UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 31, 2001
Commission File Number 1-5767
CIRCUIT CITY STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-0493875
-------- ----------
(State of Incorporation) (I.R.S. Employer
Identification No.)
9950 MAYLAND DRIVE, RICHMOND, VIRGINIA 23233
(Address of Principal Executive Offices and Zip Code)
(804) 527-4000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2001
----------------------------------------------------------------------------- ----------------------------
Circuit City Stores, Inc. - Circuit City Group Common Stock, par value $0.50 208,095,542
Circuit City Stores, Inc. - CarMax Group Common Stock, par value $0.50 26,643,573
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 40.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets -
May 31, 2001 and February 28, 2001 4
Consolidated Statements of Earnings -
Three Months Ended May 31, 2001 and 2000 5
Consolidated Statements of Cash Flows -
Three Months Ended May 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Circuit City Group Financial Statements:
Circuit City Group Balance Sheets -
May 31, 2001 and February 28, 2001 19
Circuit City Group Statements of Earnings -
Three Months Ended May 31, 2001 and 2000 20
Circuit City Group Statements of Cash Flows -
Three Months Ended May 31, 2001 and 2000 21
Notes to Circuit City Group Financial Statements 22
CarMax Group Financial Statements:
CarMax Group Balance Sheets -
May 31, 2001 and February 28, 2001 30
CarMax Group Statements of Earnings -
Three Months Ended May 31, 2001 and 2000 31
CarMax Group Statements of Cash Flows -
Three Months Ended May 31, 2001 and 2000 32
Notes to CarMax Group Financial Statements 33
Item 2. Management's Discussion and Analysis:
-------------------------------------
Circuit City Stores, Inc. Management's Discussion and Analysis
of Financial Condition and Results of Operations 14
Circuit City Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 26
CarMax Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 36
Page 2 of 42
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
-----------------------------------------------------------
Circuit City Stores, Inc. Quantitative and Qualitative Disclosures 18
About Market Risk
Circuit City Group Quantitative and Qualitative Disclosures 29
About Market Risk
CarMax Group Quantitative and Qualitative Disclosures 39
About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 6. Exhibits and Reports on Form 8-K 41
Page 3 of 42
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
May 31, 2001 Feb. 28, 2001
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 404,501 $ 446,131
Net accounts receivable 594,228 585,761
Inventory 1,731,833 1,757,664
Prepaid expenses and other current assets 68,913 57,623
-------------- -------------
Total current assets 2,799,475 2,847,179
Property and equipment, net 981,031 988,947
Other assets 34,241 35,207
-------------- -------------
TOTAL ASSETS $ 3,814,747 $ 3,871,333
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 132,414 $ 132,388
Accounts payable 821,591 902,560
Short-term debt 2,840 1,200
Accrued expenses and other current liabilities 154,795 162,972
Deferred income taxes 99,967 92,479
-------------- -------------
Total current liabilities 1,211,607 1,291,599
Long-term debt, excluding current installments 115,836 116,137
Deferred revenue and other liabilities 94,454 92,165
Deferred income taxes 13,527 14,949
-------------- -------------
TOTAL LIABILITIES 1,435,424 1,514,850
-------------- -------------
Stockholders' equity:
Circuit City group common stock, $0.50 par value;
350,000,000 shares authorized; 208,060,000 shares
issued and outstanding as of May 31, 2001 104,030 103,510
CarMax group common stock, $0.50 par value;
175,000,000 shares authorized; 26,437,000 shares
issued and outstanding as of May 31, 2001 13,218 12,820
Capital in excess of par value 651,414 642,838
Retained earnings 1,610,661 1,597,315
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,379,323 2,356,483
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,814,747 $ 3,871,333
============== =============
See accompanying notes to consolidated financial statements.
Page 4 of 42
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended
May 31
2001 2000
-------------- -------------
Net sales and operating revenues $ 2,678,474 $ 3,074,851
Cost of sales, buying and warehousing 2,112,121 2,391,589
-------------- -------------
Gross profit 566,353 683,262
-------------- -------------
Selling, general and administrative expenses 535,994 579,206
Interest expense 2,992 6,221
-------------- -------------
Total expenses 538,986 585,427
-------------- -------------
Earnings before income taxes 27,367 97,835
Provision for income taxes 10,400 37,177
-------------- -------------
Net earnings $ 16,967 $ 60,658
============== =============
Net earnings attributed to:
Circuit City group common stock $ 10,135 $ 57,123
CarMax group common stock 6,832 3,535
-------------- -------------
$ 16,967 $ 60,658
============== =============
Weighted average common shares:
Circuit City group:
Basic 204,936 202,865
============== =============
Diluted 205,491 205,877
============== =============
CarMax group:
Basic 25,934 25,519
============== =============
Diluted 27,704 26,918
============== =============
Net earnings per share attributed to:
Circuit City group common stock:
Basic $ 0.05 $ 0.28
============== =============
Diluted $ 0.05 $ 0.28
============== =============
CarMax group common stock:
Basic $ 0.26 $ 0.14
============== =============
Diluted $ 0.25 $ 0.13
============== =============
Dividends paid per share:
Circuit City group common stock $ 0.0175 $ 0.0175
============== =============
CarMax group common stock $ - $ -
============== =============
See accompanying notes to consolidated financial statements.
Page 5 of 42
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31
2001 2000
------------ ------------
Operating Activities:
Net earnings $ 16,967 $60,658
Adjustments to reconcile net earnings to net
cash used in operating activities of continuing operations:
Depreciation and amortization 39,182 34,568
(Gain) loss on sales of property and equipment (959) 545
Deferred income taxes 6,066 (1,418)
Changes in operating assets and liabilities:
(Increase) decrease in net accounts receivable (8,463) 3,726
Decrease (increase) in inventory 25,831 (159,699)
Increase in prepaid expenses and other current assets (11,287) (16,233)
Decrease (increase) in other assets 237 (2,030)
Decrease in accounts payable, accrued expenses and
other current liabilities (81,088) (10,448)
Increase (decrease) in deferred revenue and other liabilities 2,289 (1,475)
------------ ------------
Net cash used in operating activities of continuing operations (11,225) (91,806)
------------ ------------
Investing Activities:
Purchases of property and equipment (32,852) (33,807)
Proceeds from sales of property and equipment 3,248 17,471
------------ ------------
Net cash used in investing activities of continuing operations (29,604) (16,336)
------------ ------------
Financing Activities:
Proceeds from (payments on) issuance of short-term debt, net 1,640 (1,586)
Principal payments on long-term debt (275) (175,265)
Issuances of Circuit City group common stock, net 7,102 17,577
(Repurchases) issuances of CarMax group common stock, net (187) 58
Dividends paid on Circuit City group common stock (3,621) (3,570)
------------ ------------
Net cash provided by (used in) financing activities
of continuing operations 4,659 (162,786)
------------ ------------
Cash used in discontinued operations (5,460) (4,959)
------------ ------------
Decrease in cash and cash equivalents (41,630) (275,887)
Cash and cash equivalents at beginning of year 446,131 643,933
------------ ------------
Cash and cash equivalents at end of period $ 404,501 $ 368,046
============ ============
See accompanying notes to consolidated financial statements.
Page 6 of 42
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 stock is intended to reflect the
performance of the Circuit City store-related operations, the shares of
CarMax group stock reserved for the Circuit City group or for issuance to
holders of Circuit City group stock and the Company's investment in Digital
Video Express, which has been discontinued (see Note 8). The CarMax group
stock is intended to reflect the performance of the CarMax group's
operations. The reserved CarMax group shares are not outstanding CarMax
group common stock. Any net earnings attributed to the reserved CarMax
group shares are not included in the CarMax group's per share calculations.
As of May 31, 2001, 75,440,000 shares of CarMax group stock were reserved
for the Circuit City group or for issuance to holders of Circuit City group
stock. The reserved CarMax group shares represented 74.1% of the total
outstanding and reserved shares, excluding shares reserved for CarMax
employees' stock incentive plans, of CarMax group stock at May 31, 2001,
74.6% at February 28, 2001, and 74.7% at May 31, 2000. The Company
allocates to the Circuit City group the portion of the net earnings of the
CarMax group attributed to the reserved CarMax group shares. 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 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 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 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 CarMax group stock nor shares of Circuit
City group 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 operations 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 stock or CarMax
group stock will reduce funds legally available for dividends on, or
repurchases of, both stocks. Accordingly, the Company's consolidated
financial statements included in this report should be read in conjunction
with the financial statements of each group and the Company's SEC filings.
2. Accounting Policies
The consolidated financial statements of the Company conform to accounting
principles generally accepted in the United States of America. The interim
period financial statements are unaudited; however, in the opinion of
management, all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation of the interim consolidated
financial statements have been included. The fiscal year-end balance sheet
data was derived from the audited financial statements included in the
Company's fiscal 2001 Annual Report on Form 10-K.
Page 7 of 42
3. Net Earnings per Share
Reconciliations of the numerator and denominator of basic and diluted net
earnings per share are presented below.
Three Months Ended
(Amounts in thousands May 31
except per share data) 2001 2000
--------------------------------------------------------------------------------------------------
Circuit City Group:
Weighted average shares............................................ 204,936 202,865
Dilutive potential shares:
Options......................................................... 114 2,202
Restricted stock................................................ 441 810
-----------------------------
Weighted average shares and
dilutive potential shares....................................... 205,491 205,877
=============================
Net earnings available to shareholders............................. $ 10,135 $ 57,123
=============================
Basic net earnings per share....................................... $ 0.05 $ 0.28
=============================
Diluted net earnings per share..................................... $ 0.05 $ 0.28
=============================
CarMax Group:
Weighted average shares............................................ 25,934 25,519
Dilutive potential shares:
Options......................................................... 1,714 1,212
Restricted stock................................................ 56 187
-----------------------------
Weighted average shares and
dilutive potential shares....................................... 27,704 26,918
=============================
Net earnings available to shareholders............................. $ 6,832 $ 3,535
=============================
Basic net earnings per share....................................... $ 0.26 $ 0.14
=============================
Diluted net earnings per share..................................... $ 0.25 $ 0.13
=============================
Certain options were outstanding and not included in the computation of
diluted net earnings per share because the options' exercise prices were
greater than the average market price of the common shares. For the
three-month period ended May 31, 2001, options to purchase 8,371,534 shares
of Circuit City group stock at prices ranging from $13.88 to $47.53 per
share were outstanding and not included in the calculation. For the
three-month period ended May 31, 2000, options to purchase 100,000 shares
of Circuit City group stock at $56.28 per share were outstanding and not
included in the calculation.
For the three-month period ended May 31, 2001, options to purchase 289,427
shares of CarMax group stock at prices ranging from $9.19 to $16.31 per
share were outstanding and not included in the calculation. For the
three-month period ended May 31, 2000, options to purchase 1,512,376 shares
of CarMax group stock at prices ranging from $3.91 to $16.31 per share were
outstanding and not included in the calculation.
4. Securitizations
(A) Credit Card Securitizations:
The Company enters into securitization transactions, which allow for the
sale of credit card receivables to unrelated entities, to finance the
consumer revolving credit receivables generated by Circuit City's finance
operation. For transfers of receivables that qualify as sales, the Company
recognizes gains or losses as a component of Circuit City's finance
operation. In these securitizations, the Company retains servicing rights
and subordinated interests.
Page 8 of 42
At May 31, 2001, the total principal amount of loans managed was $2,599
million. Of the total loans, the principal amount of loans securitized was
$2,558 million and the principal amount of loans held for sale was $41
million. The aggregate amount of loans that were 31 days or more delinquent
was $176.4 million at May 31, 2001. The principal amount of losses net of
recoveries amounted to $69.6 million for the three months ended May 31,
2001.
The Company receives annual servicing compensation approximating 2% of the
outstanding principal loan balance of the receivables and retains the
rights to future cash flows arising after the investors in the
securitization trusts have received the return for which they contracted.
The servicing fees specified in the credit card securitization agreements
adequately compensate the finance operation for servicing the securitized
assets. Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from and paid to
securitization trusts:
Three Months Ended
(Amounts in thousands) May 31, 2001
--------------------------------------------------------------------------------
Proceeds from new securitizations........................... $174,200
Proceeds from collections reinvested
in previous credit card securitizations................... $359,557
Servicing fees received..................................... $ 13,326
Other cash flows received on retained interests*............ $ 44,215
*This amount represents cash flows received from retained interests by the
transferor other than servicing fees, including cash flows from
interest-only strips and cash above the minimum required level in cash
collateral accounts.
In determining the fair value of retained interests, the Company estimates
future cash flows using management's best estimates of key assumptions such
as finance charge income, default rates, payment rates, forward yield
curves and discount rates. The Company employs a risk-based pricing
strategy that increases the stated annual percentage rate for accounts that
have a higher predicted risk of default. Accounts with a lower risk profile
may qualify for promotional financing.
Rights recorded for future finance income from serviced assets that exceed
the contractually specified servicing fees are carried at fair value,
amounted to $134.8 million at May 31, 2001, and are included in net
accounts receivable. Gains of $37.1 million on sales were recorded for the
three-month period ended May 31, 2001.
The fair value of retained interests at May 31, 2001, was $254.5 million,
with a weighted-average life ranging from 0.4 years to 2.5 years. The
following table shows the key economic assumptions used in measuring the
fair value of retained interests at May 31, 2001, and a sensitivity
analysis showing the hypothetical effect on the fair value of those
interests when there are unfavorable variations from the assumptions used.
Key economic assumptions at May 31, 2001, are not materially different from
assumptions used to measure the fair value of retained interests at the
time of securitization. These sensitivities are hypothetical and should be
used with caution. In this table, the effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumption; in reality, changes in one factor may result
in changes in another, which might magnify or counteract the sensitivities.
Impact on Fair Impact on Fair
Assumptions Used Value of 10% Value of 20%
(Dollar amounts in thousands) (Annual) Adverse Change Adverse Change
---------------------------------------------------------------------------------------------------------
Payment rate........................... 7.0 - 11.1% $ 10,267 $ 18,412
Default rate........................... 7.8 - 15.4% $ 21,448 $ 42,896
Discount rate.......................... 9.0 - 15.0% $ 2,636 $ 5,230
Page 9 of 42
(B) Automobile Loan Securitizations:
The Company also has asset securitization programs, operated through
special purpose subsidiaries on behalf of the CarMax group, to finance the
consumer installment credit receivables generated by CarMax's automobile
loan finance operation. For transfers of receivables that qualify as sales,
the Company recognizes gains or losses as a component of CarMax's finance
operation. In these securitizations, the Company retains servicing rights
and subordinated interests.
At May 31, 2001, the total principal amount of loans managed was $1,357
million. Of the total loans, the principal amount of loans securitized was
$1,337 million and the principal amount of loans held for sale or
investment was $20 million. The principal amount of loans that were 31 days
or more delinquent was $17.4 million at May 31, 2001. The principal amount
of losses net of recoveries amounted to $1.9 million for the three months
ended May 31, 2001.
The Company receives annual servicing fees approximating 1% of the
outstanding principal balance of the securitized automobile loans and
retains the rights to future cash flows arising after the investors in the
securitization trusts have received the return for which they contracted.
The servicing fees specified in the automobile loan securitization
agreements adequately compensate the finance operation for servicing the
accounts. Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from and paid to
securitization trusts:
Three Months Ended
(Amounts in thousands) May 31, 2001
-------------------------------------------------------------------------------------
Proceeds from new securitizations............................... $ 195,000
Proceeds from collections reinvested
in previous automobile loan securitizations................... $ 91,464
Servicing fees received......................................... $ 3,252
Other cash flows received on retained interests*................ $ 13,385
*This amount represents cash flows received from retained interests by the
transferor other than servicing fees, including cash flows from
interest-only strips and cash above the minimum required level in cash
collateral accounts.
In determining the fair value of retained interests, the Company estimates
future cash flows using management's best estimates of key assumptions such
as finance charge income, default rates, prepayment rates and discount
rates. The Company employs a risk-based pricing strategy that increases the
stated annual percentage rate for accounts that have a higher predicted
risk of default. Accounts with a lower risk profile may qualify for
promotional financing.
Rights recorded for future finance income from serviced assets that exceed
the contractually specified servicing fees are carried at fair value,
amounted to $51.4 million at May 31, 2001, and are included in net accounts
receivable. Gains of $13.1 million on sales were recorded for the
three-month period ended May 31, 2001.
The fair value of retained interests at May 31, 2001, was $84.2 million,
with a weighted-average life ranging from 1.5 years to 1.8 years. The table
below shows the key economic assumptions used in measuring the fair value
of retained interests at May 31, 2001, and a sensitivity analysis showing
the hypothetical effect on the fair value of those interests when there are
unfavorable variations from the assumptions used. Key economic assumptions
at May 31, 2001, are not materially different from assumptions used to
measure the fair value of retained interests at the time of securitization.
These sensitivities are hypothetical and should be used with caution. In
this table, the effect of a variation in a particular assumption on the
fair value of the retained interest is calculated without changing any
other assumption; in reality, changes in one factor may result in changes
in another, which might magnify or counteract the sensitivities.
Page 10 of 42
Impact on Fair Impact on Fair
Assumptions Used Value of 10% Value of 20%
(Dollar amounts in thousands) (Annual) Adverse Change Adverse Change
---------------------------------------------------------------------------------------------------------
Prepayment speed........................ 1.5 - 1.6% $ 1,739 $ 4,122
Default rate............................ 1.0 - 1.2% $ 1,547 $ 3,098
Discount rate........................... 12.0% $ 978 $ 1,933
5. Financial Derivatives
On behalf of the Circuit City group, the Company enters into interest rate
cap agreements to meet the requirements of the credit card receivable
securitization transactions. In the first quarter of fiscal 2002, the
Company did not enter into any new interest rate caps. At May 31, 2001, the
total notional amount of interest rate caps outstanding was $839 million.
Purchased interest rate caps are included in net accounts receivable with a
fair value of $8.9 million as of May 31, 2001. Written interest rate caps
are included in accounts payable with a fair value of $8.9 million as of
May 31, 2001.
On behalf of the CarMax group, the Company, in the first quarter of fiscal
2002, entered into three 40-month amortizing interest rate swaps related to
auto loan receivable securitizations. These swaps had an initial notional
amount of approximately $213 million. The total notional amount of all
swaps related to the automobile loan receivable securitizations was $493
million at May 31, 2001, and $299 million at February 28, 2001. These swaps
are used to better match funding costs and are recorded at fair value. At
May 31, 2001, these swaps totaled a net liability of $5.2 million and are
included in accounts payable.
The market and credit risks associated with interest rate caps and interest
rate swaps are similar to those relating to other types of financial
instruments. Market risk is the exposure created by potential fluctuations
in interest rates and is directly related to the product type, agreement
terms and transaction volume. The Company has entered into offsetting
interest rate cap positions, and therefore, does not anticipate significant
market risk arising from interest rate caps. The Company does not
anticipate significant market risk from swaps, because their use is to
match funding costs to the use of the funding. Credit risk is the exposure
to nonperformance of another party to an agreement. The Company mitigates
credit risk by dealing with highly rated counterparties.
6. Appliance Exit Costs
On July 25, 2000, the Company announced plans to exit the major appliance
category and expand its selection of key consumer electronics and home
office products in all Circuit City Superstores. A product profitability
analysis had indicated that the appliance category produced below-average
profits. This analysis, combined with declining sales, expected increases
in appliance competition and the Company's profit expectations for the
consumer electronics and home office categories led to the decision to exit
the major appliance category. To exit the appliance business, the Company
closed six distribution centers and seven service centers in fiscal 2001
and expects to close two distribution centers and one service center by
July 31, 2001. The majority of these closed properties are leased. The
Company is in the process of marketing these properties to be subleased.
The Company maintains control over Circuit City's in-home major appliance
repair business, although repairs are subcontracted to an unrelated third
party. In the second quarter of fiscal 2001, the Company recorded appliance
exit costs of $30 million. The majority of these expenses are included in
cost of sales, buying and warehousing on the fiscal 2001 statement of
earnings.
Approximately 850 employees have been terminated and approximately 100
employees will be terminated as locations close or consolidate. These
reductions are mainly in the service, distribution and merchandising
functions. Because severance is being paid to employees on a bi-weekly
schedule based on years of service, cash payments lag job eliminations. The
exit costs also include $17.8 million for lease termination costs and $5.0
million, net of salvage value, for the write-down of fixed assets.
Page 11 of 42
Expenses Liability at
Total Paid or Assets May 31,
(Amounts in millions) Exit Costs Written Off 2001
--------------------------------------------------------------------------------------------------
Lease termination costs................... $17.8 $ 3.2 $14.6
Fixed asset write-downs................... 5.0 5.0 -
Employee termination benefits............. 4.4 3.4 1.0
Other..................................... 2.8 2.8 -
---------------------------------------------------
Appliance exit costs...................... $30.0 $ 14.4 $15.6
===================================================
7. Operating Segment Information
The Company conducts business in two operating segments: Circuit City and
CarMax. These segments are identified and managed by the Company based on
the different products and services offered by each. Circuit City refers to
the retail operations bearing the Circuit City name and to all related
operations, such as Circuit City's finance operation. This segment is
engaged in the business of selling brand-name consumer electronics,
personal computers and entertainment software. CarMax refers to the used-
and new-car retail locations bearing the CarMax name and to all related
operations, such as CarMax's finance operation. Financial information for
these segments for the first quarters of fiscal 2002 and fiscal 2001 is
presented below.
Three Months Ended May 31, 2001
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
----------------------------------------------------------------------------------------------------------------
Revenues from external customers.......................... $1,881,654 $796,820 $2,678,474
Interest expense.......................................... 441 2,551 2,992
Depreciation and amortization............................ 34,489 4,693 39,182
(Loss) earnings before income taxes....................... (15,492) 42,859 27,367
Income tax (benefit) provision............................ (5,887) 16,287 10,400
Net (loss) earnings....................................... (9,605) 26,572 16,967
Total assets.............................................. $3,019,010 $795,402 $3,814,412
Three Months Ended May 31, 2000
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
----------------------------------------------------------------------------------------------------------------
Revenues from external customers.......................... $2,449,110 $625,741 $3,074,851
Interest expense.......................................... 2,693 3,528 6,221
Depreciation and amortization............................ 29,992 4,576 34,568
Earnings before income taxes.............................. 75,345 22,490 97,835
Provision for income taxes................................ 28,631 8,546 37,177
Net earnings.............................................. 46,714 13,944 60,658
Total assets.............................................. $3,115,292 $719,086 $3,834,378
Net (loss) earnings and total assets for Circuit City on the above tables
exclude the reserved CarMax shares and the discontinued Divx operations
discussed in Note 8.
8. Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations, but that
existing, registered customers would be able to view discs during
Page 12 of 42
a two-year phase-out period. Discontinued operations have been segregated
on the consolidated statements of cash flows. However, Divx is not
segregated on the consolidated balance sheets.
The loss on the disposal includes a provision for operating losses to be
incurred during the phase-out period. It also includes provisions for
commitments under licensing agreements with motion picture distributors,
the write-down of assets to net realizable value, lease termination costs,
employee severance and benefit costs and other contractual commitments. For
the quarters ended May 31, 2001 and 2000, the discontinued Divx operations
had no impact on the earnings of Circuit City Stores, Inc.
The net liabilities of the discontinued Divx operations, reflected in the
accompanying consolidated balance sheets as of May 31, 2001, and February
28, 2001, are comprised of the following:
(Amounts in thousands) May 31, 2001 Feb. 28, 2001
-------------------------------------------------------------------------------------------------------------------
Current assets................................................................. $ 37 $ 8
Property and equipment, net.................................................... - -
Other assets................................................................... 298 324
Current liabilities........................................................... (22,043) (27,522)
Non-current liabilities....................................................... (14,082) (14,082)
--------------------------------
Net liabilities of discontinued operations..................................... $ (35,790) $ (41,272)
================================
9. Recent Accounting Pronouncements
In July 2000, the Financial Accounting Standards Board issued Emerging
Issues Task Force No. 00-14, "Accounting for Certain Sales Incentives,"
which is effective for fiscal quarters beginning after December 15, 2001.
The issue provides that sales incentives, such as mail-in rebates, offered
to customers should be classified as a reduction of revenue. The Company
offers certain mail-in rebates that are currently recorded in cost of
sales, buying and warehousing. However, the Company expects to reclassify
these rebate expenses from cost of sales, buying and warehousing to net
sales and operating revenues to be in compliance with EITF No. 00-14. For
the quarter ended May 31, 2001, this reclassification would have increased
the gross profit margin by .09% and our expense ratio by .08%. The Company
does not expect the adoption of EITF No. 00-14 to have a material impact on
its financial position, results of operations or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133, as amended by SFAS No. 137 and No. 138, standardizes the
accounting for derivative instruments and requires that an entity recognize
those items as either assets or liabilities and measure them at fair value.
The Company adopted SFAS No. 133 during the first quarter of fiscal year
2002 (see Note 5). Adoption of SFAS No. 133 did not have a material impact
on the Company's financial position, results of operations or cash flows.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125." While SFAS No. 140 carries over
most of the provisions of SFAS No. 125, it provides new standards for
reporting financial assets transferred as collateral and new standards for
the derecognition of financial assets, in particular transactions involving
the use of special purpose entities. SFAS No. 140 also prescribes
additional disclosures for securitization transactions accounted for as
sales. The Company adopted SFAS No. 140 during the first quarter of fiscal
year 2002 (see Note 4). Adoption of SFAS No. 140 did not have a material
impact on the Company's financial position, results of operations or cash
flows.
10. Reclassifications
Certain previously reported amounts have been reclassified to conform with
current-year presentation.
Page 13 of 42
ITEM 2.
CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this discussion, "we," "our" and "Circuit City Stores" refer to Circuit City
Stores, Inc. and our wholly owned subsidiaries, unless the context requires
otherwise. "Circuit City business" and "Circuit City" refer to the retail
operations bearing the Circuit City name and to all related operations such as
product service and Circuit City's finance operation. "Circuit City group"
refers to our businesses other than our CarMax business and includes the Circuit
City consumer electronics business and the reserved CarMax group shares. "CarMax
business," "CarMax" and "CarMax group" refer to retail locations bearing the
CarMax name and to all related operations such as CarMax's finance operation.
Net Sales and Operating Revenues and General Comments
Total sales for the first quarter of fiscal 2002 were $2.68 billion, a decrease
of 13% from $3.07 billion for the same period last year. For the first quarter
of fiscal 2002, Circuit City's sales declined 23% compared with sales of the
prior year quarter, reflecting the absence of major appliances, continued
industry-wide weakness in personal computer sales and general softness in some
other product categories. Circuit City continued to see strong sales growth in
new technologies and product categories where selections were expanded as a
result of the appliance exit. In the first quarter of fiscal 2002, CarMax
continued a strong sales trend begun in fiscal 2001, with sales increasing 27%
over the same period last year. The increase is a result of continued strength
in the core used-car business, increased average retails produced by a higher
mix of later-model used-car sales and stronger-than-anticipated new-car sales.
Comparable store sales changes for the first quarters of fiscal years 2002 and
2001 were as follows:
============================= ==============================
1st Quarter
------------------------------
FY02 FY01
============================= =============== ==============
============================= =============== ==============
Circuit City Group (25%) 7%
----------------------------- --------------- --------------
----------------------------- --------------- --------------
CarMax Group 27% 14%
============================= =============== ==============
For Circuit City, comparable store sales, including all merchandise sales
categories in all comparable stores, declined 25%. Excluding the appliance
category, from which we completed our exit in the third quarter of fiscal 2001,
comparable store sales declined 13%. CarMax's comparable store sales increased
27% in the first quarter compared with a 14% increase in the same prior year
period.
We plan to open approximately 15 Circuit City Superstores and relocate
approximately 10 Circuit City Superstores in the current fiscal year. In the
first quarter of fiscal 2002, we opened one Circuit City Superstore in the Las
Vegas, Nevada, market and relocated one store in the Los Angeles, California,
market. Our remodel plan for fiscal 2002 includes 24 Circuit City Superstores
and will enable us to test two different remodel designs. We began the first set
of remodels, which includes 10 stores in the Chicago market and two stores in
the Norfolk, Virginia, market, during the first quarter of fiscal 2002. We
expect costs for the first set of remodels, which is the more extensive of the
two, to average approximately $1.5 million per store. We began the second set of
remodels early in the second quarter of this fiscal year in the
Washington/Baltimore market. We expect the second set to include 12 Superstores.
We plan moderate geographic growth for the CarMax group through the addition of
superstores in new mid-sized markets that can be served effectively with one
CarMax superstore and additional satellite stores in existing multi-store
markets. Mid-sized markets are those with populations of approximately 1 million
to 2.5 million people. In late fiscal 2002, we plan to open two CarMax
superstores in the mid-sized markets of Sacramento, California, and Greensboro,
North Carolina.
Page 14 of 42
For Circuit City, gross dollar sales from all extended warranty programs were
5.5% of sales in the first quarter of fiscal 2002 and 5.4% of sales in the first
quarter of fiscal 2001. Third-party warranty revenue was 4.3% of sales in this
year's first quarter and 4.2% in the same period last year. The total extended
warranty revenue that is reported in total sales was 4.3% of sales in this
year's first quarter versus 4.4% in the first quarter of last fiscal year.
For CarMax, gross dollar sales from all extended warranty programs were 3.8% of
sales in the first quarter of fiscal 2002 compared with 4.0% in the same period
last year. Third-party warranty revenue decreased to 1.7% of sales in this
year's first quarter from 1.8% in the same period last year. The total extended
warranty revenue that is reported in total sales was 1.7% of sales in the first
quarter of fiscal 2002, compared with 1.8% in fiscal 2001.
Our operations, in common with other retailers in general, are subject to
seasonal influences. Historically, the Circuit City business has realized more
of its net sales and net earnings in the final fiscal quarter, which includes
the December holiday selling season, than in any other fiscal quarter. The
CarMax business, however, has experienced more of its net sales in the first
half of the fiscal year. The net earnings of any interim quarter are seasonally
disproportionate to net sales since administrative and certain operating
expenses remain relatively constant during the year. Therefore, interim results
should not be relied upon as necessarily indicative of results for the entire
fiscal year.
Cost of Sales, Buying and Warehousing
Our gross profit margin was 21.1% of sales in the first quarter of fiscal 2002,
compared with 22.2% in the same period last year.
For Circuit City, the gross profit margin increased to 24.6% of sales in the
first quarter from 24.4% in the same period last year. The improved margin
reflects strong sales trends in technologies that are new to the consumer, such
as digital televisions, digital cameras and camcorders, and softness in personal
computer sales.
For CarMax, the gross profit margin decreased to 13.0% of sales in the first
quarter of fiscal 2002 from 13.7% for the same period last year. Although we
achieved our gross profit margin dollar targets per vehicle, higher average
retails resulting from the growth in later-model used-car sales and
higher-than-expected new-car sales generated the decline in the gross profit
margin percentage.
Selling, General and Administrative Expenses
Our selling, general and administrative expense ratio was 20.0% in the first
quarter of fiscal 2002, compared with 18.8% for the same period last year.
For Circuit City, the selling, general and administrative expense ratio was
25.4% of sales in the first quarter of fiscal 2002, compared with 21.2% for the
same period last year. The increased expense ratio reflects lower comparable
store sales, partly offset by cost efficiency initiatives and the contribution
from Circuit City's credit operation. During the quarter, advertising
expenditures were reduced in part by eliminating inefficient print distribution,
while the effectiveness of the ads were improved through a change in format and
creative approach. Also, credit operations exceeded our expectations during the
quarter as funding costs declined more rapidly than yields, however, we do not
expect this benefit to continue.
CarMax's selling, general and administrative expense ratio was 7.3% of sales in
the first quarter of fiscal 2002, compared with 9.5% of sales for the same
period last year. The expense ratio improvement reflects the significant expense
leverage generated by the comparable sales growth. CarMax's finance operation
also contributed to the improved ratio as lower funding costs generated higher
spreads.
Page 15 of 42
Net Earnings
Our net earnings decreased to $17.0 million for the first quarter of fiscal 2002
from $60.7 million in last year's first quarter.
Liquidity and Capital Resources
At May 31, 2001, our total assets were $3.81 billion. The inventory decrease of
$25.8 million from the end of fiscal year 2001 reflects our increased focus on
inventory management, partially offset by an increase in the CarMax group's
inventory to support seasonal sales trends. Primarily because of the inventory
decline, accounts payable has decreased $81.0 million since the end of fiscal
2001. As scheduled, we used existing working capital to repay a term loan
totaling $130 million in June 2001. At May 31, 2001, we maintained a $150
million unsecured revolving credit facility and $360 million in committed
seasonal lines that are renewed annually with various banks.
Circuit City's finance operation has a master trust securitization facility that
allows the transfer of its private-label credit card receivables through private
placement and the public market. As of May 31, 2001, the master trust program
had a total program capacity of $1.18 billion. Circuit City's finance operation
also has a master trust securitization facility related to its bankcard program.
As of May 31, 2001, the bankcard master trust program had a total program
capacity of $1.94 billion. These master trust vehicles permit further expansion
of the securitization programs in both the public and private markets.
We also have an asset securitization program operated through a special purpose
subsidiary on behalf of CarMax, through which we sell automobile loan
receivables. This program had a capacity of $625 million as of May 31, 2001. On
behalf of CarMax, we also have a public asset securitization program with a
capacity of $280 million as of May 31, 2001, and a second public asset
securitization program with a capacity of $562 million as of May 31, 2001. We
anticipate that we will be able to expand these securitization programs to meet
future needs.
In July 2001, we expect to offer publicly up to 8,625,000 shares, which includes
the underwriters' over-allotment option of 1,125,000 shares, of CarMax group
stock. The shares that will be sold in the offering are shares of CarMax group
stock that have been reserved for the Circuit City group or for issuance to
holders of Circuit City group stock. We intend to allocate the net proceeds from
this offering, including any proceeds of shares issued upon exercise of the
underwriters' over-allotment option, to the Circuit City group to be used for
that group's general purposes, including the ongoing remodeling of the Circuit
City Superstores.
We believe fiscal 2002 capital expenditures can be funded through a combination
of internally generated cash, sale-leaseback transactions, operating leases,
floor plan financing of CarMax inventory or proceeds from the public stock
offering discussed above and that securitization transactions will finance any
growth in receivables.
Forward-Looking Statements
This report on Form 10-Q, in particular Item 2-Management's Discussion and
Analysis and Item 3-Disclosures About Market Risk, includes "forward-looking
statements" within the meaning of the securities laws. All statements that are
not historical facts are "forward-looking statements." The words "estimate,"
"project," "intend," "expect," "believe," "anticipate," "plan" and similar
expressions, and statements concerning our strategy, identify forward-looking
statements. These forward-looking statements include statements regarding the
expected financial position, business, financing plans, business prospects,
revenues, working capital liquidity, capital needs, interest costs and income
relating to the Circuit City group, the CarMax group and Circuit City Stores as
a whole.
Forward-looking statements are estimates and projections reflecting our judgment
and involve a number of risks and uncertainties that could cause actual results
to differ materially from those suggested by the forward-looking
Page 16 of 42
statements. Although we believe that the estimates and projections reflected in
the forward-looking statements are reasonable, our expectations may prove to be
incorrect. The United States retail industry, and the specialty retail industry
in particular, are dynamic by nature and have undergone significant changes in
recent years. Our ability to anticipate and successfully respond to the
continuing challenges of our industry is key to achieving our expectations.
Important factors that could cause actual results to differ materially from
estimates or projections contained in our forward-looking statements include:
o changes in the amount and degree of promotional intensity exerted by
current competitors and potential new competition from competitors
using similar or alternative methods or channels of distribution such
as online and telephone shopping services and mail order;
o changes in general U.S. or regional U.S. economic conditions including,
but not limited to, consumer credit availability, consumer credit
delinquency and default rates, interest rates, inflation, personal
discretionary spending levels, trends in consumer retail spending, both
in general and in our product categories, and consumer sentiment about
the economy in general;
o the presence or absence of, or consumer acceptance of, new products or
product features in the merchandise categories we sell and changes in
our actual merchandise sales mix;
o significant changes in retail prices for products sold by either of our
businesses;
o lack of availability or access to sources of inventory for either of
our businesses;
o inability on the part of either of our businesses to liquidate excess
inventory should excess inventory develop;
o our inability to dispose of vehicles acquired through the appraisal
process in our CarMax business at prices that allow us to recover our
costs;
o adverse conditions affecting the franchise relationships under which we
operate the new-car dealerships of our CarMax business, including,
labor or other production disruptions affecting particular
manufacturers or vehicle models, the termination or non-renewal of any
franchise agreement or awards by manufacturers of additional franchises
in our markets;
o failure to successfully implement sales and profitability improvement
programs for our Circuit City Superstores, including our remodeling
process;
o our ability to attract and retain an effective management team or
changes in the costs or availability of a suitable work force to manage
and support our service-driven operating strategies;
o changes in availability or cost of capital expenditure and working
capital financing, including the availability of long-term financing to
support development of our businesses and the availability of
securitization financing;
o changes in production or distribution costs or costs of materials for
our advertising;
o availability of appropriate real estate locations for expansion;
o the imposition of new restrictions or regulations regarding the sale of
products and/or services we sell, changes in tax rules and regulations
applicable to Circuit City Stores or its competitors, the imposition of
new environmental restrictions, regulations or laws or the discovery of
environmental conditions at current or future locations, or any failure
to comply with such laws or any adverse change in such laws; and
o adverse results in significant litigation matters.
We believe our forward-looking statements are reasonable; however, undue
reliance should not be placed on any forward-looking statements, which are based
on current expectations.
Page 17 of 42
ITEM 3.
Circuit City Stores, Inc. Quantitative and Qualitative
Disclosures About Market Risk
We centrally manage the private-label and bankcard revolving loan portfolios of
Circuit City's finance operation and the automobile installment loan portfolio
of CarMax's finance operation. Portions of these portfolios are securitized and,
therefore, are not presented on the consolidated balance sheets. Interest rate
exposure relating to these receivables represents a market risk exposure that we
manage with matched funding and interest rate swaps.
As of May 31, 2001, the Circuit City finance operation's private-label and
bankcard portfolios had not changed significantly since February 28, 2001.
However, as a result of CarMax's growth, the automobile installment loan
portfolio has increased.
Total principal outstanding for fixed-rate automobile loans at May 31 and
February 28, 2001, was as follows:
(Amounts in millions) May 31 February 28
----------------------------------------------------------------------
Fixed-rate.................................. $1,357 $1,296
Financing for these receivables is achieved through asset securitization
programs that, in turn, issue both fixed- and floating-rate securities.
Receivables held by Circuit City Stores for investment or sale are financed with
working capital. Financings at May 31 and February 28, 2001, were as follows:
(Amounts in millions) May 31 February 28
-------------------------------------------------------------------------
Fixed-rate securitizations.................. $ 842 $ 984
Floating-rate securitizations
synthetically altered to fixed........... 493 299
Floating-rate securitizations............... 2 1
Held by the Company:
For investment*.......................... 14 9
For sale................................. 6 3
--------------------
Total ..................................... $1,357 $1,296
====================
* Held by a bankruptcy remote special purpose company.
Because programs are in place to manage interest rate exposure relating to the
installment loan portfolios, we expect to experience relatively little impact as
interest rates fluctuate.
Page 18 of 42
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Balance Sheets
(Amounts in thousands)
May 31, 2001 Feb. 28, 2001
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 393,986 $ 437,329
Net accounts receivable 429,552 451,099
Merchandise inventory 1,328,858 1,410,527
Prepaid expenses and other current assets 68,382 55,317
-------------- -------------
Total current assets 2,220,778 2,354,272
Property and equipment, net 789,516 796,789
Reserved CarMax group shares 311,701 292,179
Other assets 9,051 9,319
-------------- -------------
TOTAL ASSETS $ 3,331,046 $ 3,452,559
============== =============
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long-term debt $ 11,428 $ 24,237
Accounts payable 713,136 820,077
Short-term debt 224 213
Accrued expenses and other current liabilities 135,230 146,818
Deferred income taxes 80,477 74,317
-------------- -------------
Total current liabilities 940,495 1,065,662
Long-term debt, excluding current installments 22,906 33,080
Deferred revenue and other liabilities 87,600 85,329
Deferred income taxes 9,954 11,329
-------------- -------------
TOTAL LIABILITIES 1,060,955 1,195,400
GROUP EQUITY 2,270,091 2,257,159
-------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY $ 3,331,046 $ 3,452,559
============== =============
See accompanying notes to group financial statements.
Page 19 of 42
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Earnings (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31
2001 2000
-------------- -------------
Net sales and operating revenues $ 1,881,654 $ 2,449,110
Cost of sales, buying and warehousing 1,419,261 1,851,310
-------------- -------------
Gross profit 462,393 597,800
-------------- -------------
Selling, general and administrative expenses 477,444 519,762
Interest expense 441 2,693
-------------- -------------
Total expenses 477,885 522,455
-------------- -------------
(Loss) earnings before income taxes and income
attributed to the reserved CarMax group shares (15,492) 75,345
Income tax (benefit) provision (5,887) 28,631
--------------- -------------
(Loss) earnings before income attributed to
the reserved CarMax group shares (9,605) 46,714
Net earnings attributed to the reserved CarMax group shares 19,740 10,409
-------------- -------------
Net earnings $ 10,135 $ 57,123
============== =============
See accompanying notes to group financial statements.
Page 20 of 42
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31
2001 2000
------------- ------------
Operating Activities:
Net earnings $ 10,135 $ 57,123
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities of continuing operations:
Net earnings attributed to the reserved CarMax group shares (19,740) (10,409)
Depreciation and amortization 34,489 29,992
(Gain) loss on sales of property and equipment (959) 545
Deferred income taxes 4,785 (2,195)
Changes in operating assets and liabilities:
Decrease in net accounts receivable 21,551 16,407
Decrease (increase) in merchandise inventory 81,669 (129,816)
Increase in prepaid expenses and other current assets (13,062) (15,952)
Decrease (increase) in other assets 242 (2,030)
Decrease in accounts payable, accrued expenses
and other current liabilities (113,516) (25,987)
Increase (decrease) in deferred revenue and other liabilities 2,271 (1,409)
------------- ------------
Net cash provided by (used in) operating activities
of continuing operations 7,865 (83,731)
------------- ------------
Investing Activities:
Purchases of property and equipment (29,505) (29,874)
Proceeds from sales of property and equipment 3,248 17,471
------------- ------------
Net cash used in investing activities of continuing operations (26,257) (12,403)
------------- ------------
Financing Activities:
Increase (decrease) in allocated short-term debt, net 11 (1,453)
Decrease in allocated long-term debt, net (22,983) (188,737)
Issuances of group equity, net 7,102 17,577
Dividends paid (3,621) (3,570)
------------- ------------
Net cash used in financing activities of continuing operations (19,491) (176,183)
------------- ------------
Cash used in discontinued operations (5,460) (4,959)
------------- ------------
Decrease in cash and cash equivalents (43,343) (277,276)
Cash and cash equivalents at beginning of year 437,329 633,952
------------- ------------
Cash and cash equivalents at end of period $ 393,986 $ 356,676
============= ============
See accompanying notes to group financial statements.
Page 21 of 42
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Notes to Group Financial Statements
(Unaudited)
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 stock is intended to reflect the
performance of the Circuit City store-related operations, the shares of
CarMax group stock reserved for the Circuit City group or for issuance to
holders of Circuit City group stock and the Company's investment in Digital
Video Express, which has been discontinued (see Note 6). The CarMax group
stock is intended to reflect the performance of the CarMax group's
operations. The reserved CarMax group shares represented 74.1% of the total
outstanding and reserved shares, excluding shares reserved for CarMax
employees' stock incentive plans, of CarMax group stock at May 31, 2001,
74.6% at February 28, 2001, and 74.7% at May 31, 2000. The Company
allocates to the Circuit City group the portion of net earnings of the
CarMax group attributed to the reserved CarMax group shares. 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 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 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 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 CarMax group stock nor shares of Circuit
City group 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 operations 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 stock or CarMax
group stock will reduce funds legally available for dividends on, or
repurchases of, both stocks. Accordingly, the Circuit City group financial
statements included in this report should be read in conjunction with the
Company's consolidated financial statements, the CarMax group financial
statements and the Company's SEC filings.
2. Accounting Policies
The Circuit City group has accounted for the reserved CarMax group shares
in a manner similar to the equity method of accounting. Accounting
principles generally accepted in the United States of America require that
the CarMax group be consolidated with the Circuit City group. Except for
the effects of not consolidating the CarMax group with the Circuit City
group, the financial statements of the Circuit City group conform to
accounting principles generally accepted in the United States of America.
The interim period financial statements are unaudited; however, in the
opinion of management, all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the interim
group financial statements have been included. The fiscal year-end balance
sheet data was derived from the audited financial statements included in
the Company's fiscal 2001 Annual Report on Form 10-K.
3. Securitizations
The Company enters into securitization transactions, which allow for the
sale of credit card receivables to unrelated entities, to finance the
consumer revolving credit receivables generated by Circuit City's finance
operation. For transfers of receivables that qualify as sales, the Company
recognizes gains or losses as a component of Circuit City's finance
operation. In these securitizations, the Company retains servicing rights
and subordinated interests.
Page 22 of 42
At May 31, 2001, the total principal amount of loans managed was $2,599
million. Of the total loans, the principal amount of loans securitized was
$2,558 million and the principal amount of loans held for sale was $41
million. The aggregate amount of loans that were 31 days or more delinquent
was $176.4 million at May 31, 2001. The principal amount of losses net of
recoveries amounted to $69.6 million for the three months ended May 31,
2001.
The Company receives annual servicing compensation approximating 2% of the
outstanding principal loan balance of the receivables and retains the
rights to future cash flows arising after the investors in the
securitization trusts have received the return for which they contracted.
The servicing fees specified in the credit card securitization agreements
adequately compensate the finance operation for servicing the securitized
assets. Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from and paid to
securitization trusts:
Three Months Ended
(Amounts in thousands) May 31, 2001
------------------------------------------------------------------------------
Proceeds from new securitizations......................... $174,200
Proceeds from collections reinvested
in previous credit card securitizations................. $359,557
Servicing fees received................................... $ 13,326
Other cash flows received on retained interests*.......... $ 44,215
*This amount represents cash flows received from retained interests by the
transferor other than servicing fees, including cash flows from
interest-only strips and cash above the minimum required level in cash
collateral accounts.
In determining the fair value of retained interests, the Company estimates
future cash flows using management's best estimates of key assumptions such
as finance charge income, default rates, payment rates, forward yield
curves and discount rates. The Company employs a risk-based pricing
strategy that increases the stated annual percentage rate for accounts that
have a higher predicted risk of default. Accounts with a lower risk profile
may qualify for promotional financing.
Rights recorded for future finance income from serviced assets that exceed
the contractually specified servicing fees are carried at fair value,
amounted to $134.8 million at May 31, 2001, and are included in net
accounts receivable. Gains of $37.1 million on sales were recorded for the
three-month period ended May 31, 2001.
The fair value of retained interests at May 31, 2001, was $254.5 million,
with a weighted-average life ranging from 0.4 years to 2.5 years. The
following table shows the key economic assumptions used in measuring the
fair value of retained interests at May 31, 2001, and a sensitivity
analysis showing the hypothetical effect on the fair value of those
interests when there are unfavorable variations from the assumptions used.
Key economic assumptions at May 31, 2001, are not materially different from
assumptions used to measure the fair value of retained interests at the
time of securitization. These sensitivities are hypothetical and should be
used with caution. In this table, the effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumption; in reality, changes in one factor may result
in changes in another, which might magnify or counteract the sensitivities.
Impact on Fair Impact on Fair
Assumptions Used Value of 10% Value of 20%
(Dollar amounts in thousands) (Annual) Adverse Change Adverse Change
------------------------------------------------------------------------------------------------------
Payment rate............................ 7.0 - 11.1% $ 10,267 $ 18,412
Default rate............................ 7.8 - 15.4% $ 21,448 $ 42,896
Discount rate........................... 9.0 - 15.0% $ 2,636 $ 5,230
Page 23 of 42
4. Financial Derivatives
On behalf of the Circuit City group, the Company enters into interest rate
cap agreements to meet the requirements of the credit card receivable
securitization transactions. In the first quarter of fiscal 2002, the
Company did not enter into any new interest rate caps. At May 31, 2001, the
total notional amount of interest rate caps outstanding was $839 million.
Purchased interest rate caps are included in net accounts receivable with a
fair value of $8.9 million as of May 31, 2001. Written interest rate caps
are included in accounts payable with a fair value of $8.9 million as of
May 31, 2001.
The market and credit risks associated with interest rate caps are similar
to those relating to other types of financial instruments. Market risk is
the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction
volume. The Company has entered into offsetting interest rate cap
positions, and therefore, does not anticipate significant market risk
arising from interest rate caps. Credit risk is the exposure to
nonperformance of another party to an agreement. The Company mitigates
credit risk by dealing with highly rated counterparties.
5. Appliance Exit Costs
On July 25, 2000, the Company announced plans to exit the major appliance
category and expand its selection of key consumer electronics and home
office products in all Circuit City Superstores. A product profitability
analysis had indicated that the appliance category produced below-average
profits. This analysis, combined with declining sales, expected increases
in appliance competition and the Company's profit expectations for the
consumer electronics and home office categories led to the decision to exit
the major appliance category. To exit the appliance business, the Company
closed six distribution centers and seven service centers in fiscal 2001
and expects to close two distribution centers and one service center by
July 31, 2001. The majority of these closed properties are leased. The
Company is in the process of marketing these properties to be subleased.
The Company maintains control over Circuit City's in-home major appliance
repair business, although repairs are subcontracted to an unrelated third
party. In the second quarter of fiscal 2001, the Company recorded appliance
exit costs of $30 million. The majority of these expenses are included in
cost of sales, buying and warehousing on the fiscal 2001 statements of
earnings.
Approximately 850 employees have been terminated and approximately 100
employees will be terminated as locations close or consolidate. These
reductions are mainly in the service, distribution and merchandising
functions. Because severance is being paid to employees on a bi-weekly
schedule based on years of service, cash payments lag job eliminations. The
exit costs also include $17.8 million for lease termination costs and $5.0
million, net of salvage value, for the write-down of fixed assets.
Expenses Liability at
Total Paid or Assets May 31,
(Amounts in millions) Exit Costs Written Off 2001
----------------------------------------------------------------------------------------------
Lease termination costs................... $17.8 $ 3.2 $14.6
Fixed asset write-downs................... 5.0 5.0 -
Employee termination benefits............. 4.4 3.4 1.0
Other..................................... 2.8 2.8 -
-----------------------------------------------
Appliance exit costs...................... $30.0 $ 14.4 $15.6
===============================================
6. Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations, but that
existing, registered customers would be able to view discs during a
two-year phase-out period. Discontinued operations have been segregated on
the Circuit City group statements of cash flows. However, Divx is not
segregated on the Circuit City group balance sheets.
Page 24 of 42
The loss on the disposal includes a provision for operating losses to be
incurred during the phase-out period. It also includes provisions for
commitments under licensing agreements with motion picture distributors,
the write-down of assets to net realizable value, lease termination costs,
employee severance and benefit costs and other contractual commitments. For
the quarters ended May 31, 2001 and 2000, the discontinued Divx operations
had no impact on the earnings of the Circuit City group.
The net liabilities of the discontinued Divx operations, reflected in the
accompanying group balance sheets as of May 31, 2001, and February 28,
2001, are comprised of the following:
(Amounts in thousands) May 31, 2001 Feb. 28, 2001
--------------------------------------------------------------------------------------------
Current assets............................................ $ 37 $ 8
Property and equipment, net............................... - -
Other assets.............................................. 298 324
Current liabilities...................................... (22,043) (27,522)
Non-current liabilities.................................. (14,082) (14,082)
------------------------------
Net liabilities of discontinued operations................ $(35,790) $(41,272)
==============================
7. Recent Accounting Pronouncements
In July 2000, the Financial Accounting Standards Board issued Emerging
Issues Task Force No. 00-14, "Accounting for Certain Sales Incentives,"
which is effective for fiscal quarters beginning after December 15, 2001.
The issue provides that sales incentives, such as mail-in rebates, offered
to customers should be classified as a reduction of revenue. The Company
offers certain mail-in rebates that are currently recorded in cost of
sales, buying and warehousing. However, the Company expects to reclassify
these rebate expenses from cost of sales, buying and warehousing to net
sales and operating revenues to be in compliance with EITF No. 00-14. For
the quarter ended May 31, 2001, this reclassification would have increased
the gross profit margin and the expense ratio by .15%. The Company does not
expect the adoption of EITF No. 00-14 to have a material impact on the
Circuit City group's financial position, results of operations or cash
flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133, as amended by SFAS No. 137 and No. 138, standardizes the
accounting for derivative instruments and requires that an entity recognize
those items as either assets or liabilities and measure them at fair value.
The Company adopted SFAS No. 133 during the first quarter of fiscal year
2002 (see Note 4). Adoption of SFAS No. 133 did not have a material impact
on the Circuit City group's financial position, results of operations or
cash flows.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125." While SFAS No. 140 carries over
most of the provisions of SFAS No. 125, it provides new standards for
reporting financial assets transferred as collateral and new standards for
the derecognition of financial assets, in particular transactions involving
the use of special purpose entities. SFAS No. 140 also prescribes
additional disclosures for securitization transactions accounted for as
sales. The Company adopted SFAS No. 140 during the first quarter of fiscal
year 2002 (see Note 3). Adoption of SFAS No. 140 did not have a material
impact on the Circuit City group's financial position, results of
operations or cash flows.
8. Reclassifications
Certain previously reported amounts have been reclassified to conform with
current-year presentation.
Page 25 of 42
ITEM 2.
CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this discussion, "we," "our" and "Circuit City Stores" refer to Circuit City
Stores, Inc. and our wholly owned subsidiaries, unless the context requires
otherwise. "Circuit City business" and "Circuit City" refer to the retail
operations bearing the Circuit City name and to all related operations such as
product service and Circuit City's finance operation. "Circuit City group"
refers to our businesses other than our CarMax business and includes the Circuit
City consumer electronics business and the reserved CarMax group shares. "CarMax
business," "CarMax" and "CarMax group" refer to retail locations bearing the
CarMax name and to all related operations such as CarMax's finance operation.
Net Sales and Operating Revenues and General Comments
Total sales for the first quarter of fiscal 2002 were $1.88 billion, a decrease
of 23% from $2.45 billion for the same period last year, reflecting the absence
of major appliances, continued industry-wide weakness in personal computer sales
and general softness in some other product categories. Circuit City continued to
see strong sales growth in new technologies and product categories where
selections were expanded as a result of the appliance exit. Comparable store
sales, including all merchandise sales categories in all comparable stores,
declined 25%. Excluding the appliance category, from which we completed our exit
in the third quarter of fiscal 2001, comparable store sales declined 13%.
We plan to open approximately 15 Circuit City Superstores and relocate
approximately 10 Circuit City Superstores in the current fiscal year. In the
first quarter of fiscal 2002, we opened one Circuit City Superstore in the Las
Vegas, Nevada, market and relocated one store in the Los Angeles, California,
market. Our remodel plan for fiscal 2002 includes 24 Circuit City Superstores
and will enable us to test two different remodel designs. We began the first set
of remodels, which includes 10 stores in the Chicago market and two stores in
the Norfolk, Virginia, market, during the first quarter of fiscal 2002. We
expect costs for the first set of remodels, which is the more extensive of the
two, to average approximately $1.5 million per store. We began the second set of
remodels early in the second quarter of this fiscal year in the
Washington/Baltimore market. We expect the second set to include 12 Superstores.
The table below details Circuit City retail units:
===================================================================================================================
Store Mix Estimate
---------------------------------------------
May 31, 2001 May 31, 2000 Feb. 28, 2002 Feb. 28, 2001
===================================================================================================================
Superstores 594 573 609 594
-------------------------------------------------------------------------------------------------------------------
Circuit City Express 32 43 30 35
===================================================================================================================
TOTAL 626 616 639 629
===================================================================================================================
Gross dollar sales from all extended warranty programs were 5.5% of sales in the
first quarter of fiscal 2002 and 5.4% of sales in the first quarter of fiscal
2001. Third-party warranty revenue was 4.3% of sales in this year's first
quarter and 4.2% in the same period last year. The total extended warranty
revenue that is reported in total sales was 4.3% of sales in this year's first
quarter versus 4.4% in the first quarter of last fiscal year.
Page 26 of 42
The percentage of merchandise sales represented by each category is listed
below:
======================================================================
1st Quarter
------------------------------------
Fiscal 2002 Fiscal 2001
======================================================================
======================================================================
Video 37% 32%
----------------------------------------------------------------------
Audio 17% 15%
----------------------------------------------------------------------
Information Technology 36% 34%
----------------------------------------------------------------------
Entertainment 10% 5%
----------------------------------------------------------------------
Appliances -- 14%
======================================================================
TOTAL 100% 100%
======================================================================
Circuit City's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, Circuit City has realized more of
its net sales and net earnings in the final fiscal quarter, which includes the
December holiday selling season, than in any other fiscal quarter. The net
earnings of any interim quarter are seasonally disproportionate to net sales
since administrative and certain operating expenses remain relatively constant
during the year. Therefore, interim results should not be relied upon as
necessarily indicative of results for the entire fiscal year.
Cost of Sales, Buying and Warehousing
For the quarter ended May 31, 2001, Circuit City's gross profit margin increased
to 24.6% of sales from 24.4% in the same period last year. The improved margin
reflects strong sales trends in technologies that are new to the consumer, such
as digital televisions, digital cameras and camcorders, and the softness in
personal computer sales.
Selling, General and Administrative Expenses
Circuit City's selling, general and administrative expense ratio was 25.4% of
sales in the first quarter of fiscal 2002, compared with 21.2% for the same
period last year. The increased expense ratio reflects lower comparable store
sales, partly offset by cost efficiency initiatives and the contribution from
Circuit City's credit operation. During the quarter, advertising expenditures
were reduced in part by eliminating inefficient print distribution, while the
effectiveness of the ads were improved through a change in format and creative
approach. Also, credit operations exceeded our expectations during the quarter
as funding costs declined more rapidly than yields, however, we do not expect
this benefit to continue.
(Loss) Earnings Before Income Attributed to the Reserved CarMax Group Shares
Excluding the income attributed to the reserved CarMax group shares, Circuit
City incurred a loss for the first quarter of $9.6 million compared with
earnings of $46.7 million for the same period last year.
Net Earnings Attributed to the Reserved CarMax Group Shares
During the first quarter of fiscal 2002, the net earnings attributed to the
reserved CarMax group shares were $19.7 million compared with $10.4 million for
the same period last year.
Net Earnings
Net earnings for the Circuit City group for the quarter ended May 31, 2001, were
$10.1 million compared with $57.1 million in the same period last year.
Page 27 of 42
Liquidity and Capital Resources
At May 31, 2001, the Circuit City group's total assets were $3.33 billion. The
merchandise inventory decrease of $81.7 million reflects an increased focus on
inventory management. Primarily because of the inventory decline, accounts
payable has decreased $106.9 million since the end of fiscal 2001. As scheduled,
we used existing working capital to repay a term loan totaling $130 million in
June 2001. Payment of corporate debt will not necessarily reduce Circuit City
group allocated debt. At May 31, 2001, we maintained a $150 million unsecured
revolving credit facility and $360 million in seasonal lines that are renewed
annually with various banks.
Circuit City's finance operation has a master trust securitization facility that
allows the transfer of its private-label credit card receivables through private
placement and the public market. As of May 31, 2001, the master trust program
had a total program capacity of $1.18 billion. Circuit City's finance operation
also has a master trust securitization facility related to its bankcard program.
As of May 31, 2001, the bankcard master trust program had a total program
capacity of $1.94 billion. These master trust vehicles permit further expansion
of the securitization programs in both the public and private markets.
Circuit City relies on the external debt we allocate to the Circuit City group
to provide working capital needed to fund net assets not otherwise financed
through sale-leasebacks or receivable securitizations. We manage all significant
financial activities of the Circuit City business on a centralized basis.
Circuit City's significant financial activities are dependent on our financial
condition as a whole and include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate.
In July 2001, we expect to offer publicly up to 8,625,000 shares, which includes
the underwriters' over-allotment option of 1,125,000 shares, of CarMax group
stock. The shares that will be sold in the offering are shares of CarMax group
stock that have been reserved for the Circuit City group or for issuance to
holders of Circuit City group stock. We intend to allocate the net proceeds from
this offering, including any proceeds of shares issued upon exercise of the
underwriters' over-allotment option, to the Circuit City business to be used for
that business' general purposes, including the ongoing remodeling of the Circuit
City Superstores.
We believe that proceeds from sales of property and equipment and receivables,
future increases in the Circuit City Stores' debt allocated to the Circuit City
group, cash generated by operations and proceeds from the public stock offering
discussed above will be sufficient to fund the capital expenditures and
operations of the Circuit City business.
Forward-Looking Statements
This Circuit City Group Management's Discussion and Analysis and the Circuit
City Group Disclosures about Market Risk below include "forward looking
statements" within the meaning of the securities laws. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those suggested by the forward-looking
statements. See the subsection "Forward-Looking Statements" in Item 2 - Circuit
City Stores, Inc. Management's Discussion and Analysis of Results of Operation
and Financial Condition, beginning on page 16, for a review of important factors
that could cause differences in our actual results.
Page 28 of 42
ITEM 3.
CIRCUIT CITY GROUP QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We centrally manage the private-label and bankcard revolving loan portfolios of
Circuit City's finance operation. Portions of these portfolios are securitized
and, therefore, are not presented on the Circuit City group's balance sheets.
Interest rate exposure relating to these receivables represents a market risk
exposure that we manage with matched funding; therefore, we expect to experience
relatively little impact as interest rates fluctuate.
As of May 31, 2001, the Circuit City finance operation's private-label and
bankcard portfolios had not changed significantly since February 28, 2001.
Page 29 of 42
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Balance Sheets
(Amounts in thousands)
May 31, 2001 Feb. 28, 2001
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,515 $ 8,802
Net accounts receivable 164,676 134,662
Inventory 402,975 347,137
Prepaid expenses and other current assets 531 2,306
------------ -----------
Total current assets 578,697 492,907
Property and equipment, net 191,515 192,158
Other assets 25,190 25,888
------------ -----------
TOTAL ASSETS $ 795,402 $ 710,953
============ ===========
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long-term debt $ 120,986 $ 108,151
Accounts payable 108,455 82,483
Short-term debt 2,616 987
Accrued expenses and other current liabilities 19,565 16,154
Deferred income taxes 19,490 18,162
------------ -----------
Total current liabilities 271,112 225,937
Long-term debt, excluding current installments 92,930 83,057
Deferred revenue and other liabilities 6,854 6,836
Deferred income taxes 3,573 3,620
------------ -----------
TOTAL LIABILITIES 374,469 319,450
GROUP EQUITY 420,933 391,503
------------ -----------
TOTAL LIABILITIES AND GROUP EQUITY $ 795,402 $ 710,953
============ ===========
See accompanying notes to group financial statements.
Page 30 of 42
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Earnings (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31
2001 2000
------------ -----------
Net sales and operating revenues $ 796,820 $ 625,741
Cost of sales 692,860 540,279
------------ -----------
Gross profit 103,960 85,462
------------ -----------
Selling, general and administrative expenses 58,550 59,444
Interest expense 2,551 3,528
------------ -----------
Total expenses 61,101 62,972
------------ -----------
Earnings before income taxes 42,859 22,490
Provision for income taxes 16,287 8,546
------------ -----------
Net earnings $ 26,572 $ 13,944
============ ===========
Net earnings attributed to:
Circuit City group common stock $ 19,740 $ 10,409
CarMax group common stock 6,832 3,535
------------ -----------
$ 26,572 $ 13,944
============ ===========
See accompanying notes to group financial statements.
Page 31 of 42
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31
2001 2000
------------ -----------
Operating Activities:
Net earnings $ 26,572 $ 13,944
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 4,693 4,576
Deferred income taxes 1,281 777
Changes in operating assets and liabilities:
Increase in net accounts receivable (30,014) (12,681)
Increase in inventory (55,838) (29,883)
Decrease (increase) in prepaid expenses and other current assets 1,775 (281)
Increase in other assets (5) -
Increase in accounts payable, accrued expenses and other
current liabilities 32,428 15,539
Increase (decrease) in deferred revenue and other liabilities 18 (66)
------------ -----------
Net cash used in operating activities (19,090) (8,075)
------------ -----------
Investing Activities:
Purchases of property and equipment (3,347) (3,933)
------------ -----------
Net cash used in investing activities (3,347) (3,933)
------------ -----------
Financing Activities:
Increase (decrease) in allocated short-term debt, net 1,629 (133)
Increase in allocated long-term debt, net 22,708 13,472
(Repurchases) issuances of group equity, net (187) 58
------------ -----------
Net cash provided by financing activities 24,150 13,397
------------ -----------
Increase in cash and cash equivalents 1,713 1,389
Cash and cash equivalents at beginning of year 8,802 9,981
------------ -----------
Cash and cash equivalents at end of period $ 10,515 $ 11,370
============ ===========
See accompanying notes to group financial statements.
Page 32 of 42
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Notes to Group Financial Statements
(Unaudited)
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 stock is intended to reflect the
performance of the Circuit City store-related operations the shares of
CarMax group stock reserved for the Circuit City group or for issuance to
holders of Circuit City group stock and the Company's investment in Digital
Video Express, which has been discontinued. The CarMax group stock is
intended to reflect the performance of the CarMax group's operations. The
reserved CarMax group shares represented 74.1% of the total outstanding and
reserved shares, excluding shares reserved for CarMax employees' stock
incentive plans, of CarMax group stock at May 31, 2001, 74.6% at February
28, 2001, and 74.7% at May 31, 2000. The Company allocates to the Circuit
City group the portion of net earnings of the CarMax group attributed to
the reserved CarMax group shares. 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 SEC.
Notwithstanding the attribution of the Company's assets and liabilities,
including contingent liabilities, and stockholders' equity between the
CarMax group and the Circuit City group for the purposes of preparing the
financial statements, holders of CarMax group stock and holders of Circuit
City 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 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 CarMax group stock nor shares of Circuit
City group 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 operations 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 stock or CarMax
group stock will reduce funds legally available for dividends on, or
repurchases of, both stocks. Accordingly, the CarMax group financial
statements included in this report should be read in conjunction with the
Company's consolidated financial statements, the Circuit City group
financial statements and the Company's SEC filings.
2. Accounting Policies
The financial statements of the CarMax group conform to accounting
principles generally accepted in the United States of America. The interim
period financial statements are unaudited; however, in the opinion of
management, all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation of the interim group
financial statements have been included. The fiscal year-end balance sheet
data was derived from the audited financial statements included in the
Company's fiscal 2001 Annual Report on Form 10-K.
3. Securitizations
The Company has asset securitization programs, operated through special
purpose subsidiaries on behalf of the CarMax group, to finance the consumer
installment credit receivables generated by CarMax's automobile loan
finance operation. For transfers of receivables that qualify as sales, the
Company recognizes gains or losses as a component of CarMax's finance
operation. In these securitizations, the Company retains servicing rights
and subordinated interests.
At May 31, 2001, the total principal amount of loans managed was $1,357
million. Of the total loans, the principal amount of loans securitized was
$1,337 million and the principal amount of loans held for sale or
investment was $20 million. The principal amount of loans that were 31 days
or more delinquent was $17.4
Page 33 of 42
million at May 31, 2001. The principal amount of losses net of recoveries
amounted to $1.9 million for the three months ended May 31, 2001.
The Company receives annual servicing fees approximating 1% of the
outstanding principal balance of the securitized automobile loans and
retains the rights to future cash flows arising after the investors in the
securitization trusts have received the return for which they contracted.
The servicing fees specified in the automobile loan securitization
agreements adequately compensate the finance operation for servicing the
accounts. Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from and paid to
securitization trusts:
Three Months Ended
(Amounts in thousands) May 31, 2001
---------------------------------------------------------------------------
Proceeds from new securitizations....................... $195,000
Proceeds from collections reinvested
in previous automobile loan securitizations........... $ 91,464
Servicing fees received................................. $ 3,252
Other cash flows received on retained interests*........ $ 13,385
*This amount represents cash flows received from retained interests by the
transferor other than servicing fees, including cash flows from
interest-only strips and cash above the minimum required level in cash
collateral accounts.
In determining the fair value of retained interests, the Company estimates
future cash flows using management's best estimates of key assumptions such
as finance charge income, default rates, prepayment rates and discount
rates. The Company employs a risk-based pricing strategy that increases the
stated annual percentage rate for accounts that have a higher predicted
risk of default. Accounts with a lower risk profile may qualify for
promotional financing.
Rights recorded for future finance income from serviced assets that exceed
the contractually specified servicing fees are carried at fair value,
amounted to $51.4 million at May 31, 2001, and are included in net accounts
receivable. Gains of $13.1 million on sales were recorded for the
three-month period ended May 31, 2001.
The fair value of retained interests at May 31, 2001, was $84.2 million,
with a weighted-average life ranging from 1.5 years to 1.8 years. The table
below shows the key economic assumptions used in measuring the fair value
of retained interests at May 31, 2001, and a sensitivity analysis showing
the hypothetical effect on the fair value of those interests when there are
unfavorable variations from the assumptions used. Key economic assumptions
at May 31, 2001, are not materially different from assumptions used to
measure the fair value of retained interests at the time of securitization.
These sensitivities are hypothetical and should be used with caution. In
this table, the effect of a variation in a particular assumption on the
fair value of the retained interest is calculated without changing any
other assumption; in reality, changes in one factor may result in changes
in another, which might magnify or counteract the sensitivities.
Impact on Fair Impact on Fair
Assumptions Used Value of 10% Value of 20%
(Dollar amounts in thousands) (Annual) Adverse Change Adverse Change
---------------------------------------------------------------------------------------------------------
Prepayment speed........................ 1.5 - 1.6% $ 1,739 $ 4,122
Default rate............................ 1.0 - 1.2% $ 1,547 $ 3,098
Discount rate........................... 12.0% $ 978 $ 1,933
Page 34 of 42
4. Financial Derivatives
On behalf of the CarMax group, the Company, in the first quarter of fiscal
2002, entered into three 40-month amortizing interest rate swaps related to
auto loan receivable securitizations. These swaps had an initial notional
amount of approximately $213 million. The total notional amount of all
swaps related to the automobile loan receivable securitizations was $493
million at May 31, 2001, and $299 million at February 28, 2001. These swaps
are used to better match funding costs and are recorded at fair market
value. At May 31, 2001, these swaps totaled a net liability of $5.2 million
and are included in accounts payable.
The market and credit risks associated with interest rate swaps are similar
to those relating to other types of financial instruments. Market risk is
the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction
volume. The Company does not anticipate significant market risk from swaps,
because their use is to match funding costs to the use of the funding.
Credit risk is the exposure to nonperformance of another party to an
agreement. The Company mitigates credit risk by dealing with highly rated
counterparties.
5. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No.
137 and No. 138, standardizes the accounting for derivative instruments and
requires that an entity recognize those items as either assets or
liabilities and measure them at fair value. The Company adopted SFAS No.
133 during the first quarter of fiscal year 2002 (see Note 4). Adoption of
SFAS No. 133 did not have a material impact on the CarMax group's financial
position, results of operations or cash flows.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125." While SFAS No. 140 carries over
most of the provisions of SFAS No. 125, it provides new standards for
reporting financial assets transferred as collateral and new standards for
the derecognition of financial assets, in particular transactions involving
the use of special purpose entities. SFAS No. 140 also prescribes
additional disclosures for securitization transactions accounted for as
sales. The Company adopted SFAS No. 140 during the first quarter of fiscal
year 2002 (see Note 3). Adoption of SFAS No. 140 did not have a material
impact on the CarMax group's financial position, results of operations or
cash flows.
6. Reclassifications
Certain previously reported amounts have been reclassified to conform with
current-year presentation.
Page 35 of 42
ITEM 2.
CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this discussion, "we," "our" and "Circuit City Stores" refer to Circuit City
Stores, Inc. and our wholly owned subsidiaries, unless the context requires
otherwise. "CarMax business," "CarMax" and "CarMax group" refer to retail
locations bearing the CarMax name and to all related operations such as CarMax's
finance operation.
Net Sales and Operating Revenues and General Comments
Total sales rose 27% for the quarter ended May 31, 2001, to $796.8 million from
$625.7 million in last year's first quarter. CarMax's first quarter sales growth
reflects continued strength in the core used-car business, increased average
retails produced by a higher mix of later-model used-car sales and
stronger-than-anticipated new-car sales. For most of the quarter, all CarMax
locations were included in the comparable store sales calculations. CarMax's
comparable store sales increased 27% in the first quarter compared with a 14%
increase in the same prior year period.
CarMax plans moderate geographic growth through the addition of superstores in
new mid-sized markets that can be served effectively with one CarMax superstore
and additional satellite stores in existing multi-store markets. Mid-sized
markets are those with populations of approximately 1 million to 2.5 million
people. In late fiscal 2002, CarMax plans to open two superstores in the
mid-sized markets of Sacramento, California, and Greensboro, North Carolina.
The table below details CarMax retail units:
=====================================================================================================================
Stores Open At End of Quarter Estimate
-------------------------------------------
May 31, 2001 May 31, 2000 Feb. 28, 2002 Feb. 28, 2001
=====================================================================================================================
"C" and "B" Stores 14 14 14 14
---------------------------------------------------------------------------------------------------------------------
"A" Stores 17 17 19 17
---------------------------------------------------------------------------------------------------------------------
Prototype Satellite Stores 4 4 4 4
---------------------------------------------------------------------------------------------------------------------
Stand-Alone New-Car Stores 5 5 5 5
=====================================================================================================================
TOTAL 40 40 42 40
=====================================================================================================================
Gross dollar sales from all extended warranty programs were 3.8% of sales in the
first quarter of fiscal 2002 compared with 4.0% in the same period last year.
Third-party warranty revenue was 1.7% of sales in this year's first quarter
compared with 1.8% in the same period last year. The total extended warranty
revenue that is reported in total sales was 1.7% of sales in the first quarter
fiscal 2002, compared with 1.8% in fiscal 2001.
Page 36 of 42
The percentages of sales dollars and sales units represented by used and new
vehicles for the first quarter are listed below:
=====================================================================
Three Months Ended
May 31
---------------------------------------
2001 2000
=====================================================================
=====================================================================
Vehicle Dollars:
---------------------------------------------------------------------
Used Vehicles 81% 80%
---------------------------------------------------------------------
New Vehicles 19% 20%
=====================================================================
=====================================================================
Vehicle Units:
---------------------------------------------------------------------
Used Vehicles 87% 86%
---------------------------------------------------------------------
New Vehicles 13% 14%
=====================================================================
CarMax's operations, in common with other retailers in general, are subject to
seasonal influences. Historically, CarMax has experienced more of its net sales
in the first half of the fiscal year. The net earnings of any interim quarter
are seasonally disproportionate to net sales since administrative and certain
operating expenses remain relatively constant during the year. Therefore,
interim results should not be relied upon as necessarily indicative of results
for the entire fiscal year.
Cost of Sales
The gross profit margin decreased to 13.0% of sales in the first quarter of
fiscal 2002 from 13.7% for the same period last year. Although we achieved our
gross profit margin dollar targets per vehicle, higher average retails resulting
from the growth in later-model used-car sales and higher-than-expected new-car
sales, generated the decline in the gross profit margin percentage.
Selling, General and Administrative Expenses
The selling, general and administrative expense ratio was 7.3% of sales in the
first quarter of fiscal 2002, compared with 9.5% of sales for the same period
last year. The expense ratio improvement reflects the significant expense
leverage generated by the comparable sales growth. CarMax's finance operation
also contributed to the improved ratio as lower funding costs generated higher
spreads.
Net Earnings
During the first quarter, CarMax's net earnings increased 91% to $26.6 million
from $13.9 million for the same period last year. The net earnings attributed to
the CarMax group stock were $6.8 million for the first quarter of fiscal 2002,
compared with $3.5 million for the same period last year.
Liquidity and Capital Resources
Total assets at May 31, 2001, were $795.4 million, an increase of $84.4 million,
or 12%, from $711.0 million at February 28, 2001. Inventory increased $55.8
million to support seasonal sales trends. Net accounts receivable increased by
$30.0 million, reflecting an increase in auto loans. As scheduled, we used
existing working capital to repay a term loan totaling $130 million in June
2001. Payment of corporate debt will not necessarily reduce CarMax group
allocated debt. At May 31, 2001, we maintained a $150 million unsecured
revolving credit facility and $360 million in seasonal lines that are renewed
annually with various banks.
We have an asset securitization program operated through a special purpose
subsidiary on behalf of CarMax, through which we sell automobile loan
receivables. This program had a capacity of $625 million as of May 31, 2001. On
behalf of CarMax, we also have a public asset securitization program with a
capacity of $280 million as of
Page 37 of 42
May 31, 2001, and a second public asset securitization program with a capacity
of $562 million as of May 31, 2001. We anticipate that we will be able to expand
these securitization programs to meet future needs.
CarMax relies on the external debt we allocate to the CarMax group to provide
working capital needed to fund net assets not otherwise financed through
sale-leasebacks or receivable securitizations. We manage all significant
financial activities of the CarMax business on a centralized basis. CarMax's
significant financial activities are dependent on our financial condition as a
whole and include the investment of surplus cash, issuance and repayment of
debt, securitization of receivables and sale-leasebacks of real estate.
In July 2001, we expect to offer publicly up to 8,625,000 shares, which includes
the underwriters' over-allotment option of 1,125,000 shares, of CarMax group
stock. The shares that will be sold in the offering are shares of CarMax group
stock that have been reserved for the Circuit City group or for issuance to
holders of Circuit City group stock. We intend to allocate the net proceeds from
this offering, including any proceeds of shares issued upon exercise of the
underwriters' over-allotment option, to the Circuit City business to be used for
that business' general purposes, including the ongoing remodeling of the Circuit
City Superstores.
We believe that proceeds from sales of property and equipment and receivables,
future increases in Circuit City Stores' debt allocated to the CarMax group,
inter-group loans, floor plan financing and cash generated by operations will be
sufficient to fund the capital expenditures and operations of the CarMax group's
business.
Forward-Looking Statements
This CarMax Group Management's Discussion and Analysis and the CarMax Group
Disclosures about Market Risk below include "forward looking statements" within
the meaning of the securities laws. These forward-looking statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking statements. See the subsection
"Forward-Looking Statements" in Item 2 - Circuit City Stores, Inc. Management's
Discussion and Analysis of Results of Operation and Financial Condition,
beginning on page 16, for a review of important factors that could cause
differences in our actual results.
Page 38 of 42
ITEM 3.
CARMAX GROUP QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We centrally manage the automobile installment loan portfolio of the CarMax
finance operation. A portion of this portfolio is securitized and, therefore, is
not presented on the CarMax group's balance sheets. Interest rate exposure
relating to these receivables represents a market risk exposure that we manage
with matched funding and interest rate swaps.
Total principal outstanding for fixed-rate automobile loans at May 31 and
February 28, 2001, was as follows:
(Amounts in millions) May 31 February 28
--------------------------------------------------------------------------------
Fixed-rate..................................... $1,357 $1,296
Financing for these receivables is achieved through asset securitization
programs that, in turn, issue both fixed- and floating-rate securities.
Receivables held by Circuit City Stores for investment or sale are financed with
working capital. Financings at May 31 and February 28, 2001, were as follows:
(Amounts in millions) May 31 February 28
--------------------------------------------------------------------------------
Fixed-rate securitizations..................... $ 842 $ 984
Floating-rate securitizations
synthetically altered to fixed............. 493 299
Floating-rate securitizations.................. 2 1
Held by the Company:
For investment*............................ 14 9
For sale................................... 6 3
------ ------
Total.......................................... $1,357 $1,296
====== ======
* Held by a bankruptcy remote special purpose company.
Because programs are in place to manage interest rate exposure relating to the
installment loan portfolio, we expect to experience relatively little impact as
interest rates fluctuate.
Page 39 of 42
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the Company's shareholders was held
June 15, 2001.
(b) (i) At the annual meeting, the shareholders of the
Company elected Richard N. Cooper, James F.
Hardymon, Hugh G. Robinson and Carolyn Y. Woo as
directors for three-year terms; Robert S. Jepson
Jr. and Mikael Salovaara for two-year terms; and
Richard L. Sharp for a one-year term. The
elections were approved by the following votes:
=========================================================================
Directors For Withheld
=========================================================================
=========================================================================
Richard N. Cooper 189,391,467 3,845,526
-------------------------------------------------------------------------
-------------------------------------------------------------------------
James F. Hardymon 189,139,370 4,097,623
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Hugh G. Robinson 189,386,461 3,850,532
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Carolyn Y. Woo 189,282,644 3,954,349
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Robert S. Jepson Jr. 189,420,066 3,816,927
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Mikael Salovaara 189,405,833 3,831,160
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Richard L. Sharp 190,767,316 2,469,677
=========================================================================
(ii) At the annual meeting, the shareholders of the
Company voted against a shareholder proposal
regarding a report on employment practices. This
proposal was defeated by the following votes:
==================================================================================================
Broker
Shareholder For Against Abstain Non-Votes
Proposal ============================================================================
============================================================================
15,611,775 125,285,587 2,029,718 50,309,913
==================================================================================================
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) (i) Articles of Incorporation
(a) Amended and Restated Articles of Incorporation
of Circuit City Stores, Inc., effective
February 3, 1997, filed as Exhibit 3 (i)(a) to
the Company's Amended Quarterly Report on Form
10-Q/A for the quarter ended May 31, 1999
(File No. 1-5767), are expressly incorporated
herein by this reference.
(b) Articles of Amendment to our Amended and
Restated Articles of Incorporation, effective
April 28, 1998, filed as Exhibit 3(i)(b) to
the Company's Amended Quarterly Report on Form
10-Q/A for the quarter ended May 31, 1999
(File No. 1-5767), are expressly incorporated
herein by this reference.
Page 40 of 42
(c) Articles of Amendment to our Amended and
Restated Articles of Incorporation, effective
June 22, 1999, filed as Exhibit 3(i)(c) to the
Company's Amended Quarterly Report on Form
10-Q/A for the quarter ended May 31, 1999
(File No. 1-5767), are expressly incorporated
herein by this reference.
(3) (ii) Bylaws
(a) Bylaws of Circuit City Stores, Inc., as
amended and restated April 11, 2000, filed as
exhibit 3(ii) to the Company's Quarterly
Report on Form 10-Q for the quarter ended May
31, 2000 (File No. 1-5767), are expressly
incorporated herein by this reference.
(10) Material Contracts
(a) Amendments effective June 15, 2001, to the
Company's 2000 Non-Employee Directors Stock
Incentive Plan, filed herewith.
(b) Reports on Form 8-K
None.
Page 41 of 42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRCUIT CITY STORES, INC.
By: s/ W. Alan McCollough
-------------------------------------
W. Alan McCollough
President and
Chief Executive Officer
By: s/ Michael T. Chalifoux
--------------------------------------
Michael T. Chalifoux
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
By: s/ Philip J. Dunn
--------------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
July 6, 2001
Page 42 of 42