CarMax 2002 Annual Report Download - page 96

CIRCUIT CITY STORES, INC. ANNUAL REPORT 2002 94
contributions allocated to the CarMax Group were $1,304,000
in fiscal 2002, $1,630,000 in fiscal 2001 and $625,000 in fis-
cal 2000.
The following tables set forth the CarMax Group’s share of
the pension plan’s financial status and amounts recognized in
the balance sheets as of February 28:
(Amounts in thousands) 2002 2001
Change in benefit obligation:
Benefit obligation at beginning of year .................. $ 7,837 $ 4,443
Service cost ............................................................ 2,549 1,525
Interest cost............................................................ 588 355
Actuarial loss.......................................................... 4,002 1,514
Benefits paid .......................................................... (108) –
Benefit obligation at end of year ............................ $14,868 $ 7,837
Change in plan assets:
Fair value of plan assets at beginning of year.......... $ 4,074 $ 2,715
Actual return on plan assets ................................... (262) (271)
Employer contributions......................................... 1,304 1,630
Benefits paid .......................................................... (108) –
Fair value of plan assets at end of year.................... $ 5,008 $ 4,074
Reconciliation of funded status:
Funded status......................................................... $ (9,860) $(3,763)
Unrecognized actuarial loss.................................... 7,524 3,039
Unrecognized transitional asset.............................. – (3)
Unrecognized prior service benefit......................... (2) (4)
Net amount recognized.......................................... $ (2,338) $ (731)
The components of net pension expense were as follows:
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
Service cost ............................................... $2,549 $1,525 $1,250
Interest cost .............................................. 588 355 173
Expected return on plan assets.................. (424) (283) (159)
Amortization of prior service cost............. (2) (2) (2)
Amortization of transitional asset ............. (3) (3) (3)
Recognized actuarial loss .......................... 203 91 77
Net pension expense................................. $2,911 $1,683 $1,336
Assumptions used in the accounting for the pension plan were:
Years Ended February 28 or 29
2002 2001 2000
Weighted average discount rate.................... 7.25% 7.50% 8.00%
Rate of increase in compensation levels........ 7.00% 6.00% 6.00%
Expected rate of return on plan assets .......... 9.00% 9.00% 9.00%
The Company also has an unfunded nonqualified plan that
restores retirement benefits for certain senior executives who are
affected by Internal Revenue Code limitations on benefits pro-
vided under the Company’s pension plan. The projected benefit
obligation under this plan and allocated to the CarMax Group
was $1.6 million at February 28, 2002, and $600,000 at
February 28, 2001.
8. LEASE COMMITMENTS
CarMax conducts a substantial portion of its business in leased
premises. CarMax’s lease obligations are based upon contractual
minimum rates. Rental expense for all operating leases was
$41,362,000 in fiscal 2002, $36,057,000 in fiscal 2001 and
$34,706,000 in fiscal 2000. Most leases provide that CarMax
pay taxes, maintenance, insurance and operating expenses appli-
cable to the premises.
The initial term of most real property leases will expire within
the next 20 years; however, most of the leases have options pro-
viding for renewal periods of 10 to 20 years at terms similar to
the initial terms.
Future minimum fixed lease obligations, excluding taxes,
insurance and other costs payable directly by CarMax, as of
February 28, 2002, were:
Operating
(Amounts in thousands) Lease
Fiscal Commitments
2003 ..................................................................................... $ 43,077
2004 ..................................................................................... 43,364
2005 ..................................................................................... 43,332
2006 ..................................................................................... 42,737
2007 ..................................................................................... 41,991
After 2007 ............................................................................ 508,516
Total minimum lease payments ............................................ $723,017
In August 2001, CarMax entered into a sale-leaseback trans-
action with unrelated parties covering nine superstore proper-
ties. This transaction, which represented the first sale-leaseback
entered into by CarMax without a Circuit City Stores, Inc.
guarantee, was structured at competitive rates with an initial
lease term of 15 years and two 10-year renewal options. In con-
junction with this sale-leaseback transaction, CarMax must
meet financial covenants relating to minimum tangible net
worth and minimum coverage of rent expense. CarMax was in
compliance with all such covenants at February 28, 2002. The
aggregate selling price of sale-leaseback transactions was
$102,388,000 in fiscal 2002 and $12,500,000 in fiscal 2000. In
fiscal 2001, the Company did not enter into any sale-leaseback
transactions. Gains or losses on sale-leaseback transactions are
deferred and amortized over the term of the leases. Neither the
Company nor CarMax has continuing involvement under sale-
leaseback transactions.
9. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
(A) ADVERTISING EXPENSE: Advertising expense, which is
included in selling, general and administrative expenses in
the accompanying statements of earnings, amounted to
$47,255,000 (1.5 percent of net sales and operating revenues)