CarMax 1999 Annual Report Download - page 65

CIRCUIT CITY STORES, INC. 1999 ANNUAL REPORT 63
CIRCUIT CITY GROUP
The market and credit risks associated with these interest rate
swaps are similar to those relating to other types of financial
instruments. Market risk is the exposure created by potential fluc-
tuations in interest rates and is directly related to the product
type, agreement terms and transaction volume. The Company
does not anticipate significant market risk from swaps, since their
use is to more closely match funding costs to the use of the fund-
ing. Credit risk is the exposure to nonperformance of another
party to an agreement. Credit risk is mitigated by dealing with
highly rated counterparties.
15. COMMITMENTS AND CONTINGENT LIABILITIES
(A) INVESTMENT IN DIVX: In May 1995, the Company agreed to
invest $30.0 million in Divx, a partnership that has developed and
is marketing a new home digital video system. That commitment
was increased to $130.0 million in September 1997. Although that
commitment was fulfilled during fiscal 1999, the Company contin-
ues to fund the operations of Divx as management continues to
explore various financing options. As of February 28, 1999, the
Company owned approximately 75 percent of the partnership.
The Company has been allocated 100 percent of the losses since
inception. The Company allocates its investment in Divx to the
Circuit City Group. As of February 28, 1999, the Company had
funded approximately $207 million for the operations of Divx.
(B) LICENSING AGREEMENTS: Divx has entered into licensing
agreements with motion picture distributors for use of their feature-
length films for the Divx system. The Company guarantees Divx’s
performance under these commitments. The licensing fees are based
on varying percentages of consumer viewing and wholesale receipts
and require minimum distributor compensation commencing from
the operational date of each agreement through the following one to
five years. As of February 28, 1999, the minimum compensation due
from Divx to the distributors is $101.0 million ($26.0 million in fiscal
2000, $32.0 million in fiscal 2001, $20.5 million in fiscal 2002, $14.5
million in fiscal 2003 and $8.0 million in fiscal 2004).
(C) LEGAL PROCEEDINGS: In the normal course of business, the
Company is involved in various legal proceedings. Based upon the
Circuit City Group’s evaluation of the information presently available,
management believes that the ultimate resolution of any such pro-
ceedings will not have a material adverse effect on the Circuit City
Group’s financial position, liquidity or results of operations.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
Net sales and operating
revenues ....................... $1,924,727 $1,679,350 $2,117,123 $1,814,139 $2,266,956 $1,917,133 $3,029,343 $2,585,969 $9,338,149 $7,996,591
Gross profit......................... $ 464,618 $ 401,649 $ 525,470 $ 453,559 $ 552,345 $ 466,396 $ 730,320 $ 648,553 $2,272,753 $1,970,157
Earnings before Inter-Group
Interest in the CarMax
Group........................... $ 15,748 $ 13,697 $ 34,427 $ 29,226 $ 21,575 $ 21,078 $ 94,688 $ 74,533 $ 166,438 $ 138,534
Net earnings ....................... $ 13,269 $ 12,749 $ 32,147 $ 27,879 $ 15,945 $ 14,012 $ 87,020 $ 57,434 $ 148,381 $ 112,074
Net earnings per share:
Basic ............................. $ 0.13 $ 0.13 $ 0.32 $ 0.28 $ 0.16 $ 0.14 $ 0.87 $ 0.58 $ 1.50 $ 1.14
Diluted......................... $ 0.13 $ 0.13 $ 0.32 $ 0.28 $ 0.16 $ 0.14 $ 0.86 $ 0.58 $ 1.48 $ 1.13
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the Circuit
City Group (as defined in Note 1) as of February 28, 1999 and 1998
and the related statements of earnings, group equity and cash flows
for each of the fiscal years in the three-year period ended February
28, 1999. These financial statements are the responsibility of Circuit
City Stores, Inc.’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and signifi-
cant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As more fully discussed in Note 1, the financial statements of
the Circuit City Group should be read in conjunction with the
consolidated financial statements of Circuit City Stores, Inc. and
subsidiaries and the financial statements of the CarMax Group.
The Circuit City Group has accounted for its interest in the
CarMax Group in a manner similar to the equity method of
accounting. Generally accepted accounting principles require that
the CarMax Group be consolidated with the Circuit City Group.
In our opinion, except for the effects of not consolidating the
Circuit City Group and the CarMax Group as discussed in the
preceding paragraph, the financial statements referred to above
present fairly, in all material respects, the financial position of the
Circuit City Group as of February 28, 1999 and 1998 and the
results of its operations and its cash flows for each of the fiscal
years in the three-year period ended February 28, 1999 in confor-
mity with generally accepted accounting principles.
Richmond, Virginia
April 2, 1999