CarMax 2002 Annual Report Download - page 80

CIRCUIT CITY STORES, INC. ANNUAL REPORT 2002 78
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 CarMax Group Common
Stock is intended to reflect the performance of the CarMax
stores and related operations. 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
reserved CarMax Group shares are not outstanding CarMax
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
reserved CarMax Group shares at February 28, 2002, reflect the
effect of the public offering of CarMax Group Common Stock
completed during the second quarter of fiscal 2002. Refer to
the “Net Earnings” section below for further discussion of the
public offering.
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 all 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. com-
mon stock for each share of stock redeemed by the Company.
We anticipate that the holders of Circuit City Group Common
Stock would receive a fraction of a share of CarMax, Inc. com-
mon 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. CarMax, Inc.
has filed a registration statement regarding this transaction with
the Securities and Exchange Commission. This registration
statement contains pro forma financial information that is
intended to reflect the potential effects of the separation of the
two businesses.
Holders of CarMax Group Common Stock and holders of
Circuit City 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. The results of operations or financial con-
dition of one Group could affect the results of operations or
financial condition of the other Group. The discussion and
analysis for the CarMax Group presented below should be read
in conjunction with the discussion and analysis presented for
Circuit City Stores, Inc. and for the Circuit City Group and in
conjunction with all the Company’s SEC filings.
CRITICAL ACCOUNTING POLICIES
In Management’s Discussion and Analysis, we discuss the
results of operations and financial condition as reflected in the
CarMax Group financial statements. Preparation of financial
statements requires us to make estimates and assumptions
affecting the reported amounts of assets, liabilities, revenues and
expenses and the disclosures of contingent assets and liabilities.
We use our historical experience and other relevant factors
when developing our estimates and assumptions. We continu-
ally evaluate these estimates and assumptions. Note 2 to the
Group financial statements includes a discussion of our signifi-
cant accounting policies. The accounting policy discussed
below is one we consider critical to an understanding of the
Group financial statements because its application places the
most significant demands on our judgment. Our financial
results might have been different if different assumptions had
been used or other conditions had prevailed.
Calculation of the Value of Retained Interests in
Securitization Transactions
CarMax securitizes automobile loan receivables. The fair value
of retained interests from securitization activities is based on the
present value of expected future cash flows. The present value is
determined by using management’s projections of key factors,
such as finance charge income, default rates, payment rates and
discount rates appropriate for the type of asset and risk. These
projections are derived from historical experience, projected
economic trends and anticipated interest rates. Adjustments to
one or more of these projections may have a material impact on
the fair value of the retained interests. These projections may be
affected by external factors, such as changes in the behavior pat-
terns of our customers, changes in the strength of the economy
and developments in the interest rate markets. Note 2(A) to the
Group financial statements includes a discussion of our
accounting policies related to securitizations. Note 10 to the
Group financial statements includes a discussion of our auto-
mobile loan securitizations.
RESULTS OF OPERATIONS
Net Sales and Operating Revenues
Total sales for the CarMax Group increased 28 percent in fiscal
2002 to $3.20 billion. In fiscal 2001, total sales increased 24
percent to $2.50 billion from $2.01 billion in fiscal 2000.
CARMAX GROUP MANAGEMENT’S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION