CarMax 1999 Annual Report Download - page 74

1. BASIS OF PRESENTATION
On January 24, 1997, shareholders of Circuit City Stores, Inc. and
its subsidiaries approved the creation of two common stock series.
The Company’s existing common stock was subsequently redesig-
nated as Circuit City Stores, Inc.–Circuit City Group Common
Stock. In an initial public offering, which was completed February
7, 1997, the Company sold 21.86 million shares of Circuit City
Stores, Inc.–CarMax Group Common Stock.
The Circuit City Group Common Stock is intended to track
the performance of the Circuit City store-related operations, the
Company’s investment in Digital Video Express and the Group’s
retained interest in the CarMax Group. The effects of this
retained interest on the Circuit City Group’s financial statements
are identified by the term “Inter-Group.” The CarMax Group
Common Stock is intended to track the performance of the
CarMax operations. The Inter-Group Interest is not considered
outstanding CarMax Stock. Therefore, any net earnings or loss
attributed to the Inter-Group Interest is not included in the
CarMax Group’s per share calculations. The Circuit City Group
held a 76.6 percent interest in the CarMax Group at February 28,
1999, 77.3 percent interest at February 28, 1998, and a 77.5 per-
cent interest at February 28, 1997.
The CarMax Group financial statements give effect to the
management and allocation policies adopted by the board of direc-
tors as described under “Corporate Activities.” The CarMax Group
financial statements have been prepared on a basis that manage-
ment believes to be reasonable and appropriate and include (i) the
historical financial position, results of operations and cash flows of
the CarMax Group, (ii) an allocated portion of the Company’s cash
equivalents and debt, including the related effects upon results of
operations and cash flows, and (iii) an allocated portion of the
Company’s corporate general and administrative costs.
Notwithstanding the attribution of the Company’s assets and
liabilities (including contingent liabilities) and stockholders’
equity between the CarMax Group and the Circuit City Group
for the purposes of preparing their respective financial statements,
holders of CarMax Stock and holders of Circuit City Stock are
shareholders of the Company and continue to be subject to all of
the risks associated with an investment in the Company and all of
its businesses, assets and liabilities. Such attribution and the
change in the equity structure of the Company does not affect
title to the assets or responsibility for the liabilities of the
Company or any of its subsidiaries. The results of operations or
financial condition of one Group could affect the results of opera-
tions or financial condition of the other Group. Accordingly, the
CarMax Group financial statements included herein should be
read in conjunction with the Company’s consolidated financial
statements and the Circuit City Group financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS: Allocated cash equivalents of
$14,750,000 at February 28, 1999, and $16,535,000 at February 28,
1998, consist of highly liquid debt securities with original maturi-
ties of three months or less.
(B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: The
Company adopted Statement of Financial Accounting Standards
No. 125, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities,” effective January 1,
1997. For transfers that qualify as sales, the Company recognizes
gains or losses as a component of the Company’s finance opera-
tions. For transfers of financial assets to qualify for sale accounting,
control over the assets must be surrendered at the time of sale.
Multiple estimates are used to calculate the gain or loss on sales of
receivables under SFAS No. 125. Finance charge income, default
rates and payment rates are estimated using projections developed
from the prior 12 months of operating history. These estimates are
adjusted for any industry or portfolio trends that have been
observed. The resulting cash flow projections are present valued at
a discount rate appropriate for the type of asset and risk. Retained
interests (such as residual interests in a securitization trust, cash
reserve accounts and rights to future interest from serviced assets
that exceed contractually specified servicing fees) are included in
net accounts receivable and are carried at fair value with changes in
fair value reflected in earnings. Loan receivables held for sale are
carried at the lower of cost or market, whereas loan receivables
held for investment are carried at cost less an allowance for losses.
At February 28, 1999 and 1998, cost approximates fair value.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company
enters into financial instruments on behalf of the CarMax Group.
The carrying value of the CarMax Group’s financial instruments
approximates fair value. Credit risk is the exposure to the poten-
tial nonperformance of another material party to an agreement
due to changes in economic, industry or geographic factors and is
mitigated by dealing only with counterparties that are highly
rated by several financial rating agencies. Accordingly, the
CarMax Group does not anticipate material loss for nonperfor-
mance. All financial instruments are broadly diversified along
industry, product and geographic areas.
(D) INVENTORY: Inventory is stated at the lower of cost or mar-
ket. Vehicle inventory cost is determined by specific identifica-
tion. Parts and labor used to recondition vehicles, as well as
transportation and other incremental expenses associated with
acquiring vehicles, are included in inventory.
(E) PROPERTY AND EQUIPMENT: Property and equipment is
stated at cost less accumulated depreciation. Depreciation is cal-
culated using the straight-line method over the assets’ estimated
useful lives.
(F) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the
Company adopted the American Institute of Certified Public
Accountants Statement of Position 98-1, “Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use.” Once the capitalization criteria of the SOP have been met,
external direct costs of materials and services used in the develop-
ment of internal-use software and payroll and payroll-related
costs for employees directly involved in the development of inter-
nal-use software are capitalized. Amounts capitalized are amor-
tized on a straight-line basis over a period of three to five years.
72 CIRCUIT CITY STORES, INC. 1999 ANNUAL REPORT
NOTES TO CARMAX GROUP FINANCIAL STATEMENTS