CarMax 2003 Annual Report Download - page 41

CARMAX 2003 39
The components of net pension expense were as follows:
Years Ended February 28
(Amounts in thousands) 2003 2002 2001
Service cost $4,021 $2,549 $1,525
Interest cost 1,104 588 355
Expected return on plan assets (617) (424) (283)
Amortization of prior year
service cost 35 (2) (2)
Amortization of transitional asset —(3) (3)
Recognized actuarial loss 194 203 91
Net pension expense $4,737 $2,911 $1,683
Assumptions used in the accounting for the pension
plan were:
Years Ended February 28
2003 2002 2001
Weighted average discount rate 6.50% 7.25% 7.50%
Rate of increase in
compensation levels 6.00% 7.00% 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 CarMax senior
executives who are affected by Internal Revenue Code
limitations on benefits provided under the pension plan.The
projected benefit obligation under this plan was
approximately $2.0 million at February 28, 2003, and $1.6
million at February 28, 2002. The liability recognized under
this plan was $1.2 million at February 28, 2003, and $0.5
million at February 28, 2002, and is included in accrued
expenses and other current liabilities in the consolidated
balance sheets.
LEASE COMMITMENTS
The company conducts a substantial portion of its business
in leased premises. The company’s lease obligations are
based upon contractual minimum rates. Twenty-three of
CarMax’s sales locations are currently operated under leases
originally entered into by Circuit City Stores. Although
each of these leases has been assigned to a subsidiary of
CarMax, Inc., Circuit City Stores remains contingently
liable under the leases. In recognition of the ongoing
contingent liability after the separation, the company made
a one-time special dividend payment to Circuit City Stores
of $28.4 million at separation.
Rental expense for all operating leases was $48.1 million
in fiscal 2003, $41.4 million in fiscal 2002 and $36.1 million
in fiscal 2001. Most leases provide that the company pay
taxes, maintenance, insurance and operating expenses
applicable 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 providing 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 the company, as
of February 28, 2003, were approximately:
Operating Lease
(Amounts in thousands) Commitments
2004 $ 48,200
2005 48,200
2006 47,500
2007 46,000
2008 46,300
After 2008 509,600
Total minimum lease payments $745,800
In fiscal 2003, the company entered into a sale-leaseback
transaction covering three superstore properties valued at
approximately $37.6 million. In fiscal 2002, the company
entered into a sale-leaseback transaction covering nine
superstore properties valued at approximately $102.4 million.
These transactions were structured at competitive rates with
initial lease terms of 15 years and two 10-year renewal
options. Gains or losses on sale-leaseback transactions are
deferred and amortized over the term of the leases. The
company does not have continuing involvement under the
sale-leaseback transactions. In conjunction with these sale-
leaseback transactions, the company must meet financial
covenants relating to minimum tangible net worth and
minimum coverage of rent expense. The company was in
compliance with all such covenants at February 28, 2003.
SUPPLEMENTAL FINANCIAL STATEMENT
INFORMATION
(A) Advertising Expense
Advertising expense, which is included in selling, general
and administrative expenses in the accompanying
consolidated statements of earnings, amounted to $52.4
million (1.3% of net sales and operating revenues) in fiscal
2003, $47.3 million (1.3% of net sales and operating
revenues) in fiscal 2002, and $44.9 million (1.6% of net sales
and operating revenues) in fiscal 2001.
(B) Write-Down of Goodwill
In the fourth quarter of fiscal 2001, CarMax recorded
$8.7 million for the write-down of goodwill associated with
two underperforming stand-alone new car franchises.
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