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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2002
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-31420
CARMAX, INC.
------------
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-1821055
-------- ----------
(State of Incorporation) (I.R.S. Employer
Identification No.)
4900 COX ROAD, GLEN ALLEN, VIRGINIA 23060
(Address of Principal Executive Offices and Zip Code)
(804) 747-0422
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 2002
----- ---------------------------------
Common Stock, par value $0.50 103,111,075
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 30.
CARMAX, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Earnings -
Three Months and Nine Months Ended November 30, 2002 and 2001 3
Consolidated Balance Sheets -
November 30, 2002, and February 28, 2002 4
Consolidated Statements of Cash Flows -
Nine Months Ended November 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
- ----------
SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER 28
- --------------------------------------------------------
SECTION 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER 29
- --------------------------------------------------------
EXHIBIT INDEX 30
- -------------
Page 2 of 30
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Consolidated Statements of Earnings (Unaudited)
-----------------------------------------------
(Amounts in thousands except per share data)
Three Months Ended Nine Months Ended
November 30 November 30
------------------------------------------ ------------------------------------------
2002 %(1) 2001 %(1) 2002 %(1) 2001 %(1)
------ ----- ------ ----- ------------ ------ ------- ------
Sales and operating revenues:
Used vehicle sales $ 690,318 73.7 $ 590,148 69.2 $2,212,925 73.2 $1,867,758 69.7
New vehicle sales 117,849 12.6 148,973 17.5 402,053 13.3 445,418 16.6
Wholesale vehicle sales 87,493 9.3 76,697 9.0 277,617 9.2 251,270 9.4
Other sales and revenues 41,159 4.4 36,852 4.3 130,709 4.3 114,172 4.3
--------- ---- ---------- ---- ---------- ---- ---------- ----
Net sales and operating revenues 936,819 100.0 852,670 100.0 3,023,304 100.0 2,678,618 100.0
Cost of sales 829,879 88.6 757,781 88.9 2,665,410 88.2 2,363,206 88.2
--------- ---- ---------- ---- ---------- ---- ---------- ----
Gross profit 106,940 11.4 94,889 11.1 357,894 11.8 315,412 11.8
CarMax Auto Finance income 19,220 2.1 18,027 2.1 61,168 2.0 52,267 2.0
(Notes 5 and 6)
Selling, general and administrative 101,810 10.9 83,117 9.7 292,844 9.7 246,206 9.2
expenses
Interest expense 299 - 64 - 1,714 0.1 4,701 0.2
Interest income 274 - 12 - 568 - 12 -
--------- ---- ---------- ---- ---------- ---- ---------- ----
Earnings before income taxes 24,325 2.6 29,747 3.5 125,072 4.1 116,784 4.4
Provision for income taxes 9,608 1.0 11,304 1.3 49,403 1.6 44,378 1.7
--------- ---- ---------- ---- ---------- ---- ---------- ----
Net earnings $ 14,717 1.6 $ 18,443 2.2 75,669 2.5 72,406 2.7
========= ==== ========== ==== ========== ==== ========== ====
Weighted average common
shares (Note 3):
Basic 103,047 102,215 102,973 101,882
========= ========== =========== ===========
Diluted 104,516 104,239 104,602 103,862
========= ========== =========== ===========
Net earnings per share (Note 3):
Basic $ 0.14 $ 0.18 $ 0.73 $ 0.71
========= ========== =========== ===========
Diluted $ 0.14 $ 0.18 $ 0.72 $ 0.70
========= ========== =========== ===========
(1) Percents of net sales and operating revenues may not total due to rounding.
See accompanying notes to consolidated financial statements.
Page 3 of 30
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Consolidated Balance Sheets
---------------------------
(Amounts in thousands)
Nov. 30, 2002 Feb. 28, 2002
-------------- -------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 31,654 $ 3,286
Accounts receivable, net 59,559 50,441
Automobile loan receivables held for sale 15,860 2,144
Retained interests in securitized receivables (Note 6) 140,530 120,683
Inventory 401,596 399,084
Prepaid expenses and other current assets 5,734 2,065
------------ -----------
Total current assets 654,933 577,703
Property and equipment, net 142,840 120,976
Other assets 23,613 21,543
------------ -----------
TOTAL ASSETS $ 821,386 $ 720,222
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 108,003 $ 87,160
Accrued expenses and other current liabilities 30,920 25,775
Deferred income taxes 22,927 22,009
Short-term debt 4,485 9,840
Current installments of long-term debt 826 78,608
------------ -----------
Total current liabilities 167,161 223,392
Long-term debt, excluding current installments 100,000 -
Deferred revenue and other liabilities 10,800 8,416
Deferred income taxes 3,244 2,935
------------ -----------
TOTAL LIABILITIES 281,205 234,743
Stockholders' equity:
Common stock, $0.50 par value; 350,000,000
shares authorized; 103,100,953 shares issued
and outstanding at November 30, 2002 51,550 -
Capital in excess of par value 477,482 -
Retained earnings 11,149 -
Parent's equity - 485,479
------------ ------------
STOCKHOLDERS' EQUITY 540,181 485,479
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 821,386 $ 720,222
============ ===========
See accompanying notes to consolidated financial statements
Page 4 of 30
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------
(Amounts in thousands)
Nine Months Ended
November 30
2002 2001
----------- -----------
Operating Activities:
- ---------------------
Net earnings $ 75,669 $ 72,406
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 11,950 13,239
Amortization of restricted stock awards 45 80
Loss on disposition of property and equipment 118 -
Provision for deferred income taxes 1,227 1,770
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net (9,118) 9,594
Increase in automobile loan receivables held
for sale (13,716) (747)
Increase in retained interests in securitized
receivables (19,847) (42,383)
Increase in inventory (2,512) (3,873)
(Increase) decrease in prepaid expenses and
other current assets (3,669) 247
(Increase) decrease in other assets (2,610) 773
Increase in accounts payable, accrued expenses
and other current liabilities 32,820 21,976
Increase in deferred revenue and other liabilities 2,384 970
---------- -----------
Net cash provided by operating activities 72,741 74,052
---------- -----------
Investing Activities:
- ---------------------
Purchases of property and equipment (71,318) (22,911)
Proceeds from sales of property and equipment 37,926 96,344
---------- -----------
Net cash (used in) provided by investing activities (33,392) 73,433
---------- -----------
Financing Activities:
- ---------------------
(Decrease) increase in short-term debt, net (5,355) 96
Issuance of long-term debt 100,000 -
Payments on long-term debt (77,782) (147,344)
Equity issuances, net 556 975
Dividends paid (28,400) -
---------- -----------
Net cash used in financing activities (10,981) (146,273)
---------- -----------
Increase in cash and cash equivalents 28,368 1,212
Cash and cash equivalents at beginning of year 3,286 8,802
---------- -----------
Cash and cash equivalents at end of period $ 31,654 $ 10,014
========== ===========
See accompanying notes to consolidated financial statements.
Page 5 of 30
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Notes to Consolidated Financial Statements
------------------------------------------
(Unaudited)
1. Basis of Presentation
On September 10, 2002, the Circuit City Stores, Inc. shareholders, which
included Circuit City Group shareholders and CarMax Group shareholders,
approved the separation of the CarMax business from Circuit City Stores,
Inc., and the Circuit City Stores, Inc. board of directors authorized the
redemption of the Circuit City Stores, Inc-CarMax Group Common Stock and
the distribution of CarMax, Inc. common stock to effect the separation. In
addition, the CarMax board of directors approved a one-time special
dividend payment of $28.4 million to Circuit City Stores on the separation
date. The separation was effective October 1, 2002. Each share of CarMax
Group Common Stock outstanding was redeemed in exchange for one share of
new CarMax, Inc. common stock. In addition, each holder of Circuit City
Group Common Stock received as a tax-free distribution approximately 0.314
of a share of CarMax, Inc. common stock for each share of Circuit City
Group Common Stock owned as of September 16, 2002, the record date of the
distribution. As a result of the separation, all of the businesses, assets
and liabilities of the CarMax Group are now held in CarMax, Inc. ("CarMax"
or the "company"), an independent, separately traded public company. These
consolidated financial statements are presented as if CarMax existed as an
entity separate from the other businesses of Circuit City Stores during the
periods presented.
Circuit City Stores contributed to CarMax all of the subsidiaries and net
assets that constituted the CarMax Group. CarMax includes the same
businesses, assets and liabilities whose financial performance was intended
to be reflected by the CarMax Group Common Stock. CarMax's assets are
accounted for at the historical values carried by Circuit City Stores prior
to the separation.
In conjunction with the separation, all outstanding CarMax Group stock
options and restricted stock were replaced with CarMax, Inc. stock options
and restricted stock with the same terms and conditions, exercise price and
restrictions as the CarMax Group stock options and restricted stock they
replaced.
The current relationship between Circuit City and CarMax is governed by a
transition services agreement, under which Circuit City provides CarMax
services including human resources, payroll, benefits administration, tax
services, television advertising buying, computer center support and
telecommunications services. These services have terms ranging from six to
24 months, with varying renewal options. A tax allocation agreement, which
generally provides that pre-separation taxes attributable to the business
of each party will be borne solely by that party, was also executed upon
separation.
2. Accounting Policies
CarMax's consolidated financial statements conform to accounting principles
generally accepted in the United States of America. The interim period
financial statements are unaudited; however, in the opinion of management,
all adjustments, which consist only of normal, recurring adjustments,
necessary for a fair presentation of the interim consolidated financial
statements have been included. The fiscal year-end balance sheet data were
derived from the audited financial statements included in CarMax's Form S-4
Registration Statement (S-4), Amendment No. 5, filed August 5, 2002.
Page 6 of 30
3. Net Earnings per Share
CarMax was a wholly owned subsidiary of Circuit City Stores, Inc. during a
portion of the periods presented. Unaudited earnings per share have been
presented to reflect the capital structure effective with the separation of
CarMax from Circuit City Stores, Inc.
All earnings per share calculations have been computed as if the separation
had occurred at the beginning of the periods presented. Basic earnings per
share have been computed by dividing the net earnings of CarMax by the
weighted average common shares outstanding. Diluted net earnings per share
calculations have been computed by dividing the net earnings of CarMax by
the sum of the weighted average common shares outstanding and dilutive
potential common shares.
Reconciliations of the numerator and denominator of the basic and diluted
net earnings per share calculations are presented below:
Three Months Ended Nine Months Ended
(Amounts in thousands November 30 November 30
except per share data) 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------
Weighted average common shares............... 103,047 102,215 102,973 101,882
Dilutive potential common shares:
Options................................... 1,466 1,998 1,620 1,944
Restricted stock.......................... 3 26 9 36
--------------------------- ---------------------------
Weighted average common shares
and dilutive potential common shares...... 104,516 104,239 104,602 103,862
=========================== ===========================
Net earnings available to common shareholders $ 14,717 $ 18,443 $ 75,669 $ 72,406
Basic net earnings per share................. $ 0.14 $ 0.18 $ 0.73 $ 0.71
Diluted net earnings per share............... $ 0.14 $ 0.18 $ 0.72 $ 0.70
Certain options were outstanding and not included in the computation of
diluted net earnings per share because the options' exercise prices were
greater than the average market price of the shares. For the three month
period ended November 30, 2002, options to purchase 1,046,510 shares of
common stock at prices ranging from $19.16 to $43.44 per share were
outstanding and not included in the calculation. For the three month period
ended November 30, 2001, options to purchase 8,406 shares of common stock
at prices ranging from $16.31 to $16.36 per share were outstanding and not
included in the calculation.
4. Debt
On May 17, 2002, CarMax entered into a $200 million credit agreement
secured by vehicle inventory. The credit agreement includes a $100 million
revolving loan commitment and a $100 million term loan. Principal is due in
full at maturity with interest payable monthly at a LIBOR-based rate. The
agreement is scheduled to terminate in May 2004. The termination date of
the agreement will be automatically extended one year on May 17, 2003, and
on each May 17 thereafter unless CarMax or either lender elects, prior to
the next extension date, not to extend the agreement. The value of CarMax's
eligible motor vehicle inventory must be at least 150 percent of the
aggregate principal amount outstanding under the credit facility on any
date. As of November 30, 2002, the amount outstanding under this credit
agreement was $104.5 million. Under this agreement, CarMax must meet
quarterly financial covenants relating to minimum current ratio, maximum
total liabilities to tangible net worth ratio and minimum fixed charge
coverage ratio. CarMax was in compliance with these covenants at November
30, 2002.
Page 7 of 30
5. CarMax Auto Finance Income
CarMax Auto Finance originates automobile loans to CarMax consumers at
competitive market rates of interest. CarMax sells the majority of the
loans it originates each month in a securitization transaction discussed in
Note 6 below. The majority of the profit contribution from CarMax Auto
Finance is generated by the spread between the interest rate charged to the
consumer and the cost of funds. A gain results from recording a receivable
equal to the present value of the expected residual cash flows generated by
the securitized receivables. The cash flows are calculated taking into
account expected prepayment and default rates.
For the three and nine month periods ended November 30, 2002 and 2001,
CarMax Auto Finance income was as follows:
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------
Gains on sales of loans......................... $15.9 $15.6 $ 49.6 $43.3
-------------------------------------------------------
Other income.................................... 6.8 5.5 22.2 17.6
-------------------------------------------------------
Direct expenses:
Payroll and fringes expense.................. 1.7 1.5 5.1 4.1
Other direct expenses........................ 1.8 1.6 5.5 4.5
-------------------------------------------------------
Total direct expenses........................... 3.5 3.1 10.6 8.6
-------------------------------------------------------
CarMax Auto Finance income...................... $19.2 $18.0 $61.2 $52.3
=======================================================
Other income includes servicing fee income and interest income. CarMax Auto
Finance income does not include any allocation of indirect costs or income.
CarMax presents this information on a direct basis to avoid making
arbitrary decisions regarding the periodic indirect benefit or costs that
could be attributed to this operation. Examples of indirect costs not
included are retail store expenses, retail financing commissions and
corporate expenses such as human resources, administrative services,
marketing, information systems, accounting, legal, treasury and executive
payroll.
6. Securitizations
The company uses a securitization program to fund substantially all of the
automobile loan receivables originated by CarMax Auto Finance. The company
sells the automobile loan receivables to a wholly owned, bankruptcy-remote,
special purpose subsidiary that transfers an undivided interest in the
receivables to a group of third party investors. The special purpose entity
and investors have no recourse to the company's assets for the principal
amount of the loans. The investors issue commercial paper supported by the
transferred receivables, and the proceeds from the sale of the commercial
paper are used to pay for the securitized receivables. This program is
referred to as the warehouse facility.
The company periodically uses public securitizations to refinance the
receivables previously securitized through the warehouse facility. This
frees up capacity in the warehouse facility. In a public securitization, a
Page 8 of 30
pool of automobile loan receivables are sold to a bankruptcy-remote special
purpose entity that in turn transfers the receivables to a special purpose
securitization trust. The securitization trust issues asset-backed
securities, secured or otherwise supported by the transferred receivables,
and the proceeds from the sale of the securities are used to pay for the
securitized receivables. The earnings impact of moving receivables from the
warehouse facility to a public securitization is not expected to be
material to the operations of the company.
The transfers of receivables are accounted for as sales in accordance with
Statement of Financial Accounting Standards (SFAS) 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The company recognizes a gain or loss on the sale of the
receivables when the receivables are securitized as described in Note 5
above.
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------
Net loans originated.......... $ 301.2 $ 229.6 $ 895.3 $ 713.9
Loans sold.................... $ 292.2 $ 241.5 $ 875.1 $ 715.1
Gains on sales of loans....... $ 15.9 $ 15.6 $ 49.6 $ 43.3
Retained Interests. The company retains various interests in the automobile
loan receivables that it securitizes. The retained interests, presented on
the company's balance sheet, serve as a credit enhancement for the benefit
of the investors in the securitized receivables. These retained interests
include the present value of the expected residual cash flows on the
securitized receivables ("interest-only strip receivables"), the restricted
cash on deposit in various reserve accounts and an undivided ownership
interest in the receivables securitized through the warehouse facility
("required excess receivables"). The special purpose entities and the
investors have no recourse to the company's assets beyond the retained
interests. The value of the retained interests may fluctuate depending upon
the performance of the securitized receivables. Retained interests balances
at November 30, 2002 and 2001, and at February 28, 2002 and 2001, consisted
of the following:
As of November 30 As of February 28
(Amounts in millions) 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------
Interest-only strip receivables........ $ 83.1 $ 78.2 $ 74.3 $ 42.0
Restricted cash........................ 39.2 31.9 34.7 23.6
Required excess receivables............ 18.2 6.4 11.7 8.5
------------------------------------------------------
Total.................................. $ 140.5 $ 116.5 $ 120.7 $ 74.1
======================================================
The retained interests had a weighted average life of 1.6 years as of
November 30, 2002 and February 28, 2002. As defined in SFAS No. 140, the
weighted average life in periods (for example, months or years) of
prepayable assets is calculated by summing the product (a), the sum of the
principal collections expected in each future period, times (b), the number
of periods until collection, and then dividing that total by (c), the
initial principal balance.
Interest-only strip receivables. Interest-only strip receivables represent
the present value of residual cash flows CarMax expects to receive over the
life of the securitized receivables. The value of these receivables is
determined by estimating the future cash flows using management's
projections of key factors, such as finance charge income, default rates,
pre-payment rates and discount rates appropriate for the type of asset and
risk. The value of interest-only strip receivables may be affected by
external factors, such as changes in the behavior patterns of customers,
changes in the strength of the economy and developments in the interest
rate markets; therefore, actual performance may differ from these
projections. Management evaluates the performance of the receivables
relative to the initial assumptions on a regular basis. Any financial
impact resulting from an adverse change in performance is recognized in the
period in which it occurs.
Page 9 of 30
Restricted cash. Restricted cash represents amounts on deposit in various
reserve accounts established for the benefit of the securitization
investors. The amounts on deposit in the reserve accounts are used to pay
various amounts, including principal and interest to investors, in the
event that the cash generated by the securitized receivables in a given
period is insufficient to pay those amounts. In general, each of the
company's securitizations requires that an amount equal to a specified
percentage of the initial receivables balance be deposited in a reserve
account on the closing date and that any excess cash generated by the
receivables be used to fund the reserve account to the extent necessary to
maintain the required amount. If the amount on deposit in the reserve
account exceeds the required amount, an amount equal to that excess is
released through the special purpose entity to CarMax. In the public
securitizations, the amount required to be on deposit in the reserve
account must equal or exceed a specified floor amount. The reserve account
remains at the floor amount until the investors are paid in full, at which
time the remaining reserve account balance is released through the special
purpose entity to CarMax. The amount required to be maintained in the
public securitization reserve accounts may increase depending upon the
performance of the securitized receivables. Generally, restricted cash
reserves range between 2.0% and 2.5% of managed receivables.
Required excess receivables. The warehouse facility requires that the total
value of the securitized receivables exceed, by a specified amount, the
principal amount owed to the investors. The required excess receivables
balance represents this specified amount. Any cash flows generated by the
required excess receivables are used, if needed, to make payments to the
investors.
Key Assumptions Used in Measuring Retained Interests and Sensitivity
Analysis. The following table shows the key economic assumptions used in
measuring the fair value of the retained interests at November 30, 2002,
and a sensitivity analysis showing the hypothetical effect on the
interest-only strip receivables if there were unfavorable variations from
the assumptions used. Key economic assumptions at November 30, 2002, are
not materially different from assumptions used to measure the fair value of
retained interests at the time of securitization. These sensitivities are
hypothetical and should be used with caution. In this table, the effect of
a variation in a particular assumption on the fair value of the retained
interests is calculated without changing any other assumption; in actual
circumstances, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities.
Impact on Fair Impact on Fair
Assumptions Value of 10% Value of 20%
(Dollar amounts in millions) Used Adverse Change Adverse Change
-----------------------------------------------------------------------------------------
Prepayment rate................ 1.5%-1.6% $ 4.5 $ 9.2
Cumulative default rate........ 1.8%-2.1% $ 2.3 $ 4.7
Annual discount rate........... 12.0% $ 1.6 $ 3.2
Prepayment rate. CarMax uses the Absolute Prepayment Model or "ABS" to
estimate prepayments. This model assumes a rate of prepayment each month
relative to the original number of receivables in a pool of receivables.
ABS further assumes that all the receivables are the same size and amortize
at the same rate and that each receivable in each month of its life will
either be paid as scheduled or prepaid in full. For example, in a pool of
receivables originally containing 10,000 receivables, a 1 percent ABS rate
means that 100 receivables prepay each month.
Cumulative default rate. Cumulative default rate or "static pool" net
losses are calculated by dividing the total projected future credit losses
of a pool of receivables by the original pool balance. The cumulative
default rate of 1.8% - 2.1% is comparable to the annualized loss rate of
1.0% - 1.2% previously presented. Annualized losses represent annual losses
expressed as a percentage of the average receivable balance. This change in
the previous presentation does not represent a change in the assumptions
used or expected performance of the receivables.
Page 10 of 30
CarMax's Continuing Involvement with Securitized Receivables. CarMax
continues to manage the automobile loan receivables that it securitizes.
CarMax receives servicing fees of approximately 1 percent of the
outstanding principal balance of the securitized receivables. The servicing
fees specified in the securitization agreements adequately compensate
CarMax for servicing the securitized receivables. Accordingly, no servicing
asset or liability has been recorded. CarMax is at risk for the retained
interests in the securitized receivables. If the securitized receivables do
not perform as originally projected, the value of the retained interests
would be impacted. The assumptions used to value the retained interests, as
well as a sensitivity analysis, are detailed in the "Key Assumptions Used
in Measuring Retained Interests and Sensitivity Analysis " section of this
footnote. Supplemental information about the managed receivables is noted
below:
As of November 30 As of February 28
(Amounts in millions) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------
Loans securitized............................ $1,760.0 $1,446.3 $1,489.4 $1,215.4
Loans held for sale or investment............ 34.0 10.1 13.9 11.6
--------------------------------------------------------
Ending managed receivables................... $1,794.0 $1,456.4 $1,503.3 $1,227.0
========================================================
Accounts 31+ days past due................... $ 25.9 $ 21.6 $ 22.3 $ 18.1
Past due accounts as a percentage of
ending managed receivables................ 1.4% 1.5% 1.5% 1.5%
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------
Average managed receivables...................... $1,748.8 $1,439.7 $1,651.7 $1,361.7
Credit losses on managed receivables............. 4.9 3.8 12.3 8.3
Annualized losses as a percentage of
average managed receivables................. 1.1% 1.1% 1.0% 0.8%
Selected Cash Flows from Securitized Receivables. The table below
summarizes certain cash flows received from and paid to the automobile loan
securitizations.
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------
o Proceeds from new securitizations...................... $ 254.0 $193.7 $ 741.6 $ 569.7
o Proceeds from collections reinvested in
revolving period securitizations................... $ 105.6 $132.3 $ 364.2 $ 350.7
o Servicing fees received................................ $ 4.5 $ 3.7 $ 12.3 $ 10.4
o Other cash flows received from retained interests:
Interest-only strip receivables.................... $ 15.0 $ 13.2 $ 49.0 $ 32.8
Cash reserve releases.............................. $ 3.0 $ 3.5 $ 13.1 $ 12.9
Proceeds from new securitizations. Proceeds from new securitizations
represent receivables newly securitized through the warehouse facility
during the period. Receivables initially securitized through the warehouse
facility that are periodically sold in publicly underwritten offers are not
considered new securitizations for this table.
Proceeds from collections. Proceeds from collections reinvested in
revolving period securitizations represent principal amounts collected on
receivables securitized through the warehouse facility which are used to
fund new originations.
Page 11 of 30
Servicing fees. Servicing fees received represent cash fees paid to CarMax
to service the securitized receivables.
Other cash flows received from retained interests. Other cash flows
received from retained interests represent cash received by CarMax from
securitized receivables other than servicing fees. It includes cash
collected on interest-only strip receivables and amounts released to CarMax
from restricted cash accounts.
Financial Covenants and Performance Triggers. The securitization agreements
include various financial covenants and performance tests. CarMax must meet
financial covenants relating to minimum tangible net worth, maximum total
liabilities to tangible net worth ratio, minimum tangible net worth to
managed assets ratio, minimum current ratio, minimum cash balance or
borrowing capacity and minimum fixed charge coverage ratio. The securitized
receivables must meet performance tests relating to portfolio yield,
default rates and delinquency rates. If these financial covenants and / or
performance tests are not met, in addition to other consequences, CarMax
may be unable to continue to securitize receivables through the warehouse
facility or be terminated as servicer under the public securitizations.
CarMax was in compliance with these financial covenants and the securitized
receivables were in compliance with these performance tests at November 30,
2002.
7. Financial Derivatives
CarMax enters into amortizing swaps relating to automobile loan receivable
securitizations to convert variable-rate financing costs in the warehouse
facility to fixed-rate obligations to better match funding costs to the
receivables being securitized. During the third quarter of fiscal 2003,
CarMax entered into two 40-month amortizing interest rate swaps with an
initial notional amount totaling approximately $191.0 million. The
amortized notional amount of the CarMax interest rate swaps was reduced in
the third quarter in conjunction with the replacement of variable-rate
securities in the warehouse facility with a $500 million fixed-rate public
securitization that was completed in December 2002. The current amortized
notional amount of all outstanding swaps related to the automobile loan
receivable securitizations was approximately $102.0 million at November 30,
2002, and $413.3 million at February 28, 2002. At November 30, 2002, the
fair value of swaps totaled a net asset of $0.2 million and was included in
other current assets. At February 28, 2002, the fair value of swaps totaled
a net liability of $0.8 million and was included in accounts payable.
The market and credit risks associated with interest rate swaps are similar
to those relating to other types of financial instruments. Market risk is
the exposure created by potential fluctuations in interest rates. The
company does not anticipate significant market risk from swaps as they are
used on a monthly basis to match funding costs to the use of the funding.
Credit risk is the exposure to nonperformance of another party to an
agreement. CarMax mitigates credit risk by dealing with highly rated bank
counterparties.
8. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting For Asset Retirement Obligations." 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. CarMax does not expect the application of the provisions of SFAS No.
143 to have an impact on the financial position, results of operations or
cash flows of the company.
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) No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Page 12 of 30
Restructuring)." It is effective for exit or disposal activities initiated
after December 31, 2002. CarMax does not expect the application of the
provisions of SFAS No. 146 to have an impact on the financial position,
results of operations or cash flows of the company.
9. Reclassifications
Certain prior year amounts have been reclassified to conform to the
current presentation. For the three and nine month periods ended November
30, 2001, wholesale sales have been reclassified and reported in net sales
and operating revenues. In previous periods, wholesale sales were recorded
as a reduction to cost of sales. The reclassification of wholesale sales to
sales increased sales and cost of sales by $76.7 million for the quarter
ended November 30, 2001, and by $251.3 million for the nine months ended
November 30, 2001. An additional reclassification between sales and cost of
sales made to conform to the current presentation decreased sales and cost
of sales by $2.2 million for the quarter ended November 30, 2001, and by
$7.1 million for the nine months ended November 30, 2001. Also, effective
in the third quarter of fiscal 2003, third party finance fees have been
reclassified and reported in net sales and operating revenues. In previous
periods, third party finance fees were recorded as a reduction to selling,
general and administrative expenses. The reclassification of third party
finance fees increased sales and selling, general and administrative
expenses by $3.9 million for the quarter ended November 30, 2001, and $11.9
million for the nine months ended November 30, 2001. Also, effective in the
third quarter of fiscal 2003, the company presents CarMax Auto Finance
income separately in the Consolidated Statements of Earnings. Previously,
CarMax Auto Finance income was recorded as a reduction to selling, general
and administrative expenses. The reclassification of CarMax Auto Finance
income increases selling, general and administrative expenses by $18.0
million for the quarter ended November 30, 2001, and $52.3 million for the
nine months ended November 30, 2001. These reclassifications had no impact
on CarMax's net earnings.
Page 13 of 30
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
In this discussion, "we", "our", "CarMax" and "the company" refer to CarMax,
Inc. and its wholly owned subsidiaries, unless the context requires otherwise.
All references to "quarter" and "year" refer to our fiscal year periods rather
than calendar year periods unless stated otherwise.
Percents in the tables may not total due to rounding.
CarMax was formerly a wholly owned subsidiary of Circuit City Stores, Inc.
("Circuit City Stores"). On September 10, 2002, the Circuit City Stores
shareholders, which included Circuit City Group shareholders and CarMax Group
shareholders, approved the separation of the CarMax Group from Circuit City
Stores and the Circuit City Stores board of directors authorized the redemption
of the Circuit City Stores, Inc.-CarMax Group Common Stock and the distribution
of CarMax, Inc. common stock to effect the separation. The separation was
effective October 1, 2002. Each outstanding share of CarMax Group Common Stock
was redeemed in exchange for one share of new CarMax, Inc. common stock. In
addition, each holder of Circuit City Group Common Stock received as a tax-free
distribution 0.313879 of a share of CarMax, Inc. common stock for each share of
Circuit City Group Common Stock owned as of September 16, 2002, the record date
for the distribution. Following the separation, the Circuit City Group Common
Stock was renamed Circuit City common stock, representing an ownership interest
only in the Circuit City business, and CarMax, Inc. became an independent,
separately traded public company.
CRITICAL ACCOUNTING POLICIES
See the discussion of critical accounting policies included in CarMax's Form S-4
Registration Statement (S-4), Amendment No. 5, filed August 5, 2002 (the "Form
S-4"). These policies relate to the calculation of the value of retained
interests in securitization transactions.
RESULTS OF OPERATIONS
Reclassifications. Effective in the first quarter of fiscal 2003, CarMax
classifies revenue from the sale of wholesale vehicles in net sales and
operating revenues. Previously, CarMax wholesale vehicle sales were recorded as
reductions to cost of sales. The reclassification of wholesale sales to sales
increased sales and cost of sales by $76.7 million for the quarter ended
November 30, 2001, and $251.3 million for the nine months ended November 30,
2001. An additional reclassification between sales and cost of sales made to
conform to the current presentation decreased sales and cost of sales by $2.2
million for the quarter ended November, 2001, and $7.1 million for the nine
months ended November 30, 2001. Also effective in the third quarter of fiscal
2003, third party finance fees have been reclassified and reported in net sales
and operating revenues. In previous periods, third party finance fees were
recorded as a reduction to selling, general and administrative expenses. The
reclassification of third party finance fees increased sales and selling,
general and administrative expenses by $3.9 million for the quarter ended
November 30, 2001, and $11.9 million for the nine months ended November 30,
2001. Also effective in the third quarter of fiscal 2003, the company presents
CarMax Auto Finance income separately in the Consolidated Statements of
Earnings. Previously, CarMax Auto Finance income was recorded as a reduction to
selling, general and administrative expenses. The reclassification of CarMax
Auto Finance income increases selling, general and administrative expenses by
$18.0 million for the quarter ended November 30, 2001, and $52.3 million for the
nine months ended November 30, 2001. These reclassifications had no impact on
CarMax's net earnings.
Page 14 of 30
Seasonality. CarMax's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, CarMax has experienced more of its
net sales in the first half of the fiscal year. The net earnings of any quarter
are seasonally disproportionate to net sales since administrative and certain
operating expenses remain relatively constant during the year. Therefore,
quarterly results should not be relied upon as necessarily indicative of results
for the entire fiscal year.
Net Sales and Operating Revenue
Total sales for the third quarter of fiscal 2003 increased 10 percent to $936.8
million from $852.7 million in last year's third quarter. For the nine months
ended November 30, 2002, total sales increased 13 percent to $3.02 billion from
$2.68 billion in last year's first nine months.
Three Months Ended November 30 Nine Months Ended November 30
(Amounts in millions) 2002 % 2001 % 2002 % 2001 %
- ----------------------------------------------------------------------------------------------------------------------
Used vehicle sales.................... $690.3 $590.1 $2,212.9 $1,867.8
New vehicle sales..................... 117.8 149.0 402.1 445.4
---------------------------------------------------------------------------
Total retail vehicle sales............ 808.1 86.3 739.1 86.7 2,615.0 86.5 2,313.2 86.4
---------------------------------------------------------------------------
Wholesale vehicle sales............... 87.5 9.3 76.7 9.0 277.6 9.2 251.3 9.4
---------------------------------------------------------------------------
Other sales and revenues:
Extended warranty.................. 16.6 13.1 51.5 41.0
Service department sales........... 13.9 14.0 45.2 42.5
Processing fees.................... 7.0 5.9 21.5 18.7
Third party financing fees........ 3.7 3.9 12.5 11.9
---------------------------------------------------------------------------
Total other sales and revenues........ 41.2 4.4 36.9 4.3 130.7 4.3 114.1 4.3
---------------------------------------------------------------------------
Total net sales and operating
revenues............................ $936.8 100.0 $852.7 100.0 $3,023.3 100.0 $2,678.6 100.0
===========================================================================
Total Retail Vehicle Sales. Comparable store used unit sales growth is a primary
driver of CarMax's profitability. For the third quarter and nine months ended
November 30, 2002, the overall increase in retail sales is attributed to the
growth in comparable store used unit sales and the five CarMax stores opened
since February 2002. For the third quarter, we were able to achieve comparable
store used unit sales growth of 8 percent on top of last year's exceptional 29
percent. For the nine months ended November 30, 2002, we had comparable store
used unit sales growth of 11 percent on top of last year's nine months' 24
percent. For the three month and nine month periods ended November 30, 2002, the
comparable store new unit sales were down. This was generally in line with the
new car industry's performance as that industry continued to struggle with
comparisons to the unprecedented traffic driven by zero-percent financing
promotions utilized in last year's third quarter.
A CarMax store is included in comparable store retail sales after the store has
been open for a full year (in the stores' fourteenth month of operation).
Comparable store retail vehicle unit and dollar sales for the third quarter and
the first nine months of fiscal years 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended
November 30 November 30
2002 2001 2002 2001
-------------------------- --------------------------
Vehicle units:
Used vehicles..................... 8 % 29% 11 % 24%
New vehicles...................... (16)% 46% (5)% 24%
Total................................ 5 % 31% 9 % 24%
Vehicle dollars:
Used vehicles..................... 8 % 36% 11 % 31%
New vehicles...................... (17)% 51% (4)% 28%
Total................................ 3 % 38% 9 % 30%
Page 15 of 30
Supplemental information related to vehicle sales follows:
Retail Vehicle Units Sold (in thousands):
-----------------------------------------
Three Months Ended Nine Months Ended
November 30 November 30
2002 2001 2002 2001
-------------------------- --------------------------
Used vehicles........................ 45.3 38.7 143.4 122.2
New vehicles......................... 5.0 6.4 17.3 19.2
-------------------------- --------------------------
Total................................ 50.3 45.1 160.7 141.4
========================== ==========================
Average Retail Selling Prices (in thousands):
---------------------------------------------
Three Months Ended Nine Months Ended
November 30 November 30
2002 2001 2002 2001
-------------------------- --------------------------
Used vehicles........................ $15.2 $15.1 $15.4 $15.2
New vehicles......................... $23.2 $23.5 $23.2 $23.1
Blended average...................... $16.0 $16.3 $16.2 $16.3
Retail Vehicle Sales Mix:
-------------------------
Three Months Ended Nine Months Ended
November 30 November 30
2002 2001 2002 2001
-------------------------- --------------------------
Vehicle units:
Used vehicles..................... 90% 86% 89% 86%
New vehicles...................... 10 14 11 14
-------------------------- --------------------------
Total................................ 100% 100% 100% 100%
========================== ==========================
Vehicle dollars:
Used vehicles..................... 85% 80% 85% 81%
New vehicles...................... 15 20 15 19
-------------------------- --------------------------
Total................................ 100% 100% 100% 100%
========================== ==========================
Wholesale Vehicle Sales. CarMax's operating strategy is to build customer
confidence and satisfaction by offering high-quality vehicles; therefore, fewer
than half of the vehicles acquired through the appraisal process meet CarMax
standards for reconditioning and subsequent retail sale. Those vehicles that do
not meet CarMax's standards are sold at its own on-site wholesale auctions.
Wholesale vehicle sales totaled $87.5 million in the third quarter of fiscal
2003, compared with $76.7 million in the same period last year. For the nine
months ended November 30, 2002, wholesale vehicle sales totaled $277.6 million,
compared with $251.3 million in the same period last year. These increases
resulted from increased consumer response to CarMax's vehicle appraisal offer,
the impact of which was partially offset by lower average wholesale sale prices.
Other Sales and Revenues. Other sales and revenues include extended warranty
revenues, service department sales, processing fees collected from consumers for
the purchase of their vehicles at a CarMax retail location and third party
financing fees. These totaled $41.2 million in the third quarter of fiscal 2003,
compared with $36.9 million in the same period last year. For the nine months
ended November 30, 2002, other sales and revenues totaled $130.7 million,
compared with $114.1 million in the same period last year.
CarMax sells extended warranties on behalf of unrelated third parties who are
the primary obligors. Under these third party warranty programs, CarMax has no
contractual liability to the customer. Extended warranty revenue was $16.6
million in the third quarter of fiscal 2003 compared with $13.1 million in the
Page 16 of 30
third quarter of fiscal 2002. For the nine months ended November 30, 2002,
extended warranty revenue was $51.5 million, compared with $41.0 million in the
same period last year. These increases in warranty revenue reflect improved
penetration, a result in part of continuing enhancement of CarMax's extended
warranty offer, and strong sales growth for used cars, which achieve a higher
extended warranty penetration rate than new cars.
Service department sales were $13.9 million in the third quarter of fiscal 2003,
compared with $14.0 million in the same period last year. The slight decrease is
a result of the initial roll-out of our new electronic repair order system to
many of our stores in the third quarter. For months when roll-outs occur, store
service sales are negatively impacted due to technician training time
requirements. For the nine months ended November 30, 2002, service sales were
$45.2 million compared with $42.5 million in the same period last year. The
increase in service department sales for the nine months ended November 30,
2002, reflects the overall increase in CarMax's customer base, offset by the
initial effect of the roll-out of the new electronic repair order system to many
of our stores.
Processing fees were $7.0 million in the third quarter of fiscal 2003,
compared with $5.9 million in the same period last year. For the nine months
ended November 30, 2002, processing fees were $21.5 million, compared with $18.7
million in the same period last year. Consumers are assessed a processing fee
when selling a vehicle to a CarMax retail location. These fees are designed to
cover some of the cost of CarMax's appraisal and purchasing operations. These
increases in processing fee revenue resulted from increased consumer response to
CarMax's vehicle appraisal offer.
Third party financing fees represent fees received from third party lenders who
finance CarMax customers' automobile loans. For the third quarter of fiscal
2003, third party financing fees were $3.7 million, compared with $3.9 million
for the same period last year. The decrease in the three months ended November
30, 2002 is a result of the decline in new car sales as compared to November 30,
2001. Since some third party financing fees are derived from the sale of new
cars, the decline in these fees was expected based on the decline in new car
sales. Also contributing to the decline in third party financing fees was an
increase in market share that CarMax Auto Finance captured from the third party
lender to prime customers. During the quarter, CarMax Auto Finance reduced its
retail interest rates to become more competitive. For the nine months ended
November 30, 2002, third party finance fees were $12.5 million, compared with
$11.9 million for the same period last year. The increase in third party
financing fees for the nine months ended November 30, 2002, was a result of the
total increase in retail vehicle sales.
Retail Stores. In the third quarter, CarMax opened a standard superstore in
Knoxville, Tenn., and a satellite superstore in Charlotte, NC. During the fourth
quarter, CarMax plans to add satellite superstores in the Chicago, Ill., and
Atlanta, Ga., markets. CarMax also plans to open its Las Vegas, Nev.,
superstore, originally planned to open in February 2003, in early March 2003.
The following table provides detail on the CarMax retail stores:
Estimate
Store Mix Feb. 28, 2003 Nov. 30, 2002 Feb. 28, 2002 Nov. 30, 2001
------------------------------------- -------------------- ------------------- ------------------ --------------------
Mega superstores 13 13 13 13
------------------------------------- -------------------- ------------------- ------------------ --------------------
Standard superstores 19 19 17 16
------------------------------------- -------------------- ------------------- ------------------ --------------------
Prototype satellite stores 8 6 5 4
------------------------------------- -------------------- ------------------- ------------------ --------------------
Co-located new car stores 2 2 2 2
------------------------------------- -------------------- ------------------- ------------------ --------------------
Stand-alone new car stores 2 2 3 4
------------------------------------- -------------------- ------------------- ------------------ --------------------
Total 44 42 40 39
===================================== ==================== =================== ================== ====================
Page 17 of 30
Gross Profit Margin
The total gross profit margin was 11.4 percent of sales in the third quarter of
fiscal 2003 and 11.1 percent for the third quarter of fiscal 2002. For the nine
months ended November 30, 2002 and 2001, the total gross profit margin was 11.8
percent of sales.
Retail Vehicle Gross Profit Margin. The retail vehicle gross profit margin was
9.7 percent of retail vehicle sales in the third quarter of fiscal 2003 versus
9.2 percent for the same period last year. For the nine months ended November
30, 2002 and 2001, the retail gross profit margin was 9.8 and 9.7 percent,
respectively.
Used Vehicle Gross Profit Margin. The used vehicle gross profit margin was 10.6
percent of used vehicle sales in the third quarter of fiscal 2003 versus 10.4
percent for the same period last year. The increase in used vehicle gross profit
margin reflects the continued improvement of our proprietary inventory
management and pricing system which allows us to turn our inventory rapidly. In
addition, the rapid decline of the wholesale market in fiscal 2002 after
September 11, 2001, negatively impacted the used vehicle gross margin in the
third quarter of fiscal 2002. For the nine months ended November 30, 2002, the
used vehicle gross profit margin was 10.8 percent compared with 10.9 percent for
the same period last year.
New Vehicle Gross Profit Margin. The new vehicle gross profit margin was 4.4
percent of new vehicle sales in the third quarter of fiscal 2003 versus 4.6
percent for the same period last year. For the nine months ended November 30,
2002, the new vehicle gross profit margin was 4.2 percent compared with 4.7
percent for the same period last year. The new car margin decline reflects an
increased competitive environment in new cars in the third quarter compared with
the same period in the prior year, requiring more aggressive pricing in order to
drive sales unit volume.
Wholesale Vehicle Gross Profit Margin. The wholesale gross margin covers the
costs of operating the auctions and their related costs. The wholesale vehicle
gross profit margin was 3.6 percent of wholesale sales in the third quarter of
fiscal 2003, compared with 3.2 percent for the same period last year. For the
nine months ended November 30, 2002, the wholesale vehicle gross profit margin
was 4.9 percent, compared with 4.5 percent for the same period last year. For
the three months and nine months ended November 30, 2002, the increase in the
wholesale vehicle gross profit margin over the same periods of fiscal 2002
reflects the negative impact of the rapid decline in the wholesale market in
fiscal 2002 after September 11, 2001.
Other Gross Profit Margin. The gross profit margin for other sales and revenues
was 62.5 percent of other sales and revenues in the third quarter of fiscal
2003, compared with 65.6 percent for the same period last year. For the nine
months ended November 30, 2002 , the gross profit margin for other sales and
revenues was 68.0 percent, compared with 69.1 percent for the same period last
year. The decrease in the other gross profit margin is due to increased costs
incurred by the service department and relatively flat sales as compared to the
third quarter of fiscal 2001. The flat growth and increased costs during the
third quarter reflects the initial effect of the roll-out of our new electronic
repair order system to many of our stores. In months when roll-outs occur, store
service sales and costs are impacted. The electronic repair order system
enhances our reconditioning efficiency and is expected to enhance the service
department and improve customer service.
CarMax Auto Finance Income
CarMax Auto Finance ("CAF") is a division of CarMax with operations located in
Kennesaw, Ga. CAF's lending business is limited to providing prime auto loans
for CarMax's new and used car sales. Because the purchase of an automobile is
traditionally reliant on the consumer's ability to obtain on-the-spot financing,
it is important to CarMax's business that such financing be available to
credit-worthy customers. While this financing can also be obtained from third
Page 18 of 30
party sources, CarMax is concerned that total reliance on such sources can
create an unacceptable volatility and business risk. Furthermore, we believe
that the CarMax processes, systems, transparency of CarMax pricing and vehicle
quality provide a unique and ideal environment to procure high-quality auto loan
receivables. CAF provides CarMax with the opportunity to capture additional
profits and cash flows from auto loan receivables while managing our reliance on
third party finance sources.
CAF income does not include any allocation of indirect costs or income. CarMax
presents this information on a direct basis to avoid making arbitrary decisions
regarding the periodic indirect benefit or costs that could be attributed to
this operation. Examples of indirect costs not included are retail store
expenses, retail financing commissions and corporate expenses such as human
resources, administrative services, marketing, information systems, accounting,
legal, treasury and executive payroll.
For the third quarter and first nine months of fiscal 2003 and 2002, CarMax Auto
Finance income was as follows:
Three Months Ended November 30 Nine Months Ended November 30
(Amounts in millions) 2002 % 2001 % 2002 % 2001 %
- ----------------------------------------------------------------------------------------------------------------------
Gains on sales of loans (1)........... $ 15.9 5.4 $ 15.6 6.5 $ 49.6 5.7 $ 43.3 6.1
---------------------------------------------------------------------------
Other income (2)...................... 6.8 1.6 5.5 1.5 22.2 1.8 17.6 1.7
----------------------------------------------------------------------------
Direct expenses (2)
Payroll and fringes expense...... 1.7 0.4 1.5 0.4 5.1 0.4 4.1 0.4
Other direct expenses............ 1.8 0.4 1.6 0.4 5.5 0.4 4.5 0.4
---------------------------------------------------------------------------
Total direct expenses................. 3.5 0.8 3.1 0.9 10.6 0.9 8.6 0.8
---------------------------------------------------------------------------
Total income (3)...................... $ 19.2 2.1 $ 18.0 2.1 $ 61.2 2.0 $52.3 2.0
===========================================================================
Average managed receivables........... $1,748.8 $ 1,439.7 $ 1,651.7 $1,361.7
Loans sold............................ $ 292.2 $ 241.5 $ 875.1 $ 715.1
Net sales and operating revenues...... $ 936.8 $ 852.7 $ 3,023.3 $2,678.6
(1) Percent of loans sold
(2) Annualized percent of averaged managed receivables
(3) Percent of net sales and operating revenues
Key Accounting Policies. CAF originates automobile loans to CarMax
consumers at competitive market rates of interest. CarMax sells the majority of
the loans it originates each month in a securitization transaction as described
in Note 6 to CarMax's consolidated financial statements. The majority of the
profit contribution from CAF is generated by the spread between the interest
rate charged to the consumer and the cost of funds. A gain results from
recording a receivable equal to the present value of the expected residual cash
flows generated by the securitized receivables. The cash flows are calculated
taking into account expected prepayment and default rates.
CarMax Auto Finance Performance. For the three months ended November 30,
2002, gains on the sales of loans were flat compared to the same period in the
prior year. Increases in loans sold driven by higher vehicle sales were
partially offset by an expected decrease in yield spreads. For the nine months
ended November 30, 2002, gains on sales of loans increased by $6.3 million. This
increase resulted from an increase in loans sold driven by higher sales volumes,
partially offset by a decrease in yield spreads. Other income and total direct
expenses for the three and nine month periods ended November 30, 2002, increased
proportionately to the increase in the managed receivables balance.
Managed Receivable Performance. CarMax is at risk for the performance of the
securitized receivables managed to the extent that it maintains a retained
interest in the receivables. Detail concerning the assumptions used to value the
retained interests and its sensitivity to adverse changes in the performance of
the managed receivables are included in Note 6 to CarMax's consolidated
financial statements. Information on CarMax's portfolio of managed receivables
is included below:
Page 19 of 30
As of November 30 As of February 28
(Amounts in millions) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------
Loans securitized.............................. $1,760.0 $1,446.3 $1,489.4 $1,215.4
Loans held for sale or investment.............. 34.0 10.1 13.9 11.6
----------------------------------------------------------
Ending managed receivables..................... $1,794.0 $1,456.4 $1,503.3 $1,227.0
========================================================
Accounts 31+ days past due..................... $ 25.9 $ 21.6 $ 22.3 $ 18.1
Past due accounts as a percentage of
ending managed receivables.................. 1.4% 1.5% 1.5% 1.5%
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------
Average managed receivables...................... $1,748.8 $1,439.7 $1,651.7 $1,361.7
Credit losses on managed receivables............. $ 4.9 $ 3.8 $ 12.3 $ 8.3
Annualized losses as a percentage of
average managed receivables................. 1.1% 1.1% 1.0% 0.8%
Delinquencies (the percentage of accounts greater than 31 days past due) and
annualized loss rates are impacted by seasonal trends. Delinquencies are
generally at their peak in the late fall and winter months. Annualized losses
peak in the winter and early spring months. Average delinquencies and annualized
losses are also impacted by the growth rate of the portfolio. When the average
age of the loans in the portfolio increases, the portfolio tends to experience
higher losses and delinquencies.
The increase in losses as a percent of managed receivables for the nine months
ended November 30, 2002, over the prior year resulted from a slow down in the
growth rate of CarMax's portfolio combined with general economic factors. The
growth rate of CarMax's portfolio has moderated over the last two years. CarMax
also experienced higher loss rates in the first six months of the year due
primarily to depressed wholesale values which lead to lower recovery rates on
repossessed vehicles.
If the managed receivables do not perform in accordance with the assumptions
CarMax uses in recording gains on sales, earnings could be impacted. Despite the
weak economic environment, the managed receivables continue to perform in line
with our initial gain assumptions.
Selling, General and Administrative Expenses
The selling, general and administrative expense ratio was 10.9 percent of sales
in the third quarter of fiscal 2003 and 9.7 percent of sales in the third
quarter of fiscal 2002. The increase in the expense ratio for the third quarter
of fiscal 2003 versus the third quarter of last fiscal year reflects the
one-time separation costs of $4.5 million, the expenses associated with the
ramping up of our geographic growth including pre-opening expenses, training and
recruiting, and incremental expenses caused by diseconomies of scale resulting
from the separation from Circuit City. These expenses include higher insurance
costs and health and welfare benefit costs. For the nine months ended November
30, 2002, the ratio was 9.7 percent of sales, compared with 9.2 percent in the
same period last year. The expense ratio in this year's first nine months
includes a higher level of expenses associated with geographic expansion, $7.6
million of one-time separation costs and the incremental expenses related to the
diseconomies of scale discussed above.
Interest Expense
Interest expense increased to $0.3 million for the third quarter of fiscal 2003
from $0.1 million in the same period last year. For the nine months ended
November 30, 2002, interest expense was $1.7 million, compared with $4.7 million
in the same period last year. The decline in interest expense for the nine
months ended November 30, 2002, is a result of lower average debt levels and
lower cost of funds.
Page 20 of 30
Income Taxes
The effective income tax rate increased to 39.5 percent for the third quarter of
fiscal 2003 from 38.0 percent for the third quarter of fiscal 2002. For the nine
months ended November 30, 2002, the effective income tax rate was 39.5 percent,
compared with 38.0 percent for the same period last year. The increase in the
fiscal 2003 effective tax rate reflects CarMax's non-tax deductible separation
costs of $4.5 million in the third quarter and $7.6 million in the first nine
months of the year.
Net Earnings
Third quarter fiscal 2003 net earnings decreased 20 percent to $14.7 million
from $18.4 million in the third quarter of fiscal 2002. Third quarter fiscal
2003 earnings include $4.5 million of one-time, non-tax-deductible costs
associated with the separation of CarMax from Circuit City. Excluding the
one-time separation costs, net earnings were 4 percent higher in the third
quarter of fiscal 2003 than the same period last year. For the nine months ended
November 30, 2002, net earnings increased 5 percent to $75.7 million from $72.4
million. Earnings for the nine months ended November 30, 2002, include $7.6
million of one-time, non-tax-deductible costs associated with the separation.
Excluding the one-time separation costs, net earnings increased 15 percent to
$83.3 million in the first nine months of fiscal 2003 compared with $72.4
million in the same period last year.
Operations Outlook
For more than two years, CarMax has demonstrated that its consumer offer and
business model can produce strong sales and earnings growth. At the beginning of
fiscal 2002, CarMax announced that it would resume geographic growth, opening
two superstores in late fiscal 2002, four to six superstores in fiscal 2003 and
six to eight stores in each of fiscal years 2004, 2005 and 2006. This expansion
is proceeding as planned with two more used car superstores scheduled to open
during the fourth quarter of the fiscal year, bringing the total number of
stores opened in fiscal 2003 to five.
Comparable store used unit sales growth is a primary driver of CarMax's
profitability. For the fourth quarter, we expect used unit comparable store
growth in the range of 4 percent to 7 percent, which would meet our forecast for
mid- to high- single-digit used unit comparable store growth in the second half.
For fiscal 2003, CarMax anticipates pro forma net earnings of 95 cents to $1.00
per CarMax share, excluding approximately 8 cents per share of one-time,
non-tax-deductible costs associated with the separation from Circuit City.
Fiscal 2003 has been a year of transition for CarMax as it ramps up its growth
pace and assumes additional expenses related to the separation. The expense
leverage that CarMax would expect from the used unit comparable store growth
during this fiscal year has been and will continue to be partially offset by
increased expenses resulting from diseconomies of scale, incremental expenses
due to the separation from Circuit City and costs related to the growth in the
number of CarMax stores. Increases in benefit plan costs, insurance and
management are examples of cost increases resulting from the separation. Growth
related costs include the development of a management bench for store expansion
for the next two fiscal years and pre-opening expenses for stores opening during
the fourth quarter of this fiscal year and the first half of next year. In
addition, other growth related costs such as training, recruiting and employee
relocation for new stores also moderate the expense leverage that CarMax would
expect from used unit comparable store growth this year.
For fiscal 2003, CarMax initially had anticipated that the cost of funds for CAF
would be higher than in fiscal 2002 and therefore, the spread between the cost
of funds and the interest rate paid by consumers would be lower in fiscal 2003,
resulting in lower CAF income. Based on the continued favorable interest rate
environment in fiscal 2003 thus far, CarMax anticipates a higher contribution
from CAF than originally expected for the fourth quarter. Beyond fiscal 2003,
CarMax expects cost of funds to increase from the historical lows experienced
recently. When that occurs, CarMax expects the spread will ultimately return to
more normal levels thereby reducing CAF's contribution to earnings.
Page 21 of 30
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting For Asset Retirement Obligations." 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. CarMax
does not expect the application of the provisions of SFAS No. 143 to have an
impact on the financial position, results of operations or cash flows of the
company.
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 EITF No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." It is effective for exit or disposal activities initiated
after December 31, 2002. CarMax does not expect the application of the
provisions of SFAS No. 146 to have an impact on the financial position, results
of operations or cash flows of the company.
Financial Condition
Liquidity and Capital Resources
Operating Activities. For the first nine months of fiscal 2003, CarMax generated
cash from operating activities of $72.7 million. In the same period last year,
CarMax generated cash from operating activities of $74.1 million.
Investing Activities. Net cash used in investing activities was $33.4 million in
the nine months ended November 30, 2002. In the first nine months of last fiscal
year, CarMax generated $73.4 million from investing activities.
CarMax capital expenditures increased to $71.3 million in the first nine months
of fiscal 2003, compared with $22.9 million in the first nine months of fiscal
2002. The increase in CarMax capital expenditures resulted from the resumption
of geographic growth, with five superstores opening since November 2001, the
planned opening of two superstores in the fourth quarter of fiscal 2003 and the
planned opening of six to eight stores in fiscal 2004.
Proceeds from the sale of property and equipment declined to $37.9 in the first
nine months of fiscal 2003, compared with $96.3 million in the first nine months
of last year. Proceeds from sales of property and equipment in the first nine
months of last year included amounts received from the sale-leaseback of nine
CarMax superstore properties. In the third quarter of fiscal 2002, CarMax
entered into a sale-leaseback transaction involving three properties valued at
approximately $37.6 million. The transaction was entered into at competitive
rates and structured with an initial lease term of 15 years with two 10-year
renewal options.
Financing Activities. Net cash used in financing activities was $11.0 million in
the first nine months of fiscal 2003, compared with net cash used of $146.3
million in the first nine months of last fiscal year. In the first quarter of
fiscal 2003, CarMax entered into a $200 million credit agreement with
DaimlerChrysler Services North America, LLC and Toyota Financial Services. This
agreement, which is secured by vehicle inventory, includes a $100 million
revolving loan commitment and a $100 million term loan. The terms for both
commitments are LIBOR-based and have initial two-year terms. As of November 30,
2002, the amounts outstanding under this credit agreement were $4.5 million for
the revolver and $100 million for the term loan.
Page 22 of 30
CarMax used a portion of the proceeds from the term loan for the repayment of
debt allocated by Circuit City Stores, the payment of a one-time special
dividend to Circuit City Stores of $28.4 million, the payment of transaction
expenses incurred in connection with the separation and general corporate
purposes.
At November 30, 2002, the aggregate principal amount of securitized automobile
loan receivables totaled $1.76 billion. During the fourth quarter of fiscal
2003, the company completed its fifth public automobile loan receivable
securitization. The total value of automobile loan receivables securitized
through this public offering was $500 million. At November 30, 2002, the unused
capacity of the warehouse facility was $107.0 million. This program matures in
June 2003. CarMax anticipates that it will be able to expand or enter into new
securitization arrangements to meet the future needs of the automobile loan
finance operation.
CarMax expects that proceeds from the credit agreement secured by vehicle
inventory, additional credit facilities, if needed, sale-leaseback transactions
and cash generated by operations will be sufficient to fund capital expenditures
and working capital of the CarMax business for the foreseeable future.
Forward-Looking Statements
--------------------------
This report on Form 10-Q contains "forward-looking statements," which are
subject to risks and uncertainties, including, but not limited to, risks
associated with the separation of the CarMax business from Circuit City Stores,
Inc. Additional discussion of factors that could cause actual results to differ
materially from management's projections, forecasts, estimates and expectations
is contained in the company's SEC filings, including the Form S-4 related to the
separation.
Page 23 of 30
ITEM 3.
QUANTITATIVE AND QUALITATIVE
----------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
Receivables Risk
CarMax manages the market risk associated with the automobile installment loan
portfolio of its finance operation. A portion of this portfolio has been
securitized in transactions accounted for as sales in accordance with SFAS No.
140 and, therefore, is not presented on the consolidated balance sheets.
Automobile Installment Loan Receivables. At November 30, 2002, and February 28,
2002, all loans in the portfolio of automobile loan receivables were fixed-rate
installment loans. Financing for these automobile loan receivables is achieved
through asset securitization programs that, in turn, issue both fixed- and
floating-rate securities. Interest rate exposure relating to floating rate
securitizations is managed through the use of interest rate swaps. Receivables
held for investment or sale are financed with working capital.
The total principal amount of receivables securitized or held for investment or
sale as of November 30, 2002, and February 28, 2002, was as follows:
(Amounts in millions) November 30 February 28
-------------------------------------------------------------------------------
Fixed-rate securitizations................. $ 1,117 $ 1,075
Floating-rate securitizations
synthetically altered to fixed.......... 102 413
Floating-rate securitizations.............. 541 1
Held for investment (1).................... 18 12
Held for sale (1).......................... 16 2
--------------------------------
Total...................................... $ 1,794 $ 1,503
================================
(1) Held by a bankruptcy-remote special purpose subsidiary.
Interest Rate Exposure. Interest rate exposure relating to the securitized
automobile loan receivables represents a market risk exposure that we manage
with matched funding and interest rate swaps matched to projected payoffs.
CarMax does not anticipate market risk from swaps because they are used on a
monthly basis to match funding costs to the use of the funding. Market risk is
the exposure created by potential fluctuations in interest rates. Generally,
changes only in interest rates do not have a material impact on CarMax's results
of operations.
CarMax also has interest rate risk from changing interest rates related to our
outstanding debt. Substantially all of our debt is floating rate debt based on
LIBOR. A 100 basis point increase in market interest rates would not have a
material effect on our fiscal 2003 results of operations or cash flows.
Credit risk is the exposure to nonperformance of another party to an agreement.
Credit risk is mitigated by dealing with highly rated bank counterparties. The
market and credit risks associated with financial derivatives are similar to
those relating to other types of financial instruments. Refer to Note 7 to the
CarMax, Inc. consolidated financial statements for a description of these items.
Page 24 of 30
Item 4.
Controls and Procedures
-----------------------
CarMax's principal executive officer and principal financial officer have
evaluated the effectiveness of CarMax's "disclosure controls and procedures," as
such term is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934,
as amended, within 90 days prior to the filing date of this Quarterly Report on
Form 10-Q. Based upon their evaluation, the principal executive officer and
principal financial officer concluded that CarMax's disclosure controls and
procedures are effective. There were no significant changes in CarMax's internal
controls or in other factors that could significantly affect these controls
since the date the controls were evaluated.
Page 25 of 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
CarMax is subject to various legal proceedings, claims and
liabilities that arise in the ordinary course of its business. In
the opinion of management, the amount of ultimate liability with
respect to these actions will not materially affect the financial
position or results of operations of CarMax.
Item 5. Other Information
In December 2002, the company completed its fifth public
automobile loan receivable securitization. The total value of
automobile loan receivables securitized through this public
offering was $500 million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) (i) Articles of Incorporation
(a) CarMax, Inc. Amended and Restated Articles of
Incorporation, effective June 6, 2002, filed as Exhibit
3.1 to CarMax's Current Report on Form 8-K, filed on
October 3, 2002 (File No. 1-31420), expressly
incorporated herein by this reference.
(b) CarMax, Inc. Articles of Amendment to the Amended and
Restated Articles of Incorporation, effective June 6,
2002, filed as Exhibit 3.2 to CarMax's Current Report
on Form 8-K, filed on October 3, 2002 (File No.
1-31420), expressly incorporated herein by this
reference.
(3) (ii) Bylaws
(a) CarMax, Inc. Bylaws, as amended and restated October 1,
2002, filed as Exhibit 3.3 to CarMax's Current Report
on Form 8-K, filed on October 3, 2002 (File No.
1-31420), expressly incorporated herein by this
reference.
(99) (i) Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(99) (ii) Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Page 26 of 30
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CARMAX, INC.
By: /s/ W. Austin Ligon
--------------------------------------
W. Austin Ligon
President and
Chief Executive Officer
By: /s/ Keith D. Browning
--------------------------------------
Keith D. Browning
Executive Vice President and
Chief Financial Officer
January 14, 2003
Page 27 of 30
I, W. Austin Ligon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CarMax, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ W. Austin Ligon
-----------------------------------
W. Austin Ligon
President and
Chief Executive Officer
Page 28 of 30
I, Keith D. Browning, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CarMax, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ Keith D. Browning
-----------------------------------
Keith D. Browning
Executive Vice President and
Chief Financial Officer
Page 29 of 30
EXHIBIT INDEX
-------------
(3) (i) Articles of Incorporation
(a) CarMax, Inc. Amended and Restated Articles of
Incorporation, effective June 6, 2002, filed as Exhibit
3.1 to CarMax's Current Report on Form 8-K, filed on
October 3, 2002 (File No. 1-31420), expressly
incorporated herein by this reference.
(b) CarMax, Inc. Articles of Amendment to the Amended and
Restated Articles of Incorporation, effective June 6,
2002, filed as Exhibit 3.2 to CarMax's Current Report
on Form 8-K, filed on October 3, 2002 (File No.
1-31420), expressly incorporated herein by this
reference.
(3) (ii) Bylaws
(a) CarMax, Inc. Bylaws, as amended and restated October 1,
2002, filed as Exhibit 3.3 to CarMax's Current Report
on Form 8-K, filed on October 3, 2002 (File No.
1-31420), expressly incorporated herein by this
reference.
(99)(i) Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(99) (ii) Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Page 30 of 30