CarMax 2005 Annual Report Download - page 45

CARMAX 2005 43
The company entered into sale-leaseback transactions
involving seven superstores valued at approximately $84.0 million
in fiscal 2005, and sale-leaseback transactions for nine superstores
valued at approximately $107.0 million in fiscal 2004. The
resulting leases have initial terms of 15 or 20 years with various
renewal options. All sale-leaseback transactions are structured at
competitive rates. Gains or losses on sale-leaseback transactions
are recorded as deferred rent and amortized over the terms of the
leases. The company does not have continuing involvement
under the sale-leaseback transactions. In conjunction with certain
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, 2005.
CONTINGENT LIABILITIES
(A) Litigation
In the normal course of business, the company is involved in
various legal proceedings. Based upon the company’s evaluation
of the information presently available, management believes that
the ultimate resolution of any such proceedings will not have a
material adverse effect on the company’s financial position,
liquidity, or results of operations.
(B) Other Matters
In accordance with the terms of real estate lease agreements, the
company generally agrees to indemnify the lessor from certain
liabilities arising as a result of the use of the leased premises,
including environmental liabilities and repairs to leased
property upon termination of the lease. Additionally, in
accordance with the terms of agreements entered into for the
sale of our properties, the company generally agrees to
indemnify the buyer from certain liabilities and costs arising
subsequent to the date of the sale, including environmental
liabilities and liabilities resulting from the breach of
representations or warranties made in accordance with the
agreements. The company does not have any known material
environmental commitments, contingencies, or other
indemnification issues arising from these arrangements.
As part of its customer service strategy, the company
guarantees the vehicles it retails with a 30-day limited warranty.
A vehicle in need of repair within 30 days of the customer’s
purchase will be repaired free of charge. As a result of this
guarantee, each vehicle sold has an implied liability associated
with it. Accordingly, the company records a provision for
repairs during the guarantee period for each vehicle sold based
on historical trends. The liability for this guarantee was $1.9
million at February 28, 2005, and $1.4 million at February 29,
2004, and is included in accrued expenses and other current
liabilities in the consolidated balance sheets.
RECENT ACCOUNTING
PRONOUNCEMENTS
SFAS No. 123R, “Share-Based Payment,” replaces SFAS No.
123, “Accounting for Stock-Based Compensation” and
supercedes APB 25, “Accounting for Stock Issued to
Employees.” This new standard requires a public entity to
measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair
value of the award. That cost will be recognized over the period
during which an employee is required to provide service in
exchange for the award (usually the vesting period). In
accordance with the revised statement, the company will be
required to recognize the expense attributable to stock options
effective with the company’s 2007 fiscal year, beginning March 1,
2006. The company has not yet determined the impact of
adopting SFAS 123R on its financial position, results of
operations, or cash flows.
SUPPLEMENTAL FINANCIAL
STATEMENT INFORMATION
(A) Goodwill and Other Intangibles
Other assets on the consolidated balance sheets included
goodwill and other intangibles with a carrying value of $15.0
million as of February 28, 2005, and $16.0 million as of
February 29, 2004.
(B) Accrued Compensation and Benefits
Accrued expenses and other current liabilities on the
consolidated balance sheets included accrued compensation and
benefits of $53.8 million as of February 28, 2005, and $44.5
million as of February 29, 2004.
(C) Advertising Expense
Selling, general, and administrative expenses on the
consolidated statements of earnings included advertising
expense of $73.6 million in fiscal 2005, $62.4 million in fiscal
2004, and $52.4 million in fiscal 2003. Advertising expenses
were 1.4% of net sales and operating revenues for fiscal 2005
and fiscal 2004 and 1.3% for fiscal 2003.
SUBSEQUENT EVENTS
In April 2005, the company completed a $617.0 million public
securitization of automobile loan receivables. The company also
completed the sale-leaseback of one superstore for proceeds of
$16.7 million.
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