CarMax 2002 Annual Report Download - page 42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The common stock of Circuit City Stores, Inc. consists of two
common stock series that are intended to reflect the performance
of the Company’s two businesses. The Circuit City Group
Common Stock is intended to reflect the performance of the
Circuit City stores and related operations and the shares of
CarMax Group Common Stock reserved for the Circuit City
Group or for issuance to holders of Circuit City Group Common
Stock. The CarMax Group Common Stock is intended to reflect
the performance of the CarMax stores and related operations.
The reserved CarMax Group shares are not outstanding CarMax
Group Common Stock. Therefore, net earnings attributed to the
reserved CarMax Group shares are included in the net earnings
and earnings per share attributed to the Circuit City Group
Common Stock and not in the earnings per share attributed to
the CarMax Group Common Stock.
During the second quarter of fiscal 2002, Circuit City Stores
completed the public offering of 9,516,800 shares of CarMax
Group Common Stock. The shares sold in the offering were
shares of CarMax Group Common Stock that previously had
been reserved for the Circuit City Group or for issuance to hold-
ers of Circuit City Group Common Stock. The net proceeds of
$139.5 million from the offering were allocated to the Circuit
City Group to be used for general purposes of the Circuit City
business, including remodeling of Circuit City Superstores. As
of February 28, 2002, 65,923,200 shares of CarMax Group
Common Stock were reserved for the Circuit City Group or for
issuance to holders of Circuit City Group Common Stock.
Excluding shares reserved for CarMax employee stock incen-
tive plans, the reserved CarMax Group shares represented 64.1
percent of the total outstanding and reserved shares of CarMax
Group Common Stock at February 28, 2002; 74.6 percent at
February 28, 2001; and 74.7 percent at February 29, 2000. The
terms of each series of common stock are discussed in detail in
the Company’s Form 8-A registration statement on file with the
Securities and Exchange Commission.
On February 22, 2002, Circuit City Stores, Inc. announced
that its board of directors had authorized management to initi-
ate a process that would separate the CarMax auto superstore
business from the Circuit City consumer electronics business
through a tax-free transaction in which CarMax, Inc., presently
a wholly owned subsidiary of Circuit City Stores, Inc., would
become an independent, separately traded public company.
CarMax, Inc. holds substantially all of the businesses, assets and
liabilities of the CarMax Group. The separation plan calls for
Circuit City Stores, Inc. to redeem the outstanding shares of
CarMax Group Common Stock in exchange for shares of com-
mon stock of CarMax, Inc. Simultaneously, shares of CarMax,
Inc. common stock, representing the shares of CarMax Group
Common Stock reserved for the holders of Circuit City Group
Common Stock, would be distributed as a tax-free dividend to
the holders of Circuit City Group Common Stock.
In the proposed separation, the holders of CarMax Group
Common Stock would receive one share of CarMax, Inc.
common stock for each share of CarMax Group Common
Stock redeemed by the Company. Management anticipates that
the holders of Circuit City Group Common Stock would
receive a fraction of a share of CarMax, Inc. common stock for
each share of Circuit City Group Common Stock they hold.
The exact fraction would be determined on the record date for
the distribution. The separation is expected to be completed by
late summer, subject to shareholder approval and final approval
from the board of directors.
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 as
such are 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. Neither shares of
Circuit City Group Common Stock nor shares of CarMax
Group Common Stock represent a direct equity or legal interest
solely in the assets and liabilities allocated to a particular Group.
Instead, those shares represent direct equity and legal interests
in the assets and liabilities of the Company. The results of oper-
ations or financial condition of one Group could affect the
results of operations 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
Company’s consolidated financial statements included herein
should be read in conjunction with the financial statements of
each Group and the Company’s SEC filings.
The financial statements of the Company reflect each
Group’s business as well as the allocation of the Company’s
assets, liabilities, expenses and cash flows between the Groups
in accordance with the policies adopted by the board of direc-
tors. These policies may be modified or rescinded, or new poli-
cies may be adopted, at the sole discretion of the board of
directors, although the board of directors has no present 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. Debt of the
Company is either allocated between the Groups (pooled debt)
or is allocated in its entirety to one Group. The pooled debt
bears interest at a rate based on the average pooled debt bal-
ance. Expenses related to increases in pooled debt are reflected
in the weighted average interest rate of such pooled debt.
CIRCUIT CITY STORES, INC. ANNUAL REPORT 2002 40