VIRGINIA
|
54-1821055
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
12800
TUCKAHOE CREEK PARKWAY, RICHMOND, VIRGINIA
|
23238
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Yes
X
|
No
|
Large
accelerated filer X
|
Accelerated
filer _
|
|
Non-accelerated
filer _
|
Smaller
reporting company _
|
Yes
|
No
X
|
Class
|
Outstanding as of
September 30, 2008
|
|
Common
Stock, par value $0.50
|
220,429,817
|
|
Page
No.
|
|||
PART
I.
|
FINANCIAL
INFORMATION
|
||
Item
1. Financial Statements:
|
|||
Consolidated
Statements of Earnings -
Three
Months and Six Months Ended August 31, 2008 and 2007
|
3
|
||
Consolidated
Balance Sheets -
August
31, 2008, and February 29, 2008
|
4
|
||
|
|
Consolidated
Statements of Cash Flows -
Six
Months Ended August 31, 2008 and 2007
|
5
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
Item
2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations
|
21
|
||
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
|
37
|
||
Item
4. Controls and Procedures
|
38
|
||
PART
II.
|
OTHER
INFORMATION
|
||
Item
1. Legal Proceedings
|
39
|
||
Item
1A. Risk Factors
|
39
|
||
Item
4. Submission of Matters to a Vote of Security
Holders
|
39
|
||
Item
6. Exhibits
|
40
|
||
SIGNATURES
|
41
|
||
EXHIBIT
INDEX
|
42
|
Three
Months Ended August 31
|
Six
Months Ended August 31
|
|||||||||||||||||||||||||||||||
2008
|
% | (1) |
2007
|
% | (1) |
2008
|
% | (1) |
2007
|
% | (1) | |||||||||||||||||||||
Sales
and operating revenues:
|
||||||||||||||||||||||||||||||||
Used
vehicle
sales
|
$ | 1,476,317 | 80.3 | $ | 1,687,142 | 79.5 | $ | 3,293,165 | 81.4 | $ | 3,395,533 | 79.5 | ||||||||||||||||||||
New
vehicle sales
|
77,818 | 4.2 | 104,779 | 4.9 | 159,888 | 3.9 | 217,394 | 5.1 | ||||||||||||||||||||||||
Wholesale
vehicle
sales
|
223,269 | 12.1 | 265,282 | 12.5 | 465,596 | 11.5 | 526,434 | 12.3 | ||||||||||||||||||||||||
Other
sales and
revenues
|
61,650 | 3.4 | 65,327 | 3.1 | 129,168 | 3.2 | 130,303 | 3.1 | ||||||||||||||||||||||||
Net
sales and operating revenues
|
1,839,054 | 100.0 | 2,122,530 | 100.0 | 4,047,817 | 100.0 | 4,269,664 | 100.0 | ||||||||||||||||||||||||
Cost
of sales
|
1,583,141 | 86.1 | 1,834,336 | 86.4 | 3,509,190 | 86.7 | 3,697,249 | 86.6 | ||||||||||||||||||||||||
Gross
profit
|
255,913 | 13.9 | 288,194 | 13.6 | 538,627 | 13.3 | 572,415 | 13.4 | ||||||||||||||||||||||||
CarMax
Auto Finance (loss) income
|
(7,141 | ) | (0.4 | ) | 33,412 | 1.6 | 2,678 | 0.1 | 70,480 | 1.7 | ||||||||||||||||||||||
Selling,
general and administrative
|
||||||||||||||||||||||||||||||||
expenses
|
225,148 | 12.2 | 214,196 | 10.1 | 468,132 | 11.6 | 428,010 | 10.0 | ||||||||||||||||||||||||
Gain
on franchise
disposition
|
― | ― | 740 | ― | ― | ― | 740 | ― | ||||||||||||||||||||||||
Interest
expense
|
1,477 | 0.1 | 950 | ― | 3,535 | 0.1 | 2,966 | 0.1 | ||||||||||||||||||||||||
Interest
income
|
354 | ― | 245 | ― | 618 | ― | 623 | ― | ||||||||||||||||||||||||
Earnings
before income
taxes
|
22,501 | 1.2 | 107,445 | 5.1 | 70,256 | 1.7 | 213,282 | 5.0 | ||||||||||||||||||||||||
Provision
for income
taxes
|
8,495 | 0.5 | 42,450 | 2.0 | 26,692 | 0.7 | 82,932 | 1.9 | ||||||||||||||||||||||||
Net
earnings
|
$ | 14,006 | 0.8 | $ | 64,995 | 3.1 | $ | 43,564 | 1.1 | $ | 130,350 | 3.1 | ||||||||||||||||||||
Weighted
average common shares:
|
||||||||||||||||||||||||||||||||
Basic
|
217,600 | 215,891 | 217,347 | 215,592 | ||||||||||||||||||||||||||||
Diluted
|
220,944 | 220,580 | 221,145 | 220,355 | ||||||||||||||||||||||||||||
Net
earnings per share:
|
||||||||||||||||||||||||||||||||
Basic
|
$ | 0.06 | $ | 0.30 | $ | 0.20 | $ | 0.60 | ||||||||||||||||||||||||
Diluted
|
$ | 0.06 | $ | 0.29 | $ | 0.20 | $ | 0.59 | ||||||||||||||||||||||||
(1)(1)Percents
are calculated as a percentage of net sales and operating revenues and may
not equal totals due to rounding.
|
||||||||||||||||||||||||||||||||
|
August
31, 2008
|
February
29, 2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash
equivalents
|
$ | 10,917 | $ | 12,965 | ||||
Accounts
receivable,
net
|
59,149 | 73,228 | ||||||
Auto
loan receivables held for
sale
|
31,037 | 4,984 | ||||||
Retained
interest in securitized
receivables
|
311,027 | 270,761 | ||||||
Inventory
|
736,131 | 975,777 | ||||||
Prepaid
expenses and other current
assets
|
15,050 | 19,210 | ||||||
Total
current
assets
|
1,163,311 | 1,356,925 | ||||||
Property
and equipment,
net
|
960,524 | 862,497 | ||||||
Deferred
income
taxes
|
89,420 | 67,066 | ||||||
Other
assets
|
50,897 | 46,673 | ||||||
TOTAL
ASSETS
|
$ | 2,264,152 | $ | 2,333,161 | ||||
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 228,578 | $ | 306,013 | ||||
Accrued
expenses and other current
liabilities
|
62,038 | 58,054 | ||||||
Accrued
income
taxes
|
23,380 | 7,569 | ||||||
Deferred
income
taxes
|
17,468 | 17,710 | ||||||
Short-term
debt
|
12,600 | 21,017 | ||||||
Current
portion of long-term
debt
|
48,229 | 79,661 | ||||||
Total
current
liabilities
|
392,293 | 490,024 | ||||||
Long-term
debt, excluding current
portion
|
176,864 | 227,153 | ||||||
Deferred
revenue and other
liabilities
|
134,049 | 127,058 | ||||||
TOTAL
LIABILITIES
|
703,206 | 844,235 | ||||||
Commitments
and contingent
liabilities
|
||||||||
Shareholders’
equity:
|
||||||||
Common
stock, $0.50 par value; 350,000,000 shares authorized; 220,379,416
and 218,616,069 shares issued and outstanding
|
||||||||
as
of August 31, 2008, and February 29, 2008, respectively
|
110,190 | 109,308 | ||||||
Capital
in excess of par
value
|
668,959 | 641,766 | ||||||
Accumulated
other comprehensive
loss
|
(16,347 | ) | (16,728 | ) | ||||
Retained
earnings
|
798,144 | 754,580 | ||||||
TOTAL
SHAREHOLDERS’
EQUITY
|
1,560,946 | 1,488,926 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 2,264,152 | $ | 2,333,161 | ||||
See
accompanying notes to consolidated financial statements.
|
Six
Months Ended August 31
|
||||||||
2008
|
2007
|
|||||||
Operating
Activities:
|
||||||||
Net
earnings
|
$ | 43,564 | $ | 130,350 | ||||
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
||||||||
Depreciation
and
amortization
|
27,494 | 22,026 | ||||||
Share-based
compensation
expense
|
19,095 | 17,744 | ||||||
Loss
(gain) on disposition of
assets
|
1,547 | (28 | ) | |||||
Deferred
income tax
benefit
|
(22,777 | ) | (1,324 | ) | ||||
Net
decrease (increase) in:
|
||||||||
Accounts
receivable, net
|
14,079 | 15,248 | ||||||
Auto
loan receivables held for sale, net
|
(26,053 | ) | 1,698 | |||||
Retained
interest in securitized receivables
|
(40,266 | ) | (22,032 | ) | ||||
Inventory
|
239,646 | 15,945 | ||||||
Prepaid
expenses and other current assets
|
4,152 | (4,925 | ) | |||||
Other
assets
|
(215 | ) | 702 | |||||
Net
(decrease) increase in:
|
||||||||
Accounts
payable, accrued expenses and other current liabilities and accrued income
taxes
|
(48,356 | ) | (26,695 | ) | ||||
Deferred
revenue and other liabilities
|
6,991 | 24,316 | ||||||
Net
cash provided by operating
activities
|
218,901 | 173,025 | ||||||
Investing
Activities:
|
||||||||
Capital
expenditures
|
(137,519 | ) | (132,092 | ) | ||||
Proceeds
from sales of
assets
|
1,254 | 1,272 | ||||||
Purchases
of money market
securities
|
(4,009 | ) | (1,000 | ) | ||||
Purchases
of investments
available-for-sale
|
– | (4,000 | ) | |||||
Net
cash used in investing
activities
|
(140,274 | ) | (135,820 | ) | ||||
Financing
Activities:
|
||||||||
Decrease
in short-term debt,
net
|
(8,417 | ) | (618 | ) | ||||
Issuances
of long-term
debt
|
278,200 | 448,600 | ||||||
Payments
on long-term
debt
|
(359,921 | ) | (510,607 | ) | ||||
Equity
issuances,
net
|
9,100 | 9,947 | ||||||
Excess
tax benefits from share-based payment arrangements
|
363 | 3,607 | ||||||
Net
cash used in financing
activities
|
(80,675 | ) | (49,071 | ) | ||||
Decrease
in cash and cash
equivalents
|
(2,048 | ) | (11,866 | ) | ||||
Cash
and cash equivalents at beginning of
period
|
12,965 | 19,455 | ||||||
Cash
and cash equivalents at end of
period
|
$ | 10,917 | $ | 7,589 | ||||
See
accompanying notes to consolidated financial statements.
|
1.
|
Background
|
2.
|
Accounting
Policies
|
3.
|
CarMax Auto Finance
(Loss) Income
|
Three
Months Ended
August
31
|
Six
Months Ended
August
31
|
|||||||||||||||
(In
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Gain
on sales of loans originated and sold (1)
|
$ | 9.4 | $ | 24.7 | $ | 23.6 | $ | 52.0 | ||||||||
Other
(losses) gains (1)
|
(28.2 | ) | 0.3 | (45.2 | ) | 0.7 | ||||||||||
Total
(loss)
gain
|
(18.8 | ) | 25.0 | (21.6 | ) | 52.8 | ||||||||||
Other
CAF income:
|
||||||||||||||||
Servicing
fee
income
|
10.4 | 9.2 | 20.6 | 18.1 | ||||||||||||
Interest
income
|
11.2 | 7.8 | 22.2 | 15.6 | ||||||||||||
Total
other CAF
income
|
21.6 | 17.0 | 42.9 | 33.7 | ||||||||||||
Direct
CAF expenses:
|
||||||||||||||||
CAF
payroll and fringe benefit expense
|
4.7 | 3.8 | 9.2 | 7.4 | ||||||||||||
Other
direct CAF expenses
|
5.2 | 4.7 | 9.4 | 8.5 | ||||||||||||
Total
direct CAF expenses
|
10.0 | 8.5 | 18.6 | 16.0 | ||||||||||||
CarMax
Auto Finance (loss) income
|
$ | (7.1 | ) | $ | 33.4 | $ | 2.7 | $ | 70.5 | |||||||
(1)To
the extent we recognize valuation or other adjustments related to loans
originated in previous quarters of the same fiscal year, the sum of
amounts reported for the individual quarters may not equal the
year-to-date total.
|
4.
|
Securitizations
|
Three
Months Ended
August
31
|
Six
Months Ended
August
31
|
|||||||||||||||
(In
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Net
loans
originated
|
$ | 547.9 | $ | 620.9 | $ | 1,179.5 | $ | 1,263.2 | ||||||||
Total
loans
sold
|
$ | 575.3 | $ | 668.5 | $ | 1,201.8 | $ | 1,315.5 | ||||||||
Total
(loss)
gain
|
$ | (18.8 | ) | $ | 25.0 | $ | (21.6 | ) | $ | 52.8 | ||||||
Total
(loss) gain as a percentage of total loans sold
|
(3.3 | )% | 3.7 | % | (1.8 | )% | 4.0 | % |
(In
millions)
|
Assumptions
Used
|
Impact
on Fair
Value
of 10%
Adverse
Change
|
Impact
on Fair
Value
of 20%
Adverse
Change
|
|||||||||
Prepayment
rate
|
1.37% - 1.50 | % | $ | 7.3 | $ |
14.0
|
||||||
Cumulative
loss
rate
|
1.30% - 3.50 | % | $ | 9.8 | $ |
19.4
|
||||||
Annual
discount
rate
|
19.00 | % | $ | 4.7 | $ |
9.3
|
||||||
Warehouse
facility costs (1)
|
2.05 | % | $ | 2.0 | $ |
3.9
|
||||||
(1)Expressed
as a spread above appropriate benchmark rates. Applies only to
retained interest in receivables securitized through the warehouse
facility. As of
August
31, 2008, there were $600.0 million receivables in the warehouse
facility.
|
As
of August 31
|
As
of February 29 or 28
|
|||||||||||||||
(In
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Accounts
31+ days past
due
|
$ | 117.7 | $ | 75.7 | $ | 86.1 | $ | 56.9 | ||||||||
Ending
managed
receivables
|
$ | 4,061.4 | $ | 3,596.0 | $ | 3,838.5 | $ | 3,311.0 | ||||||||
Past
due accounts as a percentage of ending managed receivables
|
2.90 | % | 2.10 | % | 2.24 | % | 1.72 | % |
Three
Months Ended
August
31
|
Six
Months Ended
August
31
|
|||||||||||||||
(In
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Net
credit losses on managed receivables
|
$ | 16.7 | $ | 9.2 | $ | 27.0 | $ | 14.7 | ||||||||
Average
managed
receivables
|
$ | 4,039.9 | $ | 3,550.6 | $ | 3,990.4 | $ | 3,481.0 | ||||||||
Annualized
net credit losses as a percentage of average managed
receivables
|
1.65 | % | 1.04 | % | 1.35 | % | 0.85 | % | ||||||||
Recovery
rate
|
43.8 | % | 51.4 | % | 45.4 | % | 52.1 | % |
Three
Months Ended
August
31
|
Six
Months Ended
August
31
|
|||||||||||||||
(In
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Proceeds
from new securitizations
|
$ | 477.8 | $ | 542.5 | $ | 1,007.8 | $ | 1,031.5 | ||||||||
Proceeds
from collections
|
$ | 211.7 | $ | 289.5 | $ | 488.2 | $ | 593.1 | ||||||||
Servicing
fees received
|
$ | 10.4 | $ | 9.1 | $ | 20.4 | $ | 17.8 | ||||||||
Other
cash flows received from the retained interest:
|
||||||||||||||||
Interest-only
strip receivables
|
$ | 25.2 | $ | 25.7 | $ | 56.4 | $ | 47.5 | ||||||||
Reserve
account releases
|
$ | 2.9 | $ | 5.5 | $ | 3.1 | $ | 5.8 |
5.
|
Financial
Derivatives
|
6.
|
Fair Value
Measurements
|
|
Level 1
|
Inputs
include unadjusted quoted prices in active markets for identical assets or
liabilities that we can access at the measurement
date.
|
|
Level 2
|
Inputs
other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly, including quoted
prices for similar assets in active markets and observable inputs such as
interest rates and yield curves.
|
|
Level 3
|
Inputs
that are significant to the measurement that are not observable in the
market and include management's judgments about the assumptions market
participants would use in pricing the asset or liability (including
assumptions about
risk).
|
|
As
of August 31, 2008
|
|||||||||||||||
(In
millions)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
ASSETS
|
|
|
|
|
||||||||||||
Money
market securities
|
$ | 28.6 | $ | – | $ | – | $ | 28.6 | ||||||||
Retained
interest in securitized
receivables
|
– | – | 311.0 | 311.0 | ||||||||||||
Total
assets at fair value
|
$ | 28.6 | $ | – | $ | 311.0 | $ | 339.6 | ||||||||
|
||||||||||||||||
Percent
of total assets at fair value
|
8.4 | % | – | % | 91.6 | % | 100.0 | % | ||||||||
Percent
of total assets
|
1.3 | % | – | % | 13.7 | % | 15.0 | % | ||||||||
|
||||||||||||||||
LIABILITIES
|
||||||||||||||||
Financial
derivatives
|
$ | – | $ | 3.0 | $ | – | $ | 3.0 | ||||||||
Total
liabilities at fair value
|
$ | – | $ | 3.0 | $ | – | $ | 3.0 | ||||||||
|
||||||||||||||||
Percent
of total liabilities
|
– | % | 0.4 | % | – | % | 0.4 | % | ||||||||
|
(In
millions)
|
Retained
interest in securitized receivables
|
|||
Balance
as of March 1, 2008
|
$ | 270.8 | ||
Total
realized/unrealized losses
|
(37.1 | ) | ||
Purchases,
sales, issuances and settlements
|
77.3 | |||
Balance
as of August 31, 2008
|
$ | 311.0 | ||
|
||||
Change
in unrealized losses on assets still held (1)
|
$ | (24.2 | ) | |
(1) Reported
in CarMax Auto Finance income on the consolidated statements of
earnings.
|
7.
|
Income
Taxes
|
8.
|
Retirement
Plans
|
|
Three
Months Ended August 31
|
|||||||||||||||||||||||
Pension
Plan
|
Restoration
Plan
|
Total
|
||||||||||||||||||||||
(In
thousands)
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
||||||||||||||||||
Service
cost
|
$ | 3,231 | $ | 4,173 | $ | 214 | $ | 201 | $ | 3,445 | $ | 4,374 | ||||||||||||
Interest
cost
|
1,764 | 1,639 | 208 | 101 | 1,972 | 1,740 | ||||||||||||||||||
Expected
return on plan assets
|
(1,515 | ) | (1,108 | ) | – | – | (1,515 | ) | (1,108 | ) | ||||||||||||||
Amortization
of prior service cost
|
9 | 9 | 30 | 6 | 39 | 15 | ||||||||||||||||||
Recognized
actuarial loss
|
159 | 964 | 99 | 46 | 258 | 1,010 | ||||||||||||||||||
Net
pension expense
|
$ | 3,648 | $ | 5,677 | $ | 551 | $ | 354 | $ | 4,199 | $ | 6,031 |
|
|
Six
Months Ended August 31
|
|||||||||||||||||||||||
Pension
Plan
|
Restoration
Plan
|
Total
|
||||||||||||||||||||||
(In
thousands)
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
||||||||||||||||||
Service
cost
|
$ | 6,884 | $ | 7,836 | $ | 428 | $ | 294 | $ | 7,312 | $ | 8,130 | ||||||||||||
Interest
cost
|
3,530 | 2,998 | 416 | 204 | 3,946 | 3,202 | ||||||||||||||||||
Expected
return on plan assets
|
(2,690 | ) | (1,998 | ) | – | – | (2,690 | ) | (1,998 | ) | ||||||||||||||
Amortization
of prior service cost
|
18 | 18 | 60 | 12 | 78 | 30 | ||||||||||||||||||
Recognized
actuarial loss
|
288 | 1,486 | 198 | 92 | 486 | 1,578 | ||||||||||||||||||
Net
pension expense
|
$ | 8,030 | $ | 10,340 | $ | 1,102 | $ | 602 | $ | 9,132 | $ | 10,942 |
|
9.
|
Debt
|
10.
|
Share-Based
Compensation
|
Three
Months Ended
August
31
|
Six
Months Ended
August
31
|
|||||||||||||||
(In
thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Cost
of sales
|
$ | 528 | $ | 467 | $ | 1,003 | $ | 924 | ||||||||
CarMax
Auto Finance income
|
271 | 296 | 429 | 597 | ||||||||||||
Selling,
general and administrative expenses
|
8,979 | 7,960 | 18,267 | 16,876 | ||||||||||||
Share-based
compensation expense, before income taxes
|
$ | 9,778 | $ | 8,723 | $ | 19,699 | $ | 18,397 |
(Shares
and intrinsic value in thousands)
|
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (Years)
|
Aggregate
Intrinsic
Value
|
||||||||||||
Outstanding
as of March 1, 2008
|
13,648 | $ | 14.55 | |||||||||||||
Options
granted
|
2,220 | $ | 19.56 | |||||||||||||
Options
exercised
|
(709 | ) | $ | 12.84 | ||||||||||||
Options
forfeited or expired
|
(83 | ) | $ | 17.41 | ||||||||||||
Outstanding
as of August 31, 2008
|
15,076 | $ | 15.36 | 5.4 | $ | 23,926 | ||||||||||
Exercisable
as of August 31, 2008
|
9,625 | $ | 13.13 | 5.0 | $ | 22,402 |
As
of August 31, 2008
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||||
(Shares
in thousands)
Range
of Exercise Prices
|
Number
of Shares
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Number
of Shares
|
Weighted
Average Exercise Price
|
|||||||||||||||||
$ | 6.62 to $9.30 | 2,229 | 4.5 | $ | 7.16 | 2,229 | $ | 7.16 | ||||||||||||||
$ | 10.74 to $13.42 | 4,290 | 5.4 | $ | 13.20 | 3,321 | $ | 13.20 | ||||||||||||||
$ | 14.13 to $15.72 | 2,872 | 5.6 | $ | 14.71 | 2,754 | $ | 14.70 | ||||||||||||||
$ | 16.33 to $22.29 | 3,994 | 5.7 | $ | 18.61 | 888 | $ | 17.13 | ||||||||||||||
$ | 24.99 to $25.79 | 1,691 | 5.6 | $ | 25.04 | 433 | $ | 25.06 | ||||||||||||||
Total
|
15,076 | 5.4 | $ | 15.36 | 9,625 | $ | 13.13 |
Six
Months Ended August 31
|
||||||||
2008
|
2007
|
|||||||
Dividend
yield
|
0.0 | % | 0.0 | % | ||||
Expected
volatility factor (1)
|
34.8% - 60.9 | % | 28.0% - 54.0 | % | ||||
Weighted
average expected volatility
|
44.1 | % | 38.8 | % | ||||
Risk-free
interest rate (2)
|
1.5% - 3.7 | % | 4.6% - 5.0 | % | ||||
Expected
term (in years) (3)
|
4.8 – 5.2 | 4.2 - 4.4 | ||||||
(1)Measured
using historical daily price changes of our stock for a period
corresponding to the term of the option and the implied volatility derived
from the market prices of traded options on our stock.
(2)Based
on the U.S. Treasury yield curve in effect at the time of
grant.
(3)Represents
the estimated number of years that options will be outstanding prior to
exercise.
|
(In
thousands)
|
Number
of Shares
|
Weighted
Average Grant Date Fair Value
|
||||||
Outstanding
as of March 1, 2008
|
1,721 | $ | 21.04 | |||||
Restricted
stock granted
|
1,079 | $ | 19.82 | |||||
Restricted
stock vested or cancelled
|
(65 | ) | $ | 21.04 | ||||
Outstanding
as of August 31, 2008
|
2,735 | $ | 20.56 |
11.
|
Net Earnings per
Share
|
Three
Months
Ended
August 31
|
Six
Months
Ended
August 31
|
|||||||||||||||
(In thousands except per share
data)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Net
earnings available to common shareholders
|
$ | 14,006 | $ | 64,995 | $ | 43,564 | $ | 130,350 | ||||||||
|
||||||||||||||||
Weighted
average common shares outstanding
|
217,600 | 215,891 | 217,347 | 215,592 | ||||||||||||
Dilutive
potential common shares:
|
||||||||||||||||
Stock
options
|
2,356 | 4,161 | 2,873 | 4,288 | ||||||||||||
Restricted
stock
|
988 | 529 | 925 | 475 | ||||||||||||
Weighted
average common shares and dilutive potential common shares
|
220,944 | 220,580 | 221,145 | 220,355 | ||||||||||||
Basic
net earnings per share
|
$ | 0.06 | $ | 0.30 | $ | 0.20 | $ | 0.60 | ||||||||
Diluted
net earnings per share
|
$ | 0.06 | $ | 0.29 | $ | 0.20 | $ | 0.59 |
12.
|
Accumulated Other
Comprehensive Loss
|
(In
thousands, net of income taxes)
|
Unrecognized
Actuarial Losses
|
Unrecognized
Prior Service Cost
|
Total
Accumulated Other Comprehensive Loss
|
|||||||||
Balance
as of February 29, 2008
|
$ | 15,926 | $ | 802 | $ | 16,728 | ||||||
Amortization
expense
|
(328 | ) | (53 | ) | (381 | ) | ||||||
Balance
as of August 31, 2008
|
$ | 15,598 | $ | 749 | $ | 16,347 |
13.
|
Contingent
Liabilities
|
14.
|
Recent Accounting
Pronouncements
|
15.
|
Subsequent
Events
|
§
|
We
believe the slowdown in the economy and reductions in consumer spending
power resulting from higher gasoline and food costs continued to adversely
affect industry-wide sales in the automotive retail market in the second
quarter.
|
§
|
Net
sales and operating revenues decreased 13% to $1.84 billion from $2.12
billion in the second quarter of fiscal 2008, while net earnings declined
to $14.0 million, or $0.06 per share, from $65.0 million, or $0.29 per
share.
|
§
|
Total
used vehicle unit sales decreased 7%, reflecting the combination of a 17%
decrease in comparable store used unit sales partially offset by the
growth in our store base. Wholesale vehicle unit sales
decreased 9%, reflecting a decrease in both our appraisal traffic and our
appraisal buy rate (defined as the number of appraisal purchases as a
percent of vehicles appraised). New vehicle unit sales declined
24%, primarily reflecting the soft new car industry trends, as well as the
sale of one of our new car franchises in the second quarter of fiscal
2008.
|
§
|
We
opened three used car superstores in the second quarter, entering two new
markets and expanding our presence in one existing
market.
|
§
|
Our
total gross profit per retail unit decreased $116 to $2,753 from $2,869 in
the prior year’s second quarter. The majority of the decline
resulted from a $112 decrease in gross profit per used
vehicle. Our used vehicle gross profit per unit was pressured
by a combination of factors, including the sharply slower sales and the
decline in our appraisal buy rate.
|
§
|
CAF
reported a pretax loss of $7.1 million compared with income of $33.4
million in the second quarter of fiscal 2008. CAF results for
the second quarter of fiscal 2009 were reduced by $28.2 million for
adjustments primarily related to loans originated in prior fiscal
periods. In addition, CAF’s gain on loans originated and sold
as a percentage of loans originated and sold decreased to 1.8% from 4.0%
in the second quarter of fiscal 2008. This decline was due to
the combination of higher funding costs, higher loss and discount rate
assumptions and increased credit enhancement requirements in the warehouse
facility in fiscal 2009, as well as a decline in origination
volume.
|
§
|
Selling,
general and administrative expenses as a percent of net sales and
operating revenues (the “SG&A ratio”) increased to 12.2% from 10.1% in
the second quarter of fiscal 2008. The increase in the SG&A
ratio was the result of the significant decline in comparable store used
unit sales and average selling price. The increase in the ratio
was partially offset by a reduction of variable
costs.
|
§
|
For
the first half of the fiscal year, net cash provided by operations
increased to $218.9 million compared with $173.0 million in fiscal 2008,
primarily reflecting the benefit of a large reduction in used vehicle
inventories in fiscal 2009, partially offset by the decrease in net
earnings.
|
Three
Months Ended August 31
|
Six
Months Ended August 31
|
|||||||||||||||||||||||||||||||
(In
millions)
|
2008
|
%
|
2007
|
%
|
2008
|
%
|
2007
|
%
|
||||||||||||||||||||||||
Used
vehicle sales
|
$ | 1,476.3 | 80.3 | $ | 1,687.1 | 79.5 | $ | 3,293.2 | 81.4 | $ | 3,395.5 | 79.5 | ||||||||||||||||||||
New
vehicle sales
|
77.8 | 4.2 | 104.8 | 4.9 | 159.9 | 3.9 | 217.4 | 5.1 | ||||||||||||||||||||||||
Wholesale
vehicle sales
|
223.3 | 12.1 | 265.3 | 12.5 | 465.6 | 11.5 | 526.4 | 12.3 | ||||||||||||||||||||||||
Other
sales and revenues:
|
||||||||||||||||||||||||||||||||
Extended
service plan revenues
|
31.7 | 1.7 | 33.2 | 1.6 | 68.3 | 1.7 | 67.1 | 1.6 | ||||||||||||||||||||||||
Service
department sales
|
26.5 | 1.4 | 25.2 | 1.2 | 51.0 | 1.3 | 49.4 | 1.2 | ||||||||||||||||||||||||
Third-party
finance fees, net
|
3.4 | 0.2 | 6.9 | 0.3 | 9.9 | 0.2 | 13.8 | 0.3 | ||||||||||||||||||||||||
Total
other sales and revenues
|
61.7 | 3.4 | 65.3 | 3.1 | 129.2 | 3.2 | 130.3 | 3.1 | ||||||||||||||||||||||||
Total
net sales and operating revenues
|
$ | 1,839.1 | 100.0 | $ | 2,122.5 | 100.0 | $ | 4,047.8 | 100.0 | $ | 4,269.7 | 100.0 |
Three
Months
Ended
August 31
|
Six
Months
Ended
August 31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Vehicle
units:
|
||||||||||||||||
Used
vehicles
|
(7 | )% | 11 | % | 2 | % | 13 | % | ||||||||
New
vehicles
|
(24 | )% | (15 | )% | (25 | )% | (10 | )% | ||||||||
Total
|
(7 | )% | 9 | % | 1 | % | 11 | % | ||||||||
Vehicle
dollars:
|
||||||||||||||||
Used
vehicles
|
(12 | )% | 11 | % | (3 | )% | 14 | % | ||||||||
New
vehicles
|
(26 | )% | (14 | )% | (26 | )% | (9 | )% | ||||||||
Total
|
(13 | )% | 9 | % | (4 | )% | 12 | % |
Three
Months
Ended
August 31
|
Six
Months
Ended
August 31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Vehicle
units:
|
||||||||||||||||
Used
vehicles
|
(17 | )% | 3 | % | (8 | )% | 5 | % | ||||||||
New
vehicles
|
(20 | )% | (13 | )% | (19 | )% | (9 | )% | ||||||||
Total
|
(17 | )% | 2 | % | (8 | )% | 4 | % | ||||||||
Vehicle
dollars:
|
||||||||||||||||
Used
vehicles
|
(22 | )% | 3 | % | (12 | )% | 5 | % | ||||||||
New
vehicles
|
(21 | )% | (11 | )% | (20 | )% | (8 | )% | ||||||||
Total
|
(22 | )% | 2 | % | (13 | )% | 4 | % |
Three
Months
Ended
August 31
|
Six
Months
Ended
August 31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Used
car superstores, beginning of period
|
95 | 80 | 89 | 77 | ||||||||||||
Superstore
openings:
|
||||||||||||||||
Production
superstores
|
1 | ― | 4 | 1 | ||||||||||||
Non-production
superstores
|
2 | 1 | 5 | 3 | ||||||||||||
Total
superstore openings
|
3 | 1 | 9 | 4 | ||||||||||||
Used
car superstores, end of period
|
98 | 81 | 98 | 81 |
Three
Months
Ended
August 31
|
Six
Months
Ended
August 31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Used
vehicles
|
89,664 | 96,102 | 196,411 | 192,868 | ||||||||||||
New
vehicles
|
3,300 | 4,365 | 6,815 | 9,085 | ||||||||||||
Wholesale
vehicles
|
55,124 | 60,476 | 111,453 | 118,190 |
Three
Months
Ended
August 31
|
Six
Months
Ended
August 31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Used
vehicles
|
$ | 16,278 | $ | 17,388 | $ | 16,590 | $ | 17,434 | ||||||||
New
vehicles
|
$ | 23,434 | $ | 23,863 | $ | 23,319 | $ | 23,787 | ||||||||
Wholesale
vehicles
|
$ | 3,935 | $ | 4,278 | $ | 4,061 | $ | 4,344 |
Three
Months
Ended
August 31
|
Six
Months
Ended
August 31
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Vehicle
units:
|
||||||||||||||||
Used
vehicles
|
96 | % | 96 | % | 97 | % | 96 | % | ||||||||
New
vehicles
|
4 | 4 | 3 | 4 | ||||||||||||
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Vehicle
dollars:
|
||||||||||||||||
Used
vehicles
|
95 | % | 94 | % | 95 | % | 94 | % | ||||||||
New
vehicles
|
5 | 6 | 5 | 6 | ||||||||||||
Total
|
100 | % | 100 | % | 100 | % | 100 | % |
Estimate
Feb.
28, 2009(1)
|
August
31, 2008
|
Feb.
29, 2008
|
August
31, 2007
|
|||||||||||||
Production(2)
|
59 | 60 | 56 | 53 | ||||||||||||
Non-production
superstores(2)
|
40 | 38 | 33 | 28 | ||||||||||||
Total
used car superstores
|
99 | 98 | 89 | 81 | ||||||||||||
Co-located
new car stores
|
3 | 3 | 3 | 3 | ||||||||||||
Total
|
102 | 101 | 92 | 84 | ||||||||||||
(1)Effective
October 1, 2008, we converted the superstore in Tucson, Arizona, from a
production to a non-production store.
(2)The
Clearwater, Florida, superstore has been reclassified from a production to
a non-production superstore.
|
Three
Months Ended
August
31
|
Six
Months Ended
August
31
|
|||||||||||||||||||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||||||||
$
per unit (1)
|
% | (2) |
$
per unit (1)
|
% | (2) |
$
per unit (1)
|
% | (2) |
$
per unit (1)
|
% | (2) | |||||||||||||||||||||
Used
vehicle gross profit
|
$ | 1,870 | 11.4 | $ | 1,982 | 11.3 | $ | 1,800 | 10.7 | $ | 1,958 | 11.1 | ||||||||||||||||||||
New
vehicle gross profit
|
$ | 909 | 3.9 | $ | 1,072 | 4.5 | $ | 883 | 3.8 | $ | 1,039 | 4.3 | ||||||||||||||||||||
Wholesale
vehicle gross profit
|
$ | 897 | 22.2 | $ | 796 | 18.1 | $ | 840 | 20.1 | $ | 798 | 17.9 | ||||||||||||||||||||
Other
gross profit
|
$ | 385 | 58.0 | $ | 447 | 68.8 | $ | 420 | 66.1 | $ | 451 | 69.9 | ||||||||||||||||||||
Total
gross profit
|
$ | 2,753 | 13.9 | $ | 2,869 | 13.6 | $ | 2,650 | 13.3 | $ | 2,834 | 13.4 | ||||||||||||||||||||
(1)Calculated
as category gross profit divided by its respective units sold, except the
other and total categories, which are divided by total retail units
sold.
(2)Calculated
as a percentage of its respective sales or revenue.
|
Three
Months Ended
August
31
|
Six
Months Ended
August
31
|
|||||||||||||||||||||||||||||||
(In
millions)
|
2008
|
%
|
2007
|
%
|
2008
|
%
|
2007
|
%
|
||||||||||||||||||||||||
Total
(loss) gain (1)
|
$ | (18.8 | ) | (3.3 | ) | $ | 25.0 | 3.7 | $ | (21.6 | ) | (1.8 | ) | $ | 52.8 | 4.0 | ||||||||||||||||
Other
CAF income: (2)
|
||||||||||||||||||||||||||||||||
Servicing
fee income
|
10.4 | 1.0 | 9.2 | 1.0 | 20.6 | 1.0 | 18.1 | 1.0 | ||||||||||||||||||||||||
Interest
income
|
11.2 | 1.1 | 7.8 | 0.9 | 22.2 | 1.1 | 15.6 | 0.9 | ||||||||||||||||||||||||
Total
other CAF income
|
21.6 | 2.1 | 17.0 | 1.9 | 42.9 | 2.1 | 33.7 | 1.9 | ||||||||||||||||||||||||
Direct
CAF expenses: (2)
|
||||||||||||||||||||||||||||||||
CAF
payroll and fringe benefit expense
|
4.7 | 0.5 | 3.8 | 0.4 | 9.2 | 0.5 | 7.4 | 0.4 | ||||||||||||||||||||||||
Other
direct CAF expenses
|
5.2 | 0.5 | 4.7 | 0.5 | 9.4 | 0.5 | 8.5 | 0.5 | ||||||||||||||||||||||||
Total
direct CAF expenses
|
10.0 | 1.0 | 8.5 | 1.0 | 18.6 | 0.9 | 16.0 | 0.9 | ||||||||||||||||||||||||
CAF
(loss) income (3)
|
$ | (7.1 | ) | (0.4 | ) | $ | 33.4 | 1.6 | $ | 2.7 | 0.1 | $ | 70.5 | 1.7 | ||||||||||||||||||
Total
loans sold
|
$ | 575.3 | $ | 668.5 | $ | 1,201.8 | $ | 1,315.5 | ||||||||||||||||||||||||
Average
managed receivables
|
$ | 4,039.9 | $ | 3,550.6 | $ | 3,990.4 | $ | 3,481.0 | ||||||||||||||||||||||||
Ending
managed receivables
|
$ | 4,061.4 | $ | 3,596.0 | $ | 4,061.4 | $ | 3,596.0 | ||||||||||||||||||||||||
Total
net sales and operating revenues
|
$ | 1,839.1 | $ | 2,122.5 | $ | 4,047.8 | $ | 4,269.7 | ||||||||||||||||||||||||
Percent
columns indicate:
(1)
Percent of total loans sold.
(2)
Annualized percent of average managed receivables.
(3)
Percent of total net sales and operating revenues.
|
Three
Months
Ended
August 31
|
Six
Months
Ended
August 31
|
|||||||||||||||
(In
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Gain
on sales of loans originated and sold (1)
|
$ | 9.4 | $ | 24.7 | $ | 23.6 | $ | 52.0 | ||||||||
Other
(losses) gains (1)
|
(28.2 | ) | 0.3 | (45.2 | ) | 0.7 | ||||||||||
Total
(loss) gain
|
$ | (18.8 | ) | $ | 25.0 | $ | (21.6 | ) | $ | 52.8 | ||||||
Loans
originated and sold
|
$ | 526.9 | $ | 617.8 | $ | 1,153.4 | $ | 1,264.9 | ||||||||
Receivables
repurchased from term securitizations and
resold
|
48.4 | 50.7 | 48.4 | 50.7 | ||||||||||||
Total
loans sold
|
$ | 575.3 | $ | 668.5 | $ | 1,201.8 | $ | 1,315.5 | ||||||||
Gain
percentage on loans originated and sold
|
1.8 | % | 4.0 | % | 2.0 | % | 4.1 | % | ||||||||
Total
(loss) gain as a percentage of total loans sold
|
(3.3 | )% | 3.7 | % | (1.8 | )% | 4.0 | % | ||||||||
(1)To
the extent we recognize valuation or other adjustments related to loans
originated in previous quarters of the same fiscal year, the sum of
amounts reported for the individual quarters may not equal the
year-to-date total.
|
·
|
$15.7
million related to increases in loss rate assumptions, mainly for loans
originated in fiscal 2006, 2007 and 2008. The upper end of our
cumulative loss rate assumption range increased to 3.5% from
3.0%.
|
·
|
$7.7
million for a mark-to-market reduction in the carrying value of
subordinated bonds that we hold. These bonds have a face value
of $115 million, and they were part of three term securitizations
completed earlier in calendar year
2008.
|
·
|
$4.1
million related to increasing the discount rate used to value our retained
interest in securitized receivables to 19% from 17% used at the start of
fiscal 2009.
|
As
of
August
31
|
As
of
February
29 or 28
|
|||||||||||||||
(In
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Loans
securitized
|
$ | 3,931.6 | $ | 3,524.6 | $ | 3,764.5 | $ | 3,242.1 | ||||||||
Loans
held for sale or
investment
|
129.8 | 71.4 | 74.0 | 68.9 | ||||||||||||
Ending
managed
receivables
|
$ | 4,061.4 | $ | 3,596.0 | $ | 3,838.5 | $ | 3,311.0 | ||||||||
Accounts
31+ days past
due
|
$ | 117.7 | $ | 75.7 | $ | 86.1 | $ | 56.9 | ||||||||
Past
due accounts as a percentage of ending managed receivables
|
2.90 | % | 2.10 | % | 2.24 | % | 1.72 | % |
Three
Months
Ended
August 31
|
Six
Months
Ended
August 31
|
|||||||||||||||
(In
millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
Net
credit losses on managed receivables
|
$ | 16.7 | $ | 9.2 | $ | 27.0 | $ | 14.7 | ||||||||
Average
managed receivables
|
$ | 4,039.9 | $ | 3,550.6 | $ | 3,990.4 | $ | 3,481.0 | ||||||||
Annualized
net credit losses as a percentage of average
managed receivables
|
1.65 | % | 1.04 | % | 1.35 | % | 0.85 | % | ||||||||
Recovery
rate
|
43.8 | % | 51.4 | % | 45.4 | % | 52.1 | % |
Location
|
Television
Market
|
Market
Status
|
Production
Superstores
|
Non-Production
Superstores
|
FY09
Second Half:
|
||||
Hickory, North Carolina (1)
|
Charlotte
|
Existing
|
-
|
1
|
FY10
First Half:
|
||||
Potomac Mills,
Virginia
|
D.C.
/ Baltimore
|
Existing
|
-
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1
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Augusta, Georgia
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Augusta
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New
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-
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1
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Cincinnati, Ohio
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Cincinnati
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New
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1
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-
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(1)Opened
in September 2008.
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§
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Changes
in general U.S. or regional U.S. economic
conditions.
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§
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Changes
in the availability or cost of capital and working capital financing,
including the availability and cost of long-term financing to support our
geographic expansion and the availability and cost of financing auto loans
receivable.
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§
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Changes
in consumer credit availability related to our third-party financing
providers.
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§
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Changes
in the competitive landscape within our
industry.
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§
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Significant
changes in retail prices for used and new
vehicles.
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§
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A
reduction in the availability or access to sources of
inventory.
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§
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Factors
related to the regulatory environment in which we
operate.
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§
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The
loss of key employees from our store, region and corporate management
teams.
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§
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The
failure of key information systems.
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§
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The
effect of new accounting requirements or changes to U.S. generally
accepted accounting principles.
|
§
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Security
breaches or other events that result in the misappropriation, loss or
other unauthorized disclosure of confidential customer
information.
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§
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The
effect of various litigation
matters.
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§
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Our
inability to acquire or lease suitable real estate at favorable
terms.
|
§
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The
occurrence of severe weather
events.
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§
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Factors
related to seasonal fluctuations in our
business.
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§
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Factors
related to the geographic concentration of our
superstores.
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§
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The
occurrence of certain other material
events.
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(In
millions)
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August
31, 2008
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February
29, 2008
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||||||
Principal
amount of:
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||||||||
Fixed-rate
securitizations
|
$ | 2,866.7 | $ | 2,533.4 | ||||
Floating-rate
securitizations synthetically altered
to fixed (1)
|
1,064.5 | 1,230.6 | ||||||
Floating-rate
securitizations
|
0.4 | 0.5 | ||||||
Loans
held for investment (2)
|
98.8 | 69.0 | ||||||
Loans
held for sale (3)
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31.0 | 5.0 | ||||||
Total
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$ | 4,061.4 | $ | 3,838.5 | ||||
(1)Includes
$464.8 million of variable-rate securities issued in connection with
certain term securitizations that were synthetically altered to fixed at
the bankruptcy-remote special purpose entity.
(2)The
majority is held by a bankruptcy-remote special purpose
entity.
(3)Held
by a bankruptcy-remote special purpose entity.
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Item
1.
|
Legal
Proceedings
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Item
1A.
|
Risk
Factors
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Item
4.
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Submission
of Matters to a Vote of Security
Holders
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Item
6.
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Exhibits
|
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10.1
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Amendment
No. 2 to the Credit Agreement and Joinder Agreement, dated July 17, 2008,
by and among CarMax, Inc., CarMax Auto Superstores, Inc., various
subsidiaries of CarMax, various Lenders named therein, and Bank of America
N.A., as Administrative Agent, filed as Exhibit 10.1 to CarMax’s Current
Report on Form 8-K, filed July 22, 2008 (File No. 1-1420), is incorporated
by this reference.
|
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31.1
|
Certification
of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
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31.2
|
Certification
of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
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32.1
|
Certification
of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
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32.2
|
Certification
of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
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CARMAX,
INC.
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||
By:
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/s/ Thomas J.
Folliard
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Thomas
J. Folliard
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||
President
and
|
||
Chief
Executive Officer
|
||
By:
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/s/ Keith D.
Browning
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|
Keith
D. Browning
|
||
Executive
Vice President and
|
||
Chief
Financial Officer
|
|
10.1
|
Amendment
No. 2 to the Credit Agreement and Joinder Agreement, dated July 17, 2008,
by and among CarMax, Inc., CarMax Auto Superstores, Inc., various
subsidiaries of CarMax, various Lenders named therein, and Bank of America
N.A., as Administrative Agent, filed as Exhibit 10.1 to CarMax’s Current
Report on Form 8-K, filed July 22, 2008 (File No. 1-1420), is incorporated
by this reference.
|
|
31.1
|
Certification
of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
|
31.2
|
Certification
of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
|
32.1
|
Certification
of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
|
32.2
|
Certification
of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|