CarMax 1999 Annual Report Download - page 58

such a swap were terminated, the impact on the fair value of the
financial asset created by the sale of the related receivables would
be estimated and included in earnings.
(Q) 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 Circuit City’s operat-
ing results.
Because of the Company’s investment in Divx, the Circuit
City Group is subject to additional risks and uncertainties. Divx
was formed to develop and launch an enhancement for DVD
players that provides significant 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 acceptance, there is no assurance that Divx ever
will achieve significant sales of such product. Other risks include
limited operating history, no assurance of successful operations,
early state of market development, acquiring and maintaining
licensing and manufacturing agreements, minimum compensation
requirements under studio license agreements, competition from
substitute products and services, rapid technological change,
dependence on key personnel and vendors, development or asser-
tions by or against Divx relating to intellectual property rights,
and the uncertainty of availability of additional financing.
Because of the Inter-Group Interest, the Circuit City Group
also is subject to risks and uncertainties related to the CarMax
Group. The diversity of the CarMax Group’s customers and sup-
pliers 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 sup-
ply. However, due to the CarMax Group’s limited overall size,
management cannot assure that unanticipated events will not have
a negative impact on the Circuit City Group.
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.
(R) RECLASSIFICATIONS: Certain amounts in prior years have been
reclassified to conform to classifications adopted in fiscal 1999.
3. CORPORATE ACTIVITIES
The Circuit City Group’s financial statements reflect the application
of the management and allocation policies adopted by the board of
directors to various corporate activities, as described below:
(A) FINANCIAL ACTIVITIES: Most financial activities are man-
aged by the Company on a centralized basis. Such financial activi-
ties include the investment of surplus cash and the issuance and
repayment of short-term and long-term debt. Allocated invested
surplus cash of the Circuit City Group consists of (i) Company
cash equivalents, if any, that have been allocated in their entirety
to the Circuit City Group and (ii) a portion of the Company’s cash
equivalents that are allocated between the Groups. Allocated debt
of the Circuit City Group consists of (i) Company debt, if any,
that has been allocated in its entirety to the Circuit City Group
and (ii) a portion of the Company’s pooled debt, which is debt
allocated between the Groups. The pooled debt bears interest at a
rate based on the average pooled debt balance. Expenses related
to increases in pooled debt are reflected in the weighted average
interest rate of such pooled debt as a whole.
(B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Cor-
porate general and administrative costs and other shared services
generally have been allocated to the Circuit City Group based
upon utilization of such services by the Group. Where determina-
tions based on utilization alone have been impractical, other
methods and criteria were used that management believes are
equitable and provide a reasonable estimate of the costs
attributable to the Group.
(C) INCOME TAXES: The Circuit City Group is included in the
consolidated federal income tax return and certain state tax
returns filed by the Company. Accordingly, the provision for fed-
eral income taxes and related payments of tax are determined on a
consolidated basis. The financial statement provision and the
related tax payments or refunds are reflected in each Group’s
financial statements in accordance with the Company’s tax alloca-
tion policy for such Groups. In general, this policy provides that
the consolidated tax provision and related tax payments or
refunds will be allocated between the Groups based principally
upon the financial income, taxable income, credits and other
amounts directly related to the respective Group. Tax benefits that
cannot be used by the Group generating such attributes, but can
be utilized on a consolidated basis, are allocated to the Group that
generated such benefits. As a result, the allocated Group amounts
of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the Groups had filed separate tax
returns.
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)........ $ 59,823 $ 109,115
Construction in progress ........................ 103,309 97,980
Furniture, fixtures and equipment
(3 to 8 years)...................................... 654,156 584,110
Leasehold improvements
(10 to 15 years).................................. 534,015 478,679
Capital leases, primarily buildings
(20 years)........................................... 12,471 12,471
1,363,774 1,282,355
Less accumulated depreciation and
amortization...................................... 561,947 448,008
Property and equipment, net.................. $ 801,827 $ 834,347
56 CIRCUIT CITY STORES, INC. 1999 ANNUAL REPORT