CarMax 2004 Annual Report Download - page 43

CARMAX 2004 41
To determine the expected long-term rate of return on
pension plan assets, the company considers the current and
expected asset allocations, as well as historical and expected
returns on various categories of plan assets. The company
applies the expected rate of return to a market-related value of
assets, which reduces the underlying variability in assets to
which the expected return is applied.
Asset Allocation Strategy. The company’s pension plan
assets are held in trust. The asset allocation was as follows:
As of February 29 or 28
2004 2003
Ta rget Actual Actual
Allocation Allocation Allocation
Equity securities 80% 80% 79%
Fixed income securities 20 20 21
Total 100% 100% 100%
Plan fiduciaries set investment policies and strategies for the
pension plan. Long-term strategic investment objectives
include preserving the funded status of the trust and balancing
risk and return. The plan fiduciaries oversee the investment
allocation process, which includes selecting investment
managers, setting long-term strategic targets, and monitoring
asset allocations. Target allocation ranges are guidelines, not
limitations, and occasionally plan fiduciaries will approve
allocations above or below a target range.
DEBT
Total debt is summarized as follows:
As of February 29 or 28
(In thousands) 2004 2003
Term loan $100,000 $100,000
Revolving loan 4,446 56,051
Total debt 104,446 156,051
Less current installments of
long-term debt ——
Less short-term debt 4,446 56,051
Total long-term debt, excluding
current installments $100,000 $100,000
In May 2002, the company entered into a $200 million
credit agreement secured by vehicle inventory. During the
fourth quarter of fiscal 2003, the credit agreement was
increased from $200 million to $300 million. The credit
agreement includes a $200 million revolving loan commitment
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and a $100 million term loan. Principal is due in full at
maturity with interest payable monthly at a LIBOR-based rate.
The credit agreement is scheduled to terminate on May 17,
2005. The termination date of the agreement will be
automatically extended one year each May 17 unless either
CarMax or either lender elects, prior to the extension date, not
to extend the agreement. As of February 29, 2004, the amount
outstanding under this credit agreement was $104.4 million.
Under this agreement, the company must meet financial
covenants relating to minimum current ratio, maximum total
liabilities to tangible net worth ratio, and minimum fixed
charge coverage ratio. The company was in compliance with all
such covenants at February 29, 2004.
The weighted average interest rate on the outstanding short-
term debt was 3.5% during fiscal 2004, 3.2% during fiscal
2003, and 4.4% during fiscal 2002.
The company capitalizes interest in connection with the
construction of certain facilities. Capitalized interest totaled
$2.5 million in fiscal 2004, $1.0 million in fiscal 2003, and
$0.5 million in fiscal 2002.
COMMON STOCK AND STOCK-BASED
INCENTIVE PLANS
(A) Shareholder Rights Plan
In conjunction with the company’s shareholder rights plan,
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 15% ownership interest in the company by a person or group.
When exercisable, each 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 the
company 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 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.
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