CarMax 1999 Annual Report Download - page 38

(R) RISKS AND UNCERTAINTIES: Circuit City is a leading national
retailer of brand-name consumer electronics, personal computers,
major appliances and entertainment software. The diversity of
Circuit City’s products, customers, suppliers and geographic oper-
ations significantly reduces the risk that a severe impact will occur
in the near term as a result of changes in its customer base, com-
petition, sources of supply or markets. It is unlikely that any
one event would have a severe impact on the Company’s operat-
ing results.
Because of its investment in Divx, the Company is subject to
additional risks and uncertainties. Divx was formed to develop
and launch an enhancement for DVD players that provides signif-
icant copyright protection for movies released on Divx digital
discs and sets a new standard for home video convenience. While
management believes this product will gain widespread accep-
tance, there is no assurance that Divx ever will achieve significant
sales of such product. Other risks include limited operating his-
tory, no assurance of successful operations, early state of market
development, acquiring and maintaining licensing and manufac-
turing agreements, minimum compensation requirements under
studio license agreements, competition from substitute products
and services, rapid technological change, dependence on key per-
sonnel and vendors, development or assertions by or against Divx
relating to intellectual property rights, and the uncertainty of
availability of additional financing.
The CarMax Group is a used- and new-car retail business.
The diversity of the CarMax Group’s customers and suppliers
reduces the risk that a severe impact will occur in the near term as
a result of changes in its customer base or sources of supply.
However, due to the CarMax Group’s limited overall size, man-
agement cannot assure that unanticipated events will not have a
negative impact on the Company.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. Actual results could differ from
those estimates.
(S) CORPORATE ALLOCATIONS: The Company manages corpo-
rate general and administrative costs and other shared services on
a centralized basis. Allocations of these corporate activities and
their related expenses to the Groups is based on methods that the
Company believes to be reasonable.
The provision for federal income taxes is determined on a
consolidated basis. The financial statement provision is reflected
in each Group’s financial statements in accordance with the
Company’s tax allocation policy. In general, this policy provides
that the consolidated tax provision be allocated between the
Groups based principally upon the financial income, taxable
income, credits and other amounts directly related to the respec-
tive Group. Tax benefits that cannot be used by the Group gener-
ating such attributes, but can be utilized on a consolidated basis,
are allocated to the Group that generated such benefits.
(T) RECLASSIFICATIONS: Certain amounts in prior years have been
reclassified to conform to classifications adopted in fiscal 1999.
3. BUSINESS ACQUISITIONS
During fiscal 1999, CarMax acquired the franchise rights and the
related assets of four new-car dealerships for an aggregate cost of
$49.6 million. The acquisitions were financed through available
cash resources and the issuance of two promissory notes aggregat-
ing $8.0 million. Costs in excess of the fair value of the net tangi-
ble assets acquired (primarily inventory) have been recorded as
goodwill and covenants not to compete. These acquisitions were
accounted for under the purchase method and the results of the
operations of the acquired franchises have been included in the
accompanying consolidated financial statements since the date of
acquisition. Unaudited pro-forma information related to these
acquisitions is not included as the impact of these acquisitions on
the accompanying consolidated financial statements is not
deemed to be material.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 28 is summarized as
follows:
(Amounts in thousands) 1999 1998
Land and buildings (20 to 25 years)........ $ 107,310 $ 143,905
Land held for development..................... 28,781 11,601
Construction in progress ........................ 179,664 237,205
Furniture, fixtures and equipment
(3 to 8 years)...................................... 705,660 615,564
Leasehold improvements
(10 to 15 years).................................. 549,673 483,069
Capital leases, primarily buildings
(20 years)........................................... 12,471 12,471
1,583,559 1,503,815
Less accumulated depreciation and
amortization...................................... 577,786 455,381
Property and equipment, net.................. $1,005,773 $1,048,434
5. DEBT
Long-term debt at February 28 is summarized as follows:
(Amounts in thousands) 1999 1998
Term loans.................................................... $405,000 $405,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest
ranging from 5.0% to 7.0% ..................... 6,564 7,665
Obligations under capital leases [NOTE 10] ..... 12,728 12,928
Note payable................................................ 5,000 –
Total long-term debt .................................... 429,292 425,593
Less current installments .............................. 2,707 1,301
Long-term debt, excluding
current installments................................. $426,585 $424,292
In July 1994, the Company entered into a seven-year,
$100,000,000, unsecured bank term loan. The loan was restruc-
tured in August 1996 as a $100,000,000, six-year unsecured bank
term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.40 percent. At February 28, 1999,
the interest rate on the term loan was 5.76 percent.
36 CIRCUIT CITY STORES, INC. 1999 ANNUAL REPORT