Circuit City 1997 Annual Report Download - page 22

GLOBAL DIRECTMAIL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial statements include the accounts of Global DirectMail Corp and its
wholly-owned subsidiaries (collectively, the "Company" or "Global"). The Company is the successor to several corporations, previously
referred to as the Global Group, which were owned by related shareholders. In connection with the consummation of an initial public offering
in June 1995 (the "IPO"), the stockholders of these predecessor companies exchanged all of the outstanding capital stock for common shares of
Global. That transaction was accounted for as a pooling of interests.
DESCRIPTION OF BUSINESSES - The Company is involved in the marketing and sale of personal computers (PCs), notebook computers,
computer related products, office products and industrial products, through the distribution of mail order catalogs and a network of major
account sales representatives in the North America and Western Europe.
PRINCIPLES OF CONSOLIDATION - All significant intercompany accounts and transactions have been eliminated in consolidation. When
necessary, the results of operations of the Company's foreign subsidiaries have been adjusted to conform to accounting principles generally
accepted in the United States of America.
CASH AND CASH EQUIVALENTS - The Company considers amounts held in money market accounts and other short-term investments
with an original maturity date of approximately three months or less to be cash equivalents.
SALES RECOGNITION AND ACCOUNTS RECEIVABLE - The Company recognizes sales of products, including shipping revenue at the
time of shipment. Accounts receivable are shown in the consolidated balance sheets net of allowances for doubtful collections and subsequent
customer returns of approximately $7,338,000 and $7,724,000 at December 31, 1997 and 1996, respectively. The changes in these allowance
accounts are summarized as follows (in thousands):
INVENTORIES - Inventories consist primarily of finished goods and are stated at the lower of cost or market value. Cost is determined by
using the first-in, first-out method.
PREPAID CATALOG EXPENSE - Prepaid catalog expense includes (i) unused catalog paper, (ii) cost associated with the production and
mailing of finished catalogs, net of (iii) funding from certain of the Company's vendors for advertisements placed, advertising allowances and
incentives ("Co-op") relating to those catalogs. Finished catalog expense net of the respective Co-op is deferred and charged to expense over
the period that the catalog remains the most current selling vehicle, generally three months.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at cost. Depreciation of furniture, fixtures and equipment
is on the straight line or accelerated method over their estimated useful lives ranging from three to eight years. Depreciation of buildings is on
the straight line method over estimated useful lives of 30 to 50 years. Leasehold improvements are amortized over the lesser of their useful
lives or the term of the lease.
FOREIGN CURRENCY TRANSLATION - The financial statements of the foreign entities are translated into U.S. dollars, the reporting
currency, using year-end exchange rates for consolidated balance sheet items and average exchange rates for the consolidated statement of
income items. The translation differences are recorded directly in the consolidated statement of shareholders' equity.
FOREIGN CURRENCY TRANSACTIONS - Transactions in foreign currencies are recorded at the exchange rate in effect at the transaction
date. Realized and unrealized exchange gains and losses during the year are included in the respective year's consolidated statement of income.
RESEARCH AND DEVELOPMENT COSTS - Costs incurred in connection with research and development are expensed as incurred. Such
expenses for the years ended December 31, 1997, 1996 and 1995 aggregated approximately $674,000, $573,000 and $443,000, respectively.
GOODWILL, NET - Goodwill and negative goodwill are combined and presented net of the respective accumulated amortization. For
acquisitions that the Company has recorded as purchase transactions, the amount of the excess of the purchase price over the identifiable assets,
is recorded as goodwill. In instances where the Company had acquired a business below the fair value of the assets acquired, the Company
recorded negative goodwill. Goodwill and negative goodwill are being amortized over periods ranging from 10 to 40 years.
YEAR ENDED DECEMBER 31 1997 1996 1995
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Balance, beginning of year..................................$ 7,724 $7,731 $ 4,598
Charged to expense........................................... 3,283 2,745 4,178
Reductions, principally write-offs...........................(3,669) (2,752) (1,045)
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Balance, end of year........................................$ 7,338 $7,724 $ 7,731
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