CarMax 2001 Annual Report Download - page 61

Notes to Circuit City Group Financial Statements
1. BASIS OF PRESENTATION
The common stock of Circuit City Stores, Inc. consists of two
common stock series, which are intended to reflect the perfor-
mance of the Company'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 13). The
effects of this retained interest on the Circuit City Group’s finan-
cial statements are identified by the term “Inter-Group.” The
CarMax Group Common Stock is intended to track the perfor-
mance of the CarMax Group's operations. The Inter-Group
Interest is not considered outstanding CarMax Group Common
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 74.6 percent interest
in the CarMax Group at February 28, 2001, a 74.7 percent inter-
est at February 29, 2000, and a 76.6 percent interest at February
28, 1999. The terms of each series of common stock are dis-
cussed in detail in the Company's Form 8-A registration state-
ment on file with the SEC.
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 the financial statements, holders of Circuit
City Group Common Stock and holders of CarMax Group
Common 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 equity structure of the Company do 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. Net losses of either
Group, and dividends or distributions on, or repurchases of,
Circuit City Group Common Stock or CarMax Group Common
Stock will reduce funds legally available for dividends on, or
repurchases of, both stocks. Accordingly, the Circuit City Group
financial statements included herein should be read in conjunction
with the Company’s consolidated financial statements, the CarMax
Group financial statements and the Company's SEC filings.
The Circuit City Group’s financial statements reflect the appli-
cation of the management and allocation policies adopted by the
board of directors. These policies may be modified or rescinded,
or new policies may be adopted, at the sole discretion of the
board of directors, although the board of directors has no pre-
sent plans to do so. These management and allocation policies
include the following:
(A) FINANCIAL ACTIVITIES: Most financial activities are managed
by the Company on a centralized basis. Such financial activities
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, if any, 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.
(B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporate
general and administrative costs and other shared services gener-
ally have been allocated to the Circuit City Group based upon uti-
lization of such services by the Group. Where determinations based
on utilization alone have been impractical, other methods and cri-
teria are 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 financial state-
ment provision and the related tax payments or refunds are
reflected in each Group’s financial statements in accordance with
the Company’s tax allocation policy for such Groups. In general,
this policy provides that the consolidated tax provision and
related tax payments or refunds are allocated between the
Groups based principally upon the financial income, taxable
income, credits and other amounts directly related to each
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS: Cash equivalents of
$408,778,000 at February 28, 2001, and $581,736,000 at
February 29, 2000, consist of highly liquid debt securities with
original maturities of three months or less.
(B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For trans-
fers of financial assets that qualify as sales, the Company may
retain interest-only strips, one or more subordinated tranches,
residual interests in a securitization trust, servicing rights and a
cash reserve account, all of which are retained interests in the
securitized receivables. These retained interests are measured
based on the fair value at the date of transfer. The Company
determines fair value based on the present value of future
expected cash flows using management’s best estimates of the
key assumptions such as finance charge income, default rates,
payment rates, forward yield curves and discount rates appropri-
ate for the type of asset and risk. Retained interests are included
in net accounts receivable and are carried at fair value with
changes in fair value reflected in earnings.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company
enters into financial instruments on behalf of the Circuit City
Group. The carrying value of the Company's financial instru-
ments, excluding interest rate swaps held for hedging purposes,
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CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT