CarMax 2000 Annual Report Download - page 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT
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1. BASIS OF PRESENTATION
The common stock of Circuit City Stores,Inc.consists of two common
stock series,which are intended to reflect the performance of the Com-
pany’s two businesses. The Circuit City Group Common Stock is intended
to track the performance of the Circuit City store-related operations,
the Group’s retained interest in the CarMax Group and the Company’s
investment in Digital Video Express,which has been discontinued (see
Note 15). The CarMax Group Common Stock is intended to track the
performance of the CarMax Group’s operations. The Circuit City Group
held a 74.7 percent interest in the CarMax Group at February 29, 2000, a
76.6 percent interest at February 28, 1999, and a 77.3 percent interest at
February 28, 1998.
Notwithstanding the attribution of the Company’s assets and liabilities,
including contingent liabilities,and stockholders’equity between the
Circuit City Group and the CarMax Group for the purposes of preparing
their respective financial statements,holders of Circuit City Group Stock
and holders of CarMax Group 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 attribu-
tion 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 operations or financial condition
of the other Group. Accordingly, the Company’s consolidated financial
statements included herein should be read in conjunction with the finan-
cial statements of each Group.
On June 15, 1999, the board of directors declared a two-for-one split of the
outstanding Circuit City Group Common Stock in the form of a 100 per-
cent stock dividend. All share, earnings per share and dividends per share
calculations for the Circuit City Group included in the accompanying con-
solidated financial statements reflect this stock split.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Circuit City Group and the CarMax Group,which
combined comprise all accounts of the Company. All significant intercom-
pany balances and transactions have been eliminated in consolidation.
(B) CASH AND CASH EQUIVALENTS: Cash equivalents of $583,506,000 at
February 29, 2000, and $216,129,000 at February 28, 1999, consist of
highly liquid debt securities with original maturities of three months or less.
(C) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For transfers of finan-
cial assets that qualify as sales, the Company recognizes gains or losses as
a component of the Company’s finance operations. For transfers of finan-
cial 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 the provisions of SFAS No.
125,“Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.”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 present value of
the resulting cash flow projections is calculated using 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 29,2000,and February 28, 1999, cost
approximates fair value.
(D) FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of the
Company’s financial instruments,excluding interest rate swaps held for
hedging purposes,approximates fair value. Credit risk is the exposure
created by the potential nonperformance of another material party to
an agreement because of changes in economic,industry or geographic
factors. The Company mitigates credit risk by dealing only with counter-
parties that are highly rated by several financial rating agencies. Accord-
ingly, the Company does not anticipate material loss for nonperformance.
The Company broadly diversifies all financial instruments along industry,
product and geographic areas.
(E) INVENTORY: Inventory is stated at the lower of cost or market. Cost
is determined by the average cost method for the Circuit City Group’s
inventory and by specific identification for the CarMax Group’s vehicle
inventory. Parts and labor used to recondition vehicles,as well as trans-
portation and other incremental expenses associated with acquiring
vehicles,are included in the CarMax Group’s inventory.
(F) PROPERTY AND EQUIPMENT: Property and equipment is stated at cost
less accumulated depreciation and amortization. Depreciation and amor-
tization are calculated using the straight-line method over the assets’
estimated useful lives.
Property held under capital lease is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or
market value and is amortized on a straight-line basis over the lease term
or the estimated useful life of the asset,whichever is shorter.
(G) 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 Devel-
oped 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 development of internal-use software and payroll and payroll-related
costs for employees directly involved in the development of internal-use
software are capitalized. Amounts capitalized are amortized on a
straight-line basis over a period of three to five years.
(H) INTANGIBLE ASSETS: Amounts paid for acquired businesses in excess of
the fair value of the net tangible assets acquired are recorded as goodwill,
which is amortized on a straight-line basis over 15 years,and covenants
not to compete,which are amortized on a straight-line basis over the life
of the covenant not to exceed five years. Both goodwill and covenants not
to compete are included in other assets on the accompanying consoli-
dated balance sheets. Based upon the financial performance of the