CarMax 2003 Annual Report Download - page 26

24 CARMAX 2003
We also anticipate a reduction in yield spreads from CAF
when interest rates rise above the historical lows experienced
over the last two years. In the event that interest rates remain
low, we would anticipate a more moderate reduction in yield
spreads in order to maintain our competitive consumer offer.As
the spread between the cost of funds and the retail interest rate
paid by consumers ultimately returns to more normal levels,
CAF’s contribution as a percent of sales is expected to decrease.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards
(“SFAS”) No. 143,“Accounting for Asset Retirement Obliga-
tions.” 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 is effective for fiscal years beginning after June 15,
2002. The company does not expect the application of the
provisions of SFAS No. 143 to have an impact on its financial
position, results of operations or cash flows.
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”) Issue No. 94-3,
“Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring).” SFAS No. 146 is
effective for exit or disposal activities initiated after December
31, 2002.The company does not expect the application of the
provisions of SFAS No. 146 to have an impact on its financial
position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148,
“Accounting for Stock-Based Compensation—Transition and
Disclosure.”This statement amends SFAS No. 123,“Accounting
for Stock-Based Compensation,” to provide alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the
method of accounting for stock-based employee compensation
and the effect of the method used on reported results. It is
effective for financial statements for fiscal years ending after
December 15, 2002.The company has revised its disclosures to
meet the requirements under this standard.
In November 2002, the FASB issued FASB Interpretation
(“FIN”) No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others.” FIN No. 45 requires the
recognition of a liability for certain guarantee obligations
issued or modified after December 31, 2002. FIN No. 45
also clarifies disclosure requirements to be made by a
guarantor of certain guarantees. The disclosure provisions of
FIN No. 45 are effective for fiscal years ending after
December 15, 2002. We have adopted the disclosure
provisions of FIN No. 45 as of February 28, 2003. The
company does not expect the adoption of FIN No. 45 to
have a material impact on its financial position, results of
operations or cash flows.
In January 2003, the FASB issued FIN No. 46,
“Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51.” FIN No. 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN No. 46 is effective for all new variable
interest entities created or acquired after January 31, 2003.
For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be
applied for the first interim or annual period beginning after
June 15, 2003. The company is currently analyzing the
existing guidance and reviewing any developments with
regard to the proposed FASB Staff Positions issued on the
implementation of FIN No. 46 which are currently subject
to public comment. Therefore, the company cannot
determine whether there will be an impact on its financial
position, results of operations, or cash flows at this time.
In January 2003, the FASB issued EITF Issue No. 02-16,
“Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor.” This EITF addresses
the accounting by a vendor for consideration (vendor
allowances) given to a customer, including a reseller of the
vendor’s products, and the accounting by a reseller for cash
consideration received from a vendor. It is effective for certain
arrangements entered into after November 21, 2002, and for all
new arrangements, including modifications to existing
arrangements, entered into after December 31, 2002. The
company adopted the provisions of the EITF in the fourth
quarter of fiscal 2003 and, as the company’s policies were
already consistent with those of EITF 02-16, the adoption of
this standard did not have a material impact on the company’s
financial position, results of operations or cash flows.
FINANCIAL CONDITION
Cash Provided by Operating Activities
The company generated net cash from operating activities
of $72.0 million in fiscal 2003, $42.6 million in fiscal 2002
and $18.0 million in fiscal 2001. The fiscal 2003
improvement primarily resulted from an increase in net
earnings and an increase in accounts payable and accrued
expenses associated with the separation from Circuit City
Stores. In previous years, certain liabilities such as the
workers’ compensation liability were recorded through the
debt from our former parent as a financing activity. The
fiscal 2002 improvement primarily resulted from an increase
in net earnings, partly offset by an increase in accounts
receivable. The accounts receivable increase resulted from
increased sales generating increased automobile loans, as
well as increased yield spreads from the finance operation.