UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended May 31, 2004
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to ------ -----
Commission file number: 1-5767
CIRCUIT CITY STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0493875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9950 Mayland Drive
Richmond, Virginia 23233
(Address of principal executive offices) (Zip Code)
(804) 527- 4000
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report)
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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). 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, 2004
Common Stock, par value $0.50 199,233,224
A Table of Contents is included on Page 2 and an Exhibit Index is included on
Page 26.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations -
Three Months Ended May 31, 2004 and 2003 3
Consolidated Balance Sheets -
May 31, 2004 and February 29, 2004 4
Consolidated Statements of Cash Flows -
Three Months Ended May 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT INDEX 26
Page 2 of 26
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended
May 31
2004 2003
-------------- -------------
Net sales and operating revenues $ 2,066,588 $1,933,320
Cost of sales, buying and warehousing 1,586,153 1,485,010
-------------- -----------
Gross profit 480,435 448,310
Finance income 5,564 8,018
Selling, general and administrative expenses 487,945 494,542
Stock-based compensation expense 5,954 7,515
Interest expense 350 1,007
-------------- ------------
Loss from continuing operations before income taxes (8,250) (46,736)
Income tax benefit (3,016) (18,647)
-------------- ------------
Net loss from continuing operations (5,234) (28,089)
Net loss from discontinued operation (707) (18,607)
-------------- ------------
Net loss $ (5,941) $ (46,696)
============== ============
Weighted average common shares:
Basic 199,429 205,828
============== =============
Diluted 199,429 205,828
============== =============
Net loss per share:
=
Basic:
Continuing operations $ (0.03) $ (0.14)
Discontinued operation - (0.09)
-------------- ------------
$ (0.03) $ (0.23)
============== ============
Diluted:
Continuing operations $ (0.03) $ (0.14)
Discontinued operation - (0.09)
-------------- ------------
$ (0.03) $ (0.23)
============== ============
Cash dividends paid per share $ 0.0175 $ 0.0175
============== =============
See accompanying notes to consolidated financial statements.
Page 3 of 26
Circuit City Stores, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands except share data)
May 31, 2004 Feb. 29, 2004
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 990,571 $ 783,471
Accounts receivable, net of allowance for doubtful accounts
of $416 and $547 115,272 154,039
Retained interests in securitized receivables - 425,678
Merchandise inventory 1,537,752 1,517,256
Prepaid expenses and other current assets 48,956 38,617
Assets of discontinued operation 5,085 -
-------------- -------------
Total current assets 2,697,636 2,919,061
Property and equipment, net 620,159 585,903
Deferred income taxes 91,715 98,934
Goodwill and other intangible assets 218,827 -
Other assets 25,776 29,102
-------------- -------------
TOTAL ASSETS $ 3,654,113 $3,633,000
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 974,037 $ 879,635
Accrued expenses and other current liabilities 168,715 131,512
Accrued income taxes 67,434 71,163
Deferred income taxes 25,952 90,210
Current installments of long-term debt 12,416 1,115
Liabilities of discontinued operation 2,691 3,068
------------- -------------
Total current liabilities 1,251,245 1,176,703
Long-term debt, excluding current installments 25,088 22,691
Accrued straight-line rent 100,520 98,470
Other liabilities 117,120 111,175
-------------- -------------
TOTAL LIABILITIES 1,493,973 1,409,039
------------- -------------
Stockholders' equity:
Common stock, $0.50 par value;
525,000,000 shares authorized; 199,300,619 shares
issued and outstanding at May 31, 2004
(203,899,395 at February 29, 2004) 99,650 101,950
Capital in excess of par value 867,300 922,600
Retained earnings 1,189,895 1,199,411
Accumulated other comprehensive income 3,295 -
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,160,140 2,223,961
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,654,113 $3,633,000
============= ==========
See accompanying notes to consolidated financial statements.
Page 4 of 26
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31
2004 2003
-------------- ------------
Operating Activities:
Net loss $ (5,941) $ (46,696)
Adjustments to reconcile net loss to net cash used in
operating activities of continuing operations:
Loss from discontinued operation 707 18,607
Depreciation and amortization 34,843 49,485
Stock option expense 4,011 4,077
Amortization of restricted stock awards 1,722 2,212
Loss (gain) on dispositions of property and equipment 660 (380)
Provision for deferred income taxes (71,444) (6,663)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (23,046) (4,207)
Decrease (increase) in retained interests in securitized receivables 32,867 (115,614)
Decrease in merchandise inventory 74,072 81,077
Increase in prepaid expenses and other current assets (6,023) (32,951)
Decrease in other assets 4,736 2,647
Increase (decrease) in accounts payable 70,498 (63,277)
Decrease in accrued expenses and other current liabilities,
and accrued income taxes (4,686) (43,611)
(Decrease) increase in accrued straight-line rent and
other liabilities (7,460) 1,340
------------- ------------
Net cash provided by (used in) operating activities of continuing
operations 105,516 (153,954)
------------- ------------
Investing Activities:
Proceeds from the sale of the private-label finance operation 472,710 -
Acquisitions, net of cash acquired of $30,615 (271,954) -
Purchases of property and equipment (42,694) (27,370)
Proceeds from sales of property and equipment 18,599 6,791
------------- ------------
Net cash provided by (used in) investing activities of continuing
operations 176,661 (20,579)
------------ ------------
Financing Activities:
Principal payments on long-term debt (2,412) (330)
Repurchase and retirement of common stock (71,054) (13,941)
Issuances of common stock, net 7,721 717
Dividends paid (3,575) (3,648)
------------- ---------
Net cash used in financing activities of continuing operations (69,320) (17,202)
-------------- -------------
Net cash used in discontinued bankcard finance operation (6,169) (77,291)
Effect of exchange rate changes on cash 412 -
------------- ------------
Increase (decrease) in cash and cash equivalents 207,100 (269,026)
Cash and cash equivalents at beginning of year 783,471 884,670
------------ -----------
Cash and cash equivalents at end of period $ 990,571 $ 615,644
============ ============
See accompanying notes to consolidated financial statements. See Note 13 for a
supplemental schedule of non-cash investing and financing activities.
Page 5 of 26
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The consolidated financial statements of the company conform to accounting
principles generally accepted in the United States of America. In the
opinion of management, the accompanying unaudited financial statements
contain all adjustments, which consist only of normal, recurring
adjustments, necessary for a fair presentation. Due to the seasonal nature
of the company's business, interim results are not necessarily indicative
of results for the entire fiscal year. The company's consolidated financial
statements included in this report should be read in conjunction with the
notes to the audited financial statements incorporated by reference in the
company's fiscal 2004 Annual Report on Form 10-K.
On May 12, 2004, the company acquired a controlling interest in InterTAN,
Inc. for cash consideration of $265.6 million, which includes transaction
costs and is net of cash acquired of $30.6 million. InterTAN is a leading
consumer electronics retailer of both private-label and internationally
branded products with headquarters in Barrie, Ontario, Canada. InterTAN
operates retail consumer electronics outlets under the RadioShack(R) name
in Canada under a licensing agreement with a subsidiary of RadioShack
Corporation. In addition to enabling Circuit City to accelerate the
offering of private-label merchandise to its customers, the acquisition of
InterTAN gives Circuit City its first presence in the Canadian market.
Total sales for the first quarter include sales of $21.7 million generated
by InterTAN from the date of the acquisition on May 12, 2004, to the
quarter end on May 31, 2004. InterTAN did not have a material impact on the
net loss from continuing operations for the first quarter of the current
fiscal year. See Note 3 for additional discussion of the acquisition.
On May 25, 2004, the company completed the sale of its private-label
finance operation, comprised of its private-label and co-branded Visa
credit card programs, to Bank One Corporation. Results from the
private-label finance operation, including transition and transaction costs
of approximately $6 million related to the sale of the operation to Bank
One, are included in finance income. The company also entered into a
Consumer Credit Card Program Agreement with Bank One under which Bank One
is offering private-label and co-branded credit cards to new and existing
customers of the company. The company is compensated under the program
agreement primarily based on the number of new accounts opened. After the
sale date, the earnings contribution from the program agreement has been
included in net sales and operating revenues on the consolidated statements
of operations, but was immaterial in this fiscal year's first quarter. See
Note 4 and Note 12 for additional discussion concerning the sale of the
private-label finance operation.
On November 18, 2003, the company completed the sale of its bankcard
finance operation, which included Visa and MasterCard credit card
receivables and related cash reserves. Results from the bankcard finance
operation are presented as results from discontinued operation. See Note 2
for additional discussion concerning the sale of the bankcard finance
operation.
Certain prior year amounts have been reclassified to conform to the current
presentation.
2. Discontinued Operation
On November 18, 2003, the company completed the sale of its bankcard
finance operation to FleetBoston Financial. Results from the bankcard
finance operation are presented as results from discontinued operation. The
sale agreement included a transition services agreement under which
employees of the company's finance operation continued to service the
bankcard accounts until final conversion of the bankcard portfolio to
FleetBoston, which occurred on April 2, 2004. Through that date,
FleetBoston was obligated to reimburse the company for operating costs
incurred during the transition period. The company incurred severance costs
ratably through the final conversion date.
Page 6 of 26
The after-tax loss from the discontinued bankcard finance operation totaled
$0.7 million for the quarter ended May 31, 2004, and $18.6 million for the
same period last fiscal year. Cash flows related to the discontinued
operation have been segregated on the consolidated statements of cash
flows.
The assets and liabilities of the discontinued bankcard finance operation
reflected on the consolidated balance sheets at May 31, 2004, and February
29, 2004, were comprised of the following:
At At
(Amounts in millions) May 31 February 29
-------------------------------------------------------------------------------------------------------------------
Accounts receivable............................................................. $4.2 $ -
Deferred income taxes........................................................... 0.9 -
---------------------------
Total assets of discontinued bankcard finance operation......................... $5.1 $ -
==========================
Accrued expenses and other current liabilities.................................. $2.7 $3.1
--------------------------
Total liabilities of discontinued bankcard finance operation.................... $2.7 $3.1
==========================
3. Acquisitions
On May 12, 2004, the company acquired a controlling interest in InterTAN,
Inc. This acquisition was accounted for using the purchase method in
accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations." Accordingly, we recorded the net assets at their
estimated fair values, and included operating results in our consolidated
financial statements from the date of acquisition. Due to the timing of the
acquisition relative to our quarter end, the company allocated the purchase
price to the assets and liabilities on a preliminary basis using available
information. The preliminary purchase price allocation includes goodwill of
$176.0 million and identifiable intangible assets of $37.5 million.
Goodwill is not deductible for tax purposes. Under SFAS No. 142, "Goodwill
and Intangible Assets," goodwill is not amortized, but is reviewed for
impairment at least annually. The identifiable intangible assets include
contract-based intangibles. Preliminarily,the identifiable intangibles have
been assigned indefinite lives as there are no current outstanding reasons
to believe the contracts will not continue to be renewed. The identifiable
intangible assets will be reviewed for impairment at least annually.
Selected pro forma financial information assuming the acquisition had been
consummated at the beginning of fiscal 2003 were as follows:
Three Months Ended May 31
2004 2003
(Amounts in millions except per share data) Pro Forma Pro Forma
---------------------------------------------------------------------------------------------------------------
Net sales and operating revenues........................... $2,145.9 $2,021.8
Net loss from continuing operations........................ $ 6.6 $ 28.9
Net loss per share from continuing
operations............................................... $ 0.03 $ 0.14
Net loss................................................... $ 7.4 $ 47.5
Net loss per share......................................... $ 0.4 $ 0.23
On April 5, 2004, RadioShack filed suit against InterTAN in Tarrant County,
Texas, and amended that suit on April 27, 2004. InterTAN disputes the
various termination scenarios alleged by RadioShack and is vigorously
defending against those claims. On May 11, 2004, InterTAN asserted a
counterclaim seeking a declaration under U.S. federal trademark law that
the use of the RadioShack marks is proper. Circuit City was added as a
necessary party to that litigation and removed the matter to Federal Court
in the Northern District of Texas. On May 12, 2004, Circuit City filed its
own suit in Federal Court in the Northern District of Texas seeking a
declaration under U.S. federal trademark law that the use of the marks in
Canada is proper. InterTAN has cross-claimed against RadioShack based on
federal trademark law and remedies for business disparagement.
Page 7 of 26
Circuit City believes that RadioShack is not entitled to early termination
of the agreements and that InterTAN has substantial defenses to the
RadioShack claims. Circuit City intends to vigorously pursue its claims and
defend the claims in the RadioShack litigation. Circuit City believes that
this litigation will not have a material adverse effect on the company's
financial condition or results of operations.
4. Finance Income
Finance income includes the results from the company's private-label
finance operation, including transition and transaction costs of
approximately $6 million related to the sale of the operation to Bank One,
through May 25, 2004, the date the company completed the sale of its
private-label finance operation.
For the three-months ended May 31, 2004 and 2003, the components of pretax
finance income were as follows:
Three Months Ended
May 31
(Amounts in millions) 2004 2003
-----------------------------------------------------------------------------------------
Securitization income...................................... $28.1 $ 28.4
Less: Payroll and fringe benefit expenses.................. 7.6 8.0
Other direct expenses.............................. 14.9 12.4
----------------------------
Finance income............................................. $ 5.6 $ 8.0
============================
Securitization income primarily is comprised of the gain on the sale of
receivables generated by the company's private-label finance operation,
income from retained interests in the credit card receivables and income
related to servicing the receivables, as well as the impact of increases or
decreases in the fair value of the retained interests. Finance income does
not include any allocation of indirect costs or income. The company
presents information on the performance of its finance operation on a
direct basis to avoid making arbitrary decisions regarding the periodic
indirect benefits or costs that could be attributed to this operation.
Examples of indirect costs not included are corporate expenses such as
human resources, administrative services, marketing, information systems,
accounting, legal, treasury and executive payroll, as well as retail store
expenses.
Page 8 of 26
5. Stock-Based Compensation
Effective December 1, 2003, the company adopted the fair value based method
of accounting for stock-based compensation in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation." The adoption of this standard
was applied using the retroactive restatement method as defined in SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
The table below sets forth the effect of the retroactive restatement for
adoption of SFAS No. 123 and the presentation of results from the bankcard
finance operation as results from discontinued operation.
<
Three Months Ended
(Amounts in thousands except per share data) May 31, 2003
Net loss fromcontinuing operations:
Previously reported....................................................... $43,924
Restated for bankcard operation sale...................................... $25,317
Restated for bankcard operation sale and adoption of
SFAS No. 123.......................................................... $28,089
Net loss per share from continuing operations:
Basic:
Previously reported................................................... $ 0.21
Restated for bankcard operation sale.................................. $ 0.12
Restated for bankdcard operation sale and adoption of
SFAS No. 123...................................................... $ 0.14
Diluted:
Previously reported................................................... $ 0.21
Restated for bankcard operation sale.................................. $ 0.12
Restated for bankcard operation sale and adoption of
SFAS No. 123...................................................... $ 0.14
The fair value of each option granted is estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted average
assumptions.
Three Months Ended
May 31
2004 2003
-------------------------------------------------------------------------------------
Expected dividend yield........................... 0.6% 1.2%
Expected stock volatility......................... 65% 76%
Risk-free interest rates.......................... 4% 3%
Expected lives (in years)......................... 5 5
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted was $6 per share during the quarter ended May
31, 2004, and $3 per share during the quarter ended May 31, 2003.
6. Comprehensive Loss
The components of the company's comprehensive loss consist of the net loss
and other comprehensive income. Other comprehensive income includes foreign
currency translation adjustments and is recorded net of deferred income
taxes directly to stockholders' equity.
Page 9 of 26
The components of comprehensive loss, net of taxes, were as follows:
Three Months Ended
May 31
(Amounts in millions) 2004 2003
-----------------------------------------------------------------------------------
Net loss............................................. $(5.9) $(46.7)
Foreign currency translation......................... 3.3 -
---------------------------
Comprehensive loss................................... $ (2.6) $(46.7)
=========================
7. Income Taxes
The effective income tax rate applicable to results from continuing
operations was 36.6 percent for the three months ended May 31, 2004,
compared with 39.9 percent for the three months ended May 31, 2003. The
decrease reflects lower estimated state and local income taxes.
8. Net Loss Per Share
For the three months ended May 31, 2004 and 2003, no options or restricted
stock were included in the calculation of diluted net loss per share
because the company reported a loss from continuing operations. Options to
purchase 17.3 million shares of common stock with exercise prices ranging
from $3.10 to $27.21 and restricted stock amounting to 2.5 million shares
were outstanding at May 31, 2004. Options to purchase 19.1 million shares
of common stock with exercise prices ranging from $5.61 to $27.21 per share
and restricted stock amounting to 2.6 million shares were outstanding at
May 31, 2003.
9. Restricted Cash
Cash and cash equivalents held by the company's regulated subsidiaries and
not available for general corporate purposes were $26.1 million at May 31,
2004, and $61.6 million at February 29, 2004. The sale of the private-label
finance operation eliminated the company's obligation to restrict cash for
settlement obligations. The company is in the process of settling the
remaining liquidity restrictions on cash as part of the liquidation of
First North American National Bank, the company's wholly owned national
bank subsidiary.
10. Common Stock Repurchased
In January 2003, the company's board of directors authorized the repurchase
of up to $200 million of common stock. During the three months ended May
31, 2004, the company repurchased and retired approximately 5.8 million
shares at a cost of $71.1 million. As of May 31, 2004, the company had
repurchased and retired approximately 15.0 million shares of common stock
at a cost of $155.4 million. Based on the market value of the common stock
at May 31, 2004, the remaining $44.6 million then authorized would allow
the company to repurchase up to approximately 2 percent of the 199.3
million shares then outstanding. In June 2004, the board authorized a $200
million increase in the company's stock repurchase authorization. Based on
the market value of the common stock at May 31, 2004, the $244.6 million
that remains authorized would allow the company to repurchase up to
approximately 10 percent of the 199.3 million shares outstanding on May 31,
2004.
11. Pension Plans
The company provides a noncontributory defined benefit pension plan to
eligible employees. Plan benefits generally are based on years of service
and average compensation. The company also has an unfunded nonqualified
benefit restoration plan.
Page 10 of 26
The components of the net pension expense for the plans were as follows:
Three Months Ended
May 31
(Amounts in thousands) 2004 2003
----------------------------------------------------------------------------------------------------
Service cost............................................... $ 3,817 $ 3,968
Interest cost.............................................. 3,906 3,316
Expected return on plan assets............................. (4,101) (3,630)
Amortization of prior service cost......................... 119 119
Amortization of recognized actuarial loss.................. 1,255 818
--------------------------------------
Net pension expense........................................ $ 4,996 $ 4,591
======================================
Circuit City made no pension plan contributions during the first quarter of
fiscal 2005. The company expects to make any necessary contributions to the
defined benefit pension plan to meet ERISA minimum funding standards and
any additional contributions as needed to ensure that the fair value of
plan assets at February 28, 2005, exceeds the accumulated benefit
obligation. The company does not currently expect to make a contribution in
fiscal 2005. In addition, the company's expected contribution for the
restoration plan is equal to the expected benefit payments for the plan,
which was $463,000 as of February 29, 2004.
12. Segment Information
The company has identified three reportable segments: its domestic retail
operation, international retail operation and finance operation. The
company identified these segments based on its management reporting
structure and the nature of the products and services offered by each
segment. The domestic retail operation segment is primarily engaged in the
business of selling brand-name consumer electronics, personal computers and
entertainment software in the United States. The international retail
operation segment is primarily engaged in the business of selling
private-label and internationally branded consumer electronics products in
Canada. Total sales for the international retail segment for the first
quarter include $21.7 million generated by InterTAN from the date of the
acquisition on May 12, 2004, to the quarter end on May 31, 2004. The
finance operation issued and serviced private-label credit cards prior to
the sale of the operation. The company completed the sale of its
private-label finance operation, comprised of its private-label and Visa
credit card programs, to Bank One on May 25, 2004. Results from the
private-label finance operation, including transition and transaction costs
of approximately $6 million related to the sale of the operation to Bank
One Corporation, are included in finance income. See Note 4 for additional
discussion of finance income. The company and Bank One have entered into an
ongoing arrangement under which Bank One is offering private-label and
co-branded credit cards to new and existing customers of the company and
providing credit card services to all cardholders. After the sale date, the
earnings contribution from that arrangement has been included in net sales
and operating revenues on the consolidated statements of operations and is
included in the domestic retail segment. This contribution was immaterial
in this fiscal year's first quarter.
The company allocates substantially all depreciation and amortization and
interest expense within the domestic and international retail operation
segments. The accounting policies for all of the company's segments are the
same as those set forth in Note 2 to the company's audited consolidated
financial statements incorporated by reference in the company's fiscal 2004
Annual Report on Form 10-K.
Page 11 of 26
Revenue by reportable segment and the reconciliation to the consolidated
statements of operations were as follows:
Three Months Ended
May 31
(Amounts in millions) 2004 2003
----------------------------------------------------------------------------------------
Domestic retail operation................................. $2,044.9 $ 1,933.3
International retail operation............................ 21.7 -
Finance operation......................................... 28.1 28.4
---------------------------
Total revenue............................................. 2,094.7 1,961.7
Less: securitization income*............................. 28.1 28.4
----------------------------
Net sales and operating revenues ......................... $2,066.6 $ 1,933.3
===========================
*Securitization income is included in finance income, which is reported
separately from net sales and operating revenues on the statements of
operations.
The loss from continuing operations before income taxes by reportable
segment and the reconciliation to the consolidated statements of operations
was as follows:
Three Months Ended
May 31
(Amounts in millions) 2004 2003
----------------------------------------------------------------------------------------
Domestic retail operation................................. $ (14.5) $ (54.7)
International retail operation............................ 0.6 -
Finance operation*........................................ 5.6 8.0
--------------------------
Loss from continuing operations before income
taxes................................................. $ (8.3) $ (46.7)
===========================
*Results from the finance operation do not include certain indirect costs.
See Note 5 to the consolidated financial statements in this report for a
discussion of the indirect costs excluded.
Total assets by reportable segment and the reconciliation to the
consolidated balance sheets were as follows:
At May 31 At February 29
(Amounts in millions) 2004 2004
--------------------------------------------------------------------------------------------------
Domestic retail operation................................ $3,190.0 $3,031.7
International retail operation........................... 385.0 -
Finance operation........................................ 74.0 601.3
Discontinued operation................................... 5.1 -
--------------------------------
Total assets............................................. $3,654.1 $3,633.0
==============================
Goodwill and intangible assets by reportable segment were as follows:
At May 31 At February 29
(Amounts in millions) 2004 2004
--------------------------------------------------------------------------------------------------
Domestic retail operation................................ $ 5.4 $ -
International retail operation........................... 213.4 -
Finance operation........................................ - -
-------------------------------------
Total goodwill and intangible assets..................... $218.8 $ -
=====================================
Page 12 of 26
13. Supplemental Consolidated Statement of Cash Flows Information
The following table summarizes non-cash investing and financing activities
for the three months ended May 31, 2004.
Three Months Ended
(Amounts in thousands) May 31, 2004
-----------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing
activities:
Capital lease obligation.................................................. $ 2,754
========================
Acquisition of InterTAN:
Fair value of assets acquired:
Cash and cash equivalents..................................... $ 30,615
Merchandise inventory......................................... 92,960
Property and equipment, net................................... 42,614
Goodwill and other intangible assets.......................... 210,057
Other assets.................................................. 8,684
------------------------
Total fair value of assets acquired........................... 384,930
Less: Liablities assumed............................................. 88,709
Cash acquired.................................................. 30,615
------------------------
Acquistion of InterTAN, net of cash acquired......................... $265,606
========================
Acquisition of MusicNow:
Fair value of assets acquired........................................ $ 7,622
Less: Liabilities assumed............................................ 1,274
------------------------
Acquistion of MusicNow............................................... $ 6,348
========================
14. Foreign Currency Translation
The local currency of InterTAN, the Canadian dollar, is its functional
currency. For reporting purposes, assets and liabilities are translated
into U.S. dollars using the exchange rates in effect at the balance sheet
date, income and expense items are translated using monthly average
exchange rates. The effects of exchange rate changes on net assets of
InterTAN are recorded in equity as part of accumulated other comprehensive
income. Gains and losses from foreign currency transactions are included in
the operations of each period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On May 12, 2004, we acquired a controlling interest in InterTAN, Inc. for cash
consideration of 265.6 million, which includes transaction costs and is net of
cash acquired of $30.6 million. InterTAN is a leading consumer electronics
retailer of both private-label and internationally branded products with
headquarters in Barrie, Ontario, Canada. In addition to enabling us to
accelerate the offering of private-label merchandise to our customers, the
acquisition of InterTAN gives us our first presence in the Canadian market.
Total sales for the first quarter include sales of $21.7 million generated by
InterTAN from the date of the acquisition on May 12, 2004, to the quarter end on
May 31, 2004. InterTAN did not have a material impact on the net loss from
continuing operations for the first quarter of the current fiscal year.
On May 25, 2004, we completed the sale of our private-label finance operation,
comprised of our private-label and co-branded Visa credit card programs, to Bank
One Corporation. Results from the private-label finance operation, including
transition and transaction cost of approximately $6 million related to the sale
of the operation to Bank One, are included in finance income. We also entered
into a Consumer Credit Card Program Agreement with Bank One under which Bank One
is offering private-label and co-branded credit
Page 13 of 26
cards to new and existing customers. As part of the program agreement, we plan
to jointly develop and introduce new features, products and services to drive
additional sales. We are compensated under the program primarily based on the
number of new accounts opened. Bank One is obligated to offer special
promotional financing terms to our customers. We determine the frequency, volume
and, subject to certain limits, the terms of these promotions. Bank One is
compensated for these promotions in accordance with a negotiated fee schedule.
The program agreement has an initial seven-year term with automatic three-year
renewals. The agreement has customary representations, warranties, covenants,
events of default and termination rights for an agreement of this type. After
the sale date, the earnings contribution from the program agreement has been
included in net sales and operating revenues on the consolidated statements of
operations, but was immaterial in this fiscal year's first quarter. See Note 4
and Note 12 to the consolidated financial statements in this report for
additional discussion concerning the sale of the private-label finance
operation.
On November 18, 2003, we completed the sale of our bankcard finance operation,
which included Visa and MasterCard credit card receivables and related cash
reserves. Results from the bankcard finance operation are presented as results
from discontinued operation. See Note 2 to the consolidated financial statements
in this report for additional discussion concerning the sale of the bankcard
finance operation.
CRITICAL ACCOUNTING POLICIES
See the discussion of critical accounting policies under Management's Discussion
and Analysis of Results of Operations and Financial Condition incorporated by
reference in our fiscal 2004 Annual Report on Form 10-K. These policies relate
to the calculation of the value of retained interests in securitization
transactions, the calculation of the liability for lease termination costs,
accounting for pension plans, accounting for stock-based compensation expense
and accounting for cash consideration received from vendors.
During the first quarter of fiscal 2005, we recognized goodwill and other
intangible assets related to our acquisition of InterTAN. We have added the
following critical accounting policy.
Accounting for Goodwill and Intangible Assets
We account for goodwill and intangible assets in accordance with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142 requires that goodwill and other intangible assets with indefinite
useful lives no longer be amortized, but instead evaluated for impairment on an
annual basis, or more frequently if certain events or circumstances exist. We
will evaluate the goodwill balance in the last quarter of the fiscal year.
Through the impairment test, goodwill, other intangible assets, and tangible
assets and liabilities are divided among reporting units. If the fair value of
those reporting units is less than the carrying value, then the implied fair
value of the goodwill of the reporting unit must be compared to the carrying
value of that goodwill. In the instance that the fair value of the goodwill is
less than the carrying value, goodwill is deemed to be impaired and an
impairment loss, equal to the excess of the fair value over the carrying value,
must be recorded.
The performance of the goodwill impairment test is subject to significant
judgement in determining the fair value of reporting units, due to the
estimation of future cash flows, discount rates, and other assumptions. Changes
in these estimates and assumptions could have a significant impact on the fair
value and/or goodwill impairment of each reporting unit.
RESULTS OF OPERATIONS
Our operations, in common with other retailers in general, are subject to
seasonal influences. Historically, we have realized more of our net sales and
net earnings in the fourth quarter, which includes the majority of the holiday
selling season, than in any other fiscal quarter. The net earnings of any
quarter are seasonally disproportionate to net sales since administrative and
certain operating expenses remain relatively constant during the year.
Therefore, quarterly results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
Page 14 of 26
Discussion of our results of operations includes InterTAN results unless
otherwise noted.
Net Sales and Operating Revenues
Total sales for the first quarter of fiscal 2005 increased 6.9 percent to $2.07
billion from $1.93 billion in last fiscal year's first quarter. Comparable store
merchandise sales increased 6.4 percent for the first quarter of fiscal 2005. A
store is included in comparable store merchandise sales after the store has been
open for a full year. Relocated stores are included immediately in the
comparable store base. InterTAN stores open at the date of acquisition will be
included in the comparable store base beginning in June 2005.
The first quarter comparable store sales increase in part reflects the soft
performance in last year's first quarter, when we produced our weakest
comparable store sales performance of that year. Year-over-year improvements in
the average ticket size and the close ratio, despite relatively unchanged levels
of traffic, demonstrate the increased focus on execution in our stores. We also
continued to generate strong growth in Web-originated sales.
The percent of merchandise sales represented by each major product category for
the three months ended May 31, 2004 and 2003 was as follows:
Three Months Ended
May 31
2004 2003
------------------------------------------------------------------------------
Video............................................. 42% 40%
Audio............................................. 13 14
Information technology............................ 33 33
Entertainment..................................... 12 13
------------------------
Total............................................. 100% 100%
======================
In the video category, we produced an upper-single-digit comparable store sales
increase, driven by sales of new-technology televisions. Video category sales
reflect double-digit growth in digital televisions and triple-digit growth in
plasma and LCD televisions. Double-digit comparable store sales growth in DVD
players and in digital imaging products further contributed to the category's
comparable store sales increase. A double-digit decline in tube television sales
and a slight decline in camcorder sales partly offset the growth in other video
products.
A low-single-digit comparable store sales increase for the audio category
includes single-digit comparable store sales growth in mobile audio products and
double-digit comparable store sales growth in portable audio, but double-digit
sales declines in home audio.
In the information technology category, we generated an upper-single-digit
comparable store sales increase led by double-digit comparable store sales
growth in personal computer hardware. Double-digit comparable store sales growth
in notebooks and monitors and single-digit growth in desktop computers was
partly offset by double-digit comparable store sales declines in printers.
In the entertainment category, we produced a low-single-digit comparable store
sales increase that included double-digit comparable store sales growth in video
software and single-digit sales growth in music software. Growth in these
categories was partly offset by double-digit declines in game software and
hardware sales.
Our domestic retail operation sells extended warranty programs on behalf of
unrelated third parties that are the primary obligors. For our domestic retail
operation segment, the total extended warranty revenue included in total sales
was $77.2 million, or 3.8 percent of domestic retail sales, in the first quarter
of fiscal 2005, compared with $72.4 million, or 3.7 percent of sales, in last
fiscal year's first quarter.
Page 15 of 26
The following table provides the numbers of our domestic retail segment units:
May 31, 2004 Feb. 29, 2004 May 31, 2003
---------------------------------------------------------------------------------------------------------------
Superstores....................................... 602 599 611
Mall-based stores................................. 5 5 15
----------------------------------------------------------
Total domestic retail segment units............... 607 604 626
==========================================================
In fiscal 2005, we expect to open 60 to 70 Superstores in our domestic retail
operation segment, approximately half of which will be new locations and half of
which will be relocations. In the first quarter of fiscal 2005, we opened two
new Superstores and opened one Superstore that was a replacement for a
Superstore we closed in late fiscal 2004.
The following table provides the numbers of our international retail segment
units:
May 31, 2004
---------------------------------------------------------------------
Company-operated stores........................... 509
Dealer outlets.................................... 379
Rogers Wireless stores............................ 84
Battery Plus stores............................... 30
-----------------
Total international retail segment units.......... 1,002
=================
InterTAN's company operated stores operate under the trade name "RadioShack."
Dealer outlets are independent retail businesses which operate under their own
trade names but are permitted, under dealer agreements, to purchase any of the
products sold by InterTAN company stores. Rogers Wireless stores are dedicated
primarily to the sale of wireless services, including related hardware, offered
by Rogers Wireless, Inc. Battery Plus stores retail batteries and other
specialty consumer electronics products.
Cost of Sales, Buying and Warehousing
The gross profit margin was 23.2 percent of sales in both the first quarter of
fiscal 2005 and the first quarter of fiscal 2004. Increased efficiency in our
product service organization and the inclusion of InterTAN drove improvements in
the gross profit margin, but these improvements were offset by promotional
pricing in a number of categories. The inclusion of InterTAN results from May 12
to May 31 contributed 18 basis points to this year's first quarter gross profit
margin.
Finance Income
We completed the sale of our private-label finance operation, comprised of our
private-label and co-branded Visa credit card programs, to Bank One on May 25,
2004. Results from the private-label finance operation through the date of the
sale, including transition and transaction costs of approximately $6 million
related to the sale of the operation to Bank One, are included in finance
income. See Note 1, Note 4 and Note 12 to the consolidated financial statements
in this report for additional discussion concerning the sale of our
private-label finance operation.
For the three months ended May 31, 2004 and 2003, the components of pretax
finance income were as follows:
Three Months Ended
May 31
(Amounts in millions) 2004 2003
----------------------------------------------------------------------------------------------
Securitization income........................................... $28.1 $ 28.4
Less: Payroll and fringe benefit expenses....................... 7.6 8.0
Other direct expenses................................... 14.9 12.4
----------------------------
Finance income.................................................. $ 5.6 $ 8.0
============================
Page 16 of 26
Finance income is reduced by payroll, fringe benefits and other costs directly
associated with the management and securitization of the private-label
receivables. Payroll and fringe benefit expenses generally vary with the amount
of serviced receivables. Other direct expenses include third-party data
processing fees, rent, credit promotion expenses, Visa fees, transition and
transaction costs related to the sale of the private-label finance operation and
other operating expenses. Finance income does not include any allocation of
indirect costs or income. Examples of indirect costs not included are corporate
expenses such as human resources, administrative services, marketing,
information systems, accounting, legal, treasury and executive payroll, as well
as retail store expenses.
Selling, General and Administrative Expenses
Three Months Ended May 31
2004 2003
% of % of
(Dollar amounts in millions) $ Sales $ Sales
-------------------------------------------------------------------------------------
Store expenses.......................... $451.3 21.8% $442.6 22.9%
General and administrative
expenses........................... 35.9 1.8 36.1 1.9
Remodel expenses........................ 0.1 - 11.4 0.6
Relocation expenses..................... 1.9 0.1 5.1 0.2
Pre-opening expenses.................... 0.8 - 1.7 0.1
Interest income......................... (2.1) (0.1) (2.4) (0.1)
------------------------------------------
Total ................................. $487.9 23.6% $494.5 25.6%
=========================================
The year-over-year 200-basis-point improvement was primarily driven by:
o lower rent and occupancy costs as a percent of sales, largely resulting
from the closure of 19 under-performing stores in February 2004 and
leverage generated by comparable store sales growth;
o a reduction in relocation and remodel expense, which reflected a lower
level of activity in this year's first quarter; and
o positive leverage in payroll costs for the stores as well as district and
regional store operations.
The inclusion of InterTAN results in the consolidated results from May 12 to May
31 increased the expense ratio by 13 basis points. The increase in the dollar
amount of store expenses largely reflects the inclusion of InterTAN expenses.
This year's first quarter expenses included $1.9 million of relocation costs
associated with accelerated depreciation of assets related to planned future
relocations. Expenses in last year's first quarter included $16.5 million of
remodel and relocation costs, including costs related to the refixturing of nine
Superstores, the relocation of three Superstores and the full remodel of one
Superstore, as well as accelerated depreciation on assets to be taken out of
service as a result of the store remodeling and relocation program.
We continue to anticipate that capital expenditures, net of sale-leasebacks and
tenant improvement allowances, will total approximately $165 million in the
current fiscal year and that expenses related to relocations and one remodel
will total approximately $52 million in fiscal 2005. We incurred $1.9 million or
approximately 4 percent of the anticipated remodel and relocation expenses in
the first quarter and expect the remainder to be spread approximately evenly
across the remaining three quarters of the fiscal year.
Interest Expense
Interest expense was $0.4 million for the three months ended May 31, 2004, and
$1.0 million for the three months ended May 31, 2003. Interest expense for the
first quarter of last fiscal year reflects interest paid as a result of
completed audits of prior year income tax returns.
Page 17 of 26
Income Taxes
The effective income tax rate applicable to results from continuing operations
was 36.6 percent for the three months ended May 31, 2004, and 39.9 percent for
the three months ended May 31, 2003. The decrease reflects lower estimated state
and local income taxes. The estimated effective income tax rate applicable to
results from continuing operations for the domestic retail operation segment for
fiscal 2005 is expected to be 36.7 percent. The estimated effective income tax
rate applicable to results from continuing operations for the international
retail operation segment for fiscal 2005 is expected to be 38.5 percent. The
consolidated effective income tax rate applicable to results from continuing
operations will be the weighted average of all of our segments' rates.
Net Loss from Continuing Operations
The net loss from continuing operations was $5.2 million, or 3 cents per share,
in the first quarter ended May 31, 2004, compared with $28.1 million, or 14
cents per share, in the first quarter of last fiscal year. The first quarter net
loss from continuing operations includes after-tax transition and transaction
costs of approximately $4 million related to the disposition of the
private-label finance operation. InterTAN results did not have a material impact
on the net loss from continuing operations.
Net Loss from Discontinued Operation
On November 18, 2003, we completed the sale of our bankcard finance operation to
FleetBoston Financial. Results from the bankcard finance operation are presented
as results from discontinued operation. The sale agreement included a transition
services agreement under which employees of our finance operation continued to
service the bankcard accounts until final conversion of the bankcard portfolio
to FleetBoston, which occurred on April 2, 2004. Through that date, FleetBoston
reimbursed us for operating costs incurred during the transition period. We
incurred severance costs ratably through the final conversion date.
The after-tax loss from the discontinued bankcard finance operation totaled $0.7
million for the quarter ended May 31, 2004, and $18.6 million for the same
period last fiscal year.
Operations Outlook
Our attention is focused on building value for shareholders by providing
superior consumer electronics solutions to families. We remain focused on four
basic areas: 1) driving store revenue growth, 2) growing Web-based revenues, 3)
stabilizing gross margins and 4) bringing our overall cost and expense structure
in line with our current level of revenues. We believe we have the right plan in
place to combine profitable revenue growth with improved in-store execution, and
we have the resources to execute that plan.
Growing store revenues requires a focused team effort among numerous functions
including store operations, merchandising, Circuit City Direct, marketing, real
estate and finance. An important component of driving sales growth is the
ongoing store revitalization plan, which incorporates opening new locations in
vibrant trade areas, relocating stores to better locations within existing trade
areas and, to a lesser extent, improving the performance of existing stores
through remodeling activities designed to improve the shopping experience. From
the beginning of fiscal 2001 through May 31, 2004, 134 Superstores, or 22
percent of our 602 Superstores, had been newly constructed, relocated or fully
remodeled to provide a contemporary shopping experience with easy product access
and more powerful merchandising displays. We expect that ratio to reach
approximately 30 percent by the end of this fiscal year. At the end of the first
quarter, we had 27 relocated stores that have been open for more than six
months. In their first full six months following grand opening, these 27 stores
averaged sales changes that were approximately 27 percentage points better than
the sales pace of the remainder of the store base during the same time periods
and an internal rate of return of approximately 16 percent. We expect some
movement in the sales lift and IRR statistics as we add new stores to what is a
relatively small relocation base, but we continue to expect that over the long
term, store relocations will produce attractive results. In fiscal 2005, we
expect to open 60 to 70 Superstores, approximately half of which will be new
locations and half of which will be relocations.
Page 18 of 26
Our Circuit City Direct organization is focused on continuing to drive strong
Web-originated sales growth. We have an aggressive plan that includes new
merchandise offerings; improved Web site capabilities and functionality; new
partnerships; the introduction of on-line credit applications and financing
through Bank One; strengthening of integration and cross-marketing with our
Superstores; and continual testing of new price and promotional strategies. In
the fall, we expect to launch our redesigned Web site with many of these
features. Our recent acquisition of the assets of MusicNow reflects our belief
that there is a significant Internet-based opportunity to drive sales through
the delivery of licensed content.
We have many ongoing activities throughout the company that we expect to benefit
the gross profit margin, which may include
o expanding our own-brand product assortments as we head into the holiday
season, especially through integrating InterTAN's products;
o reducing the cost of acquisition of products through increased competition
among vendors in certain product areas;
o examining the balance of products within each product category,
particularly between price points and across vendors;
o rationalizing the number of items offered in low-volume stores;
o expanding the use of markdown optimization tools;
o improving inventory forecasting; and
o focusing on selling attachments and services.
We were pleased with the year-over-year improvement in our selling, general and
administrative expenses as a percentage of sales for the quarter. During fiscal
2004, we implemented improvements such as consolidating districts, regions and
divisions; centralizing indirect procurement; rightsizing corporate missions;
and closing under-performing stores. We continue to believe that reducing our
expense structure is an integral component of building a new Circuit City and
will continue to focus on driving additional expense reductions.
FINANCIAL CONDITION
Liquidity and Capital Resources
At May 31, 2004, we had cash and cash equivalents of $990.6 million, compared
with $783.5 million at February 29, 2004. The higher cash balance primarily
reflects the net cash proceeds of $472.7 million from the sale of the
private-label finance operation partly offset by acquisition costs for InterTAN
of $265.6 million, net of cash acquired. During the first quarter of fiscal
2005, we also used $71.1 million of cash to repurchase common stock under the
company's stock buyback authorization.
At May 31, 2003, we had cash and cash equivalents of $615.6 million. The
year-over-year change in the cash balance largely reflects the net cash proceeds
of $472.7 million from the sale of the private-label finance operation and the
net cash proceeds of $282 million from the sale of the bankcard finance
operation, partly offset by acquisition costs for InterTAN of $265.6 million,
net of cash acquired. Since the end of the first quarter of fiscal 2004 through
May 31, 2004, we also used $141.5 million of cash to repurchase common stock
under the company's stock buyback authorization.
Operating Activities. In the three months ended May 31, 2004, net cash provided
by operating activities was $105.5 million, compared with net cash used in
operating activities of $154.0 million in the three months ended May 31, 2003.
The increase in net cash provided by operating activities is primarily due to
changes in retained interests in securitized receivables; accounts payable; and
accrued expenses and other current liabilities, and accrued income taxes. The
change in merchandise inventory is consistent with the prior year change due to
the seasonal nature of our business.
Retained interests in securitized receivables decreased by $32.9 million in the
first three months of fiscal 2005, compared with an increase of $115.6 million
in the first three months of last fiscal year. The current year decrease relates
to the sale of the private-label finance operation. The prior year increase
reflects the
Page 19 of 26
completion of a $500 million private-label credit card securitization
transaction to replace a maturing term securitization.
Accounts payable increased by $70.5 million in the first three months of fiscal
2005, compared with a decrease of $63.3 million in the first three months of
last fiscal year. The $133.8 million difference primarily relates to slowed
purchasing activity in the last two months of fiscal 2004 to correct our
inventory levels following lower-than-anticipated December 2003 sales.
Accrued expenses and other current liabilities and accrued income taxes
decreased by $4.7 million in the first three months of fiscal 2005, compared
with a decrease of $43.6 million in the first three months of last fiscal year.
The $38.9 million difference primarily reflects the impact of accrued income
taxes related to the sale of our private-label finance operation.
Investing Activities. For the three months ended May 31, 2004, net cash provided
by investing activities was $176.7 million compared with net cash used in
investing activities of $20.6 million for the three months ended May 31, 2003.
The increase in net cash provided by investing activities is primarily due to
net cash proceeds of $472.7 million from the sale of the private-label finance
operation offset by net acquisition costs for InterTAN of $265.6 million.
Financing Activities. For the three months ended May 31, 2004, net cash used in
financing activities was $69.3 million, compared with net cash used in financing
activities of $17.2 million for the three months ended May 31, 2003. The change
primarily reflects $71.1 million used to repurchase common stock during the
first quarter of this fiscal year compared with $13.9 million used during the
same period last fiscal year. Based on the market value of the common stock at
May 31, 2004, the then remaining $44.6 million of the original $200 million
authorization would allow for the repurchase of up to approximately 2 percent of
the 199.3 million shares then outstanding. In June 2004, the board authorized a
$200 million increase in the company's stock repurchase authorization. Based on
the market value of the common stock at May 31, 2004, the $244.6 million that
remains authorized would allow for the repurchase of up to approximately 10
percent of the 199.3 million shares outstanding on May 31, 2004.
We have a $500 million revolving credit facility secured by inventory. At May
31, 2004, there were no short-term borrowings on this facility. At May 31, 2004,
outstanding letters of credit related to this facility were $64.8 million,
leaving $435.2 million available for borrowing. We were in compliance with all
covenants under this facility at May 31, 2004.
We expect that available cash resources, credit facilities, sale-leaseback
transactions, landlord reimbursements and cash generated by operations will be
sufficient to fund capital expenditures and working capital for the foreseeable
future.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of 1995 provide
companies with a "safe harbor" when making forward-looking statements. This
"safe harbor" encourages companies to provide prospective information about
their companies without fear of litigation. We wish to take advantage of the
"safe harbor" provisions of the Act. Our statements that are not historical
facts, including statements about management's expectations for fiscal 2005 and
beyond, are forward-looking statements and involve various risks and
uncertainties.
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 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 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
Page 20 of 26
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
either similar or alternative methods or channels of distribution such as
online and telephone shopping services and mail order;
o changes in general 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
merchandise sales mix;
o significant changes in retail prices for products we sell;
o changes in availability or cost of financing for working capital and
capital expenditures, including financing to support development of our
business;
o lack of availability or access to sources of inventory;
o inability to liquidate excess inventory should excess inventory develop;
o failure to successfully implement sales and profitability improvement
programs for our Circuit City Superstores, including our remodeling and
relocation plan;
o consumer reaction to new store locations and changes in our store design
and merchandise;
o the timing and amount of any adjustments affecting the transaction costs,
severance costs or post-closing adjustments to income that may be required
as a result of the sale of the private-label finance operation;
o our ability and the ability of Bank One to successfully integrate our
retail business with the credit card program being offered by Bank One;
o future levels of sales activity and the acceptance of the Bank One credit
program by consumers on an ongoing basis;
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 production or distribution costs or costs of materials for our
advertising;
o availability of appropriate real estate locations for relocations and new
stores;
o successful implementation of our customer service initiatives;
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 us or our 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;
o our ability to integrate and operate InterTAN successfully and to realize
the anticipated benefits of the transaction, including successfully
introducing InterTAN's products in our Superstores and realizing inventory
purchasing synergies;
o reduced investment returns in our pension plan;
o changes in our anticipated cash flow;
o adverse results in significant litigation matters, including the outcome
and impact on InterTAN of litigation instituted by RadioShack Corporation
to terminate InterTAN's right to use the RadioShack(R) name in Canada and
related rights to purchase merchandise through RadioShack;
o currency exchange rate fluctuations between Canadian and U.S. dollars and
other currencies; and
o the regulatory and trade environment in the U.S. and Canada.
We believe our forward-looking statements are reasonable; however, undue
reliance should not be placed on forward-looking statements, which are based on
current expectations.
Page 21 of 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the acquisition of InterTAN, we are exposed to market risk from
potential changes in the U.S./Canadian currency exchange rates as they relate to
inventory purchases and the translation of InterTAN's financial results.
Inventory Purchases
A portion of InterTAN's purchases were from vendors requiring payment in U.S.
dollars. Accordingly, there is risk that the value of the Canadian dollar could
fluctuate relative to the U.S. dollar from the time the goods are ordered until
payment is made. InterTAN's management monitors the foreign exchange risk
associated with its U.S. dollar open orders on a regular basis by reviewing the
amount of such open orders, exchange rates, including forecasts from major
financial institutions, local news and other economic factors. At May 31, 2004,
the exchange risk was not being managed through the use of forward exchange
contracts. At May 31, 2004, U.S. dollar purchase orders totaled approximately
$30.0 million. A 10 percent decline in the value of the Canadian dollar would
result in an increase in product cost of approximately $3.0 million. The
incremental cost of such a decline in currency values, if incurred, would be
reflected in higher cost of sales in future periods. In these circumstances,
management would take product-pricing action, where appropriate.
Translation of Financial Results
Fluctuations in the value of the Canadian dollar have a direct effect on
reported consolidated results due to the acquisition of InterTAN. We do not
hedge against the possible impact of this risk. A 10 percent adverse change in
the foreign currency exchange rate would not have a significant impact on our
results of operations or financial position.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the company's management,
including the chief executive officer and chief financial officer, the company
has evaluated the effectiveness of its "disclosure controls and procedures," as
that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended, as of the end of the period covered by this Quarterly Report on Form
10-Q. Based upon their evaluation, the chief executive officer and chief
financial officer concluded that the company's disclosure controls and
procedures are effective. There were no changes in the company's internal
control over financial reporting in the quarter ended May 31, 2004, that have
materially affected, or are reasonably likely to materially affect, the
company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 31, 2004, Circuit City announced a public tender offer to purchase the
stock of InterTAN. Circuit City completed the acquisition and InterTAN became a
wholly owned subsidiary of Circuit City on May 19, 2004. Among other things,
InterTAN operates retail consumer electronics outlets under the RadioShack(R)
name in Canada under a licensing agreement with a subsidiary of RadioShack
Corporation. InterTAN also operates under two other agreements with RadioShack
and its subsidiaries ("RadioShack"): a merchandising agreement and an
advertising agreement.
After the March 31, 2004 announcement, RadioShack asserted early termination of
all three agreements under a variety of theories and on a variety of proposed
termination dates. RadioShack asserts that InterTAN failed to pay an annual fee
in material breach of the advertising agreement and, alternatively, that a
"without cause" termination of the advertising agreement triggers termination of
the other agreements.
On April 5, 2004, RadioShack filed suit against InterTAN in Tarrant County,
Texas, and amended that suit on April 27, 2004. InterTAN disputes the various
termination scenarios alleged by RadioShack and is vigorously
Page 22 of 26
defending against those claims. On May 11, 2004, InterTAN asserted a
counterclaim seeking a declaration under U.S. federal trademark law that the use
of the RadioShack marks is proper. Circuit City was added as a necessary party
to that litigation and removed the matter to Federal Court in the Northern
District of Texas. On May 12, 2004, Circuit City filed its own suit in Federal
Court in the Northern District of Texas seeking a declaration under U.S. federal
trademark law that the use of the marks in Canada is proper. InterTAN has
cross-claimed against RadioShack based on federal trademark law and remedies for
business disparagement.
Circuit City believes that RadioShack is not entitled to early termination of
the agreements and that InterTAN has substantial defenses to the RadioShack
claims. Circuit City intends to vigorously pursue its claims and defend the
claims in the RadioShack litigation. Circuit City believes that this litigation
will not have a material adverse effect on the company's financial condition or
results of operations.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides information about common stock repurchases by
or on behalf of the company during the quarter ended May 31, 2004:
Maximum Dollar
Total Number Value of
of Shares Shares that
Average Purchased as May Yet Be
Total Number Price Part of Publicly Purchased
of Shares Paid Announced Under the
(Amounts in millions except per share data) Purchased (1) per Share Program Program (2)
-----------------------------------------------------------------------------------------------------------------------------------
March 1 - March 31, 2004............................ - $ - - $115.6
April 1 - April 30, 2004............................ 4.0 $12.37 4.0 $ 66.4
May 1 - May 31, 2004................................ 1.8 $12.10 1.8 $ 44.6
------------------ ------------------
Total Fiscal 2005 First Quarter..................... 5.8 $12.29 5.8
================== ==================
(1) In addition to shares purchased as part of a publicly announced program,
includes 17,422 shares(1) that represent shares purchased in open-market
transactions by two officers of the company who may be considered "affiliated
purchasers" as defined in Rule 10b-18(c)(3) and shares delivered to the company
to pay the exercise price under stock options or to satisfy tax withholding
obligations upon the exercise of stock options or vesting of restricted stock.
(2) In January 2003, the company announced that the board of directors
authorized the repurchase of up to $200 million of common stock. In June 2004,
the company announced a $200 million increase in the company's stock repurchase
authorization, raising the total repurchase capacity to $400 million. There is
no expiration date under either authorization.
Page 23 of 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the company,
effective February 3,1997, as amended through October 1, 2002,
filed as Exhibit 3(i) to the company's Quarterly Report on Form
10-Q for the quarter ended November 30, 2002 (File No. 1-5767),
are expressly incorporated herein by this reference.
3.2 Bylaws of the company, as amended and restated June 17, 2003,
filed as Exhibit 3 (iii) to the company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 2003 (File No. 1-5767),
are expressly incorporated herein by this reference.
4.1 Third Amended and Restated Rights Agreement dated as of October
1, 2002, between the company and Wells Fargo Bank Minnesota,
N.A., as Rights Agent, filed as Exhibit 1 to the company's Form
8-A/A filed on October 1, 2002 (File No. 1-5767), is expressly
incorporated herein by this reference.
10.1 Employment agreement between the company and Brian E. Levy, filed
herewith.*
10.2 InterTAN, Inc. Amended and Restated 1996 Stock Option Plan, filed
herewith.*
31 Rule 13a-14(a)/15d-14(a) Certifications
(i) Certification of CEO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
(ii)Certification of CFO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
32 Section 1350 Certifications
(i) Certification of CEO under Section 906 of the Sarbanes-Oxley
Act of 2002
(ii)Certification of CFO under Section 906 of the Sarbanes-Oxley
Act of 2002
* Indicates management contracts, compensatory plans or
arrangements of the company required to be filed as an
exhibit.
(b) Reports on Form 8-K
The Forms 8-K listed below were furnished to the SEC during the period
covered by this report pursuant to Item 12 of Form 8-K and shall not be
deemed "filed" for purposes of the Securities Exchange Act of 1934, as
amended, or incorporated by reference into any document filed under the
Securities Act of 1933, as amended, except as shall be expressly set forth
by specific reference in such filing.
(i) On March 4, 2004, Circuit City Stores, Inc. announced its
fourth quarter and fiscal year 2004 sales and the
appointment of Rick Goings to the board of directors.
(ii) On March 29, 2004, Circuit City Stores, Inc. announced its
adoption of the fair value recognition provisions for
stock-based compensation in accordance with Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and
Disclosure.
(iii)On March 31, 2004, Circuit City Stores, Inc. announced its
results for the fourth quarter and fiscal year ended
February 29, 2004.
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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.
(Registrant)
By: /s/ W. Alan McCollough
------------------------------------
W. Alan McCollough
Chairman, President and
Chief Executive Officer
By: /s/ Michael E. Foss
------------------------------------
Michael E. Foss
Senior Vice President and
Chief Financial Officer
By: /s/ Philip J. Dunn
-----------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
July 9, 2004
Page 25 of 26
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation of the company, effective
February 3,1997, as amended through October 1, 2002, filed as Exhibit
3(i) to the company's Quarterly Report on Form 10-Q for the quarter
ended November 30, 2002 (File No. 1-5767), are expressly incorporated
herein by this reference.
3.2 Bylaws of the company, as amended and restated June 17, 2003, filed as
Exhibit 3 (iii) to the company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 2003 (File No. 1-5767), are expressly incorporated
herein by this reference.
4.1 Third Amended and Restated Rights Agreement dated as of October 1, 2002,
between he company and Wells Fargo Bank Minnesota, N.A., as Rights
Agent, filed as Exhibit 1 to the company's Form 8-A/A filed on October
1, 2002 (File No. 1-5767), is expressly incorporated herein by this
reference.
10.1 Employment agreement between the company and Brian E. Levy, file
herewith.*
10.2 InterTAN, Inc. Amended and Restated 1996 Stock Option Plan, filed
herewith.*
31.1 Certification by Registrant's Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
31.2 Certification by Registrant's Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
32.1 Certification of CEO under Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith
32.2 Certification of CFO under Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith
* Indicates management contracts, compensatory plans or arrangements of
the company required to be filed as an exhibit.
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