UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended May 31, 2006
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to _____ to ____
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) (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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |X| Accelerated filer __ Non-accelerated filer __
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes___ No |X|
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, 2006
Common Stock, par value $0.50 174,065,041
A Table of Contents is included on Page 2 and an Exhibit Index is included on
Page 30.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations -
Three Months Ended May 31, 2006 and 2005 3
Consolidated Balance Sheets -
May 31, 2006, and February 28, 2006 4
Consolidated Statements of Cash Flows -
Three Months Ended May 31, 2006 and 2005 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 6. Exhibits 27
SIGNATURES 29
EXHIBIT INDEX 30
Page 2 of 30
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
2006 2005
-------------- -------------
Net sales $ 2,616,973 $ 2,227,850
Cost of sales, buying and warehousing 1,976,596 1,669,958
-------------- -------------
Gross profit 640,377 557,892
Selling, general and administrative expenses 639,368 583,008
-------------- ------------
Operating income (loss) 1,009 (25,116)
Interest income 7,046 6,292
Interest expense 212 415
-------------- ------------
Earnings (loss) from continuing operations before income taxes 7,843 (19,239)
Income tax provision (benefit) 2,837 (7,356)
-------------- ------------
Net earnings (loss) from continuing operations 5,006 (11,883)
Loss from discontinued operations, net of tax (407) (1,226)
Cumulative effect of change in accounting principle, net of tax 1,773 -
-------------- -----------
Net earnings (loss) $ 6,372 $ (13,109)
============== ============
Weighted average common shares:
Basic 171,054 184,729
Diluted 176,256 184,729
Earnings (loss) per share:
Basic:
Continuing operations $ 0.03 $ (0.06)
Discontinued operations $ - $ (0.01)
Cumulative effect of change in accounting principle $ 0.01 $ -
Net earnings (loss) $ 0.04 $ (0.07)
Diluted:
Continuing operations $ 0.03 $ (0.06)
Discontinued operations $ - $ (0.01)
Cumulative effect of change in accounting principle $ 0.01 $ -
Net earnings (loss) $ 0.04 $ (0.07)
Cash dividends paid per share $ 0.0175 $ 0.0175
See accompanying notes to consolidated financial statements.
Page 3 of 30
Circuit City Stores, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands except share data)
May 31, 2006 Feb. 28, 2006
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 392,422 $ 315,970
Short-term investments 241,863 521,992
Accounts receivable, net of allowance for doubtful accounts 211,582 220,869
Merchandise inventory 1,931,370 1,698,026
Deferred income taxes 25,373 29,598
Income tax receivable 7,765 5,571
Prepaid expenses and other current assets 63,616 41,315
---------- ----------
Total current assets 2,873,991 2,833,341
Property and equipment, net of accumulated depreciation of
$1,214,041 and $1,179,481 837,394 839,356
Deferred income taxes 96,709 97,889
Goodwill 230,157 223,999
Other intangible assets, net of accumulated amortization of
$8,443 and $6,123 29,129 30,372
Other assets 43,940 44,087
---------- ----------
TOTAL ASSETS $4,111,320 $4,069,044
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Merchandise payable $ 995,599 $ 850,359
Expenses payable 233,598 202,300
Accrued expenses and other current liabilities 409,506 464,511
Accrued income taxes 8,175 75,909
Short-term debt 22,695 22,003
Current installments of long-term debt 6,933 7,248
---------- ----------
Total current liabilities 1,676,506 1,622,330
Long-term debt, excluding current installments 49,999 51,985
Accrued straight-line rent and deferred rent credits 259,538 256,120
Accrued lease termination costs 76,948 79,091
Other liabilities 102,571 104,885
---------- ----------
TOTAL LIABILITIES 2,165,562 2,114,411
---------- ----------
Commitments and contingent liabilities (Note 8)
Stockholders' equity:
Common stock, $0.50 par value;
525,000,000 shares authorized; 174,755,306 shares
issued and outstanding at May 31, 2006
(174,789,390 at February 28, 2006) 87,378 87,395
Capital in excess of par value 438,292 458,211
Retained earnings 1,368,026 1,364,740
Accumulated other comprehensive income 52,062 44,287
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,945,758 1,954,633
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,111,320 $4,069,044
========== ==========
See accompanying notes to consolidated financial statements.
Page 4 of 30
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31
2006 2005
-------------- ------------
(Restated - Note 2)
Operating Activities:
Net earnings (loss) $ 6,372 $ (13,109)
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Net loss from discontinued operations 407 1,226
Depreciation expense 41,953 40,413
Amortization expense 2,077 775
Stock-based compensation expense 8,662 3,001
Loss on dispositions of property and equipment 250 1,179
Provision for deferred income taxes (988) 3,255
Cumulative effect of change in accounting principle (1,773) -
Other (773) (392)
Changes in operating assets and liabilities:
Accounts receivable, net 17,295 32,815
Merchandise inventory (229,697) (220,832)
Prepaid expenses and other current assets (22,406) (24,637)
Other assets 251 324
Merchandise payable 144,765 201,396
Expenses payable 13,812 11,983
Accrued expenses, other current liabilities and accrued income taxes (125,191) (131,638)
Other long-term liabilities (6,098) (6,417)
--------------- ------------
Net cash used in operating activities of continuing operations (151,082) (100,658)
--------------- ------------
Investing Activities:
--------------------
Purchases of property and equipment (40,769) (44,664)
Proceeds from sales of property and equipment 4,074 10,605
Purchases of investment securities (117,220) (195,388)
Sales and maturities of investment securities 398,260 47,700
-------------- ------------
Net cash provided by (used in) investing activities of continuing
operations 244,345 (181,747)
-------------- ------------
Financing Activities:
--------------------
Proceeds from short-term borrowings 17,833 -
Principal payments on short-term borrowings (17,774) -
Principal payments on long-term debt (2,413) (341)
Change in overdraft balances 15,558 38,360
Excess tax benefit from stock-based payments 7,209 -
Repurchases of common stock (50,050) (92,918)
Issuances of common stock 17,454 8,906
Dividends paid (3,086) (3,300)
Redemption of preferred share purchase rights - (1,876)
--------------- ------------
Net cash used in financing activities of continuing operations (15,269) (51,169)
--------------- ------------
Discontinued Operations:
-----------------------
Operating cash flows (1,727) (1,901)
Investing cash flows - (344)
--------------- ------------
Net cash used in discontinued operations (1,727) (2,245)
Effect of exchange rate changes on cash 185 (192)
--------------- ------------
Increase (decrease) in cash and cash equivalents 76,452 (336,011)
Cash and cash equivalents at beginning of year 315,970 879,660
--------------- ------------
Cash and cash equivalents at end of period $ 392,422 $ 543,649
=============== ============
See accompanying notes to consolidated financial statements.
Page 5 of 30
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Description of Business: Circuit City Stores, Inc. is a leading specialty
retailer of consumer electronics, home office products, entertainment
software, and related services. The company has two reportable segments: its
domestic segment and its international segment.
The domestic segment is primarily engaged in the business of selling
brand-name consumer electronics, personal computers, entertainment software,
and related services in Circuit City stores in the United States and via the
Web at www.circuitcity.com. At May 31, 2006, the company's domestic segment
operated 630 Superstores and 5 other stores in 158 U.S. media markets.
The international segment, which is comprised of the operations of InterTAN,
Inc., is primarily engaged in the business of selling private-label and
brand-name consumer electronics in Canada. The international segment's
headquarters are located in Barrie, Ontario, Canada, and it operates through
retail stores and dealer outlets in Canada primarily under the trade names
The Source By Circuit CitySM, Rogers Plus(R) and Battery Plus(R). At May 31,
2006, the international segment conducted business through 951 retail stores
and dealer outlets, which consisted of 540 company-owned stores, 299 dealer
outlets, 93 Rogers Plus(R) stores and 19 Battery Plus(R) stores. The
international segment also operates a Web site at www.thesource.ca.
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results may differ from those estimates. 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 in the company's fiscal 2006 Annual Report on Form 10-K.
Reclassifications and Adjustments: The company has made revisions and
reclassifications to its fiscal 2006 first quarter consolidated statement of
operations as disclosed in Note 1, Basis of Presentation, of the Notes to the
Consolidated Financial Statements, included in Item 8, Financial Statements
and Supplementary Data, of the company's fiscal 2006 Annual Report on Form
10-K. Such revisions and reclassifications include the following:
o Amounts previously reported as rent expense related to financing lease
obligations have been reclassified to interest expense.
o Interest income has been reclassified from selling, general and
administrative expenses to a separate line item on the consolidated
statement of operations.
o The results of a domestic segment subsidiary have been presented as
results from discontinued operation.
The company reclassified stock-based compensation from a separate line item
on the consolidated statement of operations to selling, general and
administrative expenses.
2. Restatement of Cash Flows
As disclosed in Note 22, Quarterly Financial Data (Unaudited), of the Notes
to Consolidated Financial Statements, included in Item 8, Financial
Statements and Supplementary Data, of the company's fiscal 2006 Annual Report
on Form 10-K, the company identified errors in its previously filed
consolidated statement of cash flows for the quarter ended May 31, 2005, and
restated the consolidated statement of
Page 6 of 30
cash flows for the three months ended May 31, 2005. The company had
classified variable rate demand notes as cash and cash equivalents, however,
these notes should have been classified as short-term investments and their
purchases and sales as investing activities. The company incorrectly
reflected bank overdrafts as a change in accounts payable in operating
activities rather than in financing activities. The company incorrectly
included accruals for purchases of property and equipment in operating
activities and investing activities. The company incorrectly reflected
deposits in transit as a reduction to accounts payable.
In addition, the company sold the assets of a domestic segment subsidiary,
MusicNow, LLC, during the third quarter of fiscal 2006. The cash flow
activity related to this subsidiary has been reclassified and reported
separately as cash flows from discontinued operations.
The following table summarizes the cash flow activities as previously
reported for the first quarter of fiscal 2006 compared to the revised cash
flow activities to reflect the errors and cash flows from discontinued
operations.
Three Months Ended
(Amounts in millions) May 31, 2005
--------------------------------------------------------------------------------
Operating cash flows as previously reported............... $ (94.3)
Operating cash flows as revised........................... $(100.7)
Investing cash flows as previously reported............... $ (97.3)
Investing cash flows as revised........................... $(181.7)
Financing cash flows as previously reported............... $ (89.5)
Financing cash flows as revised........................... $ (51.2)
Discontinued operation cash flows as previously
previously reported................................... $ -
Discontinued operation cash flows as revised.............. $ (2.2)
Decrease in cash and cash equivalents as
previously reported................................... $(281.3)
Decrease in cash and cash equivalents as revised.......... $(336.0)
3. Stock-Based Compensation
Effective March 1, 2006, the company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment," (SFAS No. 123 (R)), using the modified prospective
transition method. Prior to the adoption of SFAS No. 123(R), the company
accounted for stock-based compensation using a fair value-based method in
accordance with SFAS No. 123, "Stock-Based Compensation." Because the fair
value recognition provisions of SFAS No. 123 and SFAS No. 123(R) were
materially consistent under the company's stock-based incentive plans, the
adoption of SFAS No. 123(R) did not have a material impact on the company's
financial position, results of operations or cash flows.
SFAS No. 123(R) requires excess tax benefits be reported as a financing cash
inflow rather than as a reduction of taxes paid. Under SFAS No. 123, benefits
of tax deductions in excess of recognized compensation costs were reported as
operating cash flows.
SFAS No. 123(R) requires companies to estimate the number of equity awards
granted that are expected to be forfeited, recognize compensation cost based
on the number of awards that are expected to vest, and subsequently adjust
estimated forfeitures to reflect actual forfeitures. Under SFAS No. 123, the
company recognized forfeitures when they occurred. The company recorded an
after-tax benefit of $1.8 million, $2.8 million pretax, as a cumulative
effect of a change in accounting principle to adjust for awards granted prior
to March 1, 2006, that are not expected to vest.
Page 7 of 30
Under the company's stock-based incentive plans, nonqualified stock options,
nonvested stock, nonvested stock units and other equity-based awards may be
granted to management, key employees and non-employee directors. The company
previously referred to nonvested stock as restricted stock and nonvested
stock units as restricted stock units. At May 31, 2006, 3.9 million shares of
common stock were available for future grants of options, nonvested stock or
nonvested stock units. Upon the exercise of stock options, the grant of
nonvested stock, or the vesting of nonvested stock units, common shares are
issued from authorized and unissued shares.
Stock-based compensation cost is recorded in cost of sales, buying and
warehousing or selling, general and administrative expenses depending on the
classification of the related Associate's payroll cost. Compensation cost for
stock-based incentive plans for the three months ended May 31, 2006, and May
31, 2005, is summarized in the table below.
Three Months Ended
May 31
(Amounts in millions) 2006 2005
-------------------------------------------------------------------------------------
Compensation cost recognized:
Stock options....................................... $ 4.4 $2.7
Nonvested stock and nonvested stock units........... 4.2 0.3
Phantom stock....................................... 1.1 -
Employee stock purchase plan........................ 0.2 0.2
Other............................................... 0.1 0.1
----------------------------
Total compensation cost recognized..................... $10.0 $3.3
============================
Tax benefit recognized................................. $ 3.3 $1.2
(A) Stock Options: The exercise price for nonqualified options must be equal
to, or greater than, the market value at the grant date. Options generally
are exercisable over a period of one year to 10 years from the grant date.
The company values stock options issued using the Black-Scholes
option-pricing model and recognizes this value as an expense over the period
in which the options vest. Option valuation models require the company to
make subjective assumptions. Changes in the subjective assumptions can
materially affect the fair value estimate. The expected stock volatility
assumption is based on historical volatility of the company's stock. The
expected dividend yield is based on expected annual dividends and the market
value of the company's stock on the grant date. The expected life represents
the period of time that options granted are expected to be outstanding and is
primarily based on the historical exercise experience of the company's
Associates. The company evaluates historical exercise behavior for two
separate groups based on the Associate's position in the company. During the
first quarter of fiscal 2007, a stock option grant with a vesting period of
five years was made to the president and chief executive officer. Due to the
lack of historical exercise behavior for an option with similar vesting
provisions, the company used a simplified method to estimate the expected
life of the grant. An average of the award's weighted average vesting period
and its contractual term was calculated and resulted in an expected life of 7
years. The risk-free interest rate is based on the U.S. Treasury Strip rate
posted at the grant date for the expected term of the option.
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
2006 2005
-------------------------------------------------------------------------------
Expected dividend yield......................... 0.3% 0.5%
Expected stock volatility....................... 62% 55%
Risk-free interest rates........................ 5% 4%
Expected lives (in years)....................... 7 4
Using these assumptions in the Black-Scholes model, the weighted average fair
value of options granted was $15.08 per share for the three months ended May
31, 2006, and $7.23 per share for the three months
Page 8 of 30
ended May 31, 2005. The total intrinsic value of options exercised was $22.4
million during the three months ended May 31, 2006, and $6.7 million during
the three months ended May 31, 2005. The tax benefits realized from stock
options exercised were $6.5 million during the three months ended May 31,
2006, and $1.2 million during the three months ended May 31, 2005. The fair
value of stock options that vested during the three months ended May 31,
2006, was $2.3 million. The fair value of stock options that vested during
the three months ended May 31, 2005, was $7.5 million. Total unrecognized
compensation cost related to unvested stock options at May 31, 2006, was
$31.7 million and is expected to be recognized over a weighted average period
of 2 years.
The company's stock option activity is summarized in the table below.
Three Months Ended May 31, 2006
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic Value
(Shares in thousands) Shares Exercise Price Contractual Life (in millions)
--------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of period.......... 14,109 $16.41
Granted..................................... 1,105 $24.32
Exercised................................... (1,439) $11.86
Forfeited or expired........................ (225) $15.37
----------
Outstanding at end of period................ 13,550 $17.55 5.2 $169.3
==========
Options exercisable at end of period........ 9,043 $17.52 3.3 $113.3
(B) Nonvested Stock and Nonvested Stock Units: Under the company's
stock-based incentive plans, shares of nonvested stock are granted in the
name of an employee or a non-employee director, who has all the rights of a
shareholder, including the right to receive dividends, subject to certain
restrictions and possible forfeitures. Restrictions on nonvested stock
generally expire one year to four years from the grant date, when the stock
becomes fully vested. The fair value of nonvested stock is the market value
on the grant date, which is expensed over the vesting period.
The weighted average fair value of nonvested stock granted was $25.44 during
the three months ended May 31, 2006 and $15.68 during the three months ended
May 31, 2005. A portion of the outstanding nonvested stock awards is
performance-based shares that are eligible for accelerated vesting if the
company achieves earnings from continuing operations before income taxes as a
percentage of sales targets in fiscal 2007, fiscal 2008 or fiscal 2009. If
vesting is not accelerated, the shares vest on July 1, 2009.
The company also issues nonvested stock units. Nonvested stock units are
granted in the name of an employee or a non-employee director. Once granted,
nonvested stock units may be eligible for dividends but have no voting
rights. The nonvested stock units are redeemed for company stock once the
vesting period and any applicable deferral restrictions have been satisfied.
The fair value of nonvested stock units is the market value on the grant
date. Compensation cost is recognized over the vesting period, which is
generally three years. No nonvested stock units were granted during the three
months ended May 31, 2006, and the three months ended May 31, 2005.
The fair value of nonvested stock and nonvested stock units that vested
during the three months ended May 31, 2006, was $0.1 million. The fair value
of nonvested stock and nonvested stock units that vested during the three
months ended May 31, 2005, was $1.8 million. Total unrecognized compensation
cost related to nonvested stock and nonvested stock units at May 31, 2006,
was $50.6 million and is expected to be recognized over a weighted average
period of 3 years. If nonvested stock or nonvested stock units are forfeited
or cancelled, the shares issued as nonvested stock or the shares reserved for
the nonvested stock units are available for future granting.
Page 9 of 30
The company's nonvested stock and nonvested stock unit activity is summarized
in the table below.
Three Months Ended May 31, 2006
Weighted
Average Intrinsic
Grant Date Value
(Shares in thousands) Shares Fair Value (in millions)
---------------------------------------------------------------------------------------------------
Unvested at beginning of period........... 3,825 $17.08
Granted................................... 491 $25.44
Vested.................................... (10) $12.26
Forfeited................................. (231) $16.95
-----------
Unvested at end of period................. 4,075 $18.11 $122.4
===========
(C) Phantom Stock Program: The company issues phantom stock units through a
long-term incentive program. An Associate does not receive rights of a
shareholder, nor is any stock transferred. The value of one unit is based on
the market value of one share of common stock on the vesting date. The units
will be paid out in cash at the end of the two year vesting period. The cost
of the grants is recognized over the vesting period and the related liability
is included in accrued expenses and other current liabilities on the
consolidated balance sheets. At May 31, 2006, 0.2 million phantom stock units
were outstanding. No phantom stock units were granted during the three months
ended May 31, 2006, and the three months ended May 31, 2005.
(D) Employee Stock Purchase Plan: The company has an employee stock purchase
plan for all domestic employees meeting certain eligibility criteria. Under
the plan, eligible employees may, subject to certain limitations, purchase
shares of common stock. The company matches $0.15 for each $1.00 contributed
by employees. Purchases are limited to 10 percent of an employee's eligible
compensation, up to a maximum of $13,000 per year. The company has authorized
18.5 million shares of common stock for purchase under the plan. At May 31,
2006, a total of 1.6 million shares remained available under the plan. During
the three months ended May 31, 2006, 0.1 million shares of common stock were
issued to or purchased on the open market on behalf of employees. During the
three months ended May 31, 2005, 0.1 million shares of common stock were
issued to or purchased on the open market on behalf of employees. The average
price per share of common stock purchased under the plan was $28.79 during
the three months ended May 31, 2006, and $16.13 during the three months ended
May 31, 2005. The obligation for the company match is included in accrued
expenses and other current liabilities on the consolidated balance sheets.
4. Comprehensive Income (Loss)
The components of the company's comprehensive income (loss) consist of the
net earnings (loss) and foreign currency translation adjustments. Foreign
currency translation adjustments are recorded net of deferred income taxes
directly as a component of stockholders' equity.
The components of comprehensive income (loss), net of taxes, were as follows:
Three Months Ended
May 31
(Amounts in millions) 2006 2005
-----------------------------------------------------------------------------------
Net earnings (loss).................................. $ 6.4 $(13.1)
Foreign currency translation......................... 7.7 (4.3)
--------------------------
Comprehensive income (loss).......................... $14.1 $(17.4)
=========================
Page 10 of 30
5. Net Earnings (Loss) Per Share
The following table presents a reconciliation of the denominators used in the
net earnings (loss) per share calculations.
Three Months Ended
May 31
(Shares in millions) 2006 2005
---------------------------------------------------------------------------------------
Weighted average common shares........................... 171.1 184.7
Dilutive potential common shares:
Options.............................................. 3.8 -
Nonvested stock...................................... 1.4 -
---------------------------
Weighted average common shares and potentially
dilutive common equivalent shares.................... 176.3 184.7
==========================
For the three months ended May 31, 2006, the computation of potentially
dilutive common equivalent shares excluded certain options to purchase shares
of common stock because the exercise prices were greater than the average
market price of the common shares and, therefore, the effect would be
anti-dilutive. For the three months ended May 31, 2005, no stock options or
nonvested stock were included in the calculation of diluted net loss per
share because the company reported a loss from continuing operations. Shares
excluded were as follows:
At May 31
(Shares in millions) 2006 2005
--------------------------------------------------------------------------------------
Options to purchase common stock........................ 1.1 15.2
Nonvested stock......................................... - 1.6
6. Accrued Lease Termination Costs
At a location's cease use date, estimated lease termination costs to close a
store, distribution center or service center are recorded in selling, general
and administrative expenses on the consolidated statements of operations. The
calculation of accrued lease termination costs includes future minimum lease
payments, taxes, insurance and maintenance costs from the date of closure to
the end of the remaining lease term. The calculation also includes estimated
sublease income, net of tenant improvement allowances and broker fees. The
liability for lease termination costs is discounted using a credit-adjusted
risk-free rate of interest. The company evaluates these assumptions each
quarter and adjusts the liability accordingly.
The accrual for lease termination costs for the domestic segment includes the
following activity:
Three Months Ended
May 31
(Amounts in millions) 2006 2005
--------------------------------------------------------------------------------------------------------
Accrued lease termination costs at beginning of period.................. $110.0 $128.2
Provisions for closed locations......................................... 1.2 1.7
Changes in assumptions about future sublease income and
terminations........................................................ 2.2 0.8
Interest accretion...................................................... 2.8 2.8
Cash payments, net of cash received, on subleased locations............. (8.8) (12.9)
-----------------------------
Accrued lease termination costs at end of period........................ 107.4 120.6
Less current portion of accrued lease termination costs................. 30.5 37.9
-----------------------------
Non-current portion of accrued lease termination costs.................. $ 76.9 $ 82.7
=============================
The current portion of accrued lease termination costs is included in accrued
expenses and other current liabilities, and the non-current portion is
presented separately on the consolidated balance sheets.
Page 11 of 30
7. Common Stock Repurchased
As of May 31, 2006, the company's board of directors had authorized common
stock repurchases up to $800 million, of which $67.3 million remained
available at May 31, 2006. The company repurchased 1.7 million shares of
common stock at a cost of $50.0 million during the three months ended May 31,
2006. As of May 31, 2006, the company had repurchased 49.6 million shares of
common stock at a cost of $732.7 million, cumulatively since inception of the
stock repurchase program. In June 2006, the board authorized a $400 million
increase in the company's stock repurchase authorization resulting in a total
stock repurchase authorization up to $1.2 billion.
8. Pension Plans
The company's domestic segment has a noncontributory defined benefit pension
plan that was frozen as of February 28, 2005, except for employees who (i)
were within three years of their early retirement date or normal retirement
date; (ii) had reached their early or normal retirement date; or (iii) were
permanently disabled before March 1, 2005. As a result, all employees
affected by the plan freeze retain any benefits accumulated to the effective
date, but are no longer eligible to increase their benefit.
The company also has an unfunded nonqualified benefit restoration plan that
restored retirement benefits for domestic segment senior executives who were
affected by Internal Revenue Code limitations on benefits provided under the
company's pension plan. The benefit restoration plan was frozen as of
February 28, 2005, and will provide benefits for participants who, as of that
date, were within 10 years of attaining their early retirement date or normal
retirement date.
On December 22, 2005, the benefit restoration plan was amended to allow W.
Alan McCollough to elect to receive a lump-sum payment following his
retirement. Mr. McCollough will receive additional age and service credit
under the benefit restoration plan, which is expected to result in Mr.
McCollough receiving the maximum benefit payable under the plan. During the
three months ended May 31, 2006, the impact of this lump sum payment was a
settlement charge of $0.2 million.
The components of the net pension expense for the plans were as follows:
Three Months Ended
May 31
(Amounts in thousands) 2006 2005
-----------------------------------------------------------------------------
Service cost...................................... $ 778 $ 925
Interest cost..................................... 3,794 3,456
Expected return on plan assets.................... (4,782) (4,508)
Recognized prior service cost..................... 54 54
Recognized actuarial loss......................... 609 265
Loss due to settlement............................ 191 -
-------------------------
Net pension expense............................... $ 644 $ 192
=========================
The company did not make a contribution to the defined benefit pension plan
during the three months ended May 31, 2006. No contributions are required
during fiscal 2007 under applicable law to meet ERISA minimum funding
standards. However, the company may make voluntary contributions to the
defined benefit pension plan to ensure that the fair value of plan assets at
February 28, 2007, exceeds the accumulated benefit obligation. The company
does not expect to make a contribution in fiscal 2007.
A contribution of $5.1 million, which is equal to the expected benefit
payments for fiscal 2007, is expected to be made to the restoration plan
during fiscal 2007. The expected benefit payments for fiscal 2007 include a
lump-sum payment to Mr. McCollough of $4.4 million, which is expected to be
paid during the fourth quarter. Benefit payments during the three months
ended May 31, 2006, were $145,000.
Page 12 of 30
9. Discontinued Operations
In the first quarter of fiscal 2007, the net loss from discontinued
operations totaled $0.4 million, which is net of $0.2 million of income
taxes, and related to operations of a domestic segment operation that is held
for sale. In the first quarter of fiscal 2006, the net loss from discontinued
operations totaled $1.2 million, which is net of $0.7 million of income
taxes, and related to the sale of the assets of a domestic segment
subsidiary, MusicNow, LLC, in October 2005.
10. Segment Information
The company has two reportable segments: its domestic segment and its
international segment. 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 segment is primarily engaged in the
business of selling brand-name consumer electronics, personal computers,
entertainment software, and related services in the United States. The
international segment is primarily engaged in the business of selling
private-label and brand-name consumer electronics products in Canada.
Net sales by reportable segment were as follows:
Three Months Ended
May 31
(Amounts in millions) 2006 2005
------------------------------------------------------------------------------------
Domestic segment...................................... $2,485.5 $2,114.7
International segment................................. 131.5 113.2
----------------------------
Net sales............................................. $2,617.0 $2,227.9
============================
The net earnings (loss) from continuing operations by reportable segment were
as follows:
Three Months Ended
May 31
(Amounts in millions) 2006 2005
-------------------------------------------------------------------------------------
Domestic segment.......................................... $ 9.3 $ (5.9)
International segment..................................... (4.3) (6.0)
----------------------
Net earnings (loss) from continuing operations............ $ 5.0 $ (11.9)
=======================
Total assets by reportable segment were as follows:
At May 31 At February 28
(Amounts in millions) 2006 2006
----------------------------------------------------------------------------------------------
Domestic segment..................................... $3,625.6 $3,594.4
International segment................................ 485.7 474.6
-------------------------------------
Total assets......................................... $4,111.3 $4,069.0
===================================
11.Supplemental Consolidated Statements of Cash Flows Information
The following table summarizes supplemental cash flow information for the
three months ended May 31, 2006 and 2005.
Three Months Ended
May 31
(Amounts in millions) 2006 2005
--------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing activities:
Change in capital expenditure accrual................................... $2.9 $(11.7)
Page 13 of 30
12. Recent Accounting Pronouncements
As discussed in Note 3, Stock-Based Compensation, the company adopted SFAS
No. 123(R) during the first quarter of fiscal 2007.
In October 2005, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) No. FAS 13-1, "Accounting for Rental Costs Incurred During a
Construction Period." FSP No. FAS 13-1 requires companies to expense rent
payments for building or ground leases incurred during a construction period.
The company adopted FSP No. FAS 13-1 on a prospective basis in the first
quarter of fiscal 2007. The adoption of this new standard did not have a
material impact on the company's financial position, results of operations or
cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a leading specialty retailer of consumer electronics, home office
products, entertainment software, and related services. We have two reportable
segments: our domestic segment and our international segment.
Our domestic segment is primarily engaged in the business of selling brand-name
consumer electronics, personal computers, entertainment software, and related
services in our stores in the United States and via the Web at
www.circuitcity.com. At May 31, 2006, the domestic segment operated 630
Superstores and 5 other stores in 158 U.S. media markets.
Our international segment, which is comprised of the operations of InterTAN,
Inc., is primarily engaged in the business of selling private-label and
brand-name consumer electronics in Canada. The international segment's
headquarters are located in Barrie, Ontario, Canada, and it operates through
retail stores and dealer outlets in Canada primarily under the trade names The
Source By Circuit CitySM, Rogers Plus(R) and Battery Plus(R). At May 31, 2006,
the international segment conducted business through 951 retail stores and
dealer outlets, which consisted of 540 company-owned stores, 299 dealer outlets,
93 Rogers Plus(R) stores and 19 Battery Plus(R) stores. The international
segment also operates a Web site at www.thesource.ca.
Management's Discussion and Analysis (MD&A) is designed to provide the reader of
financial statements with a narrative discussion of our results of operations;
financial position, liquidity and capital resources; critical accounting
policies and significant estimates; and the impact of recently issued accounting
standards. Our MD&A is presented in seven sections:
o Executive Summary
o Critical Accounting Policies
o Results of Operations
o Recent Accounting Pronouncements
o Financial Condition
o Fiscal 2007 Outlook
o Forward-Looking Statements
This discussion should be read in conjunction with the Annual Report on Form
10-K for the fiscal year ended February 28, 2006, as well as our reports on Form
8-K and other publicly available information.
EXECUTIVE SUMMARY
Fiscal 2007 First Quarter Performance
o Net sales grew 17.5 percent, driven by a comparable store sales gain of
14.6 percent. Domestic segment Web-originated sales grew 85 percent over
the same period last year.
Page 14 of 30
o Gross profit margin declined 57 basis points over the same period last
year. The domestic segment contributed 32 basis points of the decline
driven by increased promotional financing costs. The international segment
contributed 25 basis points of the decline.
o SG&A expenses as a percentage of sales declined 174 basis points from the
same period last year, driven by leverage of payroll as well as rent and
occupancy expenses in the domestic segment. The international segment SG&A
expense-to-sales ratio also improved as brand transition expenses of $11.9
million from the first quarter of fiscal 2006 were not repeated.
o Earnings from continuing operations before income taxes were 0.3 percent of
sales compared with a loss from continuing operations before income taxes
of 0.9 percent of sales in the same period last year.
o We reported net earnings from continuing operations of 3 cents per diluted
share compared with a net loss from continuing operations of 6 cents per
diluted share in the same period last year.
CRITICAL ACCOUNTING POLICIES
See the discussion of critical accounting policies under Management's Discussion
and Analysis of Financial Condition and Results of Operations in our fiscal 2006
Annual Report on Form 10-K. These policies relate to accounting for cash
consideration received from vendors, the calculation of the liability for lease
termination costs, accounting for goodwill and other identified intangible
assets, accounting for pension plans and accounting for income taxes. We have
updated our critical accounting policy for Stock-Based Compensation due to our
adoption of Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment," (SFAS No. 123(R)).
Accounting for Stock-Based Compensation
We account for stock-based compensation using a fair value-based method in
accordance with SFAS No. 123(R). The Black-Scholes option valuation model is
used to determine the fair value of stock options at the grant date, and expense
is recognized over the period in which the options vest. Option valuation models
require us to make subjective assumptions, including the expected future
volatility of the stock price, expected dividend yield, and expected life of the
option. Changes in the subjective assumptions can materially affect the fair
value estimate. We estimate the number of equity awards granted that are
expected to be forfeited, recognize compensation cost based on the number of
awards that are expected to vest, and subsequently adjust the estimated
forfeitures to reflect actual forfeitures.
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.
Reclassifications and Adjustments
We have made revisions and reclassifications to our fiscal 2006 first quarter
consolidated statement of operations as disclosed in Note 1, Basis of
Presentation, of the Notes to the Consolidated Financial Statements, included in
Item 8, Financial Statements and Supplementary Data, of our Annual Report on
Form 10-K for the fiscal year ended February 28, 2006. Such revisions and
reclassifications include the following:
o Amounts previously reported as rent expense related to financing lease
obligations have been reclassified to interest expense.
o Interest income has been reclassified from selling, general and
administrative expenses to a separate line item on the consolidated
statement of operations.
o The results of a domestic segment subsidiary have been presented as results
from discontinued operation.
Page 15 of 30
We reclassified stock-based compensation from a separate line item on the
consolidated statement of operations to selling, general and administrative
expenses.
Summary of Segment Performance
Where relevant, we have included separate discussions of our domestic and
international segments. The following tables summarize performance by segment.
SEGMENT PERFORMANCE SUMMARY
Three Months Ended May 31, 2006
(Amounts in millions) Domestic International Consolidated
---------------------------------------------------------------------------------------------------
Net sales...................................... $2,485.5 $131.5 $2,617.0
Gross profit................................... $ 594.9 $ 45.5 $ 640.4
Selling, general and administrative
expenses................................... $ 587.6 $ 51.8 $ 639.4
Net earnings (loss) from continuing
operations................................. $ 9.3 $ (4.3) $ 5.0
Three Months Ended May 31, 2005
(Amounts in millions) Domestic International Consolidated
---------------------------------------------------------------------------------------------------
Net sales...................................... $2,114.7 $113.2 $2,227.9
Gross profit................................... $ 512.9 $ 45.0 $ 557.9
Selling, general and administrative
expenses(a)................................ $ 528.2 $ 54.8 $ 583.0
Net loss from continuing operations............ $ (5.9) $ (6.0) $ (11.9)
(a) The company has reclassified stock-based compensation expense from a
separate line item on the statement of operations to selling, general and
administrative expenses, and reclassified interest income from selling, general
and administrative expenses to a separate line item on the statement of
operations.
Net Sales
Consolidated
For the first quarter of fiscal 2007, our net sales increased 17.5 percent to
$2.62 billion, and comparable store sales increased 14.6 percent from the same
period last year. A store's sales are included in comparable store sales after
the store has been open for a full 12 months. Comparable store sales include
Web-originated sales and sales from relocated stores. The calculation of
comparable store sales excludes the impact of fluctuations in foreign currency
exchange rates.
Domestic Segment
For the first quarter of fiscal 2007, the domestic segment's net sales were
$2.49 billion, an increase of 17.5 percent over the same period last fiscal
year. Comparable store sales increased 15.3 percent. For the quarter, domestic
segment Web-originated sales grew 85 percent, and domestic segment service
revenues grew 175 percent over the same period last year. Service revenues are
comprised of home theater installations and computer-related services.
The domestic segment's major product categories are
o video, which includes televisions, imaging products, DVD hardware,
camcorders, digital cameras, digital video services, furniture, and related
accessories;
o information technology, which includes personal computer hardware, personal
computer services, telecommunications products and services, and related
accessories;
Page 16 of 30
o audio, which includes home audio products, mobile audio products, portable
audio products, and related accessories; and
o entertainment, which includes movie software, music software, game
software, game hardware and personal computer software.
The percent of domestic segment sales represented by each major product category
for the periods ended May 31, 2006 and 2005 is shown below.
PERCENT OF DOMESTIC SEGMENT SALES BY CATEGORY(a)
Three Months Ended
May 31
2006 2005
----------------------------------------------------------------------------------
Video................................................. 44% 42%
Information technology................................ 29 29
Audio................................................. 16 16
Entertainment......................................... 11 13
------------------------
Total................................................. 100% 100%
======================
(a) Excludes extended warranty net sales and installation revenue
In the video category, we produced a double-digit comparable store sales
increase in the first quarter. Total television comparable store sales increased
by solid double digits, led by triple-digit comparable store sales growth in
flat panel displays. Comparable store sales of digital imaging products and
accessories increased by double digits. Growth in the category was partially
offset by a single-digit decline in comparable store sales of camcorders and a
double-digit decline in comparable store sales of DVD hardware.
In the information technology category, we produced a low double-digit
comparable store sales increase in the first quarter driven by a double-digit
comparable store sales increase in PC hardware. Comparable store sales of
notebook computers and printers increased by double digits, and comparable store
sales of monitors increased by single digits. Growth in the category was
partially offset by a low single-digit decrease in comparable store sales of
desktop computers.
In the audio category, we produced a double-digit comparable store sales
increase in the first quarter, primarily reflecting double-digit comparable
store sales growth in portable digital audio products and a triple-digit
increase in portable digital audio accessories. Double-digit comparable store
sales growth in mobile audio products reflects growth in navigation products.
Comparable store sales growth in portable and mobile audio products was
partially offset by a mid-single-digit comparable store sales decline in home
audio products.
In the entertainment category, we produced a single-digit comparable store sales
increase in the first quarter, reflecting a double-digit comparable store sales
increase in gaming products and PC software and a low single-digit increase in
video software, partially offset by a double-digit comparable store sales
decrease in music software.
The following table provides the number of our domestic segment stores:
DOMESTIC SEGMENT STORE MIX
May 31, 2006 Feb. 28, 2006 May 31, 2005
---------------------------------------------------------------------------------------------------------
Superstores................................... 630 626 612
Outlet and mall stores........................ 5 5 5
----------------------------------------------------------
Total domestic segment stores................. 635 631 617
==========================================================
In the three months ended May 31, 2006, we relocated two Superstores and opened
three new Superstores. One of the relocated Superstores replaced a store that
was closed in February 2006. We opened two outlet
Page 17 of 30
stores and closed two mall stores. We also completed one remodel, which
consisted of rebuilding a storm-damaged store.
Extended Warranty Net Sales. The domestic segment sells extended warranty
programs on behalf of unrelated third parties who are the primary obligors. The
extended warranty net sales were $92.3 million, or 3.7 percent of domestic
segment sales, in the first quarter of fiscal 2007, compared with $85.1 million,
or 4.0 percent of domestic segment sales, in the same period last fiscal year.
An increase in gross extended warranty sales as a percent of domestic segment
sales was more than offset by increased costs as a percent of domestic segment
sales due to warranty plan enhancements as well as the introduction of
additional value-added product offerings such as accidental damage coverage.
International Segment
The international segment's net sales increased 16.1 percent to $131.5 million
for the first quarter of fiscal 2007. The effect of fluctuations in foreign
currency exchange rates accounted for approximately 9 percentage points of the
international segment's first quarter net sales increase. Comparable store sales
increased 2.4 percent for the quarter in local currency. Sales from our dealer
relationships increased 26 percent for the first quarter in local currency, and
the international segment added 15 net new retail stores during the past four
quarters.
INTERNATIONAL SEGMENT STORE MIX
May 31, 2006 Feb. 28, 2006 May 31, 2005
----------------------------------------------------------------------------------------------------------
Company-owned stores............................. 540 540 522
Dealer outlets................................... 299 300 330
Rogers Plus(R) stores............................ 93 93 90
Battery Plus(R) stores........................... 19 21 25
----------------------------------------------------------
Total international segment stores............... 951 954 967
==========================================================
Gross Profit Margin
Consolidated
The gross profit margin was 24.5 percent of net sales in the first quarter of
fiscal 2007, compared with 25.0 percent in the same period last fiscal year.
Domestic Segment
For the first quarter of fiscal 2007, the domestic segment's gross profit margin
decreased 32 basis points from the same period last fiscal year. The decrease
was driven primarily by increased promotional financing costs, largely related
to higher interest rates, longer promotion lengths and increased penetration of
sales using promotional financing. Merchandise margin was relatively unchanged
from the prior year period.
International Segment
For the first quarter of fiscal 2007, the international segment gross profit
margin negatively impacted the consolidated gross profit margin by 25 basis
points. The international segment's gross profit margin in the first quarter of
fiscal 2007 decreased 514 basis points from the same period last year. The
decrease resulted primarily from margin rate declines in wireless
communications. Also, a sales mix shift from higher-margin categories, such as
batteries, to lower-margin categories, such as computers, contributed to the
decline.
Page 18 of 30
Selling, General and Administrative Expenses
Consolidated
Three Months Ended May 31
2006 2005(a)
% of % of
(Dollar amounts in millions) $ Sales $ Sales
------------------------------------------------------------------------------------
Store expenses.......................... $537.9 20.6% $500.2 22.5%
General and administrative
expenses........................... 88.6 3.4 77.4 3.5
Stock-based compensation
expense............................ 8.7 0.3 3.2 0.1
Relocation expenses..................... 1.5 0.1 2.0 0.1
Pre-opening expenses.................... 2.6 0.1 0.2 -
------------------------------------------
Total ................................. $639.4 24.4% $583.0 26.2%
=========================================
(a)Certain items in general and administrative expenses have been reclassified
to store expenses to conform with current presentation. The company has
reclassified stock-based compensation expense from a separate line item on the
statement of operations to selling, general and administrative expenses, and
reclassified interest income from selling, general and administrative expenses
to a separate line item on the statement of operations.
Selling, general and administrative expenses as a percentage of sales declined
174 basis points to 24.4 percent of net sales in the first quarter of this
fiscal year.
Domestic Segment
Three Months Ended May 31
2006 2005(a)
% of % of
(Dollar amounts in millions) $ Sales $ Sales
------------------------------------------------------------------------------------
Store expenses.......................... $496.9 20.0% $465.9 22.0%
General and administrative
expenses........................... 78.9 3.2 57.0 2.7
Stock-based compensation
expense............................ 7.6 0.3 3.1 0.1
Relocation expenses..................... 1.5 0.1 2.0 0.1
Pre-opening expenses.................... 2.6 0.1 0.2 -
------------------------------------------
Total ................................. $587.6 23.6% $528.2 25.0%
=========================================
(a)Certain items in general and administrative expenses have been reclassified
to store expenses to conform with current presentation. The company has
reclassified stock-based compensation expense from a separate line item on the
statement of operations to selling, general and administrative expenses, and
reclassified interest income from selling, general and administrative expenses
to a separate line item on the statement of operations.
During the first quarter of fiscal 2007, the domestic segment's expense-to-sales
ratio decreased 134 basis points from the same period last year. The domestic
segment's improvement primarily reflects leverage of payroll as well as rent and
occupancy expenses. These improvements were partially offset by incremental
expenses related to investments in information systems, Circuit City Direct and
innovation activities. Stock-based compensation expense increased due primarily
to the introduction of a long-term incentive plan in the second quarter of
fiscal 2006.
Page 19 of 30
International Segment
Three Months Ended May 31
2006 2005(a)
% of % of
(Dollar amounts in millions) $ Sales $ Sales
------------------------------------------------------------------------------------
Store expenses.......................... $41.0 31.2% $34.3 30.3%
General and administrative
expenses........................... 9.7 7.4 20.3 18.0
Stock-based compensation
expense............................ 1.1 0.9 0.2 0.2
------------------------------------------
Total ................................. $51.8 39.4% $54.8 48.4%
=========================================
(a) The company has reclassified stock-based compensation expense from a
separate line item on the statement of operations to selling, general and
administrative expenses, and reclassified interest income from selling, general
and administrative expenses to a separate line item on the statement of
operations.
The international segment contributed 40 basis points to the decrease in the
consolidated expense-to-sales ratio. For the first quarter of fiscal 2007, the
international segment's expense-to-sales ratio decreased 904 basis points from
the same period last year. The international segment's general and
administrative expenses in the first quarter of fiscal 2006 included expenses of
$11.9 million associated with the brand transition in Canada. For the first
quarter of fiscal 2007, store expenses increased 86 basis points from the same
period last year, primarily reflecting increased rent and occupancy and payroll
expenses due to the addition of 15 net new stores during the past four quarters
and increased advertising expense.
Income Tax Provision
The consolidated effective income tax rate applicable to results from continuing
operations was 36.2 percent for the three months ended May 31, 2006, and 38.2
percent for the three months ended May 31, 2005. The decrease in the effective
tax rate is the result of the increased use of tax-exempt investments.
Net Earnings (Loss) from Continuing Operations
The net earnings from continuing operations were $5.0 million, or 3 cents per
share, in the three months ended May 31, 2006, compared with a net loss from
continuing operations of $11.9 million, or 6 cents per share, in the same period
last fiscal year.
Net Loss from Discontinued Operations
In the first quarter of fiscal 2007, the net loss from discontinued operations
totaled $0.4 million and related to operations of a domestic segment operation
that is held for sale. In the first quarter of fiscal 2006, the net loss from
discontinued operations totaled $1.2 million and related to the sale of the
assets of a domestic segment subsidiary, MusicNow, LLC, in October 2005.
Cumulative Effect of Change in Accounting Principle
In the first quarter of fiscal 2007, we adopted SFAS No. 123(R) using the
modified prospective transition method, resulting in a non-cash after-tax
benefit of $1.8 million.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective March 1, 2006, we adopted SFAS No. 123(R), which requires companies to
record compensation expense based on the fair value of employee stock-based
compensation awards. The statement also requires that the compensation expense
be recognized over the period during which the employee is required to provide
service in exchange for the award. Prior to the adoption of SFAS No. 123(R), we
accounted for stock-based compensation using a fair-value based method in
accordance with SFAS No. 123, "Stock-Based
Page 20 of 30
Compensation." We adopted SFAS No. 123(R) using the modified prospective
transition method. The adoption of SFAS No. 123(R) did not have a material
impact on our financial position, results of operations or cash flows.
In October 2005, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) No. FAS 13-1, "Accounting for Rental Costs Incurred During a
Construction Period." FSP No. FAS 13-1 requires companies to expense rent
payments for building or ground leases incurred during a construction period. We
adopted FSP No. FAS 13-1 on a prospective basis in the first quarter of fiscal
2007. The adoption of this new standard did not have a material impact on our
financial position, results of operations or cash flows.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash Flows
Restatement of Cash Flows
As disclosed in Note 22, Quarterly Financial Data (Unaudited), of the Notes to
Consolidated Financial Statements, included in Item 8, Financial Statements and
Supplementary Data, of our fiscal 2006 Annual Report on Form 10-K, we identified
errors in our previously filed consolidated statement of cash flows for the
quarter ended May 31, 2005, and restated the consolidated statement of cash
flows for the three months ended May 31, 2005. We had classified variable rate
demand notes as cash and cash equivalents, however, these notes should have been
classified as short-term investments and their purchases and sales as investing
activities. We incorrectly reflected bank overdrafts as a change in accounts
payable in operating activities rather than in financing activities. We
incorrectly included accruals for purchases of property and equipment in
operating activities and investing activities. We incorrectly reflected deposits
in transit as a reduction to accounts payable.
Operating Activities
We used net cash from operating activities of $151.1 million in the three months
ended May 31, 2006, compared with $100.7 million in the three months ended May
31, 2005. The primary use of cash in the three months ended May 31, 2006, was an
$84.9 million increase in merchandise inventory, net of merchandise payable,
which was due to an increase in inventory purchases to support increased sales
trends and customer encountered in-stock positions. In addition, there was a
$69.5 million decrease in accrued income taxes primarily due to the payment of
income taxes. The use of cash in the three months ended May 31, 2005, primarily
resulted from an $84.1 million decrease in accrued income taxes due to the
payment of income taxes.
Investing Activities
For the three months ended May 31, 2006, net cash provided by investing
activities was $244.3 million and primarily relates to proceeds from the sales
and maturities of investment securities partly offset by purchases of investment
securities and purchases of property and equipment. For the three months ended
May 31, 2005, net cash used in investing activities was $181.7 million and
primarily relates to purchases of investment securities.
Financing Activities
We used net cash from financing activities of $15.3 million in the three months
ended May 31, 2006, compared with $51.2 million in the three months ended May
31, 2005. The primary use of cash for both periods relates to the repurchase of
common stock. As of May 31, 2006, the board of directors had authorized stock
repurchases of up to $800 million, of which $67.3 million remained available at
May 31, 2006. We used cash to repurchase 1.7 million shares of common stock at a
cost of $50.0 million during the three months ended May 31, 2006. We used cash
to repurchase 5.9 million shares of common stock at a cost of $92.9 million
Page 21 of 30
during the same period last fiscal year. As of May 31, 2006, we had repurchased
a cumulative 49.6 million shares of common stock at a cost of $732.7 million.
Based on the market value of the common stock at May 31, 2006, the then
remaining $67.3 million of the $800 million authorization would allow for the
repurchase of up to approximately 1 percent of the 174.8 million shares then
outstanding.
In June 2006, the board authorized a $400 million increase in the stock
repurchase authorization resulting in a total stock repurchase authorization of
up to $1.2 billion. Based on the market value of the common stock at May 31,
2006, the remaining $467.3 million of the $1.2 billion authorization would allow
for the repurchase of up to approximately 9 percent of the 174.8 million shares
then outstanding.
Also in June 2006, the board of directors authorized an increase in the
company's quarterly dividend rate to 4 cents per share from the previous
quarterly dividend of 1.75 cents per share on the company's common stock. The
dividend change will be effective with payment of the quarterly dividend in the
third quarter fiscal 2007.
Cash, Cash Equivalents and Short-term investments
At May 31, 2006, we had cash, cash equivalents and short-term investments of
$634.3 million, compared with $838.0 million at February 28, 2006. During the
first three months of fiscal 2007, we used $50.0 million of cash to repurchase
common stock under our stock repurchase authorization. At May 31, 2005, we had
cash, cash equivalents and short-term investments of $817.0 million. The
year-over-year change in the cash balance primarily reflects the use of $295.6
million to repurchase common stock under our stock repurchase authorization.
Net-owned Inventory
Merchandise inventory increased to $1.93 billion at May 31, 2006, from $1.70
billion at February 28, 2006, driven by an increase in domestic segment
inventory of $220.9 million due to an increase in inventory purchases to support
increased sales trends and customer encountered in-stock positions. Net-owned
inventory, calculated as merchandise inventory less merchandise payable,
increased by $88.1 million from February 28, 2006, to May 31, 2006, due to
increases in inventory to support strong sales trends as well as the timing of
receipts of purchases.
Capital Expenditures
Capital expenditures, net of landlord reimbursements, were $33.9 million in the
three months ended May 31, 2006, compared with $28.5 million in the same period
last fiscal year.
Sources of Liquidity
We have a $500 million revolving credit facility secured by inventory and
accounts receivable. This facility is scheduled to mature in June 2009. The
credit facility provides for a $400 million borrowing limit for the domestic
segment and a $100 million borrowing limit for the international segment. At May
31, 2006, short-term borrowings were $22.7 million and related to our
international segment. At May 31, 2006, outstanding letters of credit were $51.1
million, leaving $426.2 million available for borrowing. We were in compliance
with all covenants at May 31, 2006.
Our primary sources of liquidity include available cash, borrowing capacity
under the credit facility and landlord reimbursements. We expect that our
primary sources of liquidity will be sufficient to fund capital expenditures and
working capital for the foreseeable future.
FISCAL 2007 OUTLOOK
We expect to generate the following results in fiscal 2007:
o consolidated net sales growth of 7 percent to 11 percent, including
domestic segment comparable store sales growth of 5 percent to 7 percent
o earnings from continuing operations before income taxes (EBT) as a
percentage of sales of 2.0 percent to 2.4 percent
Page 22 of 30
The outlook also includes the following expectations:
o depreciation and amortization expense of approximately $180 million
o incremental expenses related to investments in information systems,
multi-channel capabilities and innovation activities that will total
approximately 100 basis points as a percentage of consolidated sales
o expenses of $34 million related to domestic segment store revitalization
activities including Superstore relocations, remodels and refreshes
o consolidated effective income tax rate applicable to results from
continuing operations of 36.2 percent
o reduction in domestic net-owned inventory of $50 million to $100 million
from February 28, 2006, to February 28, 2007
Domestic segment Superstore openings and estimates are as shown in the following
table. The timing of store openings depends upon a number of factors and can
change during the year. We expect approximately one third of the openings to be
in the 20,000 square foot format. We also plan to remodel two locations, one of
which was completed in the first quarter.
Domestic Segment Superstore Openings(a)
Q1 Q2 Q3 Q4 FY07
-----------------------------------------------------------------------------------
Incremental Superstores.................... 3 4 7 8-10 22-24
Relocated Superstores...................... 2 - 5 3-5 10-12
--------------------------------------
Total expected Superstore openings......... 5 4 12 11-15 32-36
===================================
(a) First quarter openings are actual. On February 28, 2006, the company closed
one store in advance of opening a replacement store in the first quarter of
fiscal 2007. The replacement store is included in relocations for the first
quarter of fiscal 2007.
We anticipate that capital expenditures, net of landlord reimbursements, will
total approximately $280 million in fiscal 2007. Of the fiscal 2007 estimate,
o $127 million relates to store activities including new store construction,
relocations, remodels, store refresh and category reset activities;
o $118 million relates to information systems;
o $24 million relates to distribution and other expenditures; and
o $11 million relates to the international segment.
The fiscal 2007 outlook is based on the following assumptions:
o continued sales growth in key product areas including flat panel
televisions, notebook computers, digital imaging and portable digital audio
players, as well as related accessories and services
o continued growth in Web-originated sales
o store traffic relatively unchanged from the prior year, an improvement in
the sales conversion rate and an increase in the average sales dollars per
ticket
o return to profitability in the international segment
o increased sales from domestic segment new store openings, relocations,
store refreshes and category resets
o continued improvement in the customer experience that increases the
conversion rate
o improved customer-encountered inventory in-stock levels
o stable competitive and macroeconomic environments
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 2006 and
beyond, are forward-looking statements and involve various risks and
uncertainties. In most cases, you can identify our forward-looking statements by
words such as "expect," "anticipate," "believe," "should," "may," "plan," "will"
or similar words.
Page 23 of 30
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 achieving our expectations. Important factors that
could cause actual results to differ materially from estimates or projections
contained in our forward-looking statements include the following:
o changes in the amount and degree of competition, pricing and promotional
pressure exerted by current competitors and potential new competition from
competitors using either similar or alternative methods or channels of
distribution such as the Internet, telephone shopping services and mail
order;
o changes in general economic conditions including, but not limited to,
financial market performance, consumer credit availability, interest rates,
inflation, energy prices, personal discretionary spending levels, trends in
consumer retail spending, both in general and in our product categories,
unemployment and consumer sentiment about the economy in general;
o the level of consumer response to new products or product features in the
merchandise categories we sell and changes in our merchandise sales mix;
o the impact of new products and product features on the demand for existing
products and the pricing and profit margins associated with the products we
sell ;
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 the lack of availability or access to sources of inventory or the loss or
disruption in supply from one of our major suppliers;
o the impact of inventory and supply chain management initiatives on
inventory levels and profitability;
o our inability to liquidate excess inventory should excess inventory
develop;
o our inability to maintain sales and profitability improvement programs for
our Circuit City Superstores, including our store revitalization plan;
o our ability to continue to generate strong sales growth through our direct
sales channel and to generate sales and margin growth through expanded
service offerings;
o the availability of appropriate real estate locations for relocations and
new stores;
o the cost and timeliness of new store openings and relocations;
o consumer reaction to new store locations and changes in our store design
and merchandise;
o our ability and the ability of Chase Card Services to successfully market
and promote the third party credit card program being offered by Chase Card
Services;
o the extent to which customers respond to promotional financing offers and
the types of promotional terms we offer;
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 the impact of initiatives related to upgrading merchandising, marketing and
information systems on revenue and operating margin and the costs
associated with these investments;
o changes in production or distribution costs or costs of materials for our
advertising;
o effectiveness of our advertising and marketing programs for increasing
consumer traffic and sales;
o the 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, 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 failure to successfully implement sales and profitability improvement
programs for our international segment;
o the timely production and delivery of private-label merchandise and level
of consumer demand for those products;
Page 24 of 30
o reduced investment returns or other changes relative to the assumptions for
our pension plans that impact our pension expense;
o changes in our anticipated cash flow;
o whether, when and in what amounts share repurchases may be made under our
stock buyback program;
o adverse results in significant litigation matters, including the RadioShack
litigation;
o customer acceptance of the re-branded company-owned stores and dealer
outlets in Canada;
o currency exchange rate fluctuations between Canadian and U.S. dollars and
other currencies ;
o the global regulatory and trade environment;
o the disruption of global, national or regional transportation systems;
o the occurrence of severe weather events or natural disasters that could
significantly damage or destroy stores or prohibit consumers from traveling
to our retail locations, especially during peak holiday periods; and
o the successful execution of the initiatives to achieve revenue growth and
increase operating margin and the accuracy of the assumptions underlying
our projected 2007 results as discussed under "Fiscal 2007 Outlook" in
MD&A.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 our international segment's financial results.
Inventory Purchases
A portion of InterTAN's purchases are 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, 2006,
U.S. dollar purchase orders totaled approximately $25.6 million. A 10 percent
decline in the value of the Canadian dollar would result in an increase in
product cost of approximately $2.6 million for those orders. 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, to the degree commercially feasible.
Translation of Financial Results
Because we translate our international segment's financial results from Canadian
dollars to U.S. dollars, fluctuations in the value of the Canadian dollar have a
direct effect on reported consolidated results. 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 consolidated
results of operations or financial position.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure 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
Page 25 of 30
executive officer and chief financial officer concluded that the company's
disclosure controls and procedures are effective.
Changes in Internal Controls over Financial Reporting
There were no changes in the company's internal control over financial reporting
in the quarter ended May 31, 2006, 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, Inc. Circuit City completed the acquisition and InterTAN
became a wholly owned subsidiary of Circuit City on May 19, 2004. InterTAN has
operated retail consumer electronics outlets under the RadioShack(R) name in
Canada under a licensing agreement with a subsidiary of RadioShack Corporation.
InterTAN also has operated 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. 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, and February 4, 2005 (the
"RadioShack litigation"). InterTAN disputes the various termination scenarios
alleged by RadioShack and is defending against those claims. The parties argued
a RadioShack motion for partial summary judgment on February 3, 2005. On March
24, 2005, the court issued an order on that motion stating that the three
agreements were terminated no later than December 31, 2004. Under the ruling,
InterTAN's rights under the agreements expired June 30, 2005.
Circuit City continues to believe that RadioShack is not entitled to early
termination of the agreements, that InterTAN has substantial defenses to the
RadioShack claims and that RadioShack has breached the agreements by seeking
early termination. There are several motions currently pending with the court,
including a motion to reconsider prior rulings. InterTAN intends to continue
defending the claims and exercise its rights under the agreements, as well avail
itself of any and all rights to appeal.
Because of the ongoing legal conflict with RadioShack, Circuit City has taken
steps to position its Canadian operations for continued success, regardless of
the outcome of this litigation. Circuit City believes that the outcome of this
litigation will not have a material adverse effect on the company's financial
condition or results of operations.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended February 28, 2006, which could
materially affect our business, financial condition or future results. There
have been no material changes to those risk factors since we filed our 2006
Annual Report on Form 10-K. The risks described in our Annual Report on Form
10-K are not the only risks facing our company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Page 26 of 30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about common stock repurchases by or on
behalf of the company during the quarter ended May 31, 2006:
Approximate
Total Number Dollar Value of
of Shares Shares that
Average Purchased as May Yet Be
Total Number Price Part of Publicly Purchased
of Shares Paid Announced Under
(Amounts in millions except per share data) Purchased per Share Program the Program(a)
-----------------------------------------------------------------------------------------------------------------------------------
March 1 - March 31, 2006......................... - $ - - $117.3
April 1 - April 30, 2006......................... 1.7 $28.92 1.7 $ 67.3
May 1 - May 31, 2006............................. - $ - - $ 67.3
----------------- -----------------
Total fiscal 2007 first quarter.................. 1.7 $28.92 1.7
================= =================
(a) In January 2003, the company announced that the board of directors had
authorized the repurchase of up to $200 million of common stock. In June 2004,
the company announced a $200 million increase in its stock repurchase
authorization, raising the repurchase capacity to $400 million. In March 2005,
the company announced a $400 million increase in its stock repurchase
authorization, raising the repurchase capacity to $800 million. At May 31, 2006,
$67.3 million remained available for stock repurchases under the $800 million
stock repurchase authorization. In June 2006, the company announced a $400
million increase in its stock repurchase authorization, raising the repurchase
capacity to $1.2 billion. There is no expiration date under the authorization.
ITEM 6. EXHIBITS
Articles of Incorporation and Bylaws
3.1 Circuit City Stores, Inc. Amended and Restated Articles of
Incorporation, effective February 3, 1997, as amended through
August 16, 2005, filed as Exhibit 3.1 to the company's Form 8-A/A
filed September 13, 2005 (File No. 1-5767), are expressly
incorporated herein by this reference.
3.2 Circuit City Stores, Inc. Bylaws, as amended December 17, 2005,
filed as Exhibit 3.1 to the company's Current Report on Form 8-K
filed December 22, 2005 (File No. 1-5767), are expressly
incorporated herein by this reference.
Material Contracts
10.1 Schedule of Non-Employee Director Compensation, filed as Exhibit
10.1 to the company's Current Report on Form 8-K filed June 29,
2006 (File No. 1-5767), is expressly incorporated herein by this
reference.*
10.2 Form of Restricted Stock Unit Award Agreement for Non-Employee
Directors, filed as Exhibit 10.2 to the company's Current Report
on Form 8-K filed June 29, 2006 (File No. 1-5767), is expressly
incorporated herein by this reference.*
10.3 Letter Agreement between Circuit City Stores, Inc. and Fiona P.
Dias, filed as Exhibit 10.3 to the company's Current Report on
Form 8-K filed June 29, 2006 (File No. 1-5767), is expressly
incorporated herein by this reference.*
10.4 Form of Performance Accelerated Restricted Stock Award letter,
filed as Exhibit 10.4 to the company's Current Report on Form 8-K
filed June 29, 2006 (File No. 1-5767), is expressly incorporated
herein by this reference.*
Page 27 of 30
10.5 Form of Time-Based Restricted Stock Award letter, filed as
Exhibit 10.5 to the company's Current Report on Form 8-K filed
June 29, 2006 (File No. 1-5767), is expressly incorporated herein
by this reference.*
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of CEO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
31.2 Certification of CFO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
Section 1350 Certifications
32.1 Certification of CEO under Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 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.
Page 28 of 30
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/ Philip J. Schoonover
------------------------------
Philip J. Schoonover
Chairman, President and Chief Executive Officer
By: /s/ Michael E. Foss
--------------------------------------
Michael E. Foss
Executive Vice President and
Chief Financial Officer
By: /s/ Philip J. Dunn
--------------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Controller and
Chief Accounting Officer
July 10, 2006
Page 29 of 30
EXHIBIT INDEX
Articles of Incorporation and Bylaws
3.1 Circuit City Stores, Inc. Amended and Restated Articles of
Incorporation, effective February 3, 1997, as amended through
August 16, 2005, filed as Exhibit 3.1 to the company's Form 8-A/A
filed September 13, 2005 (File No. 1-5767), are expressly
incorporated herein by this reference.
3.2 Circuit City Stores, Inc. Bylaws, as amended December 17, 2005,
filed as Exhibit 3.1 to the company's Current Report on Form 8-K
filed December 22, 2005 (File No. 1-5767), are expressly
incorporated herein by this reference.
Material Contracts
10.1 Schedule of Non-Employee Director Compensation, filed as Exhibit
10.1 to the company's Current Report on Form 8-K filed June 29,
2006 (File No. 1-5767), is expressly incorporated herein by this
reference.*
10.2 Form of Restricted Stock Unit Award Agreement for Non-Employee
Directors, filed as Exhibit 10.2 to the company's Current Report
on Form 8-K filed June 29, 2006 (File No. 1-5767), is expressly
incorporated herein by this reference.*
10.3 Letter Agreement between Circuit City Stores, Inc. and Fiona P.
Dias, filed as Exhibit 10.3 to the company's Current Report on
Form 8-K filed June 29, 2006 (File No. 1-5767), is expressly
incorporated herein by this reference.*
10.4 Form of Performance Accelerated Restricted Stock Award letter,
filed as Exhibit 10.4 to the company's Current Report on Form 8-K
filed June 29, 2006 (File No. 1-5767), is expressly incorporated
herein by this reference.*
10.5 Form of Time-Based Restricted Stock Award letter, filed as
Exhibit 10.5 to the company's Current Report on Form 8-K filed
June 29, 2006 (File No. 1-5767), is expressly incorporated herein
by this reference.*
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of CEO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
31.2 Certification of CFO under Rule 13a-14(a) of the Securities
Exchange Act of 1934
Section 1350 Certifications
32.1 Certification of CEO under Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 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.
Page 30 of 30