CarMax 2003 Annual Report Download - page 38

36 CARMAX 2003
In November 1998, CarMax entered into a four-year, $5
million unsecured promissory note.A portion of the principal
amount was due annually with interest payable periodically at
8.25%. The outstanding balance at February 28, 2002, was
$826,000 and was included in current installments of long-
term debt.The note was repaid in January 2003 using existing
working capital.
The weighted average interest rate on the outstanding
short-term debt was 3.2% during fiscal 2003, 4.4% during
fiscal 2002 and 6.8% during fiscal 2001.
The company capitalizes interest in connection with the
construction of certain facilities. Capitalized interest totaled
$956,000 in fiscal 2003 and $530,000 in fiscal 2002. No
interest was capitalized in fiscal 2001.
INCOME TAXES
The components of the provision for income taxes on net
earnings are as follows:
Years Ended February 28
(Amounts in thousands) 2003 2002 2001
Current:
Federal $47,600 $47,389 $16,986
State 5,415 5,103 2,174
53,015 52,492 19,160
Deferred:
Federal 8,614 3,067 8,494
State 266 95 264
8,880 3,162 8,758
Provision for income taxes $61,895 $55,654 $27,918
The effective income tax rate differed from the federal
statutory income tax rate as follows:
Years Ended February 28
2003 2002 2001
Federal statutory
income tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal benefit 3.0 3.0 3.0
Non-deductible
separation costs 1.5 ——
Effective income tax rate 39.5% 38.0% 38.0%
The tax effects of temporary differences that give rise to a
significant portion of the deferred tax assets and liabilities are
as follows:
As of February 28
(Amounts in thousands) 2003 2002
Deferred tax assets:
Accrued expenses $ 7,220 $ 6,719
Other 120 187
Total gross deferred tax assets 7,340 6,906
Deferred tax liabilities:
Depreciation and amortization 5,748 3,615
Securitized receivables 29,138 22,593
Inventory 5,447 4,257
Prepaid expenses 831 1,385
Total gross deferred tax liabilities 41,164 31,850
Net deferred tax liability $33,824 $24,944
Based on the company’s historical and current pretax
earnings, management believes the amount of gross deferred
tax assets will more likely than not be realized through future
taxable income; therefore, no valuation allowance is necessary.
COMMON STOCK AND STOCK-BASED INCENTIVE PLANS
(A) Shareholder Rights Plan
In conjunction with the separation from Circuit City
Stores, a shareholder rights plan was adopted. CarMax, Inc.
shareholders received preferred stock purchase rights as a
dividend at the rate of one right for each share of CarMax,
Inc. common stock owned. The rights are exercisable only
upon the attainment of, or the commencement of a tender
offer to attain, a specified ownership interest in CarMax by
a person or group. When exercisable, each CarMax right
would entitle the holder to buy one one-thousandth of a
share of Cumulative Participating Preferred Stock, Series A,
$20 par value, at an exercise price of $140 per share, subject
to adjustment. A total of 120,000 shares of such preferred
stock, which have preferential dividend and liquidation
rights, have been authorized and designated. No such shares
are outstanding. In the event that an acquiring person or
group acquires the specified ownership percentage of
CarMax, Inc. common stock (except pursuant to a cash
tender offer for all outstanding shares determined to be fair
by the board of directors) or engages in certain transactions
with CarMax after the rights become exercisable, each right
will be converted into a right to purchase, for half the
current market price at that time, shares of the CarMax, Inc.
common stock valued at two times the exercise price. The
company also has an additional 19,880,000 shares of
undesignated preferred stock authorized of which no shares
are outstanding.
6
5