended and restated, preferred
stock purchase rights were distributed as a dividend at the rate of
one right for each share of CarMax Stock. The rights are exercis-
able only upon the attainment of, or the commencement of a ten-
der offer to attain, a specified ownership interest in the Company
by a person or group. When exercisable, each CarMax Group
right would entitle shareholders to buy one four-hundredth of a
share of Cumulative Participating Preferred Stock, Series F, $20
par value, at an exercise price of $100 per share subject to adjust-
ment. A total of 500,000 shares of such preferred stock, which
have preferential dividend and liquidation rights, have been desig-
nated and reserved. No such shares are outstanding. In the event
that an acquiring person or group acquires the specified owner-
ship percentage of the Company’s common stock (except pur-
suant to a cash tender offer for all outstanding shares determined
to be fair by the board of directors) or engages in certain transac-
tions with the Company after the rights become exercisable, each
right will be converted into a right to purchase, for half the cur-
rent market price at that time, shares of the related Group stock
valued at two times the exercise price.
The Company also has 1,000,000 shares of undesignated
preferred stock authorized of which no shares are outstanding and
an additional 500,000 shares of preferred stock designated as
Series E which are related to similar rights held by Circuit City
Group shareholders.
(B) VOTING RIGHTS: The holders of both series of common
stock and any series of preferred stock outstanding and entitled to
vote together with the holders of common stock will vote
together as a single voting group on all matters on which common
shareholders generally are entitled to vote other than a matter on
which the common stock or either series thereof or any series of
preferred stock would be entitled to vote as a separate voting
group. On all matters on which both series of common stock
would vote together as a single voting group, (i) each outstanding
share of Circuit City Stock shall have one vote and (ii) each out-
standing share of CarMax Stock shall have a number of votes
based on the weighted average ratio of the market value of a share
of CarMax Stock to a share of Circuit City Stock. If shares of only
one series of common stock are outstanding, each share of that
series shall be entitled to one vote. If either series of common
stock is entitled to vote as a separate voting group with respect to
any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
(C) RESTRICTED STOCK: The Company has issued restricted
stock under the provisions of the 1994 Stock Incentive Plan
whereby management and key employees are granted restricted
shares of CarMax Stock. Shares are awarded in the name of the
employee, who has all the rights of a stockholder, subject to cer-
tain restrictions or forfeitures. Restrictions on the awards gener-
ally expire five years from the date of grant. In fiscal 1999,
restricted stock awards for 100,000 shares were granted to eligible
employees. The market value at the date of grant of these shares
has been recorded as unearned compensation and is a component
of Group equity. Unearned compensation is expensed over the
76 CIRCUIT CITY STORES, INC. 1999 ANNUAL REPORT