UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1998
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 No.: 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, VA 23233
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (804) 527-4000
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on Which Registered
Circuit City Stores, Inc. - Circuit City Group Common Stock, Par Value $0.50 New York Stock Exchange
Circuit City Stores, Inc. - CarMax Group Common Stock, Par Value $0.50 New York Stock Exchange
Rights to Purchase Preferred Stock,
Series E, Par Value $20.00 New York Stock Exchange
Series F, Par Value $20.00 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
On May 1, 1998, the Company had outstanding 99,536,965 Circuit City
Group common shares and 22,386,010 CarMax Group common shares. The aggregate
market value of the common shares held by non-affiliates (without admitting that
any person whose shares are not included in determining such value is an
affiliate) was $4,031,247,082 for the Circuit City Group and $284,022,502 for
the CarMax Group based upon the closing price of these shares as reported by the
New York Stock Exchange on May 1, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
Parts I, II, III and IV of this Form 10-K Report: (1) Pages 19 through 73 of the
Company's Annual Report to Shareholders for the fiscal year ended February 28,
1998 (Parts I, II and IV) and (2) "Item One - Election of Directors,"
"Beneficial Ownership of Securities," "Executive Compensation," "Employment
Agreements and Change-in-Control Arrangements," "Compensation of Directors" and
"Section 16(a) Compliance" in the May 12, 1998 Proxy Statement, furnished to
shareholders of the Company in connection with the 1998 Annual Meeting of such
shareholders (Part III).
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TABLE OF CONTENTS
Item Page
PART I
1. Business 3
2. Properties 9
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
Executive Officers of the Company 11
PART II
5. Market for the Company's Common Equity and Related Stockholder Matters 12
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Results of Operations and Financial Condition 13
7a. Quantitative and Qualitative Disclosure about Market Risk 13
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13
PART III
10. Directors and Executive Officers of the Company 13
11. Executive Compensation 14
12. Security Ownership of Certain Beneficial Owners and Management 14
13. Certain Relationships and Related Transactions 14
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14
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PART I
Item 1. Business.
Circuit City Stores, Inc. was incorporated under the laws of Virginia
in 1949. Its corporate headquarters is located at 9950 Mayland Drive, Richmond,
Va. Its retail operations consist of Circuit City Superstores, Circuit City
electronics-only stores and mall-based Circuit City Express stores. Certain of
Circuit City Stores, Inc. subsidiaries operate CarMax Auto Superstores, a used-
and new-car retail business. In addition, Circuit City Stores, Inc. holds
approximately two-thirds of the ownership interest in Digital Video Express, LP
and related operations, a limited partnership formed to develop and launch an
enhancement for DVD players that provides significant convenience, flexibility
and affordability for movies released on Divx digital discs. The Company has
wholly owned finance operations that provide consumer revolving credit and auto
installment loans.
Changes in Capital Structure. On January 24, 1997, shareholders of
Circuit City Stores, Inc. and subsidiaries approved the creation of two common
stock series. The Company's existing common stock was subsequently redesignated
as Circuit City Stores, Inc.-Circuit City Group Common Stock. In an initial
public offering, which was completed February 7, 1997, the Company sold 21.86
million shares of Circuit City Stores, Inc.-CarMax Group Common Stock.
The Circuit City Group Common Stock is intended to track the
performance of the Circuit City store-related operations; the Company's
investment in Digital Video Express, LP and related operations; the Group's
retained interest in the CarMax Group and all other businesses in which the
Company may be engaged (other than those comprising the CarMax Group). The
CarMax Group Common Stock is intended to track the performance of the CarMax
operations.
Notwithstanding the attribution of the Company's assets and
liabilities (including contingent liabilities) and stockholders' equity between
the Circuit City Group and the CarMax Group for the purposes of preparing their
respective financial statements, holders of CarMax Group Stock and holders of
Circuit City Group Stock are shareholders of the Company and continue to be
subject to all of the risks associated with an investment in the Company and all
of its businesses, assets and liabilities. Such attribution and the change in
the equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its subsidiaries.
The results of operations or financial condition of one Group could affect the
results of operations or financial condition of the other Group. Accordingly,
financial information about one Group should be read in conjunction with
financial information about the other Group and the consolidated information.
In this document, the following terms and definitions are used:
The Company refers to Circuit City Stores, Inc. and subsidiaries,
which includes Circuit City retail stores and related operations, the
CarMax retail stores and related operations, and the Company's
investment in Digital Video Express, LP and related operations.
Circuit City refers to the retail operations bearing the Circuit City
name and to all related operations such as product service and First
North American National Bank.
Circuit City Group refers to the Circuit City operations, the
Company's investment in Digital Video Express, LP and related
operations and the retained interest in the equity value of the
CarMax Group.
CarMax Group and CarMax refer to retail locations bearing the CarMax
name and to all related operations such as First North American
Credit Corporation.
Circuit City Group:
This section describes the Circuit City business and the Company's
investment in Digital Video Express, LP and related operations. It excludes the
retained interest in the CarMax business, which is discussed separately
beginning on page 6. Divx is discussed in more detail at the end of the Circuit
City Group section on page 6.
General. Circuit City is the nation's largest retailer of brand-name
consumer electronics and major appliances and a leading retailer of personal
computers and entertainment software. It sells video equipment, including
televisions, digital satellite systems, video cassette recorders, camcorders and
digital video disc players; audio equipment, including home stereo systems,
compact disc players, tape recorders and tape players; mobile electronics,
including car stereo systems and security
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systems; home office products, including personal computers, printers, software
and facsimile machines; other consumer electronics products, including cellular
phones, telephones and portable audio and video products; entertainment
software; and major appliances, including washers, dryers, refrigerators,
microwave ovens and ranges.
Each Circuit City store location follows detailed operating
procedures and merchandising programs. Included are procedures for inventory
maintenance, advertising, customer relations, store administration, merchandise
display, store security and the demonstration and sale of products. Merchandise
lines vary from location to location based on store size and market
characteristics. Most merchandise is supplied directly to the stores by regional
warehouse distribution facilities.
Expansion. As of April 30, 1998, Circuit City operated 558 retail
locations throughout the United States. In fiscal 1999, Circuit City expects to
open approximately 48 additional Superstores. Circuit City began its expansion
into the metropolitan New York market in fiscal 1998 and will continue this
expansion with the addition of approximately 15 Superstores in fiscal 1999.
Circuit City estimates that it has the opportunity to open approximately 250
additional stores. Circuit City's goal is to maximize profitability in each
market it serves by capturing large market shares that produce high sales
volumes across a broad merchandise mix.
Merchandising. Because management believes that local markets have
individual characteristics which vary greatly by the advertising, merchandising
and pricing strategies of competitors, Circuit City has organized its marketing
function to focus on markets with similar competitive conditions. Circuit City's
operating regions benefit from a centralized buying organization. The central
buying staff reduces costs by purchasing in large volumes, structures a sound
basic merchandising program and is supported by advanced management information
and distribution systems.
Circuit City's merchandising strategy emphasizes a broad selection of
products, including the industry's newest technologies, and a wide range of
prices. Merchandise mix and displays are controlled centrally to help ensure a
high level of consistency from store to store. Merchandise pricing and selling
strategies vary by market to reflect competitive conditions.
Although suggested retail prices are established by the corporate
merchandising department, each store manager is responsible for shopping the
local competition on a regular basis and is empowered to adjust retail prices to
meet in-market conditions. As part of its competitive strategy, Circuit City
advertises low prices and provides each customer with a low-price guarantee.
Circuit City will beat any price from a local store stocking the same new item,
available for sale with a manufacturer's warranty and in a factory-sealed box.
In most cases, if a customer finds a lower price, including Circuit City's own
sale price, within 30 days, Circuit City will refund 110 percent of the
difference to the customer.
Suppliers. During fiscal 1998, Circuit City's 10 largest suppliers
accounted for approximately 52 percent of merchandise purchased. Circuit City's
major suppliers include Sony Electronics, Thomson, Panasonic, Whirlpool, Compaq,
JVC, Packard Bell, Hewlett Packard, Sony Peripheral and Hitachi. Brand-name
advertised products are sold by all of Circuit City's retail locations. Circuit
City has no significant long-term contracts for the purchase of merchandise.
In the past, Circuit City has not experienced any continued or
ongoing difficulty obtaining satisfactory sources of supply and believes that
adequate sources of supply exist for the types of merchandise sold in its
stores.
Advertising. Circuit City relies on considerable amounts of
advertising to maintain high levels of consumer awareness. Advertising
expenditures were 4.6 percent of sales in fiscal 1998, 4.8 percent of sales in
fiscal 1997 and 4.7 percent of sales in fiscal 1996. Circuit City is generally
one of the largest newspaper advertisers in the markets that it serves. In the
first half of calendar 1997, Circuit City ranked as the nation's leading
specialty retail advertiser. Circuit City primarily uses print advertising,
including multi-page vehicles and run-of-press newspaper ads, for Superstore and
electronics-only store advertising. Circuit City emphasizes the use of
multi-page vehicles to allow a more extensive presentation of the broad
selection of products and price ranges it carries. These multi-page vehicles are
generally distributed in newspapers. Circuit City advertisements are regularly
seen in USA Today and on top-rated sports and entertainment programs.
Competition. Due to difficult industry conditions over the past three
years, competitors have closed stores, declared bankruptcy and curtailed their
expansion rates. Nevertheless, the brand-name consumer electronics and major
appliance business remains highly competitive. Circuit City's competitors
include other full-service retailers, self-service retailers, specialty
retailers with differing product selections and services, general merchandise
retailers and local independent operators.
Circuit City uses selection, service and pricing to differentiate
itself from the competition. As part of its competitive strategy, Circuit City
Superstores offer a broad product selection of top-quality merchandise that
includes 3,200 to 4,000
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name-brand items (excluding music software), depending
on the selling square footage of the Superstore. Professionally trained sales
counselors, convenient credit options, factory-authorized product repair, home
delivery, installation centers for automotive electronics, toll-free customer
service lines and the return, exchange and no-lemon policies in place, reflect a
strong commitment to customer service. Circuit City strives to maintain highly
competitive prices and offers every customer the low-price guarantee previously
described.
Customer Satisfaction. Extensive market research is conducted to
measure Circuit City's customer service record and to refine its consumer offer.
Over 300,000 customer surveys are conducted each year to track satisfaction
among Circuit City's existing customers. These surveys, conducted from customer
transaction records, measure satisfaction with all points of interaction,
including sales counselors, cashiers, warehouse staff, Roadshop installers, home
delivery personnel and product service specialists. Quick feedback enables
management to identify issues that need to be addressed, ensuring that store and
individual performance remain focused on providing the highest possible level of
customer service.
Training. Circuit City staffs its Superstores with commissioned sales
counselors, support personnel (cashiers and stockpersons), a store manager, one
or more sales managers and an operations manager. New sales counselors complete
an in-market training program focused on product knowledge, customer service and
store operations. These programs also provide experienced Associates with
ongoing training in new technologies and merchandising opportunities. Market
training facilities are utilized for classroom sessions taught by professional
trainers, and a state-of-the-art, in-house video studio produces video-based
training materials. Formalized training for store, sales and operations managers
focuses on human resource management, sales management and critical operating
procedures. Individual development plans address personal training needs, giving
Associates advancement opportunity.
Consumer Credit. Because consumer electronics, personal computers and
major appliances represent relatively large purchases for the average consumer,
Circuit City's business is affected by consumer credit availability, which
varies with the state of the economy and the location of a particular store. In
fiscal 1998, approximately 14 percent of Circuit City's total sales were made
through its private-label credit card and 46 percent through third-party credit
sources.
In fiscal 1991, the Company established First North American National
Bank to issue its private-label credit card. The credit card finance operation
is located in Marietta, Ga. This credit program enhances customer service with
increased credit availability, on-line links between the stores and the
operation and better control over customer interactions. Interfacing FNANB with
Circuit City's point-of-sale (POS) system has produced a rapid customer credit
approval process. A customer's application can be electronically scored, and
qualified customers can generally receive approval in under one minute. In
addition to increased credit availability, the private-label credit card program
provides Circuit City with additional marketing opportunities, including direct
mail campaigns to credit card customers and special financing programs for
promotions. FNANB's credit extension, customer service and collection operations
are fully automated with state-of the-art technology to maintain a high level of
profitability and customer service. This technology aids FNANB's collection
philosophy of contacting cardholders in the preliminary days of delinquency to
resolve any past due status.
FNANB also manages a growing bankcard portfolio. Receivables
generated by both the private-label credit card and bankcard programs are sold
to non-affiliated entities under asset securitization programs.
Systems. Circuit City's in-store POS system maintains an on-line
record of all transactions and allows management to track performance by region,
store and individual sales counselor. The information gathered by the system
supports automatic replenishment of in-store inventory from the regional
distribution centers and is incorporated into product buying decisions. The POS
system is interfaced with the FNANB credit approval system. In the stores,
electronic signature capture for all credit card purchases, bar-code scanning
for product returns and repairs, automatic price tag printing for price changes
and computerized home delivery scheduling enhance Circuit City's customer
service, eliminating time-consuming administrative tasks for store Associates
and reducing costs through smoother store-level execution.
Circuit City's Customer Service Information System maintains an
on-line history of customer purchases and enables sales counselors to better
assist customers with purchases by ensuring that new products can be integrated
with existing products in the home. This system also facilitates product returns
and product repair.
Distribution. At April 30, 1998, Circuit City operated 10 automated
electronics distribution centers. These centers are designed to serve stores
within a 500-mile range. They utilize conveyor systems and laser bar-code
scanners to reduce labor requirements, prevent inventory damage and maintain
inventory control. Circuit City also operates smaller distribution centers
handling primarily appliances and larger electronics products. Management
believes that the use of the distribution centers enables it to efficiently
distribute a broad selection of merchandise to its stores, reduce inventory
requirements at
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individual stores, benefit from volume purchasing and maintain
accounting control. Circuit City also operates an automated, centralized
distribution center for music software. Most of Circuit City's Superstore and
electronics-only store merchandise is distributed through its distribution
centers.
Service. Circuit City offers service and repair for nearly all the
products it sells. Customers also are able to purchase extended warranty plans
on most of the merchandise Circuit City sells.
At April 30, 1998, Circuit City had 37 regional, factory-authorized
repair facilities. To meet customer needs, merchandise that requires service or
repair usually is moved by truck from the stores to the nearest regional service
facility and is returned to the customer at the store after repair. Circuit City
also has in-home technicians who service large items not conveniently carried to
a store.
Extended warranty plans provide coverage beyond the normal
manufacturer's warranty period, usually with terms of coverage (including the
manufacturer's warranty period) between 12 and 60 months. Circuit City sells two
extended warranty programs on behalf of unrelated third parties that provide
these plans for merchandise sold by Circuit City and other retailers. One of
these programs is sold in most major markets and features in-home service for
personal computer products. The second program covers consumer electronics and
major appliances and was offered by approximately 85 percent of Circuit City
Superstores at April 30, 1998. Circuit City sells its own extended warranty
contracts in markets where the third-party programs are not permitted.
Seasonality. Like many retail businesses, Circuit City's sales are
greater in the fourth quarter of the fiscal year than in other periods of the
fiscal year because of holiday buying patterns. A corresponding pre-seasonal
inventory build-up is associated with this sales volume. This increased sales
volume results in a lower ratio of fixed costs to sales and produces a higher
ratio of operating income to sales in the fourth fiscal quarter. Circuit City's
sales for the fourth fiscal quarter (which includes the Christmas season) were
$2,585,969,000 in fiscal 1998, $2,282,625,000 in fiscal 1997 and $2,180,506,000
in fiscal 1996. Fourth quarter sales represented approximately 32 percent of
total sales in fiscal 1998, 1997 and 1996.
Divx. In September 1997, the Company announced plans to invest an
additional $100 million in Digital Video Express, LP, a partnership formed to
develop and launch a system that enhances current digital video disc technology
to provide the consumer with the most convenient home movie rental experience to
date.
The $100 million commitment, combined with a previous investment of
$30 million, gives Circuit City Stores, Inc. approximately two-thirds of the
ownership in Divx. The minority ownership interest is held by the prominent law
firm Ziffren, Brittenham, Branca & Fischer. The Company's investment in Divx is
allocated to the Circuit City Group and is reflected in the Group's financial
statements.
Digital Video Express, LP has secured agreements with Disney,
Paramount, Universal, Twentieth Century Fox, Metro-Goldwyn-Mayer and DreamWorks
SKG to provide titles, including all new titles, for release on Divx discs on
the same day they are available for rental on VHS tape. Zenith, Thomson,
Matsushita, JVC, Pioneer and Harman Kardon have announced plans to manufacture
DVD players with the Divx feature.
Divx is a concept that offers the consumer a convenient no-return,
rental-like system. Divx allows consumers to purchase special, limited-play
discs that include a single two-day viewing period which begins when the disc is
placed in the machine and the "play" button is pressed. Unlike typical tape
rentals, a Divx disc never has to be returned to the store, therefore, the
consumer will not incur a late fee. Also, since the disc is never returned,
consumers are able to create a cost effective home movie library. After the
initial two-day viewing period, additional viewing periods may be purchased by
placing the disc back in the player, hitting play and authorizing the additional
charge using the simple on-screen menu. Each player counts the number of
additional viewing periods and once a month, in the middle of the night, sends
the information toll free to the Divx billing computer.
After the first quarter of fiscal 1999, management intends to obtain
additional funding to support the national launch of Digital Video Express
products and the continuing operations of the partnership.
CarMax Group:
General. In 1993, CarMax pioneered the used-car Superstore concept
when it opened its first location in Richmond, Va. In fiscal 1998, the Company
continued the first phase of its national roll out plan. CarMax allows customers
to purchase vehicles the same way they can buy virtually every other retail
product, with friendly service and non-negotiated
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low prices. CarMax purchases, reconditions and sells used vehicles at each of
its stores and sells new vehicles at two of its Atlanta, Ga. locations under
franchise agreements with Chrysler Corporation.
Expansion. As of April 30, 1998, CarMax operated 19 Superstores in 11
markets. In fiscal 1999, CarMax plans to open approximately nine additional
Superstores.
Merchandising. Each CarMax location features a broad selection of
top-quality domestic and import used cars and trucks, with a wide range of
prices appealing to a large range of potential customers. CarMax's selection
covers the most popular brands, such as Toyota, Honda, Nissan, Chrysler, Ford
and General Motors, and specialty brands like BMW. To appeal to the vast array
of consumer preferences and budgets, CarMax offers its used vehicles under two
programs - the CarMax program and the ValuMax program. CarMax vehicles generally
are one to six years old, with less than 60,000 miles, and most are priced from
$7,000 to $35,000. Through the ValuMax program, CarMax sells high-quality used
vehicles that generally are more than six years old or have more than 60,000
miles, with most priced in a range from $3,000 to $12,000. To ensure that CarMax
quality standards are maintained, vehicles under both programs undergo a
comprehensive, certified quality inspection by CarMax service technicians.
CarMax backs its commitment to quality with a five-day or 250-mile, money-back
guarantee, subject to vehicles being returned in substantially the same
condition. A free 99-day limited warranty on each vehicle is offered in most
markets, with the remainder offering a free 30-day limited warranty on each
vehicle.
CarMax's used cars are priced at an average of $500 to $1,000 below
the National Automobile Dealers Association average retail book value. All
customers receive the same low price with no negotiating required. CarMax has
extended its "no-haggle" philosophy to every stage of the vehicle transaction,
including trade-ins, financing rates, extended warranty pricing and low vehicle
documentation fees. CarMax has replaced the traditional "trade-in" transaction
with a process in which trained CarMax buyers appraise any vehicle, usually in
30 minutes or less, and provide the vehicle's owner with a written guaranteed
cash offer that is good for seven days or 300 miles. The appraisal process is
available to everyone, whether or not the individual is purchasing a vehicle
from CarMax. In conjunction with Circuit City's in-store Roadshops, CarMax has
began selling electronic accessories at its store locations.
Suppliers. In stores open for more than one year, CarMax acquires
more than 50 percent of its used-vehicle inventory from consumers or from local
and regional auctions in the markets that it serves. This buying strategy
provides an inventory of makes and models that reflect the tastes of the market.
CarMax appraises and makes an offer to purchase any properly documented vehicle
from an individual. CarMax also acquires used vehicles directly from other
sources, including wholesalers, franchised and independent dealers and fleet
owners, such as leasing companies and rental companies. Based on consumer
acceptance of the appraisal process at existing CarMax stores and the experience
and success of CarMax to date in acquiring vehicles from auctions and other
sources, management believes that its sources of used vehicles will continue to
be sufficient to meet current needs and to support planned expansion.
New-car inventory for the Norcross, Ga. and Stockbridge, Ga.
locations are provided by Chrysler Corporation, under the terms of the existing
franchise agreements. CarMax has also signed a framework agreement with Nissan
Motor Corporation that will allow CarMax to own and operate Nissan franchises
throughout the United States.
Reconditioning. An integral part of CarMax's consumer offer is the
reconditioning process. In fiscal 1998, management decided to close its
centralized reconditioning facilities when experience proved that in-store
reconditioning is more efficient and produces a higher quality vehicle for the
consumer. On-site reconditioning by trained CarMax service technicians provides
direct accountability to the customer, eliminates potential transportation
damage to the vehicle and reduces transportation costs. Each CarMax location has
between 15 and 40 mechanical bays available for reconditioning.
Advertising. Television and radio advertisements are designed to
enhance consumer awareness of the CarMax name and key components of the CarMax
offer. These advertisements are distinctly different from those placed by most
auto dealers. Newspaper ads promote CarMax's selection and price leadership,
targeting consumers with immediate purchase intentions. Advertising expenditures
were 3.4 percent of sales in fiscal 1998, 2.3 percent of sales in fiscal 1997
and 2.6 percent of sales in fiscal 1996. During fiscal 1998, expansion left
CarMax with five markets that were partially stored for much of the second half
of the year. Because these new markets were not completely stored, initial
advertising levels were below those of a fully stored market. While this
approach worked successfully for the Atlanta entry two years ago, it did not
create sufficient consumer awareness to drive expected levels of consumer
traffic this year. As a consequence, CarMax instituted stepped-up awareness
building campaigns in the third quarter of fiscal 1998 and advertising expense
as a percentage of sales was above normal levels. These campaigns and continued
retail development are expected to help increase traffic and sales for these
stores.
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Franchises. CarMax operates its new-car dealerships in the Atlanta
market under two Sales and Service Agreements with the Chrysler Corporation. The
franchise agreements provide, among other things, that CarMax has the right and
obligation to sell specified models of new Chrysler-manufactured vehicles and
provide related parts and service solely at its Norcross and Stockbridge
locations. The franchise agreements impose various requirements on CarMax and
compliance with these requirements is closely monitored by Chrysler. The
franchise agreements may be terminated by Chrysler on generally not less than 60
days written notice for specified reasons.
CarMax has signed a framework agreement with Nissan Motor Corporation
that will allow CarMax to own and operate Nissan franchises throughout the
United States. The agreement provides that CarMax can acquire existing Nissan
franchises and obtain new franchise points and that Nissan franchises may be
integrated into CarMax Superstores or operated as stand-alone locations.
Competition. The $600 billion used- and new-car retail business is
highly competitive. In the used-vehicle market, CarMax competes with existing
franchised and independent dealers, rental companies and private parties. The
used-vehicle market also has attracted attention recently from a number of
public companies. Many franchised new-car dealerships also have increased their
focus on the used-vehicle market. Part of CarMax's business strategy is to
position itself as a low-price, low-cost operator in the industry.
In the new-vehicle market, CarMax competes with other franchised
dealers offering vehicles produced by the same or other manufacturers, and with
auto brokers and leasing companies. As is typical of such arrangements, CarMax's
existing franchise agreements with Chrysler do not guarantee exclusivity within
a specified territory. Aggressive discounting by manufacturers of new cars,
which typically occurs in the fall during the close-out of prior year models,
may result in lower retail sales prices and margins for used vehicles during
such discounting.
Customer Satisfaction. The elements of the CarMax offer are designed
to create a customer-friendly experience. The "no-haggle" pricing allows the
sales consultant to focus solely on the customer's needs. CarMax sales personnel
play a significant role in ensuring a customer-friendly sales process. All sales
consultants, including both full and part-time employees, are compensated solely
on a commission basis. The amount of the commission is a fixed dollar amount per
vehicle sold. The entire purchase process, including a test-drive and financing,
can be completed in less than one hour. Extensive market research is conducted
to measure CarMax's customer service record and to refine its consumer offer.
Training. All of CarMax's Associates complete an initial orientation
program entitled "The CarMax Way." This program is designed to ensure that all
CarMax Associates deliver on its mission statement, which is to provide all
customers with great quality cars at great prices with exceptional customer
service. At the completion of fiscal 1998, the 18 location general managers
averaged almost three years of CarMax experience and 10 years of prior
management experience. Each store has 10 to 15 inventory buyers. Each buyer
undergoes an 18-to-24 month apprenticeship under the tutelage of an experienced
buyer and appraises thousands of cars before making his or her first independent
purchase. All sales consultants complete two weeks of additional training and
receive ongoing training as new products and services become available. Most of
CarMax's service technicians are ASE-certified, the industry standard for
technician training.
Consumer Credit. CarMax provides prime financing for its customers'
vehicle purchases through its finance operation, First North American Credit
Corporation, or NationsBank. In addition, Chrysler Financial provides prime
financing to customers purchasing new vehicles at the two Atlanta locations.
Sub-prime financing is provided by third-party lenders such as TransSouth
Financial with no financial recourse to CarMax. Sales consultants use
AutoMation(R) to electronically submit financing applications and receive
responses from multiple lenders, generally in less than eight minutes.
Systems. AutoMation(R) is a unique, proprietary and enterprise-wide
inventory management system. Using a touch screen, CarMax customers can
electronically search the inventory for cars that meet their specific needs.
AutoMation(R) displays a color picture of the car and generates a vehicle
information sheet for customer reference. After the selection process is
complete, financing applications and purchase and title forms are submitted
electronically, reducing customer wait time. The inventory management system
includes bar codes on each vehicle and each on-site parking place. Daily
scanning tracks movement of vehicles on the lot. An electronic gate helps track
test drives for vehicles and sales consultants. This combination of systems
allows inventory and sales performance issues to be closely monitored, enabling
management to quickly resolve any issues.
Page 8 of 17
Service. During fiscal 1998, CarMax completed the rollout of retail
repair service to all locations. In fiscal 1999, CarMax will continue to grow
its retail service operations by building awareness with non-CarMax purchasers.
CarMax sells service contracts on behalf of unrelated third parties and, prior
to July 1997, sold its own contracts where third-party warranty sales were not
permitted. Contracts usually have terms of coverage between 12 and 72 months.
Seasonality. The business of CarMax is seasonal, with each location
generally experiencing more of its net sales in the first half of the fiscal
year. During the fall quarter, new-model-year introductions and discounting on
close-out vehicles can cause rapid depreciation on used-car prices, especially
on late-model vehicles. CarMax anticipates that the seasonality of its business
may vary from region to region as its operations expand geographically.
Employees:
On April 30, 1998, the Company had 29,622 hourly and salaried
employees and 16,940 sales employees working on a commission basis. None of the
Company's employees are subject to a collective bargaining agreement. Additional
personnel are employed during peak selling seasons. The Circuit City Group
accounted for 26,840 of the Company's hourly and salaried employees and 15,766
of the Company's sales employees working on a commission basis. The CarMax Group
accounted for 2,782 of the Company's hourly and salaried employees and 1,174 of
the Company's sales employees working on a commission basis.
Item 2. Properties.
At April 30, 1998, the Company's Circuit City retail operations were
conducted in 558 locations. The Company operates four Circuit City Superstore
formats with square footage and merchandise assortments tailored to population
and volume expectations for specific trade areas. The "D" format was developed
to serve the most populous trade areas. At the end of fiscal 1998, selling space
in the "D" format averaged approximately 23,000 square feet with total square
footage averaging 43,102. The "D" stores offer the largest merchandise
assortment of all the formats. The "C" format constitutes the largest percent of
the store base. At the end of fiscal 1998 selling square footage in this format
averaged 15,000 square feet with total square footage for all "C" stores
averaging 34,093. The "B" format is often located in smaller markets or in trade
areas that are on the fringes of larger metropolitan markets. At the end of
fiscal 1998, selling space in these stores averaged approximately 12,000 square
feet with an average total square footage of 26,251. The "B" stores offer a
broad merchandise assortment that maximizes return on investment in these lower
volume areas. The "A" format serves the least populated trade areas. Selling
space in these stores averaged approximately 9,600 square feet at the end of
fiscal 1998, and total square footage averaged 19,329. The "A" stores feature a
layout, staffing levels and merchandise assortment that creates high
productivity in the smallest markets.
The four electronics-only stores offer the Company's full line of
consumer electronics and a limited selection of major appliances. Selling space
in these stores averages approximately 4,000 square feet with an average total
square footage of approximately 9,000. The Company's 52 mall-based Circuit City
Express stores are located in regional malls, are approximately 2,000 to 3,000
square feet in size and sell leading-edge technology.
The Company's CarMax operations were conducted in 19 locations as of
April 30, 1998. The Company operates three different store formats, which vary
in acreage, vehicle assortment and facility square footage depending on local
market size and consumer demands. For the current store base, square footage
averages 82,926 for "C" stores, 68,261 for "B" stores and 47,521 for "A" stores.
Management believes that smaller store formats are more productive and expects
that over the long term the majority of locations will be "A" and "B" stores.
Going forward, a typical "C" store will have 20 acres to 25 acres with 650
spaces to 800 spaces for saleable inventory; "B" sites will generally have 17
acres to 20 acres and 550 spaces to 700 spaces; and "A" stores will have 11
acres to 17 acres and 350 spaces to 600 spaces. Virtually all sites can
accommodate a new-car franchise, either in the existing spaces or through
pavement of small amounts of surplus acreage.
Page 9 of 17
<TABLE>
<S> <C>
The following table summarizes the Company's Circuit City and CarMax
stores as of April 30, 1998:
Circuit City Group CarMax Group
Superstores Electronics - Mall Superstores
------------------------ -------------------
D C B A Only Stores Total C B A Total
- - - - ---- ------ ----- ------------------- -----
Alabama 1 4 - - - 1 6 - - - -
Arizona 2 6 1 - - 1 10 - - - -
Arkansas - 2 - - - - 2 - - - -
California 16 51 11 2 - 4 84 - - - -
Colorado 5 2 1 1 - - 9 - - - -
Connecticut 3 2 1 - - 1 7 - - - -
Delaware - 1 - - - 1 2 - - - -
District of Columbia - - - - - 1 1 - - - -
Florida 5 23 7 - - 1 36 1 3 1 5
Georgia 4 7 4 - - 4 19 1 - 2 3
Hawaii 1 - - - - - 1 - - - -
Idaho 1 - - 1 - - 2 - - - -
Illinois 6 19 4 - - 4 33 1 - 1 2
Indiana 1 5 2 1 - - 9 - - - -
Kansas 1 3 - - - - 4 - - - -
Kentucky - 5 - - - - 5 - - - -
Louisiana - 5 - 1 - 1 7 - - - -
Maine - - 1 - - - 1 - - - -
Maryland 1 12 2 - 1 4 20 1 - - 1
Massachusetts 1 9 3 - - 6 19 - - - -
Michigan 8 6 4 2 - 1 21 - - - -
Minnesota 1 7 1 - - 3 12 - - - -
Mississippi - 1 - - - - 1 - - - -
Missouri 1 9 - - - 1 11 - - - -
Nebraska 1 1 - - - - 2 - - - -
Nevada 1 3 - - - - 4 - - - -
New Hampshire - 4 - - - 2 6 - - - -
New Jersey - 5 - - - - 5 - - - -
New Mexico 1 - - - - - 1 - - - -
New York 9 6 2 1 - 2 20 - - - -
North Carolina 6 5 4 1 - 2 18 - 1 1 2
Ohio 7 12 5 - - 3 27 - - - -
Oklahoma - 2 1 - - - 3 - - - -
Oregon 2 5 - 1 - - 8 - - - -
Pennsylvania 2 11 2 2 - 2 19 - - - -
Rhode Island - 1 - - - - 1 - - - -
South Carolina 2 4 1 - - 1 8 - - - -
Tennessee 4 5 1 2 1 - 13 - - - -
Texas 7 27 4 6 - 2 46 2 1 2 5
Utah 5 - - - - - 5 - - - -
Vermont - - 1 - - - 1 - - - -
Virginia 2 13 5 5 - 4 29 - - 1 1
Washington 4 3 3 1 - - 11 - - - -
West Virginia - - - - 2 - 2 - - - -
Wisconsin 4 2 1 - - - 7 - - - -
-----------------------------------------------------------------------------------------------
115 288 72 27 4 52 558 6 5 8 19
===============================================================================================
</TABLE>
Of the stores open at April 30, 1998, the Company owns 13 Circuit
City store locations and four CarMax store locations. The Company leases the
remaining 545 Circuit City locations and 15 CarMax locations. During fiscal
1999, the Company anticipates entering into sale-leaseback transactions for 10
of the Circuit City locations and for all the CarMax locations that were owned
by the Company and open as of April 30, 1998.
Page 10 of 17
For information with respect to obligations for Circuit City leases,
see note 10 of the Notes to Circuit City Group Financial Statements on page 54
of the Company's 1998 Annual Report to Stockholders, which is incorporated
herein by reference. For information with respect to obligations for CarMax
leases, see note 11 of the Notes to CarMax Group Financial Statements on page 72
of the Company's 1998 Annual Report to Stockholders, which is incorporated
herein by reference.
The Company owns a 388,000 square-foot consumer electronics/appliance
distribution center in Doswell, Va., and a 387,000 square-foot consumer
electronics/appliance distribution center in Atlanta, Ga. These distribution
centers have been financed with Industrial Development Revenue Bonds.
The Company owns most of the land but leases the three buildings in
which its corporate headquarters is located. The Company leases space for all
warehouse, service and office facilities except for the aforementioned
properties.
Item 3. Legal Proceedings.
In the normal course of business, the Company is involved in various
legal proceedings. Based upon the Company's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the Company's
financial position, liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year ended February 28, 1998.
Executive Officers of the Company.
The following table identifies the present executive officers of the
Company. The Company is not aware of any family relationship between any
executive officers of the Company or any executive officer and any director of
the Company. All executive officers are generally elected annually and serve for
one year or until their successors are elected and qualify. The next general
election of officers will occur in June 1998.
<TABLE>
<S> <C>
Name Age Office
Richard L. Sharp 51 Chairman of the Board and
Chief Executive Officer
W. Alan McCollough 48 President and
Chief Operating Officer
Richard S. Birnbaum 45 Executive Vice President,
Operations
Dennis J. Bowman 44 Senior Vice President and
Chief Information Officer
W. Stephen Cannon 46 Senior Vice President and
General Counsel
Michael T. Chalifoux 51 Senior Vice President,
Chief Financial Officer and
Corporate Secretary
John A. Fitzsimmons 55 Senior Vice President,
Administration
John W. Froman 44 Senior Vice President,
Merchandising
W. Austin Ligon 47 Senior Vice President,
Automotive
Jonathan T. M. Reckford 35 Senior Vice President,
Corporate Planning and Communications
Jeffrey S. Wells 52 Senior Vice President,
Human Resources
</TABLE>
Page 11 of 17
Mr. Sharp is a director and a member of the Company's executive
committee. He joined the Company in 1982 as executive vice president and was
elected president in 1984, chief executive officer in 1986, and chairman of the
board in 1994.
Mr. McCollough joined the Company in 1987 as general manager of
corporate operations. He was elected assistant vice president in 1989, vice
president and Central Division president in 1991, senior vice president -
merchandising in 1994, and president and chief operating officer in 1997.
Mr. Birnbaum joined the Company in 1972. He was elected vice
president in 1985, Central Division president in 1986, senior vice president -
marketing in 1991, and executive vice president - operations in 1994.
Mr. Bowman joined the Company in 1996 as vice president and chief
information officer. He was elected senior vice president and chief information
officer in 1997. Prior to joining the Company, he had served as senior vice
president - information services for Rite Aid Corporation since 1993 and from
1984 to 1993 was a consultant with McKinsey & Company.
Mr. Cannon joined the Company in 1994 as senior vice president and
general counsel. Prior to joining the Company, he had been, since 1986, a
partner in Wunder, Diefenderfer, Ryan, Cannon & Thelen, a Washington, D.C., law
firm.
Mr. Chalifoux is a director and a member of the Company's executive
committee. He joined the Company in 1983 as corporate controller and was elected
vice president and chief financial officer in 1988. He was elected senior vice
president in 1991 and became corporate secretary in 1993.
Mr. Fitzsimmons joined the Company in 1987 as senior vice president -
administration.
Mr. Froman joined the Company in 1986 as a store manager and general
manager in training. In 1987, he was promoted to general manager and in 1989 was
named assistant vice president. He was promoted to director of corporate
operations in 1990 and in 1992 added the title of vice president. In 1994, he
was elected president of the Company's Central Division until 1997 when he was
named senior vice president - merchandising.
Mr. Ligon joined the Company in 1990 as vice president - corporate
planning and communications. He was elected senior vice president - corporate
planning and communications in 1991, senior vice president - corporate planning
and automotive in 1994, and senior vice president-automotive and CarMax
president in 1996.
Mr. Reckford joined the Company in 1995 as vice president - corporate
planning and communications. He was elected senior vice president - corporate
planning and communications in 1996. Prior to joining the Company, he was
director of business planning and development for Disney Design and Development
since 1991.
Mr. Wells joined the Company in 1996 as senior vice president - human
resources. Prior to joining the Company, he had served as a senior vice
president of Toys "R" Us, Inc. since 1992.
Part II
With the exception of the information incorporated by reference from
the 1998 Annual Report to Stockholders in Item 2 of Part I and Items 5, 6, 7, 7a
and 8 of Part II and Item 14 of Part IV of this Form 10-K, the Company's 1998
Annual Report to Stockholders is not to be deemed filed as a part of this
Report.
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.
Incorporated herein by reference is the information appearing under
the heading "Common Stock" on page 24 of the Company's 1998 Annual Report to
Stockholders.
As of May 1, 1998, there were 7,004 shareholders of record of the
Circuit City Group common stock and 337 shareholders of record of the CarMax
Group common stock.
Item 6. Selected Financial Data.
Incorporated herein by reference is the information appearing under
the heading "Reported Historical Information" on page 19 of the Company's 1998
Annual Report to Stockholders.
Page 12 of 17
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Incorporated herein by reference is the information appearing under
the heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition" on pages 19 through 24 for Circuit City Stores, Inc., pages
40 through 43 for Circuit City Group, and pages 58 through 61 for the CarMax
Group of the Company's 1998 Annual Report to Stockholders.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk.
Incorporated herein by reference is the information appearing under
the sub-heading "Market Risk" on page 23 for Circuit City Stores, Inc., page 43
for the Circuit City Group and page 61 for the CarMax Group of the Company's
1998 Annual Report to Stockholders.
Item 8. Financial Statements and Supplementary Data.
Incorporated herein by reference is the information appearing under
the headings "Consolidated Statements of Earnings," "Consolidated Balance
Sheets," "Consolidated Statements of Cash Flows," "Consolidated Statements of
Stockholders' Equity," "Notes to Consolidated Financial Statements," and
"Independent Auditors' Report," on pages 26 through 39 of the Company's 1998
Annual Report to Stockholders.
Incorporated herein by reference is the information appearing under
the headings "Circuit City Group Statements of Earnings," "Circuit City Group
Balance Sheets," "Circuit City Group Statements of Cash Flows," "Circuit City
Group Statements of Group Equity," "Notes to Circuit City Group Financial
Statements," and "Independent Auditors' Report," on pages 44 through 57 of the
Company's 1998 Annual Report to Stockholders.
Incorporated herein by reference is the information appearing under
the headings "CarMax Group Statements of Operations," "CarMax Group Balance
Sheets," "CarMax Group Statements of Cash Flows," "CarMax Group Statements of
Group Equity (Deficit)," "Notes to CarMax Group Financial Statements," and
"Independent Auditors' Report," on pages 62 through 73 of the Company's 1998
Annual Report to Stockholders.
Incorporated herein by reference is the information appearing under
the heading "Quarterly Financial Data (Unaudited)" on page 39 for Circuit City
Stores, Inc., page 56 for Circuit City Group and page 73 for the CarMax Group of
the Company's 1998 Annual Report to Stockholders.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
With the exception of the information incorporated by reference from
the Company's Proxy Statement in Items 10, 11 and 12 of Part III of this Form
10-K, the Company's Proxy Statement dated May 12, 1998, is not to be deemed
filed as a part of this Report.
Item 10. Directors and Executive Officers of the Company.
The information concerning the Company's directors required by this
Item is incorporated by reference to the section entitled "Item One - Election
of Directors" appearing on pages 2 through 4 of the Company's Proxy Statement
dated May 12, 1998.
The information concerning the Company's executive officers required
by this Item is incorporated by reference to the section in Part I hereof
entitled "Executive Officers of the Company" appearing on pages 11 and 12.
The information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 required by this Item is incorporated by
reference to the section entitled "Section 16(a) Compliance" appearing on page
16 of the Company's Proxy Statement dated May 12, 1998.
Page 13 of 17
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the sections entitled "Executive Compensation," "Employment Agreements and
Change-in-Control Arrangements," and "Compensation of Directors," appearing on
pages 8 through 10 and pages 14 through 16 of the Company's Proxy Statement
dated May 12, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to
the section entitled "Beneficial Ownership of Securities" appearing on pages 5
through 7 of the Company's Proxy Statement dated May 12, 1998.
Item 13. Certain Relationships and Related Transactions.
None.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following Financial Statements of
Circuit City Stores, Inc., the Circuit City Group and the CarMax
Group, and the related notes to Financial Statements and the
Independent Auditors' Reports are incorporated by reference to
pages 26 through 39 for Circuit City Stores, Inc., pages 44
through 57 for the Circuit City Group, and pages 62 through 73
for the CarMax Group of the Company's 1998 Annual Report to
Shareholders:
Consolidated Statements of Earnings for the fiscal years ended
February 28, 1998, February 28, 1997, and February 29, 1996.
Circuit City Group Statements of Earnings for the fiscal years
ended February 28, 1998, February 28, 1997, and February 29,
1996.
CarMax Group Statements of Operations for the fiscal years ended
February 28, 1998, February 28, 1997, and February 29, 1996.
Consolidated Balance Sheets at February 28, 1998, and February
28, 1997.
Circuit City Group Balance Sheets at February 28, 1998, and
February 28, 1997.
CarMax Group Balance Sheets at February 28, 1998, and February
28, 1997.
Consolidated Statements of Cash Flows for the fiscal years ended
February 28, 1998, February 28, 1997, and February 29, 1996.
Circuit City Group Statements of Cash Flows for the fiscal years
ended February 28, 1998, February 28, 1997, and February 29,
1996.
CarMax Group Statements of Cash Flows for the fiscal years ended
February 28, 1998, February 28, 1997, and February 29, 1996.
Consolidated Statements of Stockholders' Equity for the fiscal
years ended February 28, 1998, February 28, 1997, and February
29, 1996.
Circuit City Group Statements of Group Equity for the fiscal
years ended February 28, 1998, February 28, 1997, and February
29, 1996.
CarMax Group Statements of Group Equity (Deficit) for the fiscal
years ended February 28, 1998, February 28, 1997, and February
29, 1996.
Page 14 of 17
Notes to Consolidated Financial Statements.
Notes to Circuit City Group Financial Statements.
Notes to CarMax Group Financial Statements.
Independent Auditors' Report, Circuit City Stores, Inc.
Independent Auditors' Report, Circuit City Group.
Independent Auditors' Report, CarMax Group.
2. Financial Statement Schedule. The following financial statement
schedules of Circuit City Stores, Inc., Circuit City Group and
CarMax Group for the fiscal years ended February 28, 1998,
February 28, 1997, and February 29, 1996, are filed as part of
this Report and should be read in conjunction with the Financial
Statements of Circuit City Stores, Inc., Circuit City Group and
CarMax Group.
<TABLE>
<S> <C>
II Valuation and Qualifying Accounts and Reserves, Circuit City Stores, Inc. S-1
II Valuation and Qualifying Accounts and Reserves, Circuit City Group S-1
II Valuation and Qualifying Accounts and Reserves, CarMax Group S-1
Independent Auditors' Report on Circuit City Stores, Inc. Financial Statement Schedule S-2
Independent Auditors' Report on Circuit City Group Financial Statement Schedule S-2
Independent Auditors' Report on CarMax Group Financial Statement Schedule S-2
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits. The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedules
are filed as part of, or incorporated by reference into, this
Report.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the last
fiscal quarter covered by this Report.
Page 15 of 17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CIRCUIT CITY STORES, INC.
(Registrant)
By s/ Richard L. Sharp
Richard L. Sharp
Chairman of the Board and
Chief Executive Officer
By s/ Michael T. Chalifoux
Michael T. Chalifoux
Senior Vice President,
Chief Financial Officer and
Corporate Secretary
By s/ Philip J. Dunn
Philip J. Dunn
Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
May 27, 1998
Page 16 of 17
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature Title Date
Michael T. Chalifoux* Director May 27, 1998
Michael T. Chalifoux
Richard N. Cooper* Director May 27, 1998
Richard N. Cooper
Barbara S. Feigin* Director May 27, 1998
Barbara S. Feigin
Robert S. Jepson, Jr.* Director May 27, 1998
Robert S. Jepson, Jr.
Hugh G. Robinson* Director May 27, 1998
Hugh G. Robinson
Walter J. Salmon* Director May 27, 1998
Walter J. Salmon
Mikael Salovaara* Director May 27, 1998
Mikael Salovaara
s/ Richard L. Sharp Director May 27, 1998
Richard L. Sharp
John W. Snow* Director May 27, 1998
John W. Snow
Edward Villanueva* Director May 27, 1998
Edward Villanueva
Alan L. Wurtzel* Director May 27, 1998
Alan L. Wurtzel
By: s/ Richard L. Sharp*
Richard L. Sharp,
Attorney-In-Fact
The original powers of attorney authorizing Richard L. Sharp and Michael T.
Chalifoux, or either of them, to sign this annual report on behalf of certain
directors and officers of the Company are included as Exhibit 24.
Page 17 of 17
<PAGE>
S-1
Schedule II
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
<TABLE>
<S> <C>
Balance at Charged Charge-offs Balance at
Beginning to less End of
Description of Year Income Recoveries Year
Consolidated:
Year ended February 29, 1996:
Allowance for doubtful accounts $ 6,737 $ 5,078 $ (1,790) $ 10,025
======== ======= ========= =========
Year ended February 28, 1997:
Allowance for doubtful accounts $ 10,025 $ 8,773 $ (3,402) $ 15,396
======== ======= ========= =========
Year ended February 28, 1998:
Allowance for doubtful accounts $ 15,396 $ 8,464 $ (5,554) $ 18,306
======== ======= ========= =========
Circuit City Group:
Year ended February 29, 1996:
Allowance for doubtful accounts $ 6,431 $ 4,599 $ (1,450) $ 9,580
======== ======= ========= =========
Year ended February 28, 1997:
Allowance for doubtful accounts $ 9,580 $ 6,817 $ (2,863) $ 13,534
======== ======= ========= =========
Year ended February 28, 1998:
Allowance for doubtful accounts $ 13,534 $ 5,616 $ (4,627) $ 14,523
======== ======= ========= =========
CarMax Group:
Year ended February 29, 1996:
Allowance for doubtful accounts $ 306 $ 479 $ (340) $ 445
======== ======= ========= =========
Year ended February 28, 1997:
Allowance for doubtful accounts $ 445 $ 1,956 $ (539) $ 1,862
======== ======= ========= =========
Year ended February 28, 1998:
Allowance for doubtful accounts $ 1,862 $ 2,848 $ (927) $ 3,783
======== ======= ========= =========
</TABLE>
<PAGE>
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 3, 1998, we reported on the consolidated balance sheets of
Circuit City Stores, Inc. and subsidiaries (the Company) as of February 28, 1998
and 1997, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the fiscal years in the three-year period
ended February 28, 1998, as contained in the February 28, 1998 annual report to
stockholders. These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year ended
February 28, 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related Circuit City
Stores, Inc. financial statement schedule as listed in Item 14(a)2 of this Form
10-K. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1998
<PAGE>
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 3, 1998, we reported on the balance sheets of the Circuit
City Group as of February 28, 1998 and 1997, and the related statements of
earnings, group equity and cash flows for each of the fiscal years in the
three-year period ended February 28, 1998, as contained in the February 28, 1998
annual report to stockholders. Our report dated April 3, 1998 includes a
qualification related to the effects of not consolidating the CarMax Group with
the Circuit City Group as required by generally accepted accounting principles.
These financial statements and our report thereon are incorporated by reference
in the annual report on Form 10-K of Circuit City Stores, Inc. for the year
ended February 28, 1998. In connection with our audits of the aforementioned
financial statements, we also have audited the related Circuit City Group
financial statement schedule as listed in Item 14(a)2 of this Form 10-K. This
financial statement schedule is the responsibility of Circuit City Stores,
Inc.'s management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, except for the effects of not consolidating the CarMax Group
with the Circuit City Group as discussed in the preceding paragraph, such
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
/s/KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1998
<PAGE>
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 3, 1998, we reported on the balance sheets of the CarMax
Group as of February 28, 1998 and 1997, and the related statements of
operations, group equity (deficit) and cash flows for each of the fiscal years
in the three-year period ended February 28, 1998, as contained in the February
28, 1998 annual report to stockholders. These financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
of Circuit City Stores, Inc. for the year ended February 28, 1998. In connection
with our audits of the aforementioned financial statements, we also have audited
the related CarMax Group financial statement schedule as listed in Item 14(a)2
of this Form 10-K. This financial statement schedule is the responsibility of
Circuit City Stores, Inc.'s management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
s/KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1998
<PAGE>
Circuit City Stores, Inc.
Annual Report on Form 10-K
INDEX TO EXHIBITS
(3) Articles of Incorporation and Bylaws
(a) Amended and Restated Articles of Incorporation of the
Company, effective February 3, 1997, filed as Exhibit
4.1 to the Company's Registration Statement on Form
S-8 (Registration No. 333-22759), filed on March 4,
1997, are expressly incorporated herein by this
reference.
(b) Articles of Amendment to the company's Amended and
Restated Articles of Incorporation, effective April
28, 1998, filed with the Commission as Exhibit 4 to
Registrant's Form 8-A filed April 28, 1998 (File No.
1-5767), are expressly incorporated herein by this
reference.
(c) Bylaws of the Company, as amended and restated August
19, 1997, filed as Exhibit 3(i) to the Company's
Quarterly Report on Form 10-Q for the quarter ended
August 31, 1997, (File No. 1-5767) are expressly
incorporated herein by this reference.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Rights Agreement dated April 14, 1998, between the
Company and Norwest Bank Minnesota, N.A., as Rights
Agent, filed as Exhibit 1 to the Company's 8-A filed
on April 28, 1998, is expressly incorporated herein
by this reference.
(b) $100,000,000 term loan agreement dated July 28, 1994,
between the Company, the Long-Term Credit Bank of
Japan, Limited, as agent, and the banks named
therein. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
(c) First Amendment to Term Loan Agreement dated October
24, 1995, to the $100,000,000 term loan agreement
dated July 28, 1994, between the Company, the
Long-Term Credit Bank of Japan, Limited, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(d) Second Amendment to Term Loan Agreement dated August
21, 1996, to the $100,000,00 term loan agreement
dated July 28, 1994, between the Company, the
Long-Term Credit Bank of Japan, Limited, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(e) $175,000,000 term loan agreement dated May 26, 1995,
between the Company, the LTCB Trust Company, as
agent, and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(f) First Amendment to Term Loan Agreement dated October
24, 1995, to the $175,000,000 term loan agreement
dated May 26, 1995, between the Company, the LTCB
Trust
Page 1 of 4
Company, as agent, and the banks named therein.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in
lieu of filing a copy of such agreement, the Company
agrees to furnish a copy of such agreement to the
Commission upon request.
(g) $130,000,000 term loan agreement dated June 14, 1996,
between the Company, the Royal Bank of Canada, as
agent, and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(h) $150,000,000 Credit Agreement dated August 31, 1996,
between the Company, Crestar Bank, as agent, and the
banks named therein. Pursuant to Item 601(b)(4)(iii)
of Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
(i) First Amendment to Credit Agreement dated May 1,
1998, to the $150,000,000 Credit Agreement dated
August 31, 1996, between the Company, Crestar Bank,
as agent, and the banks named therein. Pursuant to
Item 601(b)(4)(iii) of Regulation S-K, in lieu of
filing a copy of such agreement, the Company agrees
to furnish a copy of such agreement to the Commission
upon request.
(10) Material Contracts*
(a) The Company's 1988 Stock Incentive Plan, filed as
Exhibit 10(c) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1993,
(File No. 1-5767) is expressly incorporated herein by
this reference.
(b) Amendments to the Company's 1988 Stock Incentive Plan
filed as Exhibit 10(k) to the Company's Annual Report
on Form 10-K for the fiscal year ended February 29,
1990, (File No. 1-5767) are expressly incorporated
herein by this reference.
(c) Amendment to the Company's 1988 Stock Incentive Plan
filed as Exhibit 4(h) to the Company's Registration
Statement on Form S-8 (Registration No. 33-50144)
filed with the Commission on July 28, 1992, is
expressly incorporated herein by this reference.
(d) Amendment adopted February 20, 1997 to the Company's
1988 Stock Incentive Plan filed as Exhibit 10(d) to
the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1997 (File No. 1-5767)
is expressly incorporated herein by this reference.
(e) The Company's Amended and Restated 1989 Non-Employee
Directors' Stock Option Plan, filed as Exhibit A to
the Company's Definitive Proxy Statement dated May 9,
1997, for the Annual Meeting of Stockholders held on
June 17, 1997, is expressly incorporated herein by
this reference.
(f) Amendments adopted June 17, 1997, to the Company's
Amended and Restated 1989 Non-Employee Directors
Stock Option Plan filed as Exhibit 10(ii) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1997 is expressly incorporated
herein by this reference.
(g) Amendment adopted February 20, 1997 to the Company's
Amended and Restated 1989 Non-Employee Directors
Stock Option Plan filed as Exhibit 10(g) to the
Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1997 (File No. 1-5767) is
expressly incorporated herein by this reference.
Page 2 of 4
(h) The Company's 1994 Stock Incentive Plan, as amended
as of January 24, 1997, filed as Annex III to the
Company's Definitive Proxy Statement dated December
24, 1996, for a Special Meeting of Shareholders held
on January 24, 1997, (File No. 1-5767) is expressly
incorporated herein by this reference.
(i) Letter agreement and non-compete agreement dated
January 30, 1996, (revised February 12, 1996),
between the Company and Alan L. Wurtzel filed as
Exhibit 10(g) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1995,
(File No. 1-5767) is expressly incorporated herein by
this reference.
(j) Employment agreement between the Company and Richard
L. Sharp dated October 17, 1986, and amendment dated
August 1, 1989, to the employment agreement, filed as
Exhibit 10(m) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1993,
(File No. 1-5767) is expressly incorporated herein by
this reference.
(k) Employment agreement dated June 1, 1988, between the
Company and John A. Fitzsimmons, filed as Exhibit
10(n) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1989, (File No.
1-5767) is expressly incorporated herein by this
reference.
(l) Amendment dated August 1, 1989, to employment
agreement dated June 1, 1988, between the Company and
John A. Fitzsimmons, filed as Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1993, (File No. 1-5767) is
expressly incorporated herein by this reference.
(m) Employment agreement dated May 25, 1989, between the
Company and Michael T. Chalifoux, filed as Exhibit
10(x) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1991, (File No.
1-5767) is expressly incorporated herein by this
reference.
(n) Employment agreement dated April 24, 1995, between
the Company and W. Alan McCollough filed as Exhibit
10(l) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, (File No.
1-5767), is expressly incorporated herein by this
reference.
(o) Amended and restated employment agreement dated May
12, 1995, between the Company and Richard S. Birnbaum
filed as Exhibit 10(s) to the Company's Annual Report
on Form 10-K for the fiscal year ended February 28,
1995, (File No. 1-5767) is expressly incorporated
herein by this reference.
(p) The Company's Annual Performance-Based Bonus Plan, as
amended as of January 24, 1997, filed as Annex IV to
the Company's Definitive Proxy Statement dated
December 24, 1996, for a Special Meeting of
Shareholders held on January 24, 1997, (File No.
1-5767) is expressly incorporated herein by this
reference.
(q) Program for deferral of director compensation
implemented October 1995 filed as Exhibit 10(i) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 1995, (Filed No. 1-5767)
is expressly incorporated herein by this reference.
Page 3 of 4
(13) Annual Report to Stockholders
(21) Subsidiaries of the Company
(23) Consents of Experts and Counsel
Consent of KPMG Peat Marwick LLP to Incorporation by Reference of
Independent Auditors' Reports into the Company's Registration
Statements on Form S-8.
(24) Powers of Attorney
(27) Financial Data Schedule
* All contracts listed under Exhibit 10 are management contracts, compensatory
plans or arrangements of the Company required to be filed as an exhibit.
Page 4 of 4
REPORTED HISTORICAL INFORMATION
<TABLE>
<S> <C>
(Amounts in thousands except per share data) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues.................... $8,870,797 $7,663,811 $7,029,123 $5,582,947 $4,130,415
Net earnings........................................ $ 104,311 $ 136,414 $ 179,375 $ 167,875 $ 132,400
Net earnings (loss) per share:
Circuit City Group:
Basic.......................................... $ 1.14 $ 1.40 $ 1.86 $ 1.75 $ 1.39
Diluted........................................ $ 1.13 $ 1.39 $ 1.84 $ 1.74 $ 1.37
CarMax Group..................................... $ (0.35) $ (0.01) $ - $ - $ -
Total assets........................................ $3,231,701 $3,081,173 $2,526,022 $ 2,004,055 $1,554,664
Long-term debt, excluding current installments...... $ 424,292 $ 430,290 $ 399,161 $ 178,605 $ 29,648
Deferred revenue and other liabilities.............. $ 145,107 $ 166,295 $ 214,001 $ 241,866 $ 268,360
Cash dividends per share paid on
Circuit City Group common stock.................. $ 0.14 $ 0.14 $ 0.12 $ 0.10 $ 0.08
=======================================================================
</TABLE>
See notes to consolidated financial statements.
CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
On January 24, 1997, Circuit City Stores, Inc. shareholders approved the
creation of two common stock series. The Company's existing common stock was
subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common
Stock. In an initial public offering, which was completed February 7, 1997, the
Company sold 21.86 million shares of Circuit City Stores, Inc.- CarMax Group
Common Stock.
The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations, the Company's
investment in Digital Video Express, LP and the Group's retained interest in the
CarMax Group. The effects of this retained interest on the Circuit City Group's
financial statements are identified by the term "Inter-Group."
The CarMax Group Common Stock is intended to track separately the
performance of the CarMax operations. The Inter-Group Interest is not considered
outstanding CarMax Group stock. Therefore, any net earnings or loss attributable
to the Inter-Group Interest is not included in the CarMax Group's per share
calculations.
The following discussion and analysis refers to Circuit City Stores, Inc., which
includes the operations related to both the Circuit City Group and the CarMax
Group. All financial statements reflect consummation of the CarMax Group stock
offering on February 7, 1997. For additional information, refer to the
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" for the Circuit City Group and for the CarMax Group.
RESULTS OF OPERATIONS
Sales Growth
Total sales for Circuit City Stores, Inc. increased 16 percent in fiscal 1998 to
$8.87 billion. In fiscal 1997, total sales were $7.66 billion, a 9 percent
increase from $7.03 billion in fiscal 1996.
Percentage Sales Change from Prior Year
Circuit City Circuit City CarMax
Stores, Inc. Group Group
-------------------------------------------------------
Fiscal Total Total Comparable Total Comparable
- --------------------------------------------------------------------------
1998.................. 16% 12% (1)% 71% 6%
1997.................. 9% 6% (8)% 85% 23%
1996.................. 26% 23% 5 % 258% 12%
1995.................. 35% 34% 15 % 376% 43%
1994.................. 26% 26% 8 % - -
The Circuit City Group. Geographic expansion has been the primary contributor to
the Group's total sales growth during the past five years. From 1994 to 1996,
the addition of products such as personal computers also contributed to both
total and comparable store sales growth. Late in fiscal 1996, industry sales of
consumer electronics and personal computers weakened, resulting in comparable
store sales declines for the Circuit City Group. The industry remained soft in
fiscal 1997 and 1998, with few new product introductions and lower average
retail prices in virtually all product categories. In fiscal 1998, stronger
industry sales of major appliances, digital satellite systems and wireless
communication products partly offset decreased sales in other categories. Based
on market research, sales performance and available industry rankings,
management believes that at the end of fiscal 1998, Circuit City continued to
lead the industry in consumer electronics sales and was the nation's
second-largest major appliance retailer. Although the products sold in Circuit
City locations remain widely available, industry weakness nevertheless has
resulted in a significant number of competitor store closings and reductions in
competitor expansion plans. As a result, management believes that the Circuit
City locations continue to maintain substantial shares in existing markets and
to build significant shares in new markets.
The Circuit City Group sells two extended warranty programs on behalf of
unrelated third parties that issue these plans for merchandise sold by the Group
and other retailers. One of these programs is sold in most major markets and
features in-home service for personal computer products. The second program
covers electronics and major appliances and at the end of
19
fiscal year 1998 was offered by approximately 85 percent of the Superstores. The
remaining stores sell a Circuit City extended warranty. For the Circuit City
Group, gross dollar sales from all extended warranty programs were 5.5 percent
of the Group's total sales in fiscal year 1998, compared with 6.0 percent in
fiscal 1997 and 5.9 percent in fiscal 1996. The change in fiscal 1998 reflects a
shift in store management emphasis towards other product categories. The Group's
management believes that a renewed focus on warranty sales with continued
attention to other categories will help improve results in fiscal 1999. Total
extended warranty revenue, which is reported in the Group's total sales, was 4.6
percent of sales in fiscal year 1998 and 5.1 percent of sales in fiscal years
1997 and 1996. The gross profit margins on products sold with extended
warranties are higher than the gross profit margins on products sold without
extended warranties. Third-party extended warranty revenue was 3.6 percent of
the Group's total sales in both fiscal years 1998 and 1997 and 3.0 percent in
fiscal 1996. The increase in third-party revenue as a percentage of the total
from fiscal 1996 to fiscal 1997 reflects a higher percentage of stores selling
third-party contracts.
The CarMax Group. The fiscal 1998 sales growth primarily reflects the
addition of 11 locations, two of which opened in the last week of the fiscal
year, and a 6 percent comparable store sales increase. During the second half of
fiscal 1998, the CarMax Group's used-car sales fell below management's
expectations. In the fall of each calendar year, the new-car segment discounts
prior-model-year vehicles as it begins to introduce new models. In fiscal 1998,
the industry experienced prolonged discounting on close-out models and low
introductory prices on new models. As a result, the spread between the retail
price of new and used vehicles was temporarily compressed. The result was
lower-than-anticipated used-car unit sales and gross margins. As wholesale and
retail prices for used cars adjusted, CarMax's unit sales and gross margins
improved. Nevertheless, lower average retail prices adversely affected
comparable store sales measured in dollars.
Sales also were below expectations in most of the markets entered in fiscal
1998. Management believes that the higher level of competition in these markets
and limited advertising, which reflected CarMax's partial storing of the
markets, resulted in low consumer awareness of the CarMax offer. Incomplete real
estate development surrounding some new locations further contributed to the
lower-than-expected sales. Total sales for fiscal 1998 reflect the highest
proportion the Group expects to have of new stores in the total store base and
of markets that are not fully stored.
New-car sales remained strong throughout fiscal 1998. In June 1997, CarMax
acquired its second Chrysler-Plymouth-Jeep-and-Eagle franchise, which was
relocated and opened in conjunction with the opening of the CarMax Superstore in
Stockbridge, Ga. Within six months, sales volume at this franchise ranked it
third in sales among all Chrysler-Plymouth-Jeep-and-Eagle dealers in the Atlanta
zone. In March 1998, CarMax's first new-car franchise received Chrysler's top
award for achieving the highest retail sales volume of all Pacesetters Club
members. Pacesetters Club members are the 100 highest volume dealers who qualify
for the Five Star rating, Chrysler Corporation's highest award for customer
service excellence in sales and mechanical service. Both of CarMax's Chrysler
franchise stores received the Five Star rating in fiscal 1998.
The fiscal 1997 sales growth includes the addition of three stores, a 23
percent comparable store sales increase for two locations classified as
comparable stores throughout the year and two locations classified as comparable
stores for a portion of the year. Early in fiscal 1997, CarMax began selling new
vehicles at its Norcross, Ga., location, under the terms of its first franchise
agreement with Chrysler Corporation. The fiscal 1996 sales increase includes the
addition of two stores and a 12 percent comparable store sales increase for one
location classified as a comparable store throughout the year and a second
location classified as a comparable store for a portion of the year.
Extended warranty sales prior to July 1997 include third-party contracts
and CarMax's own extended warranty contracts. In most states, CarMax sells
warranties on behalf of an unrelated third party and has no contractual
liability to the customer under the warranty programs. In states where
third-party warranty sales are not permitted, CarMax has sold its own extended
warranty; CarMax expects to continue selling this warranty in connection with
its ongoing expansion. Gross dollar sales from all extended warranty programs
were 3.8 percent of the Group's total sales in fiscal 1998, 3.5 percent in
fiscal 1997 and 3.8 percent in fiscal 1996. Total extended warranty revenue,
which is reported in the Group's total sales, was 1.5 percent of total sales in
fiscal 1998, 1.2 percent in fiscal 1997 and 1.4 percent in fiscal 1996.
Third-party extended warranty revenue was 1.4 percent of total sales in fiscal
1998, 1.1 percent in fiscal 1997 and 1.3 percent in fiscal 1996. The lower
extended warranty percentages in fiscal 1997 reflect a higher percentage of new
cars, which are covered by manufacturers' warranties, in that year's sales mix
than in the fiscal 1998 and fiscal 1996 sales mixes.
Impact of Inflation. Inflation has not been a significant contributor to the
Company's results. For the Circuit City Group, the average retail price declined
in virtually all product categories during the past year. Although new product
introductions could help reverse this trend, management expects no significant
short-term change. Because the Group purchases substantially all products,
including consumer electronics, in U.S. dollars, prices are not directly
impacted by the value of the dollar in relation to other foreign currencies,
including the Japanese yen.
For the CarMax Group, average retail prices of used cars declined during
the second half of the year. These lower prices adversely affected the CarMax
Group's sales in fiscal 1998 and could continue to limit sales in fiscal 1999.
However, the CarMax Group's profitability is based on achieving specific gross
profit dollars per unit rather than on average retail prices. Because the
wholesale market quickly adjusts to reflect lower retail prices, management
believes that if the stores meet inventory turn objectives then declines in
average retail prices will have only a short-term impact on the Group's gross
margin and thus profitability. The discounting that took place in the fall of
fiscal 1998 and the disappointing new-store sales contributed to the Group's
missing its profit expectations during the second half of fiscal 1998.
Cost of Sales, Buying and Warehousing
The gross profit margin was 23.0 percent of sales in fiscal years 1998 and 1997
and 23.3 percent in fiscal 1996. The fiscal 1998
20
gross margin reflects a higher Circuit City Group margin, resulting from
improved inventory management and increased sales of stronger-margin products
such as major appliances, digital satellite systems and wireless communication
products, offset by a higher percentage of sales from the CarMax Group. Because
the CarMax business produces lower gross margins than the Circuit City business,
the increased sales contribution from CarMax reduces the Company's overall gross
profit margin. In fiscal 1998, industry price changes resulted in
lower-than-anticipated CarMax margins during the second half and for the full
year. The Company's fiscal 1997 gross margin reflects weak industry sales and an
intense promotional climate for the Circuit City Group and the sales
contribution from the CarMax Group.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to 20.8 percent of sales
in fiscal 1998 from 19.7 percent in fiscal 1997 and 18.8 percent in fiscal 1996.
The primary contributors to the fiscal 1998 increase were the impact of lower
comparable store sales for the Circuit City Group, a decline in profits from the
Circuit City Group's finance operation and the Company's investment in Digital
Video Express. Although the CarMax Group's expense ratio increased in fiscal
1998, CarMax's lower expense structure reduces the Company's overall
expense-to-sales ratio. The increase in the fiscal 1997 ratio primarily reflects
the impact of lower comparable store sales and less favorable productivity of
larger-square-footage stores for the Circuit City Group. Operating profits
generated by the Company's finance operations are recorded as a reduction to
selling, general and administrative expenses.
In September 1997, the Company announced plans to invest an additional $100
million in Digital Video Express, LP, a partnership that has developed and will
market a new digital video system that is supported by leading U.S. movie
studios and brand-name consumer electronics manufacturers. Circuit City Stores,
Inc. holds approximately two-thirds of the ownership in the partnership. The
minority ownership interest is held by the prominent Los Angeles law firm
Ziffren, Brittenham, Branca & Fischer. The Company's investment in Divx is
allocated to the Circuit City Group. Before the additional commitment announced
in September, the investment in Divx totaled approximately $30 million. Expenses
associated with the investment increased the Company's expense ratio by 38 basis
points in fiscal 1998, 16 basis points in fiscal 1997 and 11 basis points in
fiscal 1996.
Interest Expense
Interest expense was 0.3 percent of sales in fiscal 1998 and 0.4 percent in
fiscal years 1997 and 1996. Interest expense was incurred for both the Circuit
City and the CarMax Groups on debt used to fund store expansion and working
capital.
Income Taxes
The effective tax rate was 38.0 percent in fiscal years 1998 and 1997 and 37.5
percent in fiscal 1996. The increase in the tax rate for fiscal years 1998 and
1997 reflects increased sales in states with higher tax rates.
Net Earnings
Net earnings for Circuit City Stores, Inc. declined 24 percent to $104.3 million
in fiscal 1998. In fiscal 1997, net earnings were $136.4 million, a decrease of
24 percent from $179.4 million in fiscal 1996. The lower earnings in fiscal 1998
and 1997 reflect the Company's investment in Digital Video Express, LP and the
higher losses incurred by the CarMax Group.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
and No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and presentation
of comprehensive income and its components. SFAS No. 131 requires publicly held
companies to report financial and descriptive information about operating
segments in financial statements issued to shareholders for interim and annual
periods. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 revises and
standardizes employers' disclosures about pensions and other postretirement
benefits. All the standards are effective for fiscal years beginning after
December 15, 1997.
FINANCIAL CONDITION
Liquidity and Capital Resources
In fiscal 1998, net cash provided by operating activities was $194.6 million
compared with $14.2 million provided by operating activities in fiscal 1997 and
$55.3 million used in operating activities in fiscal 1996. The fiscal 1998
increase primarily reflects improved inventory control, a smaller increase in
net accounts receivable and a slight earnings increase for the Circuit City
business, partly offset by the investment in Digital Video Express, greater
automotive inventory to support a larger number of CarMax Superstore openings
and a higher loss from the CarMax business. The fiscal 1997 improvement
primarily reflects less rapid growth in inventory for the Circuit City Group and
an increase in accounts payable partly offset by an increase in accounts
receivable and lower net earnings.
Most financial activities, including the investment of surplus cash and the
issuance and repayment of short-term and long-term debt, are managed by the
Company on a centralized basis. Interest-bearing loans, with terms determined by
the board of directors, are used to manage cash between the Groups. These loans
are reflected as inter-group receivables or payables on the financial statements
of each Group.
Capital expenditures have been funded through sale-leaseback transactions,
landlord reimbursements, proceeds from the CarMax Group equity offering and
short- and long-term debt. Capital expenditures of $588.1 million in fiscal 1998
principally reflect Circuit City and CarMax stores opened during the year and a
portion of the stores opening in fiscal 1999. The sale-leaseback and landlord
reimbursement transactions completed in fiscal 1998 totaled $297.1 million and
were largely related to real estate purchased in fiscal 1998 and fiscal 1997.
Capital expenditures of $542.0 million in fiscal 1997 and $518.2 million in
fiscal 1996 largely were incurred in connection with the Company's expansion
programs.
21
Receivables generated by the consumer finance operations, First North
American National Bank and First North American Credit Corporation, are funded
through securitization transactions, which allow the finance operations to sell
the receivables while retaining a small interest. The Circuit City Group's
finance operation has a master trust securitization facility for its
private-label credit card that allows the transfer of up to $1.025 billion in
receivables through both private placement and the public market. A second
master trust securitization program allows for the transfer of up to $2.050
billion in receivables related to the operation's bankcard programs. Receivables
securitized under the master trust facilities totaled $2.501 billion at February
28, 1998. In fiscal 1996, Circuit City Stores, Inc. initiated an asset
securitization program on behalf of the CarMax Group. At the end of fiscal 1998,
that program allowed the transfer of up to $300.0 million in auto loan
receivables. At February 28, 1998, securitized receivables totaled $268.0
million. Under the securitization programs, receivables are sold to an
unaffiliated third party with the servicing retained. Management expects that
these securitization programs can be expanded to accommodate future receivables
growth.
Capital Structure
Total assets at February 28, 1998, were $3.23 billion, up $150.5 million or 5
percent since February 28, 1997. The rise in assets primarily includes increases
of $162.3 million in net property and equipment, $66.1 million in net accounts
receivable and $18.2 million in inventory.
Over the past three years, expansion for the Groups has been funded with
internally generated cash, sale-leaseback transactions, proceeds from the CarMax
equity offering, operating leases and long-term debt. Consumer receivables have
been funded through securitization transactions. Late in fiscal 1997, Circuit
City Stores, Inc. raised a net of $412.3 million through the initial public
offering of 21.86 million shares of newly created CarMax Group Common Stock. In
fiscal 1997, the CarMax Group used approximately $187 million of the net
proceeds to repay its allocated portion of Circuit City Stores, Inc.
indebtedness. Management has used the remainder of the net proceeds to finance
part of the CarMax expansion plan. In fiscal 1997, the Company also entered into
a five-year, $130 million unsecured bank term loan agreement.
During the period from fiscal 1994 to 1998, stockholders' equity grew
substantially. From fiscal 1997 to 1998, stockholders' equity increased 7
percent to $1.73 billion. Capitalization for the past five years is illustrated
in the "Capitalization" table below. Slightly higher earnings for Circuit City,
offset by the investment in Digital Video Express and higher losses from the
CarMax Group, produced a return on equity of 6.2 percent in fiscal 1998 compared
with 10.2 percent in fiscal 1997. The returns are below the Company's long-term
objective but reflect the challenging environment for Circuit City and the
investments in the development and launch of the Divx technology and in the
national roll out of CarMax.
Management anticipates that in fiscal 1999 capital expenditures of
approximately $490 million will be funded through a combination of internally
generated cash, proceeds from equity offerings, sale-leaseback transactions and
operating leases and that securitization transactions will finance the growth in
receivables. After discussions with various banks, management believes that it
can secure a renewable financing program for CarMax inventory. At the end of
fiscal 1998, the Company maintained a multi-year, $150.0 million unsecured
revolving credit agreement and $410.0 million in seasonal lines that are renewed
annually with various banks.
After the first quarter of fiscal 1999, management expects to obtain
additional funding to support the national roll out of Digital Video Express
products and continuing operations of the partnership. Management will attempt
to limit dilution for Circuit City Group investors. The Company has provided
guarantees relating to licensing agreements with motion picture distributors for
use of their films by the Divx system. The licensing fees are based on varying
percentages of consumer viewing and wholesale receipts and require minimum
distributor compensation commencing from the operational date of each agreement
through the following three to five years.
The Groups rely on the external debt of Circuit City Stores, Inc. to
provide working capital needed to fund net assets not otherwise financed through
sale-leasebacks or the securitization of receivables. All significant financial
activities of each Group are managed by the Company on a centralized basis and
are dependent on the financial condition of the Company. These financial
activities include the investment of surplus cash, issuance and repayment of
debt, securitization of receivables and sale-leasebacks of real estate.
<TABLE>
<S> <C>
Capitalization
Fiscal 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions) $ % $ % $ % $ % $ %
- ------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current
installments 424.3 18 430.3 19 399.2 23 178.6 14 29.6 3
Other long-term liabilities 171.5 7 199.4 9 231.8 14 241.9 19 268.4 27
Total stockholders' equity 1,730.0 75 1,614.8 72 1,063.9 63 877.4 67 710.4 70
-----------------------------------------------------------------------------------
Total capitalization 2,325.8 100 2,244.5 100 1,694.9 100 1,297.9 100 1,008.4 100
===================================================================================
</TABLE>
22
MARKET RISK
The Company manages the private-label and bankcard revolving loan portfolios of
First North American National Bank and the installment loan portfolio of First
North American Credit Corporation. Portions of these portfolios are securitized
and, therefore, are not presented on the Company's balance sheet. Interest rate
exposure relating to these receivables represents a market risk exposure that
the Company has managed with matched funding and interest rate swaps.
Revolving Loans
Interest rates charged on the managed private-label and bankcard portfolios are
primarily indexed to the prime rate, adjustable on a monthly basis, with the
balance at a fixed annual percentage rate. Total principal outstanding at
February 28 had the following APR structure:
(Amounts in millions) 1998 1997
- --------------------------------------------------------------------
Indexed to prime rate....................... $ 2,523 $ 2,350
Fixed APR................................... 227 245
----------------------
Total ...................................... $ 2,750 $ 2,595
======================
Financing for the securitization programs is achieved primarily through the
issuance of public market debt, which is issued either at floating rates based
on LIBOR or at fixed rates. Certain of the fixed-rate issuances have been
swapped to LIBOR. Receivables held by the Company for investment or sale are
financed with working capital. At February 28, financings were as follows:
(Amounts in millions) 1998 1997
- --------------------------------------------------------------
Floating-rate (including synthetic
alteration) securitizations.............. $2,211 $1,979
Fixed-rate securitizations................. 290 290
Held by the Company:........................
For investment........................... 204 139
For sale................................. 45 187
----------------
Total ...................................... $2,750 $2,595
================
Auto Installment Loans
Many of the automobiles CarMax sells are financed through FNAC. All receivables
represent fixed-rate installment loans with a principal weighted average life of
approximately 20 months. Total principal outstanding at February 28 was as
follows:
(Amounts in millions) 1998 1997
- ------------------------------------------------------------
Fixed APR.................................. $297 $165
==============
Financing for these receivables is achieved through bank conduit
securitizations which, in turn, issue floating-rate securities. Interest rate
exposure is hedged through the use of interest rate swaps matched to projected
payoffs. Receivables held by the Company for investment or sale are financed
with working capital. Financings at February 28 and related interest rates were
as follows:
(Amounts in millions) 1998 1997
- --------------------------------------------------------------
Floating-rate securitizations
synthetically altered to fixed........... $224 $114
Floating-rate securitizations............... 44 31
Held by the Company:
For investment........................... 23 19
For sale................................. 6 1
---------------
Total ...................................... $297 $165
===============
Because of the programs in place to manage interest rate exposure relating
to its consumer loan portfolios, the Company expects to experience relatively
little impact as interest rates fluctuate in the future. The Company also has
the ability to adjust fixed-APR revolving cards and the index on floating-rate
cards, subject to cardholder ratification, but does not currently anticipate the
need to do so.
YEAR 2000 CONVERSION
The Year 2000 issue arises because many computer programs use two digits rather
than four to define the applicable year. Using two digits could result in a
system failure or miscalculations that cause disruption of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
In fiscal 1997, the Company began a Year 2000 date conversion project to
address necessary code changes, testing and implementation for its systems. The
Company has utilized both internal and external resources to reprogram or
replace and test the software for Year 2000 modifications. The Company expects
that most of its Year 2000 conversions will be completed by December 1998. In
fiscal 1998, the Company spent $3.3 million for Year 2000 modifications related
to the Circuit City Group. The total remaining cost of the Circuit City Group's
Year 2000 project is estimated at $12.1 million and is being funded through
operating cash flows. Because CarMax's computer systems were developed in recent
years, management believes the CarMax Group will incur no material costs related
to the Year 2000 issue. The Company is coordinating with other entities with
which it electronically interacts to address potential Year 2000 issues in order
to minimize potential adverse consequences.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from plans.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of 1995, which
became law in December 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.
23
The Company wishes to take advantage of the "safe harbor" provisions of the Act.
Company statements that are not historical facts, including statements about
management's expectations for fiscal 1999 and beyond, are forward-looking
statements and involve various risks and uncertainties. Factors that could cause
the Company's actual results to differ materially from management's projections,
forecasts, estimates and expectations include, but are not limited to, the
following:
(a) changes in the amount and degree of promotional intensity exerted by
current competitors and potential new competition from both retail stores and
alternative methods or channels of distribution such as electronic and telephone
shopping services and mail order;
(b) changes in general U.S. or regional U.S. economic conditions including,
but not limited to, consumer credit availability, consumer credit delinquency
and default rates, interest rates, inflation, personal discretionary spending
levels and consumer sentiment about the economy in general;
(c) the presence or absence of new products or product features in the
merchandise categories the Company sells and changes in the Company's actual
merchandise sales mix;
(d) significant changes in retail prices for products sold by any of the
Company's businesses;
(e) lack of availability/access to sources of supply for appropriate
Circuit City or CarMax inventory;
(f) the ability to retain and grow an effective management team in a
dynamic environment or changes in the cost or availability of a suitable work
force to manage and support the Company's service-driven operating strategies;
(g) changes in availability or cost of capital expenditure and working
capital financing, including the availability of long-term financing to support
development of the Company's businesses and the availability of securitization
financing for credit card and auto installment loan receivables;
(h) changes in production or distribution costs or cost of materials for
the Company's advertising;
(i) availability of appropriate real estate locations for expansion;
(j) the imposition of new restrictions or regulations regarding the sale of
products and/or services the Company sells, changes in tax rules and regulations
applicable to the Company, 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;
(k) adverse results in significant litigation matters;
(l) changes in levels of competition in the car business from either
traditional competitors and/or new nontraditional competitors utilizing auto
superstore or other formats;
(m) the inability of the CarMax stores to reach planned mature sales and
earnings potential by the end of their fourth year;
(n) limited or lack of availability of new-car franchises within a suitable
radius of existing and proposed CarMax stores or limited manufacturer approval
of franchise acquisitions;
(o) availability of long-term financing to support the national roll out of
Divx products;
(p) the early stage of market development and absence of operating history
for Divx and therefore lack of assurance that this business will achieve
significant sales or profits;
(q) the early stage of technological development of the Divx system and
therefore lack of assurance that the products will work as expected on a large
scale;
(r) ability to maintain and acquire additional long-term agreements for
title releases on Divx discs, manufacturing of Divx discs and licensing of the
proprietary Divx hardware architecture;
(s) developments or assertions by or against Divx, relating to intellectual
property rights;
(t) difficulty securing long-term agreements for the distribution of Divx
discs through retail outlets; and
(u) development of alternative and highly competitive means of distributing
movies for in-home viewing.
The United States retail industry and the specialty retail industry in
particular are dynamic by nature and have undergone significant changes over the
past several years. The Company's ability to anticipate and successfully respond
to continuing challenges is key to achieving its expectations.
COMMON STOCK
Circuit City Stores, Inc. Common Stock began trading as Circuit City Stores,
Inc.-Circuit City Group Common Stock on February 4, 1997. Newly created Circuit
City Stores, Inc.-CarMax Group Common Stock also began trading on February 4,
1997. Both Group stocks are traded on the New York Stock Exchange. The quarterly
dividend data shown below applies to the Circuit City Stores, Inc. or the
Circuit City Group Common Stock for the applicable periods. No dividend data is
shown for the CarMax Group Common Stock since it pays no dividends at this time.
<TABLE>
<S> <C>
Circuit City Stores, Inc./Circuit City Group CarMax Group
- -------------------------------------------------------------------------------------------------
Market Price of Common Stock Dividends Market Price of Common Stock
FISCAL 1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------------------------
1st....... $40.88 $30.88 $36.00 $29.25 $.035 $.030 $20.13 $13.50 - -
2nd....... $39.88 $33.13 $38.75 $29.25 $.035 $.035 $15.38 $12.63 - -
3rd....... $45.50 $31.00 $36.88 $30.25 $.035 $.035 $18.50 $11.38 - -
4th....... $39.56 $31.38 $35.75 $28.63 $.035 $.035 $12.06 $ 6.50 $22.00 $20.00
--------------------------------------------------------------------------------------
Total $.140 $.135
==============
</TABLE>
24
MANAGEMENT'S REPORT
The Board of Directors and Stockholders of Circuit City Stores, Inc.:
The consolidated financial statements of Circuit City Stores, Inc. and
subsidiaries, as well as the financial statements of the Circuit City Group and
the CarMax Group, have been prepared under the direction of management, which is
responsible for their integrity and objectivity. These financial statements have
been prepared in conformity with generally accepted accounting principles,
except for the Circuit City Group which has accounted for its interest in the
CarMax Group in a manner similar to the equity method of accounting. Generally
accepted accounting principles require that the CarMax Group be consolidated
with the Circuit City Group. However, management feels the manner in which the
Circuit City Group is presented more clearly indicates the separate operating
results of the core electronics business. The financial statements include
amounts that are the best estimates and judgments of management with
consideration given to materiality.
Management is responsible for maintaining an internal control structure
designed to provide reasonable assurance that the books and records reflect the
transactions of the Company and that the Company's established policies and
procedures are carefully followed. Because of inherent limitations in any
system, there can be no absolute assurance that errors or irregularities will
not occur. Nevertheless, management believes that the internal control structure
provides reasonable assurance that assets are safeguarded and that financial
information is objective and reliable.
The Company's and the Groups' financial statements have been audited by
KPMG Peat Marwick LLP, independent auditors. Their Independent Auditors'
Reports, which are based on audits made in accordance with generally accepted
auditing standards, express opinions as to the fair presentation in conformity
with generally accepted accounting principles of the financial statements. In
performing their audits, KPMG Peat Marwick LLP considers the Company's internal
control structure to the extent it deems necessary in order to issue its
opinions on the Company's and the Groups' financial statements.
The audit committee of the board of directors is composed solely of outside
directors. The committee meets periodically with management, the internal
auditors and the independent auditors to assure each is properly discharging its
responsibilities. KPMG Peat Marwick LLP and the internal auditors have full and
free access to meet privately with the audit committee to discuss accounting
controls, audit findings and financial reporting matters.
/s/Richard L. Sharp
Chairman and Chief Executive Officer
/s/Michael T. Chalifoux
Senior Vice President, Chief Financial Officer and
Corporate Secretary
April 3, 1998
25
<TABLE>
<S> <C>
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended February 28 or 29
(Amounts in thousands except per share data) 1998 % 1997 % 1996 %
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES.................. $8,870,797 100.0 $ 7,663,811 100.0 $7,029,123 100.0
Cost of sales, buying and warehousing............. 6,827,133 77.0 5,902,711 77.0 5,394,293 76.7
-----------------------------------------------------------------------
GROSS PROFIT...................................... 2,043,664 23.0 1,761,100 23.0 1,634,830 23.3
-----------------------------------------------------------------------
Selling, general and administrative
expenses [NOTE 10]............................. 1,848,559 20.8 1,511,294 19.7 1,322,430 18.8
Interest expense [NOTE 4]......................... 26,861 0.3 29,782 0.4 25,400 0.4
-----------------------------------------------------------------------
TOTAL EXPENSES.................................... 1,875,420 21.1 1,541,076 20.1 1,347,830 19.2
-----------------------------------------------------------------------
Earnings before income taxes...................... 168,244 1.9 220,024 2.9 287,000 4.1
Provision for income taxes [NOTE 5]............... 63,933 0.7 83,610 1.1 107,625 1.5
-----------------------------------------------------------------------
NET EARNINGS...................................... $ 104,311 1.2 $ 136,414 1.8 $ 179,375 2.6
=======================================================================
Net earnings (loss) attributable to [NOTES 1 AND 2]:
Circuit City Group common stock................ $ 112,074 $ 136,680 $ 179,375
CarMax Group common stock...................... (7,763) (266) -
---------- ----------- ----------
$ 104,311 $ 136,414 $ 179,375
========== =========== ==========
Weighted average common shares [NOTE 2 AND 7]:
Circuit City Group:
Basic...................................... 98,027 97,311 96,573
========== =========== ==========
Diluted.................................... 99,204 98,472 97,689
========== =========== ==========
CarMax Group................................... 22,001 21,860
========== ===========
NET EARNINGS (LOSS) PER SHARE [NOTES 2 AND 7]:
Circuit City Group:
Basic...................................... $ 1.14 $ 1.40 $ 1.86
========== =========== ==========
Diluted.................................... $ 1.13 $ 1.39 $ 1.84
========== =========== ==========
CarMax Group................................... $ (0.35) $ (0.01)
========== ===========
See accompanying notes to consolidated financial statements.
26
<PAGE>
CONSOLIDATED BALANCE SHEETS
At February 28
(Amounts in thousands except share data) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 116,612 $ 202,643
Net accounts receivable [NOTE 11]................................................... 598,035 531,974
Inventory........................................................................... 1,410,545 1,392,363
Deferred income taxes [NOTE 5]...................................................... - 21,340
Prepaid expenses and other current assets........................................... 21,157 14,813
---------------------------------
TOTAL CURRENT ASSETS................................................................ 2,146,349 2,163,133
Property and equipment, net [NOTES 3 AND 4]......................................... 1,048,434 886,091
Other assets........................................................................ 36,918 31,949
---------------------------------
TOTAL ASSETS........................................................................ $3,231,701 $ 3,081,173
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTES 4 AND 9].............................. $ 1,301 $ 1,490
Accounts payable.................................................................... 765,391 720,754
Short-term debt [NOTE 4]............................................................ 5,976 347
Accrued expenses and other current liabilities...................................... 132,802 105,500
Accrued income taxes................................................................ - 8,560
Deferred income taxes [NOTE 5]...................................................... 356 -
---------------------------------
TOTAL CURRENT LIABILITIES........................................................... 905,826 836,651
Long-term debt, excluding current installments [NOTES 4 AND 9]...................... 424,292 430,290
Deferred revenue and other liabilities.............................................. 145,107 166,295
Deferred income taxes [NOTE 5]...................................................... 26,437 33,081
---------------------------------
TOTAL LIABILITIES................................................................... 1,501,662 1,466,317
---------------------------------
STOCKHOLDERS' EQUITY [NOTES 1 AND 6]:
Circuit City Group common stock, $0.50 par value; 175,000,000 shares authorized;
99,282,000 shares issued and outstanding (98,178,000 in 1997).................... 49,641 49,089
CarMax Group common stock, $0.50 par value; 175,000,000 shares authorized;
22,204,000 shares issued and outstanding (21,860,000 in 1997).................... 11,102 10,930
Capital in excess of par value...................................................... 530,763 506,823
Retained earnings................................................................... 1,138,533 1,048,014
---------------------------------
TOTAL STOCKHOLDERS' EQUITY.......................................................... 1,730,039 1,614,856
---------------------------------
Commitments and contingent liabilities [NOTES 1, 8, 9, 11, 12 AND 13]
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $3,231,701 $ 3,081,173
=================================
See accompanying notes to consolidated financial statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings............................................................ $104,311 $ 136,414 $179,375
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................ 116,326 98,977 79,812
Loss (gain) on disposition of property and equipment................. 14,093 (1,540) 5,600
Provision for deferred income taxes.................................. 15,052 20,973 22,411
Decrease in deferred revenue and other liabilities................... (23,024) (47,706) (27,865)
Increase in net accounts receivable................................. (66,061) (207,579) (59,830)
Increase in inventory, prepaid expenses and other current assets..... (24,526) (66,594) (290,644)
(Increase) decrease in other assets.................................. (4,969) (15,869) 1,911
Increase in accounts payable, accrued expenses and
other current liabilities, and accrued income taxes............... 63,379 97,162 33,910
-------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..................... 194,581 14,238 (55,320)
-------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (588,052) (541,989) (518,175)
Proceeds from sales of property and equipment........................... 297,126 332,726 251,454
-------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................... (290,926) (209,263) (266,721)
-------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of (payments on) short-term debt, net............ 5,629 (91,740) 92,087
Proceeds from issuance of long-term debt................................ - 32,619 222,000
Principal payments on long-term debt.................................... (6,187) (1,436) (2,386)
Issuances of Circuit City Group common stock, net........................ 22,311 15,385 18,245
Issuances of CarMax Group common stock, net.............................. 2,353 412,335 -
Dividends paid on Circuit City Group common stock....................... (13,792) (13,199) (11,163)
-------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................... 10,314 353,964 318,783
-------------------------------------------
(Decrease) increase in cash and cash equivalents........................... (86,031) 158,939 (3,258)
Cash and cash equivalents at beginning of year............................. 202,643 43,704 46,962
-------------------------------------------
Cash and cash equivalents at end of year................................... $116,612 $ 202,643 $ 43,704
===========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................................ $ 26,697 $ 29,925 $ 22,905
Income taxes............................................................ $ 47,936 $ 73,113 $ 88,477
See accompanying notes to consolidated financial statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Shares Outstanding Common Stock Capital In
Circuit City CarMax Circuit City CarMax Excess of Retained
(Amounts in thousands except per share data) Group Group Group Group Par Value Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1995.......................... 96,476 - $ 48,238 $ - $ 72,639 $ 756,587 $ 877,464
-----------------------------------------------------------------------------
Net earnings................................... - - - - - 179,375 179,375
Exercise of common stock options [NOTE 6]...... 645 - 322 - 7,831 - 8,153
Shares issued under Employee
Stock Purchase Plan [NOTE 6]................ 75 - 38 - 2,174 - 2,212
Shares issued under the 1994 Stock
Incentive Plan [NOTE 6]..................... 259 - 129 - 5,745 - 5,874
Tax benefit from stock issued.................. - - - - 4,746 - 4,746
Shares cancelled upon reacquisition by Company. (75) - (37) - (1,631) - (1,668)
Unearned compensation-restricted stock......... - - - - (1,072) - (1,072)
Cash dividends-Circuit City Group common
stock ($0.12 per share)..................... - - - - - (11,163) (11,163)
-----------------------------------------------------------------------------
BALANCE AT FEBRUARY 29, 1996...................... 97,380 - 48,690 - 90,432 924,799 1,063,921
-----------------------------------------------------------------------------
Net earnings................................... - - - - - 136,414 136,414
Exercise of common stock options [NOTE 6]...... 786 - 393 - 13,497 - 13,890
Shares issued under Employee
Stock Purchase Plan [NOTE 6]................ 78 - 39 - 2,491 - 2,530
Shares issued under the 1994 Stock
Incentive Plan [NOTE 6]..................... 255 - 127 - 7,455 - 7,582
Tax benefit from stock issued.................. - - - - 3,080 - 3,080
Shares issued in the CarMax Group stock
offering.................................... - 21,860 - 10,930 401,405 - 412,335
Shares cancelled upon reacquisition by Company. (321) - (160) - (9,654) - (9,814)
Unearned compensation-restricted stock......... - - - - (1,883) - (1,883)
Cash dividends-Circuit City Group common
stock ($0.14 per share)..................... - - - - - (13,199) (13,199)
-----------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1997...................... 98,178 21,860 49,089 10,930 506,823 1,048,014 1,614,856
-----------------------------------------------------------------------------
Net earnings................................... - - - - - 104,311 104,311
Exercise of common stock options [NOTE 6]...... 483 273 241 136 6,790 - 7,167
Shares issued under Employee
Stock Purchase Plans [NOTE 6]............... 173 51 87 26 6,648 - 6,761
Shares issued under the 1994 Stock
Incentive Plan [NOTE 6]..................... 605 20 302 10 20,214 - 20,526
Tax benefit from stock issued.................. - - - - 8,013 - 8,013
Shares cancelled upon reacquisition by Company. (157) - (78) - (4,470) - (4,548)
Unearned compensation-restricted stock......... - - - - (13,255) - (13,255)
Cash dividends-Circuit City Group common
stock ($0.14 per share)..................... - - - - - (13,792) (13,792)
-----------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1998...................... 99,282 22,204 $ 49,641 $ 11,102 $ 530,763 $ 1,138,533 $ 1,730,039
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On January 24, 1997, shareholders of Circuit City Stores, Inc. and its
subsidiaries (the Company) approved the creation of two common stock series. The
Company's existing common stock was subsequently redesignated as Circuit City
Stores, Inc.- Circuit City Group Common Stock. In an initial public offering,
which was completed February 7, 1997, the Company sold 21.86 million shares of
Circuit City Stores, Inc.-CarMax Group Common Stock.
The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations, a retained interest in
the CarMax Group, and all other businesses in which the Company may be engaged,
other than those comprising the CarMax Group, and including the Company's
investment in Digital Video Express, LP. The CarMax Group Common Stock is
intended to track separately the performance of the CarMax operations. The
Circuit City Group held a 77.3 percent interest in the CarMax Group at February
28,1998, and a 77.5 percent interest at February 28,1997.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the Circuit
City Group and the CarMax Group for the purposes of preparing their respective
financial statements, holders of Circuit City Group Stock and holders of CarMax
Group Stock are shareholders of the Company and continue to be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its subsidiaries.
The results of operations or financial condition of one Group could affect the
results of operations or financial condition of the other Group. Accordingly,
the Company's consolidated financial statements included herein should be read
in conjunction with the financial statements of each Group.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation: The consolidated financial statements include
the accounts of the Circuit City Group, including Digital Video Express, LP, and
the CarMax Group, which combined comprise all accounts of the Company. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(B) Cash and Cash Equivalents: Cash equivalents of $71,750,000 at February 28,
1998, and $165,975,000 at February 28,1997, consist of highly liquid debt
securities with original maturities of three months or less.
(C) Transfers and Servicing of Financial Assets: The Company adopted Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," effective
January 1, 1997. For transfers that qualify as sales, the Company recognizes
gains or losses as a component of the Company's finance operations. For
transfers of financial assets to qualify for sale accounting, control over the
assets must be surrendered at the time of sale. Multiple estimates are used to
calculate the gain or loss on sales of receivables under SFAS No. 125. Finance
charge income, default rates and payment rates are estimated using projections
developed from the prior 12 months of operating history. These estimates are
adjusted for any industry or portfolio trends that have been observed. The
resulting cash flow projections are present valued at a discount rate
appropriate for the type of asset and risk. Retained interests (such as residual
interests in a securitization trust, cash reserve accounts and rights to future
interest from serviced assets that exceed contractually specified servicing
fees) are included in net accounts receivable and are carried at fair value with
changes in fair value reflected in earnings. Loan receivables held for sale are
carried at the lower of cost or market, whereas loan receivables held for
investment are carried at cost less an allowance for losses. At February 28,
1998 and 1997, cost approximates fair value.
(D) Fair Value of Financial Instruments: The carrying value of the Company's
financial instruments, excluding interest rate swaps held for hedging purposes,
approximates fair value. Credit risk is the exposure created by the potential
nonperformance of another material party to an agreement due to changes in
economic, industry or geographic factors. The Company mitigates credit risk by
dealing only with counterparties that are highly rated by several financial
rating agencies. Accordingly, the Company does not anticipate loss for
nonperformance. The Company broadly diversifies all financial instruments along
industry, product and geographic areas.
(E) Inventory: Inventory is stated at the lower of cost or market. Cost is
determined by the average cost method for the Circuit City Group's inventory and
by specific identification for the CarMax Group's vehicle inventory. Parts and
labor used to recondition vehicles, as well as transportation and other
incremental expenses associated with acquiring vehicles, are included in the
CarMax Group's inventory.
(F) Property and Equipment: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the assets' estimated useful
lives.
Property held under capital lease is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or market
value and is amortized straight-line over the lease term or the estimated useful
life of the asset, whichever is shorter.
(G) Pre-opening Expenses: Expenses associated with the opening of new stores are
deferred and amortized ratably over the period from the date of the store
opening to the end of the fiscal year.
(H) Income Taxes: The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the impact
of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and the amounts recognized for
income tax purposes, measured by applying currently enacted tax laws. The
Company recognizes deferred tax assets if it is more likely than not that a
benefit will be realized.
(I) Deferred Revenue: The Circuit City Group sells its own extended warranty
contracts and extended warranty contracts on behalf of unrelated third parties.
The contracts extend
30
beyond the normal manufacturer's warranty period, usually with terms (including
the manufacturer's warranty period) between 12 and 60 months. All revenue from
the sale of the Circuit City Group's own extended warranty contracts is deferred
and amortized on a straight-line basis over the life of the contracts.
Incremental direct costs related to the sale of contracts are deferred and
charged to expense in proportion to the revenue recognized. Commission revenue
for the unrelated third-party extended warranty plans is recognized at the time
of sale.
The CarMax Group sells service contracts on behalf of unrelated third
parties and, prior to July 1997, sold its own contracts at one location where
third-party warranty sales were not permitted. Contracts usually have terms of
coverage between 12 and 72 months. All revenue from the sale of the CarMax
Group's own service contracts is deferred and amortized over the life of the
contracts consistent with the pattern of repair experience of the industry.
Incremental direct costs related to the sale of contracts are deferred and
charged to expense in proportion to the revenue recognized. All other costs are
charged to expense as incurred. Commission revenue for the unrelated third-party
service contracts is recognized at the time of sale.
(J) Selling, General and Administrative Expenses: Operating profits generated by
the Company's finance operations are recorded as a reduction to selling, general
and administrative expenses.
(K) Advertising Expenses: All advertising costs are expensed as incurred.
(L) Net Earnings (Loss) per Share: On December 15, 1997, the Company adopted
SFAS No. 128, "Earnings per Share." All prior period earnings per share data
presented has been restated to conform with the provisions of SFAS No. 128.
Basic net earnings per share for Circuit City Stock is computed by dividing
net earnings attributable to Circuit City Stock, including the Circuit City
Group's 100 percent interest in the losses of the CarMax Group for periods prior
to the offering and the Circuit City Group's retained interest in the CarMax
Group subsequent to the offering, by the weighted average number of shares of
Circuit City Stock outstanding. Diluted net earnings per share for Circuit City
Stock is computed by dividing net earnings attributable to Circuit City Stock,
which includes the Circuit City Group's retained interest in CarMax, by the
weighted average number of shares of Circuit City Stock outstanding and dilutive
potential Circuit City Stock.
Net loss per share for CarMax Stock is computed by dividing the net loss
attributable to CarMax Stock by the weighted average number of shares of CarMax
Stock outstanding. Diluted net loss per share for CarMax Stock is not calculated
since it has a net loss for the periods presented. Historical net loss per share
is omitted from the statements of operations for periods prior to the offering
since CarMax Stock was not part of the capital structure of the Company for
those periods.
(M) Stock-Based Compensation: On March 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue applying the provisions of the Accounting Principles Board (APB)
Opinion No. 25, "Accounting For Stock Issued to Employees," and to provide the
pro forma disclosures of SFAS No. 123.
(N) Derivative Financial Instruments: The Company enters into interest rate swap
agreements to manage exposure to interest rates and to more closely match
funding costs to the use of funding. Interest rate swaps relating to long-term
debt are classified as held for purposes other than trading and are accounted
for on a settlement basis. To qualify for this accounting treatment, the swap
must synthetically alter the nature of a designated underlying financial
instrument. Under this method, payments or receipts due or owed under the swap
agreement are accrued through each settlement date and recorded as a component
of interest expense. If a swap designated as a synthetic alteration were to be
terminated, any gain or loss on the termination would be deferred and recognized
over the shorter of the original contractual life of the swap or the related
life of the designated long-term debt.
The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller as part of a sale
of financial assets are considered proceeds at fair value in the determination
of the gain or loss on the sale. If such a swap were terminated, the impact on
the fair value of the financial asset created by the sale of the related
receivables would be estimated and included in earnings.
(O) Risks and Uncertainties: Circuit City is the nation's largest retailer of
brand-name consumer electronics and major appliances and a leading retailer of
personal computers and music software. The diversity of Circuit City's products,
customers, suppliers and geographic operations significantly reduces the risk
that a severe impact will occur in the near term as a result of changes in its
customer base, competition, sources of supply or markets. It is unlikely that
any one event would have a severe impact on the Company's operating results.
Because of its investment in Divx, the Company is subject to additional
risks and uncertainties. Divx is a partnership formed to develop and launch an
enhancement for DVD players that provides significant copyright protection for
movies released on Divx digital discs and sets a new standard for home video
convenience. While management believes this product will gain widespread
acceptance, there is no assurance that Divx ever will have commercially accepted
products or that it will achieve significant sales of any such products. Other
risks include lack of operating history, no assurance of successful operations,
early state of market and technological development, acquiring and maintaining
licensing and manufacturing agreements, minimum compensation requirements under
studio license agreements, competition from substitute products and services,
rapid technological change, dependence on key personnel and vendors, development
or assertions by or against Divx relating to intellectual property rights, and
the uncertainty of availability of additional financing.
The CarMax Group is a used- and new-car retail business. The diversity of
the CarMax Group's customers and suppliers reduces the risk that a severe impact
will occur in the near term as a result of changes in its customer base,
competition or sources of supply. At fiscal year-end, the CarMax Group's
operations were concentrated in the southeastern United States and Texas. A
severe economic downturn in either of these areas could negatively impact the
CarMax Group's operating results. Due to the CarMax Group's geographic
concentration and limited overall size, management cannot assure that
unanticipated events will not have a negative impact on the Company.
31
The preparation of financial statements in conformity with 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 could differ from those estimates.
(P) Corporate Allocations: The Company manages corporate general and
administrative costs and other shared services on a centralized basis.
Allocations of these corporate activities and their related expenses to the
Groups is based on methods that the Company believes to be reasonable.
The provision for federal income taxes is determined on a consolidated
basis. The financial statement provision is reflected in each Group's financial
statements in accordance with the Company's tax allocation policy. In general,
this policy provides that the consolidated tax provision be allocated between
the Groups based principally upon the financial income, taxable income, credits
and other amounts directly related to the respective Group. Tax benefits that
cannot be used by the Group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the Group that generated such benefits.
(Q) Reclassifications: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 1998.
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 28 is summarized as follows:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Land and buildings (20 to 25 years)......... $ 143,905 $ 132,127
Construction in progress.................... 248,806 152,831
Furniture, fixtures and equipment
(3 to 8 years)........................... 615,564 506,324
Leasehold improvements
(10 to 15 years)......................... 483,069 433,085
Capital leases, primarily buildings
(20 years)............................... 12,471 12,471
-----------------------
1,503,815 1,236,838
Less accumulated depreciation and
amortization............................. 455,381 350,747
----------------------
Property and equipment, net................. $1,048,434 $ 886,091
=======================
4. DEBT
Long-term debt at February 28 is summarized as follows:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Term loans.................................. $ 405,000 $ 405,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest
ranging from 5.5% to 7.0%................ 7,665 13,706
Obligations under capital leases [NOTE 9]... 12,928 13,074
----------------------
Total long-term debt........................ 425,593 431,780
Less current installments................... 1,301 1,490
----------------------
Long-term debt, excluding
current installments..................... $ 424,292 $ 430,290
======================
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. The loan was restructured in August 1996 as a
$100,000,000, six-year unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 1998, the interest rate on the term loan was 6.08 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1998, the interest rate
on the term loan was 6.04 percent.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1998, the interest rate
on the term loan was 6.01 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving
credit agreement with five banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.13 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2002. The agreement provides for annual one-year extensions of the
final maturity each August 31. No amounts were outstanding under the revolving
credit agreement at February 28, 1998 or 1997.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$10,879,000 at February 28, 1998, and $14,575,000 at February 28, 1997.
The scheduled aggregate annual principal payments on long-term obligations
for the next five fiscal years are as follows: 1999 - $1,301,000; 2000 -
$1,457,000; 2001 - $176,094,000; 2002 - $131,235,000; 2003 - $102,744,000.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 1998 and 1997.
Short-term debt includes committed lines of credit and informal credit
arrangements. Amounts outstanding and committed lines of credit available are as
follows:
Years Ended February 28
(Amounts in thousands) 1998 1997
- ----------------------------------------------------------------------
Average short-term debt outstanding.......... $ 48,254 $ 186,569
=======================
Maximum short-term debt outstanding.......... $ 414,000 $ 580,000
=======================
Aggregate committed lines of credit.......... $ 410,000 $ 415,000
=======================
The weighted average interest rate on the outstanding short-term debt was
5.7 percent during fiscal 1998, 5.4 percent during fiscal 1997 and 5.9 percent
during fiscal 1996.
The Company capitalizes interest in connection with the construction of
certain facilities. In fiscal 1998, interest capitalized amounted to $9,638,000
($6,970,000 in fiscal 1997 and $6,780,000 in fiscal 1996).
32
5. INCOME TAXES
The Company files a consolidated federal income tax return. The components of
the provision for income taxes are as follows:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Current:
Federal.............................. $ 46,475 $ 55,673 $ 80,678
State................................ 2,406 6,964 4,536
-----------------------------------
48,881 62,637 85,214
-----------------------------------
Deferred:
Federal.............................. 12,801 19,839 18,891
State................................ 2,251 1,134 3,520
-----------------------------------
15,052 20,973 22,411
-----------------------------------
Provision for income taxes.............. $ 63,933 $ 83,610 $ 107,625
===================================
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
Years Ended February 28 or 29
1998 1997 1996
- ----------------------------------------------------------------------------
Federal statutory income
tax rate............................ 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit.............. 3.0 3.0 2.5
-------------------------------
Effective income tax rate.............. 38.0% 38.0% 37.5%
===============================
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 28, 1998 and 1997, are as follows:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Deferred tax assets:
Deferred revenue......................... $ 1,360 $ 10,004
Inventory capitalization................. 4,976 7,643
Accrued expenses......................... 42,554 30,176
Other.................................... 3,638 3,354
----------------------
Total gross deferred tax assets....... 52,528 51,177
----------------------
Deferred tax liabilities:
Depreciation and amortization............ 45,118 43,085
Gain on sales of receivables............. 11,439 1,424
Other prepaid expenses................... 10,569 7,982
Other.................................... 12,195 10,427
----------------------
Total gross deferred tax liabilities.. 79,321 62,918
----------------------
Net deferred tax liability.................. $ 26,793 $ 11,741
======================
</TABLE>
Based on the Company's historical and current pre-tax earnings, management
believes the amount of gross deferred tax assets will be realized through future
taxable income; therefore, no valuation allowance is necessary.
6. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) Preferred Stock: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of Circuit City Stock and
CarMax Stock. The rights are exercisable only upon the attainment of, or the
commencement of a tender offer to attain, a specified ownership interest in the
Company by a person or group. When exercisable, each Circuit City right would
entitle shareholders to buy one four-hundredth of a share of Cumulative
Participating Preferred Stock, Series E, $20 par value, at an exercise price of
$35 per share subject to adjustment. Each CarMax right, when exercisable, would
entitle shareholders to buy one four-hundredth of a share of Cumulative
Participating Preferred Stock, Series F, $20 par value, at an exercise price of
$22 per share subject to adjustment. A total of 1,000,000 shares of such
preferred stock, which have preferential dividend and liquidation rights, have
been designated; 800,000 shares have been reserved. No such shares are
outstanding. In the event that an acquiring person or group acquires the
specified ownership percentage of the Company's common stock (except pursuant to
a cash tender offer for all outstanding shares determined to be fair by
continuing directors) or engages in certain transactions with the Company after
the rights become exercisable, each right will be converted into a right to
purchase, for half the current market price at that time, shares of the related
Group stock valued at two times the exercise price.
The Company also has 1,000,000 shares of undesignated preferred stock
authorized of which no shares are outstanding.
(B) Voting Rights: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters on which
common shareholders generally are entitled to vote other than a matter on which
the common stock or either series thereof or any series of preferred stock would
be entitled to vote as a separate voting group. On all matters on which both
series of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes based on the
weighted average ratio of the market value of a share of CarMax Stock to a share
of Circuit City Stock. If shares of only one series of common stock are
outstanding, each share of that series shall be entitled to one vote. If either
series of common stock is entitled to vote as a separate voting group with
respect to any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
(C) Restricted Stock: The Company has issued restricted stock under the
provisions of the 1994 and 1988 Stock Incentive Plans whereby management and key
employees are granted restricted shares of Circuit City Stock or CarMax Stock.
Shares are awarded in the name of the employee, who has all the rights of a
stockholder, subject to certain restrictions or forfeitures. Restrictions on the
awards generally expire three to seven years from the date
33
of grant. In fiscal 1998, certain officers of the Circuit City Group were
granted 378,425 restricted shares of Circuit City Stock which vest seven years
from the date of grant. These awards provide accelerated vesting if certain
performance factors are met. Total restricted stock awards of 604,516 shares of
Circuit City Stock and 20,000 shares of CarMax Stock were granted to eligible
employees in fiscal 1998. The market value at the date of grant of these shares
has been recorded as unearned compensation and is a component of stockholders'
equity. Unearned compensation is expensed over the restriction periods. In
fiscal 1998, a total of $5,073,100 was charged to operations ($3,790,200 in
fiscal 1997 and $3,362,500 in fiscal 1996). As of February 28, 1998, 953,833
restricted shares of Circuit City Stock and 20,000 restricted shares of CarMax
Stock were outstanding.
(D) Employee Stock Purchase Plans: The Company has Employee Stock Purchase Plans
for all employees meeting certain eligibility criteria. Under the Circuit City
Plan and, starting in April 1997, under the CarMax Plan, eligible employees may
purchase shares of Circuit City Stock or CarMax Stock, subject to certain
limitations, at 85 percent of market value. Purchases are limited to 10 percent
of an employee's eligible compensation, up to a maximum of $7,500 per year. At
February 28, 1998, a total of 112,370 shares remained available under the
Circuit City Plan and 407,225 shares remained available under the CarMax Plan.
During fiscal 1998, 450,698 shares of Circuit City Stock were issued to or
purchased on the open market for employees (499,338 shares in fiscal 1997 and
474,889 in fiscal 1996), and 92,775 shares of CarMax Stock were issued to or
purchased on the open market on behalf of employees. The average price per share
of Circuit City Stock was $36.78 in fiscal 1998, $32.68 in fiscal 1997 and
$29.97 in fiscal 1996. The average price per share of CarMax Stock was $12.73 in
fiscal 1998. The purchase price discount is charged to operations and totaled
$2,670,400 in fiscal 1998, $2,433,600 in fiscal 1997 and $2,030,000 in fiscal
1996.
(E) Stock Incentive Plans: Under the Company's stock incentive plans, incentive
and nonqualified stock options may be granted to management, key employees and
outside directors to purchase shares of Circuit City Stock or CarMax Stock. The
exercise price for incentive stock options for employees and nonqualified
options for outside directors is equal to, or greater than, the market value at
the date of grant; for nonqualified options granted under the 1988 Plan for
employees, it is at least 85 percent of the market value at the date of grant
(100 percent under the 1994 Plan). Options generally are exercisable over a
period of from one to 10 years from the date of grant. In fiscal 1998, options
that were outstanding as of February 28, 1997, to purchase shares of stock of
the corporate entity comprising the CarMax Group were converted into options to
purchase CarMax Stock.
A summary of the status of the Company's stock options and changes during
the years ended February 28, 1998 and 1997, and February 29, 1996, are shown in
Table 1. Table 2 summarizes information about stock options outstanding as of
February 28, 1998.
<TABLE>
<S> <C>
TABLE 1 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
Outstanding at beginning of year 4,828 $29.76 3,563 $18.63 3,709 $17.14
Granted 726 35.21 2,159 43.38 763 22.98
Exercised (483) 15.00 (786) 17.67 (645) 12.64
Cancelled (77) 29.42 (108) 21.90 (264) 24.06
----- ----- -----
Outstanding at end of year 4,994 $32.00 4,828 $29.76 3,563 $18.63
====== ===== =====
Options exercisable at end of year 1,754 $19.68 1,629 $17.24 1,847 $16.19
====== ===== =====
CarMax Group:
Outstanding at beginning of year 4,769 $ 0.51 4,278 $ 0.22 3,518 $ 0.22
Granted 413 13.04 961 1.68 796 0.22
Exercised (273) 0.22 - - - -
Cancelled (87) 6.36 (470) 0.27 (36) 0.22
------ ----- -----
Outstanding at end of year 4,822 $ 1.49 4,769 $ 0.51 4,278 $ 0.22
====== ===== =====
Options exercisable at end of year 762 $ 0.37 - $ - - $ -
====== ===== =====
34
TABLE 2 Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
Circuit City Group:
$ 7.70 to 9.25................... 177 0.3 $ 8.80 177 $ 8.80
15.69 to 20.13................... 991 2.2 17.27 872 17.12
22.50 to 29.13................... 977 2.9 23.57 556 24.36
29.50 to 38.00................... 1,849 6.2 31.96 149 30.21
59.00............................ 1,000 4.1 59.00 - -
----- -----
Total............................. 4,994 4.1 $ 32.00 1,754 $19.68
===== =====
CarMax Group:
$ 0.22............................ 4,241 4.0 $ 0.22 754 $ 0.22
6.25 to 9.19.................... 291 5.0 7.28 - -
12.94 to 16.31................... 290 6.3 14.32 8 15.00
----- -----
Total............................. 4,822 4.2 $ 1.49 762 $ 0.37
===== =====
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the Circuit City
Group's and the CarMax Group's net earnings or loss and net earnings or loss per
share would have been changed to the pro forma amounts indicated below. In
accordance with the transition provisions of SFAS No. 123, the pro forma amounts
reflect options with grant dates subsequent to March 1, 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net earnings amounts presented below
because compensation cost is reflected over the options' vesting periods and
compensation cost of options granted prior to March 1, 1995, is not considered.
The pro forma effect on fiscal year 1998 may not be representative of the pro
forma effects on net earnings or loss for future years.
<PAGE>
(Amounts in thousands Years Ended February 28 or 29
except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------
Circuit City Group:
Net earnings-as reported............... $ 112,074 $ 136,680 $ 179,375
Net earnings-pro forma................. 107,399 133,326 178,325
Basic net earnings per
share-as reported................... $ 1.14 $ 1.40 $ 1.86
Basic net earnings per
share-pro forma..................... 1.10 1.37 1.85
Diluted net earnings per
share-as reported................... $ 1.13 $ 1.39 $ 1.84
Diluted net earnings per
share-pro forma..................... 1.08 1.35 1.83
CarMax Group:
Net loss-as reported................... $ 7,763 $ 266 -
Net loss-pro forma..................... 7,824 268 -
Net loss per share-as reported......... $ 0.35 $ 0.01 -
Net loss per share-pro forma.......... 0.36 0.01 -
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model. The weighted average assumptions used in the
model are as follows:
Years Ended February 28 or 29
1998 1997 1996
- ---------------------------------------------------------------------------
Circuit City Group:
Expected dividend yield............... 0.4% 0.4% 0.4%
Expected stock volatility............. 33% 33% 35%
Risk-free interest rates.............. 6% 6% 7%
Expected lives (in years)............. 4 4 4
CarMax Group:
Expected dividend yield............... - - -
Expected stock volatility............. 50% 40% -
Risk-free interest rates.............. 6% 6% -
Expected lives (in years)............. 3 4 -
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted for the Circuit City Group is $13 in fiscal 1998,
$8 in fiscal 1997 and $9 in fiscal 1996; and for the CarMax Group, $6 in fiscal
1998 and $0.70 in fiscal 1997.
35
7. NET EARNINGS (LOSS) PER SHARE
On December 15, 1997, the Company adopted SFAS No. 128, "Earnings per Share."
Prior period net earnings per share data has been restated in accordance with
SFAS No. 128. Reconciliations of the numerator and denominator of basic and
diluted net earnings (loss) per share are presented below:
(Amounts in thousands
except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------
Circuit City Group:
Weighted average common
shares................................ 98,027 97,311 96,573
Dilutive potential common shares:
Options............................... 842 889 862
Restricted stock...................... 335 272 254
-----------------------------------
Weighted average common shares
and dilutive potential
common shares......................... 99,204 98,472 97,689
===================================
Income available to common
shareholders.......................... $ 112,074 $ 136,680 $ 179,375
===================================
Basic net earnings per share............. $ 1.14 $ 1.40 $ 1.86
===================================
Diluted net earnings per share........... $ 1.13 $ 1.39 $ 1.84
===================================
CarMax Group:
Weighted average common
shares................................ 22,001 21,860 -
===================================
Loss available to
common shareholders................... $ 7,763 $ 266 $ -
===================================
Net loss per share....................... $ 0.35 $ 0.01 $ -
===================================
Certain options were not included in the computation of diluted net
earnings per share because the options' exercise prices were greater than the
average market price of the common shares. Options to purchase 1,510,000 shares
of Circuit City Stock ranging from $35.47 to $59.00 per share were outstanding
and not included in the calculation at the end of fiscal 1998; 1,076,000 shares
ranging from $32.25 to $59.00 per share at the end of fiscal 1997; and 65,000
shares ranging from $26.75 to $34.63 per share at the end of fiscal 1996.
The CarMax Group had no diluted net loss per share because the Group had a
net loss for the periods presented. No net loss per share is presented for
fiscal 1996 because CarMax Stock was not part of the capital structure of the
Company for that fiscal year.
8. PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of the program is being funded currently. Plan
benefits are generally based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of
Circuit City Stock at February 28, 1998 and 1997.
The components of net pension expense are as follows:
Years Ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Service cost of benefits earned
during the year....................... $ 8,584 $ 9,388 $ 5,896
Interest cost on projected
benefit obligation.................... 5,260 4,701 3,632
Actual return on plan assets............. (12,759) (9,903) (9,277)
Net amortization......................... 7,336 6,908 6,314
-----------------------------------
Net pension expense...................... $ 8,421 $ 11,094 $ 6,565
===================================
Contributions required were $11,642,000 in fiscal 1998, $6,603,000 in
fiscal 1997 and $1,160,000 in fiscal 1996.
The following table sets forth the Plan's financial status and amounts
recognized in the consolidated balance sheets as of February 28:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested................................... $ 55,683 $ 43,568
Nonvested................................ 7,489 5,401
----------------------
Total benefits.............................. 63,172 48,969
Additional amounts related to projected
salary increases......................... 25,952 21,607
----------------------
Projected benefit obligation for services
rendered to date......................... 89,124 70,576
Plan assets at fair value................... (84,251) (62,928)
----------------------
Projected benefit obligation in excess of
plan assets.............................. 4,873 7,648
Unrecognized gain from past experience...... 3,189 3,328
Unrecognized prior service cost............. 665 770
Unrecognized net asset being
recognized over 15 years................. 808 1,010
----------------------
Accrued pension cost........................ $ 9,535 $ 12,756
======================
Assumptions used in the accounting for the pension plan were:
Years Ended February 28 or 29
1998 1997 1996
- -------------------------------------------------------------------------------
Weighted average discount rate.............. 7.0% 7.5% 7.0%
Rate of increase in compensation levels..... 5.0% 5.5% 6.0%
Rate of return on plan assets............... 9.0% 9.0% 9.0%
==============================
9. LEASE COMMITMENTS
The Company conducts a substantial portion of its business in leased premises.
The Company's lease obligations are based upon contractual minimum rates. For
certain locations, amounts in excess of these minimum rates are payable based
upon specified
36
<PAGE>
percentages of sales. Rental expense and sublease income for all operating
leases are summarized as follows:
Years ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Minimum rentals........................ $ 248,383 $ 184,618 $ 148,082
Rentals based on sales volume.......... 730 2,322 2,871
Sublease income........................ (12,879) (11,121) (9,996)
-----------------------------------
Net ................................. $ 236,234 $ 175,819 $ 140,957
===================================
The Company computes rent based on a percentage of sales volumes in excess
of defined amounts in certain store locations. Most of the Company's other
leases are fixed-dollar rental commitments, with many containing rent
escalations based on the Consumer Price Index. Most provide that the Company pay
taxes, maintenance, insurance and certain other operating expenses applicable to
the premises.
The initial term of real property leases will expire within the next 25
years; however, most of the leases have options providing for additional lease
terms of from five to 25 years at terms similar to the initial terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Company, as of February 28, 1998, were:
Operating Operating
(Amounts in thousands) Capital Lease Sublease
Fiscal Leases Commitments Income
- ----------------------------------------------------------------------------
1999.................................. $ 1,579 $ 256,698 $ (13,177)
2000.................................. 1,662 254,200 (12,159)
2001.................................. 1,681 252,328 (11,509)
2002.................................. 1,725 249,110 (11,120)
2003.................................. 1,726 245,605 (10,123)
After 2003............................ 18,232 2,859,083 (48,150)
-----------------------------------
Total minimum lease
payments........................... 26,605 $4,117,024 $(106,238)
======================
Less amounts representing
interest........................... 13,677
--------
Present value of net
minimum capital lease
payments [NOTE 4].................. $ 12,928
========
In fiscal 1998, the Company entered into sale-leaseback transactions with
unrelated parties at an aggregate selling price of $218,768,000 ($201,694,000 in
fiscal 1997 and $183,900,000 in fiscal 1996). The Company does not have
continuing involvement under the sale-leaseback transactions.
10. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Advertising expense, which is included in selling, general and administrative
expenses in the accompanying consolidated statements of earnings, amounted to
$400,346,000 (4.5 percent of net sales and operating revenues) in fiscal 1998,
$354,270,000 (4.6 percent of net sales and operating revenues) in fiscal 1997
and $324,335,000 (4.6 percent of net sales and operating revenues) in fiscal
1996.
11. SECURITIZATIONS
(A) Credit Card Securitizations: The Company enters into securitization
transactions, which allow for the sale of credit card receivables to unrelated
entities, to finance the consumer revolving credit receivables generated by
First North American National Bank, its wholly owned finance operation. The
Company implemented SFAS No. 125 with respect to sales of credit card
receivables occurring after December 31, 1996. Proceeds from securitization
transactions were $331.4 million for fiscal 1998, $551.1 million for fiscal 1997
and $692.3 million for fiscal 1996.
Receivables relating to the securitization facilities consist of the
following at February 28:
(Amounts in thousands) 1998 1997
- ---------------------------------------------------------------------
Managed receivables......................... $2,749,793 $2,594,651
Receivables/residual interests
held by the Company:
For sale................................. (44,622) (186,378)
For investment........................... (203,921) (139,458)
-----------------------
Net receivables sold........................ $2,501,250 $2,268,815
=======================
Net receivables sold
with recourse............................ $ 726,000 $1,317,565
=======================
Program capacity............................ $3,075,000 $2,665,000
=======================
<PAGE>
The finance operation finances its private-label credit card program
through a single master trust, through both private placement and the public
market. The master trust vehicle permits further expansion of the securitization
program to meet future receivables growth. As of February 28, 1998, the master
trust program had a total program capacity of $1.025 billion. The agreement has
no recourse provisions.
During fiscal 1998, the finance operation created a master trust
securitization facility related to its bank card program and issued two series
from the master trust. The master trust vehicle permits further expansion of the
securitization program in the public market. The bank card securitization
program has a total program capacity of $2.050 billion. The agreement related to
the first series issued under the master trust provides recourse to the Company
for any cash flow deficiencies. The Company believes that as of February 28,
1998, no liability existed under these recourse provisions. The finance charges
from the transferred receivables are used to fund interest costs, charge-offs,
servicing fees and other related costs.
The net gain on sales of receivables totaled $21.8 million for fiscal 1998
and $3.2 million for fiscal 1997. The finance operation's revenue, including
gains on sales of receivables, totaled $195.7 million for fiscal 1998, $197.0
million for fiscal 1997 and $142.9 million for fiscal 1996. The servicing fees
specified in the credit card securitization agreements adequately compensate the
finance operation for servicing the accounts. Accordingly, no servicing asset or
liability has been recorded. Rights recorded for future interest income from
serviced assets that exceed the contractually specified servicing fees are
carried at fair value and amounted to $25 million at February 28, 1998, and $3.2
million at February 28, 1997, and are included in net accounts receivable.
37
(B) Auto Loan Securitization: In fiscal 1996, the Company entered into a
securitization agreement to finance the consumer installment credit receivables
generated by First North American Credit Corporation, a finance operation of the
Company. Proceeds from the auto loan securitization transaction were $123
million during fiscal 1998 and $58 million during fiscal 1997. The seasoned
portfolio and more estimable losses allowed the Company to recognize gains on
the sales of these receivables beginning in fiscal 1997. Receivables relating to
the securitization facility consist of the following at February 28:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Managed receivables......................... $ 291,294 $ 155,234
Receivables held by the Company:
For sale................................. (5,816) (920)
For investment........................... (17,478) (9,314)
----------------------
Net receivables sold ................. $ 268,000 $ 145,000
======================
Program capacity............................ $ 300,000 $ 175,000
======================
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. A restructuring of the facility
during fiscal 1997 resulted in the recourse provisions being eliminated.
The net gain on sales of receivables totaled $3.7 million for fiscal 1998
and $3.1 million for fiscal 1997. FNAC's revenue, including gains on sales of
receivables, totaled $11.2 million for fiscal 1998, $8.7 million for fiscal 1997
and $2.0 million for fiscal 1996. The servicing fee specified in the auto loan
securitization agreement adequately compensates FNAC for servicing the accounts.
Accordingly, no servicing asset or liability has been recorded. Rights recorded
for future interest income from serviced assets that exceed the contractually
specified servicing fees are carried at fair value and amounted to $6.8 million
at February 28, 1998, and $3.1 million at February 28, 1997, and are included in
net accounts receivable.
12. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year interest rate swap
agreements with notional amounts totaling $300 million relating to a public
issuance of securities by the master trust. As part of this issuance, $344
million of five-year, fixed-rate certificates were issued to fund consumer
credit receivables. The finance operation is servicer for the accounts, and as
such, receives its monthly cash portfolio yield after deducting interest,
charge-offs and other related costs. The underlying receivables are based on a
floating rate. The swaps were put in place to better match funding costs to the
receivables being securitized. As a result, the master trust pays fixed-rate
interest while the Company utilizes the swaps to convert the fixed-rate
obligation to a floating-rate, LIBOR-based obligation. These swaps were entered
into as part of the sales of receivables and are included in the gain on sales
of receivables.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year interest rate swaps with notional
amounts aggregating $175 million. These swaps effectively converted the
variable-rate obligation into a fixed-rate obligation. The fair value of the
swaps is the amount at which they could be settled. This value is based on
estimates obtained from the counterparties, which are two banks highly rated by
several financial rating agencies. The swaps are held for hedging purposes and
are not recorded at fair value. Recording the swaps at fair value at February
28, 1998, would result in a loss of $1.9 million and at February 28, 1997, would
result in a gain of $0.1 million.
The Company enters into amortizing swaps relating to the auto loan
receivable securitization to convert variable-rate financing costs to fixed-rate
obligations to better match funding costs to the receivables being securitized.
In November 1995, the Company entered into a 50-month amortizing swap with a
notional amount of $75 million and, in October 1996, entered into a 40-month
amortizing swap with a notional amount of $64 million. During fiscal 1998, the
Company entered into four new 40-month amortizing swaps with notional amounts
totaling approximately $162 million. These swaps were entered into as part of
the sales of receivables and are included in the gain on sales of receivables.
The remaining total notional amount of all swaps related to the auto loan
receivable securitization was approximately $224 million at February 28, 1998,
and $114 million at February 28, 1997.
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Company does not anticipate significant market risk from swaps, since their
use is to more closely match funding costs to the use of the funding. Credit
risk is the exposure to nonperformance of another party to an agreement. The
Company mitigates credit risk by dealing with highly rated counterparties.
13. COMMITMENTS AND CONTINGENT LIABILITIES
(A) Investment in Divx: In May 1995, the Company agreed to invest $30.0 million
in Divx, a partnership that has developed and will market a new home digital
video system. That commitment was increased to $130.0 million in September 1997.
The Company holds approximately 66 percent of the partnership and allocates its
investment in Divx to the Circuit City Group. As of February 28, 1998, the
Company had funded approximately $86.8 million of its commitment of which $51.9
million has been expensed ($31.8 million was expensed in fiscal 1998, $11.4
million in fiscal 1997 and $8.7 million in fiscal 1996 and prior).
(B) Licensing Agreements: Divx has entered into licensing agreements with motion
picture distributors for use of their feature-length films for the Divx system.
The Company guarantees Divx's performance under these commitments. The licensing
fees are based on varying percentages of consumer viewing and wholesale receipts
and require minimum distributor compensation commencing from the operational
date of each agreement
38
through the following three to five years. This compensation is contingent upon
shipment of the first Divx disc, currently expected to occur in May 1998. At
that time, the minimum compensation due from Divx to the studios is $112.0
million ($11.0 million in fiscal 1999, $26.0 million in fiscal 2000, $32.0
million in fiscal 2001, $20.5 million in fiscal 2002, $14.5 million in fiscal
2003 and $8.0 million in fiscal 2004).
(C) Legal Proceedings: In the normal course of business, the Company is involved
in various legal proceedings. Based upon the Company's evaluation of the
information presently available, management believes that the ultimate
resolution of any such proceedings will not have a material adverse effect on
the Company's financial position, liquidity or results of operations.
<TABLE>
<S> <C>
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales and operating
revenues.......... $1,856,904 $1,615,266 $2,020,572 $1,767,043 $2,144,219 $1,863,947 $2,849,102 $2,417,555 $8,870,797 $7,663,811
Gross profit.........$ 418,278 $ 362,270 $ 472,429 $ 396,328 $ 481,753 $ 422,859 $ 671,204 $ 579,643 $2,043,664 $1,761,100
-------------------------------------------------------------------------------------------------------------
Net earnings (loss)
attributable to:
Circuit City Stock..$ 12,749 $ 16,783 $ 27,879 $ 31,583 $ 14,012 $ 19,787 $ 57,434 $ 68,527 $ 112,074 $ 136,680
-------------------------------------------------------------------------------------------------------------
CarMax Stock......$ (275)$ - $ (393) $ - $ (2,075) $ - $ (5,020) $ (266)$ (7,763)$ (266)
------------------------------------------------------------------------------------------------------------
Net earnings (loss)
per share:
Circuit City Stock:
Basic..........$ 0.13 $ 0.17 $ 0.28 $ 0.32 $ 0.14 $ 0.20 $ 0.58 $ 0.70 $ 1.14 $ 1.40
Diluted....... $ 0.13 $ 0.17 $ 0.28 $ 0.32 $ 0.14 $ 0.20 $ 0.58 $ 0.70 $ 1.13 $ 1.39
----------------------------------------------------------------------------------------------------------
CarMax Stock...... $ (0.01)$ - $ (0.02) $ - $ (0.09) $ - $ (0.23) $ (0.01) (0.35) $ (0.01)
-------------------------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Circuit City Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Circuit City
Stores, Inc. and subsidiaries as of February 28, 1998 and 1997 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the fiscal years in the three-year period ended February 28, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Circuit City
Stores, Inc. and subsidiaries as of February 28, 1998 and 1997 and the results
of their operations and their cash flows for each of the fiscal years in the
three-year period ended February 28, 1998 in conformity with generally accepted
accounting principles.
/s/KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1998
39
CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On January 24, 1997, Circuit City Stores, Inc. shareholders approved the
creation of two common stock series. The Company's existing common stock was
subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common
Stock. In an initial public offering, which was completed February 7, 1997, the
Company sold 21.86 million shares of Circuit City Stores, Inc.- CarMax Group
Common Stock.
The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations, the Company's
investment in Digital Video Express, LP and the Group's retained interest in the
CarMax Group. The effects of this retained interest on the Circuit City Group's
financial statements are identified by the term "Inter-Group."
The CarMax Group Common Stock is intended to track separately the
performance of the CarMax operations. The Inter-Group Interest is not considered
outstanding CarMax Group stock. Therefore, any net earnings or loss attributable
to the Inter-Group Interest is not included in the CarMax Group's per share
calculations.
The following discussion and analysis relates to the Circuit City Group.
Reported earnings reflect the Circuit City Group's 100 percent interest in the
losses of the CarMax Group prior to the consummation of the offering on February
7, 1997, and the lower Inter-Group Interest since that time. For additional
information, refer to the "Management's Discussion and Analysis of Results of
Operations and Financial Condition" for Circuit City Stores, Inc. and for the
CarMax Group.
RESULTS OF OPERATIONS
Sales Growth
Total sales for the Circuit City Group increased 12 percent in fiscal 1998 to
$8.00 billion. In fiscal 1997, total sales were
$7.15 billion, a 6 percent increase from $6.75 billion in fiscal 1996.
Percentage Sales Change from Prior Year
Circuit City Group
------------------
Fiscal Total Comparable Industry*
- ------------------------------------------------------------------------
1998 ................................ 12% (1)% (3)%
1997 ................................ 6% (8)% (8)%
1996 ................................ 23% 5 % 6 %
1995 ................................ 34% 15 % 11 %
1994 ................................ 26% 8 % 7 %
* The industry sales rates are derived from Electronics Industries Association,
Recording Industry Association of America and Company estimates of audio, video,
home office, telecommunications, appliance and music software sales. Music
software is not included in industry sales for fiscal 1994. In that year,
Circuit City was not a significant participant in this category.
Continued geographic expansion of the Group's Circuit City Superstores
produced the fiscal 1998 total sales increase. The contribution from new stores
was partly offset by a comparable store sales decline of 1 percent, which
reflects the effects of an estimated 3 percent reduction in industry sales. In
fiscal 1998, the Group opened 57 Superstores, including entries into the New
York, Dayton, Columbus and Indianapolis metropolitan markets.
Seven of the new stores opened in the last month of the year. The Group
also entered smaller markets, added stores to existing markets and replaced 11
stores, including one electronics-only store that was replaced with a
Superstore.
The Group operates four Circuit City Superstore formats with square footage
and merchandise assortments tailored to population and volume expectations for
specific trade areas. The "D" format serves the most populous trade areas and
offers the largest merchandise assortment of all the formats. Selling space in
"D" stores has decreased during the last two years. At the end of fiscal 1998,
selling space for the "D" format stores averaged about 23,000 square feet and
total square footage for all "D" stores averaged 43,102. The "C" format
constitutes the largest percent of the store base. At the end of fiscal 1998,
selling space in the "C" format stores averaged about 15,000 square feet with
total square footage for all "C" stores averaging 34,093. The "B" format often
is located in smaller markets or in trade areas that are on the fringes of
larger metropolitan markets. At the end of fiscal 1998, selling space in these
stores averaged approximately 12,000 square feet with an average total square
footage of 26,251. The "B" stores offer a broad merchandise assortment that
maximizes return on investment in lower volume areas. The "A" format serves the
least populated trade areas. Selling space for all "A" stores averaged
approximately 9,600 square feet at the end of fiscal 1998, and total square
footage averaged 19,329. These stores feature a layout, staffing level and
merchandise assortment that creates high productivity in the smallest markets.
The Group also operates 52 mall-based Circuit City Express stores. These
stores are located in regional malls, are approximately 2,000 to 3,000 square
feet in size and sell leading-edge technology. During fiscal 1998, the Group
opened a net of seven Circuit City Express stores.
Store Mix
Retail Units at Year End
-----------------------------------------------------
Fiscal 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Superstore
"D" Superstore........ 114 95 61 12 -
"C" Superstore........ 289 278 259 257 219
"B" Superstore........ 72 54 46 37 30
"A" Superstore........ 25 16 12 6 4
Electronics-Only......... 4 5 5 5 7
Circuit City Express..... 52 45 36 35 34
---------------------------------------------------
Total.................... 556 493 419 352 294
===================================================
Geographic expansion and the addition of product categories such as
personal computers were the primary contributors to the Group's total sales
growth from fiscal 1994 through fiscal 1996. Late in fiscal 1996, industry sales
of consumer electronics and personal computers weakened, resulting in comparable
store sales declines for the Circuit City Group. The industry remained soft in
fiscal 1997 and 1998, as few new product introductions resulted in lower average
retail prices in virtually all product categories and an intense promotional
climate. In fiscal 1998, stronger industry sales of major appliances, digital
satellite systems and wireless communication products partly offset decreased
sales in other cat-
40
egories. Based on market research, sales performance and available industry
rankings, management believes that in fiscal 1998 Circuit City continued to lead
the industry in consumer electronics sales and was the nation's second-largest
major appliance retailer. Although the products sold in Circuit City locations
remain widely available, industry weakness nevertheless has resulted in a
significant number of competitor store closings and reductions in competitor
expansion plans. As a result, management believes that the Circuit City
locations continue to maintain substantial shares in existing markets and to
build significant shares in new markets.
Sales by Merchandise Categories
Fiscal 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
TV................. 18% 18% 17% 19% 20%
VCR/Camcorders..... 13% 14% 13% 14% 17%
Audio.............. 17% 18% 19% 22% 23%
Home Office........ 25% 24% 26% 20% 12%
Appliances......... 15% 15% 14% 15% 18%
Other.............. 12% 11% 11% 10% 10%
--------------------------------------------------------
Total.............. 100% 100% 100% 100% 100%
========================================================
The Group sells two extended warranty programs on behalf of unrelated third
parties that issue these plans for merchandise sold by the Group and other
retailers. One of these programs is sold in most major markets and features
in-home service for personal computer products. The second program covers
electronics and major appliances and at the end of fiscal year 1998 was offered
by approximately 85 percent of the Superstores. The remaining stores sell a
Circuit City extended warranty. Gross dollar sales from all extended warranty
programs were 5.5 percent of the Group's total sales in fiscal year 1998,
compared with 6.0 percent in fiscal 1997 and 5.9 percent in fiscal 1996. The
change in fiscal 1998 reflects a shift in store management emphasis towards
other product categories. The Group's management believes that a renewed focus
on warranty sales with continued attention to other categories will help improve
results in fiscal 1999. Total extended warranty revenue, which is reported in
the Group's total sales, was 4.6 percent of sales in fiscal year 1998 and 5.1
percent of sales in fiscal years 1997 and 1996. The gross profit margins on
products sold with extended warranties are higher than the gross profit margins
on products sold without extended warranties. Third-party extended warranty
revenue was 3.6 percent of the Group's total sales in fiscal years 1998 and 1997
and 3.0 percent in fiscal 1996. The increase in third-party revenue as a
percentage of the total from fiscal 1996 to fiscal 1997 reflects a higher
percentage of stores selling third-party contracts.
Superstore Sales per Total Square Foot
Fiscal
- ---------------------------------------------
1998.................................. $478
1997.................................. $499
1996.................................. $577
1995.................................. $584
1994.................................. $523
Superstore Sales per Total Square Foot. Over the last five years, the Group has
significantly increased the percentage of store square footage devoted to
selling space. In fiscal 1995, the Group introduced the larger format "D" stores
in some markets. These stores are intended to generate high sales volumes in
specific trade areas but lower sales per total square foot than smaller
Superstores. As a result, the Group's Superstore sales per total square foot
declined in fiscal 1996. These stores and the decline in comparable store sales
again produced lower Superstore sales per total square foot in fiscal 1998 and
fiscal 1997.
Impact of Inflation. Inflation has not been a significant contributor to the
Group's results. In fact, during the past year, the average retail price has
declined in virtually all of the Group's product categories. Although new
product introductions could help reverse this trend, management expects no
significant short-term change. Because the Group purchases substantially all
products, including consumer electronics, in U.S. dollars, prices are not
directly impacted by the value of the dollar in relation to other foreign
currencies, including the Japanese yen.
Cost of Sales, Buying and Warehousing
The gross profit margin was 24.6 percent of sales in fiscal 1998, up from 24.0
percent in fiscal 1997 and 23.9 percent in fiscal 1996. The higher gross margin
trend reflects better inventory management and a stronger sales performance in
higher margin categories, especially major appliances, digital satellite systems
and wireless communication products. The Group has gradually reduced its
assortment in a variety of product categories to more closely match consumer
demand and carefully managed model transitions, especially in the personal
computer business. As a result, markdowns have decreased, contributing to the
gross margin improvement.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to 21.5 percent of sales
in fiscal 1998 from 20.4 percent in fiscal 1997 and 19.2 percent in fiscal 1996.
The primary contributors to the fiscal 1998 increase in the expense ratio were
lower comparable store sales, a decline in profits from the finance operation,
and the Company's investment in Digital Video Express, LP. Operating profits
generated by the finance operation are recorded as a reduction to the Group's
selling, general and administrative expenses.
In September 1997, Circuit City Stores, Inc. announced plans to invest an
additional $100 million in Digital Video Express, LP, a partnership that has
developed and will market a new digital video system that is supported by
leading U.S. movie studios and brand-name consumer electronics manufacturers.
Circuit City Stores, Inc. holds approximately two-thirds of the ownership in the
partnership. The minority ownership interest is held by the prominent Los
Angeles law firm Ziffren, Brittenham, Branca & Fischer. The Company's investment
in Divx is allocated to the Circuit City Group. Before the additional commitment
announced in September, the investment in Divx totaled approximately $30
million. Expenses associated with the investment increased the Circuit City
Group's expense ratio by 42 basis points in fiscal 1998, 18 basis points in
fiscal 1997 and 12 basis points in fiscal 1996.
Interest Expense
Interest expense was 0.3 percent in fiscal 1998, 1997 and 1996. Interest expense
was incurred on allocated debt used to fund store expansion and working capital.
Income Taxes
The Group's effective income tax rate was 38.3 percent in fiscal year 1998, 38.2
percent in fiscal 1997 and 37.6 in fiscal 1996.
41
The higher tax rates for fiscal years 1998 and 1997 reflect increased sales in
states with higher tax rates.
Earnings before the Inter-Group Interest in the CarMax Group
Earnings before the Inter-Group Interest in the CarMax Group declined 5 percent
to $138.5 million in fiscal 1998. In fiscal 1997, earnings before the
Inter-Group Interest were $145.7 million, a 21 percent decrease from $184.6
million in fiscal 1996. The results for all three years include the Company's
investment in Digital Video Express. Excluding this investment, earnings for the
Circuit City Group before the Inter-Group Interest in the CarMax Group rose 4
percent in fiscal 1998 to $159.2 million versus $153.6 million in fiscal 1997
and $189.4 million in fiscal 1996.
Net Loss Related to the Inter-Group Interest in the CarMax Group
The CarMax Group has incurred losses during the testing stage and the first
phase of national roll out, which began late in fiscal 1997. The net loss
attributable to the Circuit City Group's Inter-Group Interest in the CarMax
Group was $26.5 million in fiscal 1998, $9.1 million in fiscal 1997 and $5.2
million in fiscal 1996.
Net Earnings
Net earnings for the Circuit City Group were $112.1 million in fiscal 1998,
$136.7 million in fiscal 1997 and $179.4 million in fiscal 1996. Net earnings
per share were $1.13 in fiscal 1998, $1.39 in fiscal 1997 and $1.84 in fiscal
1996. The lower earnings in fiscal years 1998 and 1997 reflect the challenging
industry environment faced by the Group, the Company's investment in Digital
Video Express and the higher losses incurred by the CarMax Group.
All per share numbers have been restated to conform with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
Operations Outlook
Management believes that continued investment in Circuit City's Superstore
expansion will maximize long-term shareholder value. Circuit City has
established its presence in the nation's top 50 markets and will continue adding
to the existing store base as attractive market opportunities arise. In fiscal
1999, the Group plans to open approximately 50 Superstores, including an
estimated 30 "A" stores. Store openings will consist of entries into smaller
one- and two-store markets and additions to existing Circuit City markets,
including approximately 15 more stores in the New York metropolitan area.
In fiscal 1999, growth for the Circuit City business likely will be
influenced by the timing and strength of a pickup in industry sales and by
consumer interest in new product introductions, such as digital television and
digital video disc players. Management believes that a modest upturn in industry
sales will produce stronger sales growth than experienced in fiscal 1998.
The intense promotional climate of the past three years has prompted some
industry consolidation. The rationalization of industry square footage should
have a positive impact over the long term as the Circuit City stores gain a
portion of the vacated market share. Management believes that the Group's
financial condition, in-store execution and geographic coverage leave it
well-positioned competitively. Management believes this competitive position and
an upturn in the industry represent substantial long-term earnings potential.
Management is also enthusiastic about the long-term profit potential of the
Company's investment in Digital Video Express. Decisions to invest additional
funds in Divx have been made over a period of years and were based on
accomplishment of specific tech- nical goals and on achieving support from key
studios and hardware manufacturers. As of early April 1998, Digital Video
Express had secured key agreements with Disney, Paramount, Universal, Twentieth
Century Fox, Metro-Goldwyn-Mayer and DreamWorks SKG to provide titles, including
all new home videos, for release on Divx discs on the same day they are
available for rental on VHS tape. Zenith, Thomson, Matsushita, JVC, Pioneer and
Harman Kardon had announced plans to manufacture DVD players with the Divx
feature. Additional funding will be needed to support national retail roll out
in fiscal 1999; management expects to pursue various funding alternatives with a
focus on those that would remove future losses from the Company's and the
Group's financial statements. Management does not expect Digital Video Express
to generate profits until substantial player penetration has been achieved and
transaction volumes reach significant levels.
Management expects CarMax results to surpass the break-even point in fiscal
1999. The CarMax results will be partly reflected in the Circuit City Group's
Inter-Group Interest.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the "Management's Discussion and Analysis of Results of Operations and
Financial Condition" for Circuit City Stores, Inc. for a review of recent
accounting pronouncements.
FINANCIAL CONDITION
In fiscal 1998, net cash provided by operating activities was $280.7 million
compared with $39.7 million provided by operating activities in fiscal 1997 and
$71.5 million used in operating activities in fiscal 1996. The fiscal 1998
increase primarily reflects further improvements in inventory management, which
resulted in a decrease in inventory from the previous year, a smaller increase
in net accounts receivable and a slight earnings increase in the Circuit City
business, partly offset by the investment in Digital Video Express. The fiscal
1997 improvement primarily reflects only a slight inventory increase in that
year compared with fiscal 1996 and an increase in accounts payable, partly
offset by an increase in net accounts receivable and lower net earnings.
Most financial activities, including the investment of surplus cash and the
issuance and repayment of short-term and long-term debt, are managed by the
Company on a centralized basis. Allocated debt of the Circuit City Group
consists of (1) Company debt, if any, that has been allocated in its entirety to
the Circuit City Group and (2) a portion of the Company's debt that is allocated
between the Groups. This pooled debt bears interest at a rate based on the
average pooled debt balance. Expenses related to increases in pooled debt are
reflected in the weighted average interest rate of the pooled debt.
In addition to the allocation of cash and debt, interest-bearing loans,
with terms determined by the board of directors, are used to manage cash between
the Groups. These loans are reflected as inter-group payables or receivables on
the financial statements of each Group. During fiscal 1998, an inter-group note
was issued by the Circuit City Group on behalf of the CarMax Group as a
temporary financing vehicle for CarMax inventory. At fiscal year-end 1998, the
Circuit City Group main-
42
tained no inter-group notes, payables or receivables with the CarMax Group. At
February 28, 1997, the Circuit City Group had an inter-group payable totaling
$48.1 million.
Capital expenditures for the Circuit City Group have been funded through
sale-leaseback transactions, landlord reimbursements and allocated short- and
long-term debt. Capital expenditures of $353.8 million during fiscal 1998
principally reflect Superstores opened during the year and a portion of the
Superstores opening in fiscal 1999. Sale-leaseback and landlord reimbursement
transactions completed in fiscal 1998 totaled $199.0 million. Capital
expenditures of $451.6 million in fiscal 1997 and $491.4 million in fiscal 1996
were largely incurred in connection with the Superstore expansion program.
The finance operation, First North American National Bank, primarily funds
its credit card programs through securitization transactions, which allow the
operation to sell the receivables while retaining a small interest in the
receivables. The finance operation has a master trust securitization facility
for its private-label credit card that allows the transfer of up to $1.025
billion in receivables through both private placement and the public market. A
second master trust securitization program allows for the transfer of up to
$2.050 billion in receivables related to the operation's bankcard programs.
Securitized receivables totaled $2.501 billion at February 28, 1998. Under the
securitization programs, receivables are sold to an unaffiliated third party
with the servicing retained. Management expects that both securitization
programs can be expanded to accommodate future receivables growth.
Late in fiscal 1997, Circuit City Stores, Inc. raised a net of $412.3
million through the initial public offering of 21.86 million shares of newly
created CarMax Group Common Stock. At the end of fiscal 1998, the Circuit City
Group retained a 77.3 percent interest in the equity of the CarMax Group. As of
February 28, 1998, the Circuit City Group's equity in the CarMax Group was
$278.2 million.
Management believes that proceeds from sales of property and equipment and
receivables, future increases in Circuit City Stores, Inc. debt allocated to the
Circuit City Group and cash generated by operations will be sufficient to fund
the capital expenditures and operations of the Circuit City business. In fiscal
1999, the Group anticipates capital expenditures of approximately $300 million
for the Circuit City business.
After the first quarter of fiscal 1999, management expects to obtain
additional funding to support the national roll out of Digital Video Express
products and continuing operations of the partnership. Management will attempt
to limit dilution for Circuit City Group investors. The Company has provided
guarantees relating to licensing agreements with motion picture distributors for
use of their films by the Divx system. The licensing fees are based on varying
percentages of consumer viewing and wholesale receipts and require minimum
distributor compensation commencing from the operational date of each agreement
through the following three to five years.
MARKET RISK
The Company manages the private-label and bankcard revolving loan portfolios of
First North American National Bank. Portions of these portfolios are securitized
and, therefore, are not presented on the Group's balance sheet. Interest rate
exposure relating to these receivables represents a market risk exposure that
the Company has managed with matched funding and interest rate swaps.
Interest rates charged on the managed private-label and bankcard portfolios
are primarily indexed to the prime rate, adjustable on a monthly basis, with the
balance at a fixed annual percentage rate. Total principal outstanding at
February 28 had the following APR structure:
(Amounts in millions) 1998 1997
- ----------------------------------------------------------------
Indexed to prime rate....................... $2,523 $2,350
Fixed APR................................... 227 245
------------------
Total ...................................... $2,750 $2,595
------------------
Financing for the securitization programs is achieved primarily through the
issuance of public market debt, which is issued either at floating rates based
on LIBOR or at fixed rates. Certain of the fixed-rate issuances have been
swapped to LIBOR. Receivables held by the Company for investment or sale are
financed with working capital. At February 28, financings were as follows:
(Amounts in millions) 1998 1997
- ----------------------------------------------------------------
Floating-rate (including synthetic
alteration) securitizations.............. $2,211 $1,979
Fixed-rate securitizations.................. 290 290
Held by the Company:........................
For investment........................... 204 139
For sale................................. 45 187
------------------
Total ...................................... $2,750 $2,595
------------------
Because of the programs in place to manage interest rate exposure relating
to its consumer loan portfolios, the Company expects to experience relatively
little impact as interest rates fluctuate in the future. The Company also has
the ability to adjust fixed-APR revolving cards and the index on floating-rate
cards, subject to cardholder ratification, but does not currently anticipate the
need to do so.
YEAR 2000 CONVERSION
Refer to the "Management's Discussion and Analysis of Results of Operations and
Financial Condition" for Circuit City Stores, Inc. for a discussion of the Year
2000 issue and its impact on the Group's financial statements.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of 1995, which
became law in December 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. The
Company wishes to take advantage of the "safe harbor" provisions of the Act.
Company statements that are not historical facts, including statements about
management's expectations for fiscal year 1999 and beyond, are forward-looking
statements and involve various risks and uncertainties. Refer to the "Circuit
City Stores, Inc. Management's Discussion and Analysis of Results of Operations
and Financial Condition" for a review of possible risks and uncertainties.
43
CIRCUIT CITY GROUP STATEMENTS OF EARNINGS
<TABLE>
<S> <C>
Years Ended February 28 or 29
(Amounts in thousands except per share data) 1998 % 1997 % 1996 %
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES.................. $7,996,591 100.0 $ 7,153,562 100.0 $6,753,266 100.0
Cost of sales, buying and warehousing............. 6,026,434 75.4 5,435,923 76.0 5,142,009 76.1
-----------------------------------------------------------------------
GROSS PROFIT...................................... 1,970,157 24.6 1,717,639 24.0 1,611,257 23.9
-----------------------------------------------------------------------
Selling, general and administrative
expenses [NOTES 3 AND 11]...................... 1,720,737 21.5 1,458,183 20.4 1,293,990 19.2
Interest expense [NOTES 3 AND 5].................. 25,072 0.3 23,503 0.3 21,325 0.3
-----------------------------------------------------------------------
TOTAL EXPENSES.................................... 1,745,809 21.8 1,481,686 20.7 1,315,315 19.5
-----------------------------------------------------------------------
Earnings before income taxes and Inter-Group
Interest in the CarMax Group................... 224,348 2.8 235,953 3.3 295,942 4.4
Provision for income taxes [NOTES 3 AND 6]........ 85,814 1.1 90,221 1.3 111,332 1.6
-----------------------------------------------------------------------
EARNINGS BEFORE INTER-GROUP INTEREST
IN THE CARMAX GROUP............................ 138,534 1.7 145,732 2.0 184,610 2.8
Net loss related to Inter-Group Interest in the
CarMax Group [NOTE 2].......................... 26,460 0.3 9,052 0.1 5,235 0.1
-----------------------------------------------------------------------
NET EARNINGS...................................... $ 112,074 1.4 $ 136,680 1.9 $ 179,375 2.7
=======================================================================
Weighted average common shares [NOTES 2 AND 8]:
Basic.......................................... 98,027 97,311 96,573
========== =========== ----------
Diluted........................................ 99,204 98,472 97,689
========== =========== ==========
NET EARNINGS PER SHARE [NOTES 2 AND 8]:
Basic.......................................... $ 1.14 $ 1.40 $ 1.86
========== =========== ==========
Diluted........................................ $ 1.13 $ 1.39 $ 1.84
========== =========== ==========
See accompanying notes to group financial statements.
44
<PAGE>
CIRCUIT CITY GROUP BALANCE SHEETS
At February 28
(Amounts in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 90,200 $ 32,222
Net accounts receivable [NOTE 12]................................................... 537,169 503,624
Merchandise inventory............................................................... 1,266,575 1,310,103
Deferred income taxes [NOTE 6]...................................................... - 23,764
Prepaid expenses and other current assets........................................... 19,798 10,711
---------------------------------
TOTAL CURRENT ASSETS................................................................ 1,913,742 1,880,424
Property and equipment, net [NOTES 4 AND 5]......................................... 834,347 793,917
Inter-Group Interest in the CarMax Group [NOTE 2]................................... 278,239 303,657
Other assets........................................................................ 35,290 30,258
---------------------------------
TOTAL ASSETS........................................................................ $3,061,618 $ 3,008,256
=================================
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTES 5 AND 10]............................. $ 1,301 $ 1,490
Accounts payable.................................................................... 714,171 692,461
Short-term debt [NOTE 5]............................................................ 5,591 347
Inter-group payable [NOTE 3]........................................................ - 48,147
Accrued expenses and other current liabilities...................................... 129,198 103,441
Accrued income taxes................................................................ - 8,560
---------------------------------
TOTAL CURRENT LIABILITIES........................................................... 850,261 854,446
Long-term debt, excluding current installments [NOTES 5 AND 10]..................... 396,906 430,290
Deferred revenue and other liabilities.............................................. 139,841 163,700
Deferred income taxes [NOTE 6]...................................................... 26,278 33,123
---------------------------------
TOTAL LIABILITIES................................................................... 1,413,286 1,481,559
GROUP EQUITY........................................................................ 1,648,332 1,526,697
---------------------------------
Commitments and contingent liabilities [NOTES 1, 9, 10, 12, 13 AND 14]
TOTAL LIABILITIES AND GROUP EQUITY.................................................. $3,061,618 $ 3,008,256
=================================
See accompanying notes to group financial statements.
45
<PAGE>
CIRCUIT CITY GROUP STATEMENTS OF CASH FLOWS
Years Ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings............................................................ $112,074 $ 136,680 $179,375
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Net loss related to Inter-Group Interest in the CarMax Group......... 26,460 9,052 5,235
Depreciation and amortization........................................ 111,749 97,313 78,991
Loss (gain) on sales of property and equipment....................... 2,593 (1,540) 5,600
Provision for deferred income taxes.................................. 16,919 19,307 21,301
Decrease in deferred revenue and other liabilities................... (23,859) (48,863) (28,604)
Increase in net accounts receivable.................................. (33,545) (195,791) (87,594)
Decrease (increase) in merchandise inventory, prepaid expenses
and other current assets.......................................... 34,441 (42,676) (275,260)
(Increase) decrease in other assets.................................. (5,032) (14,178) 1,911
Increase in accounts payable, accrued expenses and
other current liabilities, and accrued income taxes............... 38,907 80,373 27,579
-------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..................... 280,707 39,677 (71,466)
--------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (353,800) (451,561) (491,399)
Proceeds from sales of property and equipment........................... 199,028 316,276 225,704
-------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................... (154,772) (135,285) (265,695)
--------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of (payments on) short-term debt, net............ 5,244 (73,690) 74,037
(Decrease) increase in inter-group payable.............................. (48,147) 48,147 -
(Principal payments on) proceeds from issuance of long-term debt, net... (33,573) 109,702 252,724
Equity issuances, net................................................... 22,311 15,385 18,245
Dividends paid.......................................................... (13,792) (13,199) (11,163)
-------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES..................... (67,957) 86,345 333,843
-------------------------------------------
Increase (decrease) in cash and cash equivalents........................... 57,978 (9,263) (3,318)
Cash and cash equivalents at beginning of year............................. 32,222 41,485 44,803
-------------------------------------------
Cash and cash equivalents at end of year................................... $ 90,200 $ 32,222 $ 41,485
===========================================
See accompanying notes to group financial statements.
46
<PAGE>
CIRCUIT CITY GROUP STATEMENTS OF GROUP EQUITY
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1995....................................................................................... $ 877,464
-----------
Net earnings................................................................................................ 179,375
Equity issuances, net....................................................................................... 18,245
Cash dividends.............................................................................................. (11,163)
-----------
BALANCE AT FEBRUARY 29, 1996................................................................................... 1,063,921
-----------
Net earnings................................................................................................ 136,680
Equity issuances, net....................................................................................... 15,385
Cash dividends.............................................................................................. (13,199)
Inter-Group Interest adjustment resulting from the Offering [NOTE 2]........................................ 323,910
-----------
BALANCE AT FEBRUARY 28, 1997................................................................................... 1,526,697
-----------
Net earnings................................................................................................ 112,074
Equity issuances, net....................................................................................... 22,311
Cash dividends.............................................................................................. (13,792)
Inter-Group Interest adjustment [[NOTE 2]................................................................... 1,042
-----------
BALANCE AT FEBRUARY 28, 1998................................................................................... $ 1,648,332
===========
</TABLE>
See accompanying notes to group financial statements.
47
NOTES TO CIRCUIT CITY GROUP FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On January 24, 1997, shareholders of Circuit City Stores, Inc. and its
subsidiaries (the Company) approved the creation of two common stock series. The
Company's existing common stock was subsequently redesignated as Circuit City
Stores, Inc.-Circuit City Group Common Stock. In an initial public offering,
which was completed February 7, 1997, the Company sold 21.86 million shares of
Circuit City Stores, Inc.-CarMax Group Common Stock.
The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations, a retained interest in
the CarMax Group, and all other businesses in which the Company may be engaged,
other than those comprising the CarMax Group, and including the Company's
investment in Digital Video Express, LP. The CarMax Group Common Stock is
intended to track separately the performance of the CarMax operations. The
Circuit City Group held a 77.3 percent interest in the CarMax Group at February
28,1998, and a 77.5 percent interest at February 28, 1997.
The Circuit City Group financial statements give effect to the management
and allocation policies adopted by the board of directors as described under
"Corporate Activities" below. The Circuit City Group financial statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include (i) the historical financial position, results of
operations and cash flows of the Circuit City Group, (ii) an allocated portion
of the Company's cash equivalents and debt, including the related effects upon
results of operations and cash flows, (iii) an allocated portion of the
Company's corporate general and administrative costs and (iv) the Inter-Group
Interest held by the Circuit City Group in the CarMax Group.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the Circuit
City Group and the CarMax Group for the purposes of preparing their respective
financial statements, holders of Circuit City Group Stock and holders of CarMax
Group Stock are shareholders of the Company and continue to be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its subsidiaries.
The results of operations or financial condition of one Group could affect the
results of operations or financial condition of the other Group. Accordingly,
the Circuit City Group financial statements included herein should be read in
conjunction with the Company's consolidated financial statements and the CarMax
Group financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Cash and Cash Equivalents: Allocated cash equivalents of $55,215,000 at
February 28, 1998, consist of highly liquid debt securities with original
maturities of three months or less. No cash equivalents were allocated to the
Circuit City Group at February 28, 1997.
(B) Transfers and Servicing of Financial Assets: The Company adopted Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," effective
January 1, 1997. For transfers that qualify as sales, the Company recognizes
gains or losses as a component of the Company's finance operations. For
transfers of financial assets to qualify for sale accounting, control over the
assets must be surrendered at the time of sale. Multiple estimates are used to
calculate the gain or loss on sales of receivables under SFAS No. 125. Finance
charge income, default rates and payment rates are estimated using projections
developed from the prior 12 months of operating history. These estimates are
adjusted for any industry or portfolio trends that have been observed. The
resulting cash flow projections are present valued at a discount rate
appropriate for the type of asset and risk. Retained interests (such as residual
interests in a securitization trust, cash reserve accounts and rights to future
interest from serviced assets that exceed contractually specified servicing
fees) are included in net accounts receivable and are carried at fair value with
changes in fair value reflected in earnings. Loan receivables held for sale are
carried at the lower of cost or market, whereas loan receivables held for
investment are carried at cost less an allowance for losses. At February 28,
1998 and 1997, cost approximates fair value.
(C) Fair Value of Financial Instruments: The Company enters into financial
instruments on behalf of the Circuit City Group. The carrying value of the
Circuit City Group's financial instruments, excluding interest rate swaps held
for hedging purposes, approximates fair value. Credit risk is the exposure to
the potential nonperformance of another material party to an agreement due to
changes in economic, industry or geographic factors and is mitigated by dealing
only with counterparties that are highly rated by several financial rating
agencies. Accordingly, the Circuit City Group does not anticipate loss for
nonperformance. All financial instruments are broadly diversified along
industry, product and geographic areas.
(D) Merchandise Inventory: Inventory is stated at the lower of cost or market.
Cost is determined by the average cost method.
(E) Property and Equipment: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the assets' estimated useful
lives.
Property held under capital lease is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or market
value and is amortized straight-line over the lease term or the estimated useful
life of the asset, whichever is shorter.
(F) Pre-opening Expenses: Expenses associated with the opening of new stores are
deferred and amortized ratably over the period from the date of the store
opening to the end of the fiscal year.
(G) Income Taxes: Income taxes are accounted for in accordance with SFAS No.
109, "Accounting for Income Taxes." Deferred income taxes reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for
48
financial reporting purposes and the amounts recognized for income tax purposes,
measured by applying currently enacted tax laws. A deferred tax asset is
recognized if it is more likely than not that a benefit will be realized.
(H) Deferred Revenue: The Circuit City Group sells its own extended warranty
contracts and extended warranty contracts on behalf of unrelated third parties.
The contracts extend beyond the normal manufacturer's warranty period, usually
with terms (including the manufacturer's warranty period) between 12 and 60
months. All revenue from the sale of the Circuit City Group's own extended
warranty contracts is deferred and amortized on a straight-line basis over the
life of the contracts. Incremental direct costs related to the sale of contracts
are deferred and charged to expense in proportion to the revenue recognized.
Commission revenue for the unrelated third-party extended warranty plans is
recognized at the time of sale.
(I) Inter-Group Interest: Prior to the offering, the Circuit City Group had a
100 percent Inter-Group Interest in the CarMax Group. The Circuit City Group
held a 77.3 percent Inter-Group Interest in the CarMax Group at February 28,
1998, and a 77.5 percent Inter-Group Interest at February 28, 1997. For purposes
of these group financial statements, the Circuit City Group accounts for the
Inter-Group Interest in a manner similar to the equity method of accounting.
Accordingly, the Circuit City Group's Inter-Group Interest in the Company's
equity value that is attributable to the CarMax Group is reflected as
"Inter-Group Interest in the CarMax Group" on the Circuit City Group balance
sheets. Similarly, the net losses of the CarMax Group attributable to the
Circuit City Group's Inter-Group Interest are reflected as "Net loss related to
Inter-Group Interest in the CarMax Group" on the Circuit City Group statements
of earnings. All amounts corresponding to the Circuit City Group's Inter-Group
Interest in the CarMax Group in these group financial statements represent the
Circuit City Group's proportional interest in the businesses, assets and
liabilities and income and expenses of the CarMax Group.
The carrying value of the Circuit City Group's Inter-Group Interest in the
CarMax Group has been decreased proportionally for the net loss of the CarMax
Group. In addition, in the event of any dividend or other distribution on CarMax
Stock, an amount that is proportionate to the aggregate amount so paid in
respect to shares of CarMax Stock would be transferred to the Circuit City Group
from the CarMax Group with respect to its Inter-Group Interest and would reduce
the related book value.
(J) Selling, General and Administrative Expenses: Operating profits generated by
finance operations are recorded as a reduction to selling, general and
administrative expenses.
(K) Advertising Expenses: All advertising costs are expensed as incurred.
(L) Net Earnings per Share: On December 15, 1997, the Company adopted SFAS No.
128, "Earnings per Share." All prior period earnings per share data presented
has been restated to conform with the provisions of SFAS No. 128.
Basic net earnings per share is computed by dividing net earnings
attributable to common shares, including the Circuit City Group's 100 percent
interest in the losses of the CarMax Group for periods prior to the offering and
the Circuit City Group's retained interest in the CarMax Group subsequent to the
offering, by the weighted average number of common shares outstanding. Diluted
net earnings per share is computed by dividing net earnings attributable to
common shares, which includes the Circuit City Group's retained interest in
CarMax, by the weighted average number of common shares outstanding and dilutive
potential common shares.
(M) Stock-Based Compensation: On March 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue applying the provisions of the Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and to provide the
pro forma disclosures of SFAS No. 123.
(N) Derivative Financial Instruments: The Company enters into interest rate swap
agreements to manage exposure to interest rates and to more closely match
funding costs to the use of funding. Interest rate swaps relating to long-term
debt are classified as held for purposes other than trading and are accounted
for on a settlement basis. To qualify for this accounting treatment, the swap
must synthetically alter the nature of a designated underlying financial
instrument. Under this method, payments or receipts due or owed under the swap
agreement are accrued through each settlement date and recorded as a component
of interest expense. If a swap designated as a synthetic alteration were to be
terminated, any gain or loss on the termination would be deferred and recognized
over the shorter of the original contractual life of the swap or the related
life of the designated long-term debt.
The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller as part of a sale
of financial assets are considered proceeds at fair value in the determination
of the gain or loss on the sale. If such a swap were terminated, the impact on
the fair value of the financial asset created by the sale of the related
receivables would be estimated and included in earnings.
(O) Risks and Uncertainties: Circuit City is the nation's largest retailer of
brand-name consumer electronics and major appliances and a leading retailer of
personal computers and music software. The diversity of Circuit City's products,
customers, suppliers and geographic operations significantly reduces the risk
that a severe impact will occur in the near term as a result of changes in its
customer base, competition, sources of supply or markets. It is unlikely that
any one event would have a severe impact on Circuit City's operating results.
Because of the Company's investment in Divx, the Circuit City Group is
subject to additional risks and uncertainties. Divx is a partnership formed to
develop and launch an enhancement for DVD players that provides significant
copyright protection for movies released on Divx digital discs and sets a new
standard for home video convenience. While management believes this product will
gain widespread acceptance, there is no assurance that Divx ever will have
commercially accepted products or that it will achieve significant sales of any
such products. Other risks include lack of operating history, no assurance of
successful operations, early state of market and technological development,
acquiring and maintaining licensing and manufacturing agreements, minimum
compensation requirements under studio
49
license agreements, competition from substitute products and services, rapid
technological change, dependence on key personnel and vendors, development or
assertions by or against Divx relating to intellectual property rights, and the
uncertainty of availability of additional financing.
Because of the Inter-Group Interest, the Circuit City Group also is subject
to risks and uncertainties related to the CarMax Group. The diversity of the
CarMax Group's customers and suppliers reduces the risk that a severe impact
will occur in the near term as a result of changes in its customer base,
competition or sources of supply. At fiscal year-end, the CarMax Group's
operations were concentrated in the southeastern United States and Texas. A
severe economic downturn in either of these areas could negatively impact the
CarMax Group's operating results. Due to the CarMax Group's geographic
concentration and limited overall size, management cannot assure that
unanticipated events will not have a negative impact on the Circuit City Group.
The preparation of financial statements in conformity with 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 could differ from those estimates.
(P) Reclassifications: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 1998.
3. CORPORATE ACTIVITIES
The Circuit City Group's financial statements reflect the application of the
management and allocation policies adopted by the board of directors to various
corporate activities, as described below:
(A) Financial Activities: Most financial activities are managed by the Company
on a centralized basis. Such financial activities include the investment of
surplus cash and the issuance and repayment of short-term and long-term debt.
Allocated invested surplus cash of the Circuit City Group consists of (i)
Company cash equivalents, if any, that have been allocated in their entirety to
the Circuit City Group and (ii) a portion of the Company's cash equivalents that
are allocated between the Groups. Allocated debt of the Circuit City Group
consists of (i) Company debt, if any, that has been allocated in its entirety to
the Circuit City Group and (ii) a portion of the Company's debt that is
allocated between the Groups (pooled debt). The pooled debt bears interest at a
rate based on the average pooled debt balance. Expenses related to increases in
pooled debt are reflected in the weighted average interest rate of such pooled
debt as a whole. In addition to the allocation of cash and debt,
interest-bearing loans, with terms determined by the board of directors, are
used to manage cash between the Groups. These loans are reflected as an
inter-group payable on the balance sheet.
(B) Corporate General and Administrative Costs: Corporate general and
administrative costs and other shared services generally have been allocated to
the Circuit City Group based upon utilization of such services by the Group.
Where determinations based on utilization alone have been impractical, other
methods and criteria were used that management believes are equitable and
provide a reasonable estimate of the costs attributable to the Group.
(C) Income Taxes: The Circuit City Group is included in the consolidated federal
income tax return and certain state tax returns filed by the Company.
Accordingly, the provision for federal income taxes and related payments of tax
are determined on a consolidated basis. The financial statement provision and
the related tax payments or refunds are reflected in each Group's financial
statements in accordance with the Company's tax allocation policy for such
Groups. In general, this policy provides that the consolidated tax provision and
related tax payments or refunds will be allocated between the Groups based
principally upon the financial income, taxable income, credits and other amounts
directly related to the respective Group. Tax benefits that cannot be used by
the Group generating such attributes, but can be utilized on a consolidated
basis, are allocated to the Group that generated such benefits. As a result, the
allocated Group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the Groups had filed separate
tax returns.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 28 is summarized as follows:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Land and buildings (20 to 25 years)......... $ 109,115 $ 116,638
Construction in progress.................... 97,980 88,779
Furniture, fixtures and equipment
(3 to 8 years)........................... 584,110 496,657
Leasehold improvements
(10 to 15 years)......................... 478,679 427,322
Capital leases, primarily buildings
(20 years)............................... 12,471 12,471
----------------------
$1,282,355 $1,141,867
Less accumulated depreciation and
amortization............................. 448,008 347,950
----------------------
Property and equipment, net................. $ 834,347 $ 793,917
======================
5. DEBT
Long-term debt of the Company at February 28 is summarized as follows:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Term loans.................................. $ 405,000 $ 405,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest ranging
from 5.5% to 7.0%........................ 7,665 13,706
Obligations under capital leases [Note 10].. 12,928 13,074
----------------------
Total long-term debt........................ 425,593 431,780
Less current installments................... 1,301 1,490
----------------------
Long-term debt, excluding
current installments..................... $ 424,292 $ 430,290
======================
Portion of long-term debt allocated
to Circuit City Group.................... $ 398,207 $ 431,780
======================
50
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. The loan was restructured in August 1996 as a
$100,000,000, six-year unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 1998, the interest rate on the term loan was 6.08 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1998, the interest rate
on the term loan was 6.04 percent.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1998, the interest rate
on the term loan was 6.01 percent.
<PAGE>
The Company maintains a multi-year, $150,000,000, unsecured revolving
credit agreement with five banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.13 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2002. The agreement provides for annual one-year extensions of the
final maturity each August 31. No amounts were outstanding under the revolving
credit agreement at February 28, 1998 or 1997.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$10,879,000 at February 28, 1998, and $14,575,000 at February 28, 1997.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 1998 and 1997.
Short-term debt of the Company includes committed lines of credit and
informal credit arrangements. Amounts outstanding and committed lines of credit
available are as follows:
Years Ended February 28
(Amounts in thousands) 1998 1997
- -----------------------------------------------------------------------
Average short-term debt outstanding......... $ 48,254 $ 186,569
=========================
Maximum short-term debt outstanding......... $ 414,000 $ 580,000
=========================
Aggregate committed lines of credit......... $ 410,000 $ 415,000
==========---============
The weighted average interest rate on the outstanding short-term debt was
5.7 percent during fiscal 1998, 5.4 percent during fiscal 1997 and 5.9 percent
during fiscal 1996.
Interest expense allocated by the Company to the Circuit City Group,
excluding interest capitalized, was $25,071,576 in fiscal 1998, $23,502,965 in
fiscal 1997, and $21,325,263 in fiscal 1996. The Circuit City Group capitalizes
interest in connection with the construction of certain facilities. In fiscal
1998, interest capitalized amounted to $4,759,000 ($6,072,000 in fiscal 1997 and
$5,466,000 in fiscal 1996).
6. INCOME TAXES
The components of the provision for income taxes on earnings before income taxes
and Inter-Group Interest in the CarMax Group are as follows:
Years Ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------
Current:
Federal........................... $ 63,576 $ 62,649 $ 84,348
State............................. 5,319 8,265 5,683
-----------------------------------
68,895 70,914 90,031
-----------------------------------
Deferred:
Federal........................... 14,060 18,150 18,047
State............................. 2,859 1,157 3,254
-----------------------------------
16,919 19,307 21,301
-----------------------------------
Provision for income taxes........... $ 85,814 $ 90,221 $ 111,332
===================================
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
Years Ended February 28 or 29
1998 1997 1996
- ----------------------------------------------------------------------------
Federal statutory income
tax rate............................ 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit.............. 3.3 3.2 2.6
-------------------------------
Effective income tax rate.............. 38.3% 38.2% 37.6%
===============================
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 28, 1998 and 1997 are as follows:
<PAGE>
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Deferred tax assets:
Deferred revenue......................... $ 1,129 $ 9,421
Inventory capitalization................. 7,783 8,871
Accrued expenses......................... 36,448 29,981
Other.................................... 3,638 2,690
----------------------
Total gross deferred tax assets....... 48,998 50,963
======================
Deferred tax liabilities:
Depreciation and amortization............ 43,630 42,544
Gain on sales of receivables............. 9,489 -
Other prepaid expenses................... 10,569 7,351
Other.................................... 11,588 10,427
----------------------
Total gross deferred tax liabilities.. 75,276 60,322
----------------------
Net deferred tax liability.................. $ 26,278 $ 9,359
======================
Based on the Company's historical and current pre-tax earnings, management
believes the amount of gross deferred tax assets will be realized through future
taxable income; therefore, no valuation allowance is necessary.
51
7. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) Preferred Stock: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of Circuit City Stock. The
rights are exercisable only upon the attainment of, or the commencement of a
tender offer to attain, a specified ownership interest in the Company by a
person or group. When exercisable, each Circuit City Group right would entitle
shareholders to buy one four-hundredth of a share of Cumulative Participating
Preferred Stock, Series E, $20 par value, at an exercise price of $35 per share
subject to adjustment. A total of 500,000 shares of such preferred stock, which
have preferential dividend and liquidation rights, have been designated; 300,000
shares have been reserved. No such shares are outstanding. In the event that an
acquiring person or group acquires the specified ownership percentage of the
Company's common stock (except pursuant to a cash tender offer for all
outstanding shares determined to be fair by continuing directors) or engages in
certain transactions with the Company after the rights become exercisable, each
right will be converted into a right to purchase, for half the current market
price at that time, shares of the related Group stock valued at two times the
exercise price.
The Company also has 1,000,000 shares of undesignated preferred stock
authorized of which no shares are outstanding and an additional 500,000 shares
of preferred stock designated as Series F which are related to similar rights
held by CarMax Group shareholders.
(B) Voting Rights: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters on which
common shareholders generally are entitled to vote other than a matter on which
the common stock or either series thereof or any series of preferred stock would
be entitled to vote as a separate voting group. On all matters on which both
series of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes based on the
weighted average ratio of the market value of a share of CarMax Stock to a share
of Circuit City Stock. If shares of only one series of common stock are
outstanding, each share of that series shall be entitled to one vote. If either
series of common stock is entitled to vote as a separate voting group with
respect to any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
(C) Restricted Stock: The Company has issued restricted stock under the
provisions of the 1994 and 1988 Stock Incentive Plans whereby management and key
employees are granted restricted shares of Circuit City Stock. Shares are
awarded in the name of the employee, who has all the rights of a stockholder,
subject to certain restrictions or forfeitures. Restrictions on the awards
generally expire three to seven years from the date of grant. In fiscal 1998,
certain officers of the Circuit City Group were granted 378,425 restricted
shares of Circuit City Stock which vest seven years from the date of grant.
These awards provide accelerated vesting if certain performance factors are met.
Total restricted stock awards of 604,516 shares were granted to eligible
employees in fiscal 1998. The market value at the date of grant of these shares
has been recorded as unearned compensation and is a component of Group equity.
Unearned compensation is expensed over the restriction periods. In fiscal 1998,
a total of $4,995,400 was charged to operations ($3,790,200 in fiscal 1997 and
$3,362,500 in 1996). As of February 28, 1998, 953,833 restricted shares were
outstanding.
(D) Employee Stock Purchase Plan: The Company has Employee Stock Purchase Plans
for all employees meeting certain eligibility criteria. Under the Circuit City
Plan, eligible employees may purchase shares of Circuit City Stock, subject to
certain limitations, at 85 percent of market value. Purchases are limited to 10
percent of an employee's eligible compensation, up to a maximum of $7,500 per
year. At February 28, 1998, a total of 112,370 shares remained available under
the Circuit City Plan. During fiscal 1998, 450,698 shares were issued to or
purchased on the open market for employees (499,338 in fiscal 1997 and 474,889
in fiscal 1996). The average price per share was $36.78 in fiscal 1998, $32.68
in fiscal 1997 and $29.97 in fiscal 1996. The purchase price discount is charged
to Circuit City Group operations and totaled $2,509,500 in fiscal 1998,
$2,433,600 in fiscal 1997 and $2,030,000 in fiscal 1996.
(E) Stock Incentive Plans: Under the Company's stock incentive plans, incentive
and nonqualified stock options may be granted to management, key employees and
outside directors to purchase shares of Circuit City Stock. The exercise price
for incentive stock options for employees and nonqualified options for outside
directors is equal to, or greater than, the market value at the date of grant;
for nonqualified options granted under the 1988 Plan for employees, it is at
least 85 percent of the market value at the date of grant (100 percent under the
1994 Plan). Options generally are exercisable over a period of from one to 10
years from the date of grant.
A summary of the status of the Circuit City Group's stock options and
changes during the years ended February 28, 1998 and 1997, and February 29,
1996, are shown in Table 1. Table 2 summarizes information about stock options
outstanding as of February 28, 1998.
The Circuit City Group applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized. Had compensation cost been determined
based on the fair value at the grant date consistent with the methods of SFAS
No. 123, the Circuit City Group's net earnings and net earnings per share would
have been reduced to the pro forma amounts indicated below. In accordance with
the transition provisions of SFAS No. 123, the pro forma amounts reflect options
with grant dates subsequent to March 1, 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net earnings amounts presented below because
compensation cost is reflected over the options' vesting periods and
compensation cost of options
52
granted prior to March 1, 1995, is not considered. The pro forma effect on
fiscal year 1998 may not be representative of the pro forma effects on net
earnings for future years.
<TABLE>
<S> <C>
TABLE 1 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year........ 4,828 $ 29.76 3,563 $18.63 3,709 $17.14
Granted................................. 726 35.21 2,159 43.38 763 22.98
Exercised............................... (483) 15.00 (786) 17.67 (645) 12.64
Cancelled............................... (77) 29.42 (108) 21.90 (264) 24.06
----- ----- ------
Outstanding at end of year.............. 4,994 $ 32.00 4,828 $29.76 3,563 $18.63
===== ===== ======
Options exercisable at end of year...... 1,754 $ 19.68 1,629 $17.24 1,847 $16.19
===== ===== ======
Table 2 Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
$ 7.70 to 9.25..................... 177 0.3 $ 8.80 177 $ 8.80
15.69 to 20.13.................... 991 2.2 17.27 872 17.12
22.50 to 29.13.................... 977 2.9 23.57 556 24.36
29.50 to 38.00.................... 1,849 6.2 31.96 149 30.21
59.00............................. 1,000 4.1 59.00 - -
----- ----
Total.............................. 4,994 4.1 $ 30.06 1,754 $19.68
===== =====
</TABLE>
(Amounts in thousands Years Ended February 28 or 29
except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------
Net earnings-as reported............... $ 112,074 $ 136,680 $ 179,375
Net earnings-pro forma................. 107,399 133,326 $ 178,325
Basic net earnings per
share-as reported................... $ 1.14 $ 1.40 $ 1.86
Basic net earnings per
share-pro forma..................... 1.10 1.37 1.85
Diluted net earnings per
share-as reported................... $ 1.13 $ 1.39 $ 1.84
Diluted net earnings per
share-pro forma..................... 1.08 1.35 1.83
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model. The weighted average assumptions used in the
model are as follows:
1998 1997 1996
- -------------------------------------------------------------------------------
Expected dividend yield..................... 0.4% 0.4% 0.4%
Expected stock volatility................... 33% 33% 35%
Risk-free interest rates.................... 6% 6% 7%
Expected lives (in years)................... 4 4 4
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted for the Circuit City Group is $13 in fiscal 1998,
$8 in fiscal 1997 and $9 in fiscal 1996.
8. NET EARNINGS PER SHARE
On December 15, 1997, the Company adopted SFAS No. 128, "Earnings per Share."
Prior period net earnings per share data has been restated in accordance with
SFAS No. 128. Reconciliations of the numerator and denominator of basic and
diluted net earnings per share are presented below:
(Amounts in thousands
except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------
Weighted average common
shares............................... 98,027 97,311 96,573
Dilutive potential common shares:
Options............................... 842 889 862
Restricted stock...................... 335 272 254
-----------------------------------
Weighted average common shares
and dilutive potential
common shares......................... 99,204 98,472 97,689
===================================
Income available to common
shareholders.......................... $ 112,074 $ 136,680 $ 179,375
Basic net earnings per share............. $ 1.14 $ 1.40 $ 1.86
===================================
Diluted net earnings per share........... $ 1.13 $ 1.39 $ 1.84
===================================
Certain options were not included in the computation of diluted net
earnings per share because the options' exercise prices were greater than the
average market price of the common shares. Options to purchase 1,510,000 shares
of Circuit City Stock ranging from $35.47 to $59.00 per share were outstanding
and not included in the calculation at the end of fiscal 1998; 1,076,000 shares
ranging from $32.25 to $59.00 per share at the end of fiscal 1997; and 65,000
shares ranging from $26.75 to $34.63 per share at the end of fiscal 1996.
53
9. PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of this program is being funded currently. Plan
benefits are generally based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of
Circuit City Stock at February 28, 1998 and 1997.
Eligible employees of the Circuit City Group participate in the Company's
plan. Pension costs for these employees have been allocated to the Circuit City
Group based on its proportionate share of the projected benefit obligation.
The components of net pension expense for the Circuit City Group are as
follows:
Years ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Service cost of benefits earned
during the year....................... $ 8,365 $ 9,226 $ 5,756
Interest cost on projected
benefit obligation.................... 5,221 4,667 3,606
Actual return on plan assets............. (12,574) (9,783) (9,149)
Net amortization......................... 7,211 6,830 6,227
-----------------------------------
Net pension expense...................... $ 8,223 $ 10,940 $ 6,440
===================================
The following table sets forth the Circuit City Group's share of the Plan's
financial status and amounts recognized in the balance sheets as of February 28:
<PAGE>
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested................................... $ 55,466 $ 43,367
Nonvested................................ 7,150 5,290
----------------------
Total benefits.............................. 62,616 48,657
Additional amounts related to projected
salary increases......................... 25,550 21,398
----------------------
Projected benefit obligation for services
rendered to date......................... 88,166 70,055
Plan assets at fair value................... (83,009) (62,033)
-----------------------
Projected benefit obligation in excess of
plan assets.............................. 5,157 8,022
Unrecognized gain from past experience...... 3,187 3,276
Unrecognized prior service cost............. 656 760
Unrecognized net asset being
recognized over 15 years................. 797 996
----------------------
Accrued pension cost........................ $ 9,797 $ 13,054
======================
Assumptions used in the accounting for the pension plan were:
Years Ended February 28 or 29
1998 1997 1996
- -------------------------------------------------------------------------------
Weighted average discount rate.............. 7.0% 7.5% 7.0%
Rate of increase in compensation levels..... 5.0% 5.5% 6.0%
Rate of return on plan assets............... 9.0% 9.0% 9.0%
==============================
10. LEASE COMMITMENTS
The Circuit City Group conducts a substantial portion of its business in leased
premises. The Circuit City Group's lease obligations are based upon contractual
minimum rates. For certain locations, amounts in excess of these minimum rates
are payable based upon specified percentages of sales. Rental expense and
sublease income for all operating leases are summarized as follows:
Years Ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Minimum rentals.......................... $ 236,962 $ 178,599 $ 144,232
Rentals based on sales volume............ 730 2,322 2,871
Sublease income.......................... (12,879) (11,121) (9,996)
-----------------------------------
Net ................................... $ 224,813 $ 169,800 $ 137,107
===================================
The Circuit City Group computes rent based on a percentage of sales volumes
in excess of defined amounts in certain store locations. Most of the Circuit
City Group's other leases are fixed-dollar rental commitments, with many
containing rent escalations based on the Consumer Price Index. Most provide that
the Circuit City Group pay taxes, maintenance, insurance and certain other
operating expenses applicable to the premises.
The initial term of real property leases will expire within the next 25
years; however, most of the leases have options providing for additional lease
terms of from five to 25 years at terms similar to the initial terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Circuit City Group, as of February 28, 1998,
were:
Operating Operating
(Amounts in thousands) Capital Lease Sublease
Fiscal Leases Commitments Income
- ----------------------------------------------------------------------
1999 ........................... $ 1,579 $ 241,698 $ (13,177)
2000 ........................... 1,662 239,230 (12,159)
2001 ........................... 1,681 237,358 (11,509)
2002 ........................... 1,725 234,140 (11,120)
2003 ........................... 1,726 230,635 (10,123)
After 2003....................... 18,232 2,626,020 (48,150)
-----------------------------------
Total minimum lease
payments...................... 26,605 $3,809,081 $(106,238)
======================
Less amounts representing
interest...................... 13,677
---------
Present value of net
minimum capital lease
payments [Note 5]............. $ 12,928
=========
In fiscal 1998, the Company entered into sale-leaseback transactions on
behalf of the Circuit City Group with unrelated parties at an aggregate selling
price of $120,670,000 ($185,244,000 in fiscal 1997 and $158,150,000 in fiscal
1996). Neither the Company nor the Circuit City Group has continuing involvement
under the sale-leaseback transactions.
54
11. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Advertising expense, which is included in selling, general and administrative
expenses in the accompanying statements of earnings, amounted to $370,725,000
(4.6 percent of net sales and operating revenues) in fiscal 1998, $342,777,000
(4.8 percent of net sales and operating revenues) in fiscal 1997 and
$317,181,000 (4.7 percent of net sales and operating revenues) in fiscal 1996.
12. SECURITIZATIONS
On behalf of the Circuit City Group, the Company enters into securitization
transactions, which allow for the sale of credit card receivables to unrelated
entities, to finance the consumer revolving credit receivables generated by
First North American National Bank, a wholly owned finance operation of the
Company. The Circuit City Group implemented SFAS No. 125 with respect to sales
of credit card receivables occurring after December 31, 1996. Proceeds from
securitization transactions were $331.4 million for fiscal 1998, $551.1 million
for fiscal 1997 and $692.3 million for fiscal 1996.
Receivables relating to the securitization facilities consist of the
following at February 28:
(Amounts in thousands) 1998 1997
- ---------------------------------------------------------------------
Managed receivables......................... $2,749,793 $2,594,651
Receivables/residual interests held
by the Circuit City Group:
For sale................................. (44,622) (186,378)
For investment........................... (203,921) (139,458)
-----------------------
Net receivables sold........................ $2,501,250 $2,268,815
=======================
Net receivables sold
with recourse............................ $ 726,000 $1,317,565
=======================
Program capacity............................ $3,075,000 $2,665,000
=======================
The finance operation finances its private-label credit card program
through a single master trust, through both private placement and the public
market. The master trust vehicle permits further expansion of the securitization
program to meet future receivables growth. As of February 28, 1998, the master
trust program had a total program capacity of $1.025 billion. The agreement has
no recourse provisions.
During fiscal 1998, the finance operation created a master trust
securitization facility related to its bank card program and issued two series
from the master trust. The master trust vehicle permits further expansion of the
securitization program in the public market. The bank card securitization
program has a total program capacity of $2.050 billion. The agreement related to
the first series issued under the master trust provides recourse to the Company
for any cash flow deficiencies. The Company believes that as of February 28,
1998, no liability existed under these recourse provisions. The finance charges
from the transferred receivables are used to fund interest costs, charge-offs,
servicing fees and other related costs.
The net gain on sales of receivables totaled $21.8 million for fiscal 1998
and $3.2 million for fiscal 1997. The finance operation's revenue, including
gains on sales of receivables, totaled $195.7 million for fiscal 1998, $197.0
million for fiscal 1997 and $142.9 million for fiscal 1996. The servicing fees
specified in the credit card securitization agreements adequately compensate the
finance operation for servicing the accounts. Accordingly, no servicing asset or
liability has been recorded. Rights recorded for future interest income from
serviced assets that exceed the contractually specified servicing fees are
carried at fair value and amounted to $25 million at February 28, 1998, and $3.2
million at February 28, 1997, and are included in net accounts receivable.
13. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year interest rate swap
agreements with notional amounts totaling $300 million relating to a public
issuance of securities by the master trust. As part of this issuance, $344
million of five-year, fixed-rate certificates were issued to fund consumer
credit receivables. The finance operation is servicer for the accounts, and as
such, receives its monthly cash portfolio yield after deducting interest,
charge-offs and other related costs. The underlying receivables are based on a
floating rate. The swaps were put in place to better match funding costs to the
receivables being securitized. As a result, the master trust pays fixed-rate
interest while the Company utilizes the swaps to convert the fixed-rate
obligation to a floating-rate, LIBOR-based obligation. These swaps were entered
into as part of the sales of receivables and are included in the gain on sales
of receivables.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year interest rate swaps with notional
amounts aggregating $175 million. These swaps effectively converted the
variable-rate obligation into a fixed-rate obligation. The fair value of the
swaps is the amount at which they could be settled. This value is based on
estimates obtained from the counterparties, which are two banks highly rated by
several financial rating agencies. The swaps are held for hedging purposes and
are not recorded at fair value. Recording the swaps at fair value at February
28, 1998, would result in a loss of $1.9 million and at February 28, 1997, would
result in a gain of $0.1 million.
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Company does not anticipate significant market risk from swaps, since their
use is to more closely match funding costs to the use of the funding. Credit
risk is the exposure to nonperformance of another party to an agreement. Credit
risk is mitigated by dealing with highly rated counterparties.
55
14. COMMITMENTS AND CONTINGENT LIABILITIES
(A) Investment in Divx: In May 1995, the Company agreed to invest $30.0 million
in Divx, a partnership that has developed and will market a new home digital
video system. That commitment was increased to $130.0 million in September 1997.
The Company holds approximately 66 percent of the partnership and allocates its
investment in Divx to the Circuit City Group. As of February 28, 1998, the
Company had funded approximately $86.8 million of its commitment of which $51.9
million has been expensed ($31.8 million was expensed in fiscal 1998, $11.4
million in fiscal 1997 and $8.7 million in fiscal 1996 and prior).
(B) Licensing Agreements: Divx has entered into licensing agreements with motion
picture distributors for use of their feature-length films for the Divx system.
The Company guarantees Divx's performance under these commitments. The licensing
fees are based on varying percentages of consumer viewing and wholesale receipts
and require minimum distributor compensation commencing from the operational
date of each agreement through the following three to five years. This
compensation is contingent upon shipment of the first Divx disc, currently
expected to occur in May 1998. At that time, the minimum compensation due from
Divx to the studios is $112.0 million ($11.0 million in fiscal 1999, $26.0
million in fiscal 2000, $32.0 million in fiscal 2001, $20.5 million in fiscal
2002, $14.5 million in fiscal 2003 and $8.0 million in fiscal 2004).
(C) Legal Proceedings: In the normal course of business, the Company is involved
in various legal proceedings. Based upon the Circuit City Group's evaluation of
the information presently available, management believes that the ultimate
resolution of any such proceedings will not have a material adverse effect on
the Circuit City Group's financial position, liquidity or results of operations.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<S> <C>
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Net sales and operating
revenues...... $1,679,350 $1,490,572 $1,814,139 $1,634,827 $1,917,133 $1,745,538 $2,585,969 $2,282,625 $7,996,591 $7,153,562
-------------------------------------------------------------------------------------------------------------
Gross profit.... $ 401,649 $ 350,151 $ 453,559 $ 385,381 $ 466,396 $ 414,604 $ 648,553 $ 567,503 $1,970,157 $1,717,639
-------------------------------------------------------------------------------------------------------------
Earnings before Inter-Group
Interest in the
CarMax Group... $ 13,697 $ 16,345 $ 29,226 $ 32,631 $ 21,078 $ 23,700 $ 74,533 $ 73,056 $ 138,534 $ 145,732
-------------------------------------------------------------------------------------------------------------
Net Earnings.... $ 12,749 $ 16,783 $ 27,879 $ 31,583 $ 14,012 $ 19,787 $ 57,434 $ 68,527 $ 112,074 $ 136,680
-------------------------------------------------------------------------------------------------------------
Net earnings per share:
Basic........ $ 0.13 $ 0.17 $ 0.28 $ 0.32 $ 0.14 $ 0.20 $ 0.58 $ 0.70 $ 1.14 $ 1.40
-------------------------------------------------------------------------------------------------------------
Diluted...... $ 0.13 $ 0.17 $ 0.28 $ 0.32 $ 0.14 $ 0.20 $ 0.58 $ 0.70 $ 1.13 $ 1.39
-------------------------------------------------------------------------------------------------------------
</TABLE>
56
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the Circuit City Group (as
defined in Note 1) as of February 28, 1998 and 1997 and the related statements
of earnings, group equity and cash flows for each of the fiscal years in the
three-year period ended February 28, 1998. These financial statements are the
responsibility of Circuit City Stores, Inc.'s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully discussed in Note 1, the financial statements of the Circuit
City Group should be read in conjunction with the consolidated financial
statements of Circuit City Stores, Inc. and subsidiaries and the financial
statements of the CarMax Group.
The Circuit City Group has accounted for its interest in the CarMax Group
in a manner similar to the equity method of accounting. Generally accepted
accounting principles require that the CarMax Group be consolidated with the
Circuit City Group.
In our opinion, except for the effects of not consolidating the Circuit
City Group and the CarMax Group as discussed in the preceding paragraph, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Circuit City Group as of February 28, 1998 and
1997 and the results of its operations and its cash flows for each of the fiscal
years in the three-year period ended February 28, 1998 in conformity with
generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1998
57
CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On January 24, 1997, Circuit City Stores, Inc. shareholders approved the
creation of two common stock series. The Company's existing common stock was
subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common
Stock. In an initial public offering, which was completed February 7, 1997, the
Company sold 21.86 million shares of Circuit City Stores, Inc.- CarMax Group
Common Stock.
The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations, the Company's
investment in Digital Video Express, LP and the Group's retained interest in the
CarMax Group. The effects of this retained interest on the Circuit City Group's
financial statements are identified by the term "Inter-Group."
The CarMax Group Common Stock is intended to track separately the
performance of the CarMax operations. The Inter-Group Interest is not considered
outstanding CarMax Group stock. Therefore, any net earnings or loss attributable
to the Inter-Group Interest is not included in the CarMax Group's per share
calculations.
The following discussion and analysis relates to the CarMax Group. Reported
losses attributable to the CarMax Group Common Stock reflect the Circuit City
Group's 100 percent interest in the losses of the CarMax Group prior to the
consummation of the offering on February 7, 1997, and the lower Inter-Group
Interest since that time. For additional information, refer to the "Management's
Discussion and Analysis of Results of Operations and Financial Condition" for
Circuit City Stores, Inc. and for the Circuit City Group.
RESULTS OF OPERATIONS
Sales Growth
Total sales for the CarMax Group increased 71 percent in fiscal 1998 to $874.2
million. In fiscal 1997, total sales increased 85 percent to $510.3 million from
$275.9 million in fiscal 1996. The fiscal 1998 sales growth primarily reflects
the addition of 11 locations, two of which opened in the last week of the fiscal
year, and a 6 percent comparable store sales increase.
During the second half of fiscal 1998, the Group's used-car sales fell
below management's expectations. In the fall of each calendar year, the new-car
segment discounts prior-model-year vehicles as it begins to introduce new
models. In fiscal 1998, the industry experienced prolonged discounting on
close-out models and low introductory prices on new models. As a result, the
spread between the retail price of new and used vehicles was temporarily
compressed. The result was lower-than-anticipated used-car unit sales and gross
profit margins. As wholesale and retail prices for used cars adjusted, CarMax's
unit sales and gross margins improved. Nevertheless, lower average retail prices
adversely affected comparable store sales measured in dollars.
Sales also were below expectations in most of the markets entered in fiscal
1998. Management believes that the higher level of competition in these markets
and limited advertising, which reflected CarMax's partial storing of the
markets, resulted in low consumer awareness of the CarMax offer. Incomplete real
estate development surrounding some new locations further contributed to the
lower-than-expected sales. Total sales for fiscal 1998 reflect the highest
proportion the Group expects to have of new stores in the total store base and
of markets that are not fully stored.
New-car sales remained strong throughout fiscal 1998. In June 1997, CarMax
acquired its second Chrysler-Plymouth-Jeep-and-Eagle franchise, which was
relocated and opened in conjunction with the opening of the CarMax Superstore in
Stockbridge, Ga. Within six months, sales volume at this franchise ranked it
third in sales among all Chrysler-Plymouth-Jeep-and-Eagle dealers in the Atlanta
zone. In March 1998, CarMax's first new-car franchise, open for approximately
two years in Norcross, Ga., received Chrysler's top award for achieving the
highest retail sales volume of all Pacesetters Club members. To gain membership
in the Pacesetters Club, a dealer must be among the 100 highest volume dealers
who qualify for the Five Star rating, Chrysler Corporation's highest award for
customer service excellence in sales and mechanical service. Both of CarMax's
Chrysler franchise stores received the Five Star rating in fiscal 1998.
The fiscal 1997 sales growth includes the addition of three stores, a 23
percent comparable store sales increase for two locations classified as
comparable stores throughout the year and two locations classified as comparable
stores for a portion of the year. Early in fiscal 1997, CarMax began selling new
vehicles at its Norcross, Ga., location, under the terms of its first franchise
agreement with Chrysler Corporation. The fiscal 1996 sales increase includes the
addition of two stores and a 12 percent comparable store sales increase for one
location classified as a comparable store throughout the year and a second
location classified as a comparable store for a portion of the year.
The CarMax operations currently include three different store sizes, which
allow the Group to tailor its operations to the populations and volume
expectations for specific trade areas. For the current store base, square
footage averages 82,926 for "C" stores, 68,261 for "B" stores and 47,521 for "A"
stores. Management believes that smaller stores are more productive and expects
that over the long term the majority of locations will be "A" and "B" stores. In
addition, the Group is developing smaller "A" store designs ranging from
approximately 35,000 square feet to 45,000 square feet. The store locations also
vary in acreage and vehicle spaces. Going forward, "C" sites will generally have
20 acres to 25 acres and 650 spaces to 800 spaces for saleable inventory; "B"
sites will generally have 17 acres to 20 acres and 550 spaces to 700 spaces; and
"A" stores will have 11 acres to 17 acres and 350 spaces to 600 spaces.
Virtually all sites can accommodate a new-vehicle franchise, either in the
existing spaces or through pavement of the small amounts of surplus acreage.
58
Store Mix
Retail Units at Year End
------------------------------------------
1998 1997 1996 1995
- -----------------------------------------------------------------------
"C" Store.................. 5 1 1 -
"B" Store.................. 5 3 - -
"A" Store.................. 8 3 3 2
-------------------------------------------
Total...................... 18 7 4 2
===========================================
Extended warranty sales prior to July 1997 include third-party contracts
and CarMax's own extended warranty contracts. In most states, CarMax sells
warranties on behalf of an unrelated third party and has no contractual
liability to the customer under the warranty programs. In states where
third-party warranty sales are not permitted, CarMax has sold its own extended
warranty; CarMax expects to continue selling this warranty in connection with
its ongoing expansion. Gross dollar sales from all extended warranty programs
were 3.8 percent of the Group's total sales in fiscal 1998, 3.5 percent in
fiscal 1997 and 3.8 percent in fiscal 1996. Total extended warranty revenue,
which is reported in the Group's total sales, was 1.5 percent of total sales in
fiscal 1998, 1.2 percent in fiscal 1997 and 1.4 percent in fiscal 1996.
Third-party extended warranty revenue was 1.4 percent of total sales in fiscal
1998, 1.1 percent in fiscal 1997 and 1.3 percent in fiscal 1996. The lower
extended warranty percentages in fiscal 1997 reflect a higher percentage of new
cars, which are covered by manufacturers' warranties, in that year's sales mix
than in the fiscal 1998 and fiscal 1996 sales mixes.
Impact of Inflation. Inflation has not been a significant contributor to the
Group's results. In fact, during the second half of fiscal 1998, average retail
prices of used cars declined in response to price reductions and prolonged
discounts in the new-car market. These lower prices adversely affected sales in
fiscal 1998 and could continue to limit sales in fiscal 1999.
The Group's profitability is based on achieving specific gross profit
dollars per unit rather than on average retail prices. Because the wholesale
market quickly adjusts to reflect lower retail prices, management believes that
if the stores meet inventory turn objectives then declines in average retail
prices will have only a short-term impact on the Group's gross margin and thus
profitability. The discounting that took place in the fall of fiscal 1998 and
the disappointing new-store sales contributed to the Group's missing its profit
expectations during the second half of fiscal 1998.
Cost of Sales
The CarMax marketing concept includes a strong commitment to providing a high
level of consumer value. CarMax attempts to price vehicles at or below the best
negotiated price in the market. As a result, CarMax operates with lower gross
profit margins than industry averages for used-vehicle dealerships. The gross
profit margin was 8.4 percent in fiscal 1998, 8.5 percent in fiscal 1997 and 8.6
percent in fiscal 1996. The gross profit margin improved slightly during the
first half of fiscal 1998 but was below expectations during the second half. The
lower second-half margin primarily reflects the temporary compression of the
spread between retail and wholesale prices and lower gross margins on aging
inventories at stores where sales were disappointing. The margin decrease in
fiscal 1997 primarily reflects the addition of the first new-car franchise. In
general, new cars produce a lower gross margin than used cars. Cost of sales
includes vehicle costs, reconditioning costs, transportation and related
purchasing costs.
Selling, General and Administrative Expenses
CarMax's consumer-oriented marketing concept produces store volumes
significantly higher than industry averages. As a result, management also
expects selling, general and administrative expenses to be relatively lower as a
percentage of sales than industry averages. Selling, general and administrative
expenses were 14.6 percent of sales in fiscal 1998, 10.4 percent of sales in
fiscal 1997 and 10.3 percent of sales in fiscal 1996. The increase in fiscal
1998 primarily reflects the costs associated with the national roll out of
CarMax Superstores, including pre-opening expenses; the lower-than-anticipated
sales during the second half of the year; and an $11.5 million write-down of
assets associated with the closure and expected disposal of the Group's
centralized reconditioning facilities and excess property at some locations.
Management decided to close the centralized reconditioning facilities when
experience proved that in-store reconditioning is more efficient and produces a
higher quality vehicle for the consumer. Excluding the write-down of assets, the
Group's expense-to-sales ratio would have been 13.3 percent in fiscal 1998.
Profits generated by CarMax's finance operation, First North American
Credit Corporation, and fees received for arranging financing through third
parties are recorded as a reduction to selling, general and administrative
expenses.
Interest Expense
Interest expense was 0.2 percent of sales in fiscal 1998, 1.2 percent of sales
in fiscal 1997 and 1.5 percent of sales in fiscal 1996. In fiscal 1998, interest
expense primarily was incurred on an inter-group note used to finance inventory
for much of the year. In fiscal 1997, interest expense primarily was incurred on
allocated debt used to fund store expansion and working capital. The significant
decrease in interest from fiscal 1997 to fiscal 1998 reflects the reduction in
the Group's average debt, using funds raised through the CarMax equity offering,
which was completed late in fiscal 1997. The slight improvement in fiscal 1997
reflects an improved level of inventory per store in that year and the
securitization for the full year of the installment receivables generated by the
CarMax Group's finance operation. This securitization program was entered into
in fiscal 1996 and was in place throughout fiscal years 1997 and 1998.
Pre-Tax Losses
Management anticipated that CarMax would produce a loss in its initial test
stage and increased losses early in the first phase of a national roll out. For
reasons discussed above, the fiscal 1998 loss exceeded expectations. Excluding
the $11.5 million write-down of assets, the pre-tax loss totaled $44.6 million
in fiscal 1998. Including this expense, the pre-tax loss was $56.1 million in
fiscal 1998 compared with $15.9 million in fiscal 1997 and $8.9 million in
fiscal 1996.
59
Income Taxes
The Group's effective income tax rate was 39.0 percent in fiscal 1998 and 41.5
percent in both fiscal 1997 and fiscal 1996. The CarMax Group generated losses
in all reported periods and as a result has recorded related income tax
benefits.
Net Losses
In fiscal 1998, the net loss totaled $27.2 million, excluding the after-tax
impact of the asset write-down, and $34.2 million including the impact.
Including the asset write-down, the net loss attributable to the CarMax Group
common stock was $7.8 million, or 35 cents per share. The remainder of the loss
was attributable to the Circuit City Group.
Net losses were $9.3 million in fiscal 1997 and $5.2 million in fiscal
1996. For the period from the public offering date to the end of fiscal 1997,
the net loss attributable to the CarMax Group common stock was $266,000, or 1
cent per share. The remainder of the fiscal 1997 loss was attributable to the
Circuit City Group.
All per share numbers have been restated to conform with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."
Operations Outlook
CarMax has begun a national roll out that includes a planned total store count
of 80 to 90 locations by the end of fiscal 2002. The planned roll out includes
approximately 10 additional stores in fiscal year 1999 and 15 to 20 openings per
year thereafter. CarMax also will continue to explore opportunities in new-car
retailing. CarMax expects to add at least 25 new-car franchises to its used-car
Superstore locations by the end of fiscal 2002. Management intends to add value
by acquiring underperforming new-car franchises or franchise grants from
automobile manufacturers and extending CarMax's consumer-friendly offer to these
franchises.
In fiscal 1998, the Group completed the roll out of vehicle repair service
to all CarMax locations. Management expects service revenues and profits to grow
as advertising and consumer experience with CarMax generate higher awareness
levels. Because CarMax's multi-brand model selection appeals to a broad trade
area while the trade area for service is limited by consumers' preference for
locational convenience, management expects service to remain a modest percentage
of total sales and profits.
Management expects CarMax to generate earnings that are slightly above
break-even in fiscal year 1999. Changes in the CarMax Group's marketing programs
have already had a positive impact on consumer awareness, customer flow and
sales in the fiscal 1998 new markets. Management believes resolution of pending
real estate issues such as incomplete road construction, land clearing and
nearby retail development will further contribute to customer awareness and
sales at several of the new stores. Going forward, the Group plans to focus on
opening the critical number of stores needed to support a cost-effective
advertising program in new markets. More aggressive advertising should increase
consumer awareness, which is expected to help produce sales and profits that are
more consistent with CarMax's longer term model expectations. The fiscal 1999
opening schedule includes grand openings in Chicago early in the year, store
additions in the Dallas and Washington, D.C./Baltimore, Md., markets and
openings in single-store markets. The Group has delayed entry into Los Angeles
until fiscal 2000, when it expects to open approximately six stores in a brief
period of time.
On a broader level, management has identified various factors that are
expected to support profitability for the overall CarMax operation in fiscal
1999. These factors include: (1) the elimination of centralized reconditioning
facilities, (2) pricing adjustments, which include the fine-tuning of prices on
extended service plans and financing and the introduction of documentation fees,
(3) more efficient store staffing resulting from a larger store base from which
to draw future Associates and (4) in partnership with Circuit City, the
introduction of electronic accessory sales to all CarMax locations.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the "Management's Discussion and Analysis of Results of Operations and
Financial Condition" for Circuit City Stores, Inc. for a review of recent
accounting pronouncements.
FINANCIAL CONDITION
In fiscal 1998, net cash used in operating activities was $86.1 million compared
with $25.4 million used in operating activities in fiscal 1997 and $16.1 million
provided by operating activities in fiscal 1996. The decreases in cash in fiscal
years 1998 and 1997 primarily reflect greater inventory to support a larger
number of store openings and the addition of the new-car franchises, higher net
losses and an increase in net accounts receivable, which were partly offset by
an increase in accounts payable.
Most financial activities, including the investment of surplus cash and the
issuance and repayment of short-term and long-term debt, are managed by the
Company on a centralized basis. Investment of surplus cash from the equity
offering has been allocated to the CarMax Group. Allocated debt of the CarMax
Group consists of (1) Company debt, if any, that has been allocated in its
entirety to the CarMax Group and (2) a portion of the Company's debt that is
allocated between the Circuit City Group and the CarMax Group. For the periods
covered by the CarMax Group's financial statements, all debt consists of an
allocated portion of the pooled debt. The pooled debt bears interest at a rate
based on the average pooled debt balance. Expenses related to increases in
pooled debt are reflected in the weighted average interest rate of the pooled
debt.
In addition to the allocation of cash and debt, interest-bearing loans,
with terms determined by the board of directors, are used to manage cash between
the Groups. These loans are reflected as inter-group receivables or payables on
the financial statements of each Group. During fiscal 1998, an inter-group note
was issued by the Circuit City Group on behalf of the CarMax Group as a
temporary financing vehicle for the CarMax inventory. At fiscal year-end 1998,
the CarMax Group maintained no inter-group notes, payables or receivables with
the Circuit City Group. At February 28, 1997, the CarMax Group had an
inter-group receivable totaling $48.1 million with the Circuit City Group.
The CarMax Group's capital expenditures were $234.3 million in fiscal 1998,
$90.4 million in fiscal 1997 and $26.8 million in fiscal 1996. Most of CarMax's
capital expenditures through fiscal 1998 were related to the opening of its 18
stores and stores
60
scheduled to open during fiscal 1999. Capital expenditures have been funded
through sale-leaseback transactions, landlord reimbursements, proceeds from the
CarMax Group equity offering and allocated short- and long-term debt.
Sale-leaseback and landlord reimbursement transactions totaled $98.1 million in
fiscal 1998, $16.5 million in fiscal 1997 and $25.8 million in fiscal 1996.
In fiscal 1996, Circuit City Stores, Inc. initiated an asset securitization
program on behalf of the CarMax Group. At the end of fiscal 1998, that program
allowed the transfer of up to $300.0 million in auto loan receivables.
Securitized receivables totaled $268.0 million at February 28, 1998. The
receivables are sold to an unaffiliated third party with the servicing retained.
Management expects that the existing securitization program can be increased to
accommodate receivables as CarMax grows.
Late in fiscal 1997, Circuit City Stores, Inc. raised a net of $412.3
million through the initial public offering of 21.86 million shares of newly
created CarMax Group Common Stock. In fiscal 1997, the Group used approximately
$187 million of the net proceeds to repay its allocated portion of Circuit City
Stores, Inc. indebtedness. Management has used the remainder of the net proceeds
to finance part of the CarMax expansion plan.
Management believes that the establishment of a renewable inventory
financing program for CarMax, proceeds from sales of property and equipment and
receivables, the proceeds of equity offerings, future increases in Circuit City
Stores, Inc. debt allocated to the CarMax Group and cash generated by operations
will be sufficient to fund the CarMax Group's capital expenditures and
operations. In fiscal 1999, the Group anticipates capital expenditures of
approximately $190 million.
MARKET RISK
The Company manages the auto installment portfolio of its finance operation,
First North American Credit Corporation. A portion of this portfolio is
securitized and, therefore, is not presented on the Group's balance sheet.
Interest rate exposure relating to these receivables represents a market risk
exposure that the Company has managed with matched funding and interest rate
swaps.
Many of the automobiles CarMax sells are financed through FNAC. All
receivables represent fixed-rate installment loans with a principal weighted
average life of approximately 20 months. Total principal outstanding at February
28 was as follows:
(Amounts in millions) 1998 1997
- --------------------------------------------------------------------
Fixed APR................................... $ 297 $ 165
==================
Financing for these receivables is achieved through bank conduit
securitizations which, in turn, issue floating-rate securities. Interest rate
exposure is hedged through the use of interest rate swaps matched to projected
payoffs. Receivables held by the Company for investment or sale are financed
with working capital. Financings at February 28 and related interest rates were
as follows:
<PAGE>
(Amounts in millions) 1998 1997
- ---------------------------------------------------------------
Floating-rate securitizations...............
synthetically altered to fixed........... $224 $114
Floating-rate securitizations............... 44 31
Held by the Company:
For investment........................... 23 19
For sale................................. 6 1
----------------
Total ...................................... $297 $165
================
Because of the program in place to manage interest rate exposure relating
to its installment loan portfolio, the Company expects to experience relatively
little impact as interest rates fluctuate in the future.
YEAR 2000 CONVERSION
Refer to the "Management's Discussion and Analysis of Results of Operations and
Financial Condition" for Circuit City Stores, Inc. for a complete discussion of
the Year 2000 issue and its impact on the Group's financial statements.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of 1995, which
became law in December 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. The
Company wishes to take advantage of the "safe harbor" provisions of the Act.
Company statements that are not historical facts, including statements about
management's expectations for fiscal year 1999 and beyond, are forward-looking
statements and involve various risks and uncertainties. Refer to the "Circuit
City Stores, Inc. Management's Discussion and Analysis of Results of Operations
and Financial Condition" for a review of possible risks and uncertainties.
61
<TABLE>
<S> <C>
CARMAX GROUP STATEMENTS OF OPERATIONS
Years Ended February 28 Or 29
(Amounts in thousands except per share data) 1998 % 1997 % 1996 %
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES................... $ 874,206 100.0 $ 510,249 100.0 $275,857 100.0
Cost of sales...................................... 800,699 91.6 466,788 91.5 252,284 91.4
-----------------------------------------------------------------------
GROSS PROFIT....................................... 73,507 8.4 43,461 8.5 23,573 8.6
-----------------------------------------------------------------------
Selling, general and administrative expenses
[including $1l.5 million expense related
to owned and leased real estate in fiscal
1998. NOTES 3 AND 12]............................. 127,822 14.6 53,111 10.4 28,440 10.3
Interest expense [NOTE 6].......................... 1,789 0.2 6,279 1.2 4,075 1.5
-----------------------------------------------------------------------
TOTAL EXPENSES..................................... 129,611 14.8 59,390 11.6 32,515 11.8
-----------------------------------------------------------------------
Loss before income tax benefit..................... 56,104 6.4 15,929 3.1 8,942 3.2
Income tax benefit [NOTES 3 AND 7]................. 21,881 2.5 6,611 1.3 3,707 1.3
-----------------------------------------------------------------------
NET LOSS........................................... $ 34,223 3.9 $ 9,318 1.8 $ 5,235 1.9
=======================================================================
Net loss attributable to [NOTES 1 AND 2]:
Circuit City Group common stock................. $ 26,460 $ 9,052 $ 5,235
=======
CarMax Group common stock....................... 7,763 266
--------- ---------
$ 34,223 $ 9,318
========= =========
Weighted average common shares [NOTES 2 AND 9]..... 22,001 21,860
========= =========
NET LOSS PER SHARE [NOTES 2 AND 9]................. $ 0.35 $ 0.01
========= =========
See accompanying notes to group financial statements.
62
<PAGE>
CARMAX GROUP BALANCE SHEETS
At February 28
(Amounts in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 26,412 $ 170,421
Net accounts receivable [NOTE 4]....................................................... 60,866 28,350
Inter-group receivable [NOTE 3]........................................................ - 48,147
Inventory.............................................................................. 143,970 82,260
Prepaid expenses and other current assets.............................................. 1,359 4,102
-------------------------------
TOTAL CURRENT ASSETS................................................................... 232,607 333,280
Property and equipment, net [NOTES 5 AND 6]............................................ 214,087 92,174
Deferred income taxes [NOTE 7]......................................................... - 42
Other assets........................................................................... 1,628 1,691
-------------------------------
TOTAL ASSETS........................................................................... $ 448,322 $ 427,187
===============================
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Accounts payable....................................................................... $ 51,220 $ 28,293
Short-term debt [NOTE 6]............................................................... 385 -
Deferred income taxes [NOTE 7]......................................................... 370 2,424
Accrued expenses and other current liabilities......................................... 3,604 2,059
-------------------------------
TOTAL CURRENT LIABILITIES.............................................................. 55,579 32,776
Long-term debt [NOTE 6]................................................................ 27,386 -
Deferred revenue and other liabilities................................................. 5,266 2,595
Deferred income taxes [NOTE 7]........................................................ 145 -
-------------------------------
TOTAL LIABILITIES...................................................................... 88,376 35,371
GROUP EQUITY........................................................................... 359,946 391,816
-------------------------------
Commitments and contingent liabilities [NOTES 1, 4, 10, 11, 13 AND 14 ]
TOTAL LIABILITIES AND GROUP EQUITY..................................................... $ 448,322 $ 427,187
===============================
See accompanying notes to group financial statements.
63
<PAGE>
CARMAX GROUP STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss................................................................ $(34,223) $ (9,318) $ (5,235)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization........................................ 4,577 1,664 821
Expense related to owned and leased real estate (NOTE 12)............ 11,500 - -
Provision for deferred income taxes.................................. (1,867) 1,666 1,110
Increase in deferred revenue and other liabilities................... 835 1,157 739
(Increase) decrease in net accounts receivable....................... (32,516) (11,788) 27,764
Increase in inventory, prepaid expenses and other current assets..... (58,967) (23,918) (15,384)
Decrease (increase) in other assets.................................. 63 (1,691) -
Increase in accounts payable, accrued expenses and other
current liabilities............................................... 24,472 16,789 6,331
-------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES..................... (86,126) (25,439) 16,146
-------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (234,252) (90,428) (26,776)
Proceeds from sales of property and equipment........................... 98,098 16,450 25,750
Decrease (increase) in inter-group receivable........................... 48,147 (48,147) -
-------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................... (88,007) (122,125) (1,026)
--------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of (payments on) short-term debt, net............ 385 (18,050) 18,050
Proceeds from issuance of (principal payments on) long-term debt, net... 27,386 (78,519) (33,110)
Equity issuances, net................................................... 2,353 412,335 -
-------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..................... 30,124 315,766 (15,060)
--------------------------------------------
(Decrease) increase in cash and cash equivalents........................... (144,009) 168,202 60
Cash and cash equivalents at beginning of year............................. 170,421 2,219 2,159
-------------------------------------------
Cash and cash equivalents at end of year................................... $ 26,412 $ 170,421 $ 2,219
===========================================
See accompanying notes to group financial statements.
64
<PAGE>
CARMAX GROUP STATEMENTS OF GROUP EQUITY (DEFICIT)
(Amounts in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1995....................................................................................... $ (5,966)
---------
Net loss.................................................................................................... (5,235)
---------
BALANCE AT FEBRUARY 29, 1996................................................................................... (11,201)
---------
Net loss.................................................................................................... (9,318)
Equity issuances, net....................................................................................... 412,335
---------
BALANCE AT FEBRUARY 28, 1997................................................................................... 391,816
---------
Net loss.................................................................................................... (34,223)
Equity issuances, net....................................................................................... 2,353
---------
BALANCE AT FEBRUARY 28, 1998................................................................................... $ 359,946
=========
</TABLE>
See accompanying notes to group financial statements.
65
NOTES TO CARMAX GROUP FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On January 24, 1997, shareholders of Circuit City Stores, Inc. and its
subsidiaries (the Company) approved the creation of two common stock series. The
Company's existing common stock was subsequently redesignated as Circuit City
Stores, Inc.-Circuit City Group Common Stock. In an initial public offering,
which was completed February 7, 1997, the Company sold 21.86 million shares of
Circuit City Stores, Inc.-CarMax Group Common Stock.
The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations, a retained interest in
the CarMax Group, and all other businesses in which the Company may be engaged,
other than those comprising the CarMax Group, and including the Company's
investment in Digital Video Express, LP. The CarMax Group Common Stock is
intended to track separately the performance of the CarMax operations. The
Circuit City Group held a 77.3 percent interest in the CarMax Group at February
28, 1998, and a 77.5 percent interest at February 28, 1997.
The CarMax Group financial statements give effect to the management and
allocation policies adopted by the board of directors as described under
"Corporate Activities" below. The CarMax Group financial statements have been
prepared on a basis that management believes to be reasonable and appropriate
and include (i) the historical financial position, results of operations and
cash flows of the CarMax Group, (ii) an allocated portion of the Company's cash
equivalents and debt, including the related effects upon results of operations
and cash flows and (iii) an allocated portion of the Company's corporate general
and administrative costs.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the CarMax
Group and the Circuit City Group for the purposes of preparing their respective
financial statements, holders of CarMax Group Stock and holders of Circuit City
Group Stock are shareholders of the Company and continue to be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its subsidiaries.
The results of operations or financial condition of one Group could affect the
results of operations or financial condition of the other Group. Accordingly,
the CarMax Group financial statements included herein should be read in
conjunction with the Company's consolidated financial statements and the Circuit
City Group financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Cash and Cash Equivalents: Allocated cash equivalents of $16,535,000 and
$165,975,000 at February 28, 1998 and 1997, consist of highly liquid debt
securities with original maturities of three months or less.
(B) Transfers and Servicing of Financial Assets: The Company adopted Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," effective
January 1, 1997. For transfers that qualify as sales, the Company recognizes
gains or losses as a component of the Company's finance operations. For
transfers of financial assets to qualify for sale accounting, control over the
assets must be surrendered at the time of sale. Multiple estimates are used to
calculate the gain or loss on sales of receivables under SFAS No. 125. Finance
charge income, default rates and payment rates are estimated using projections
developed from the prior 12 months of operating history. These estimates are
adjusted for any industry or portfolio trends that have been observed. The
resulting cash flow projections are present valued at a discount rate
appropriate for the type of asset and risk. Retained interests (such as residual
interests in a securitization trust, cash reserve accounts and rights to future
interest from serviced assets that exceed contractually specified servicing
fees) are included in net accounts receivable and are carried at fair value with
changes in fair value reflected in earnings. Loan receivables held for sale are
carried at the lower of cost or market, whereas loan receivables held for
investment are carried at cost less an allowance for losses. At February 28,
1998 and 1997, cost approximates fair value.
(C) Fair Value of Financial Instruments: The Company enters into financial
instruments on behalf of the CarMax Group. The carrying value of the CarMax
Group's financial instruments approximates fair value. Credit risk is the
exposure to the potential nonperformance of another material party to an
agreement due to changes in economic, industry or geographic factors and is
mitigated by dealing only with counterparties that are highly rated by several
financial rating agencies. Accordingly, the CarMax Group does not anticipate
loss for nonperformance. All financial instruments are broadly diversified along
industry, product and geographic areas.
(D) Inventory: Inventory is stated at the lower of cost or market. Vehicle
inventory cost is determined by specific identification. Parts and labor used to
recondition vehicles, as well as transportation and other incremental expenses
associated with acquiring vehicles, are included in inventory.
(E) Property and Equipment: Property and equipment is stated at cost less
accumulated depreciation. Depreciation is calculated using the straight-line
method over the assets' estimated useful lives.
(F) Goodwill: Amounts paid for the acquisition of franchise rights in excess of
the book value of the rights are recorded as goodwill and are amortized over 15
years, or the estimated useful life, whichever is shorter.
(G) Pre-opening Expenses: Expenses associated with the opening of new stores are
deferred and amortized ratably over the period from the date of the store
opening to the end of the fiscal year.
(H) Income Taxes: Income taxes are accounted for in accordance with SFAS No.
109, "Accounting for Income Taxes." Deferred income taxes reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and the amounts recognized for income tax
purposes, measured by applying currently enacted tax laws. A deferred tax asset
is recognized if it is more likely than not that a benefit will be realized.
66
(I) Deferred Revenue: The CarMax Group sells service contracts on behalf of
unrelated third parties and, prior to July 1997, sold its own contracts at one
location where third-party warranty sales were not permitted. Contracts usually
have terms of coverage between 12 and 72 months. All revenue from the sale of
the CarMax Group's own service contracts is deferred and amortized over the life
of the contracts consistent with the pattern of repair experience of the
industry. Incremental direct costs related to the sale of contracts are deferred
and charged to expense in proportion to the revenue recognized. Commission
revenue for the unrelated third-party service contracts is recognized at the
time of sale.
(J) Selling, General and Administrative Expenses: Operating profits generated by
finance operations are recorded as a reduction to selling, general and
administrative expenses.
(K) Advertising Expenses: All advertising costs are expensed as incurred.
(L) Net Loss per Share: On December 15, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." All prior period loss per share data presented has been
restated to conform with the provisions of SFAS No. 128.
Net loss per share is computed by dividing the net loss attributable to
common shares by the weighted average number of common shares outstanding.
Diluted net loss per share is not calculated since CarMax has a net loss for the
periods presented. Historical net loss per share is omitted from the statements
of operations for periods prior to the offering since CarMax Stock was not part
of the capital structure of the Company for those periods.
(M) Stock-Based Compensation: On March 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue applying the provisions of the Accounting Principles Board (APB)
Opinion No. 25, "Accounting For Stock Issued to Employees," and to provide the
pro forma disclosures of SFAS No. 123.
(N) Derivative Financial Instruments: The Company enters into interest rate swap
agreements to manage exposure to interest rates and to more closely match
funding costs to the use of funding. Interest rate swaps relating to long-term
debt are classified as held for purposes other than trading and are accounted
for on a settlement basis. To qualify for this accounting treatment, the swap
must synthetically alter the nature of a designated underlying financial
instrument. Under this method, payments or receipts due or owed under the swap
agreement are accrued through each settlement date and recorded as a component
of interest expense. If a swap designated as a synthetic alteration were to be
terminated, any gain or loss on the termination would be deferred and recognized
over the shorter of the original contractual life of the swap or the related
life of the designated long-term debt.
The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller as part of a sale
of financial assets are considered proceeds at fair value in the determination
of the gain or loss on the sale. If such a swap were terminated, the impact on
the fair value of the financial asset created by the sale of the related
receivables would be estimated and included in earnings.
(O) Risks and Uncertainties: The CarMax Group is a used- and new-car retail
business. The diversity of the CarMax Group's customers and suppliers reduces
the risk that a severe impact will occur in the near term as a result of changes
in its customer base, competition or sources of supply. The CarMax Group's
operations currently are concentrated in the southeastern United States and
Texas. A severe economic downturn in either of these areas could negatively
impact the CarMax Group's operating results. Due to the CarMax Group's
geographic concentration and limited overall size, management cannot assure that
unanticipated events will not have a negative impact on the Group.
The preparation of financial statements in conformity with 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 could differ from those estimates.
(P) Reclassifications: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 1998.
3. CORPORATE ACTIVITIES
The CarMax Group's financial statements reflect the application of the
management and allocation policies adopted by the board of directors to various
corporate activities, as described below:
(A) Financial Activities: Most financial activities are managed by the Company
on a centralized basis. Such financial activities include the investment of
surplus cash and the issuance and repayment of short-term and long-term debt.
Allocated invested surplus cash of the CarMax Group consists of (i) Company cash
equivalents, if any, that have been allocated in their entirety to the CarMax
Group and (ii) a portion of the Company's cash equivalents that are allocated
between the Groups. Investment of surplus cash from the offering has been
allocated to the CarMax Group. Allocated debt of the CarMax Group consists of
(i) Company debt, if any, that has been allocated in its entirety to the CarMax
Group and (ii) a portion of the Company's debt that is allocated between the
Groups (pooled debt). For the periods covered by the CarMax Group's financial
statements, all debt consists of an allocated portion of the pooled debt. The
pooled debt bears interest at a rate based on the average pooled debt balance.
Expenses related to increases in pooled debt are reflected in the weighted
average interest rate of such pooled debt as a whole.
In addition to the allocation of cash and debt, interest-bearing loans,
with terms determined by the board of directors, are used to manage cash between
the Groups. These loans are reflected as an inter-group receivable on the
balance sheet.
(B) Corporate General and Administrative Costs: Corporate general and
administrative costs and other shared services generally have been allocated to
the CarMax Group based upon utilization of such services by the Group. Where
determinations based on utilization alone have been impractical, other methods
and criteria were used that management believes are equitable and provide a
reasonable estimate of the costs attributable to the Group. Costs allocated to
the CarMax Group totaled approximately $6.2 million for fiscal 1998, $1.3
million for fiscal 1997 and $1.8 million for fiscal 1996.
67
(C) Income Taxes: The CarMax Group is included in the consolidated federal
income tax return and in certain state tax returns filed by the Company.
Accordingly, the provision for federal income taxes and related payments of tax
are determined on a consolidated basis. The financial statement provision and
the related tax payments or refunds are reflected in each Group's financial
statements in accordance with the Company's tax allocation policy for such
Groups. In general, this policy provides that the consolidated tax provision and
related tax payments or refunds will be allocated between the Groups based
principally upon the financial income, taxable income, credits and other amounts
directly related to the respective Group. Tax benefits that cannot be used by
the Group generating such attributes, but can be utilized on a consolidated
basis, are allocated to the Group that generated such benefits. As a result, the
allocated Group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the Groups had filed separate
tax returns.
<PAGE>
4. ACCOUNTS RECEIVABLE AND SECURITIZATION TRANSACTIONS
Accounts receivable consist of the following at February 28:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Trade receivables........................... $ 23,085 $ 3,327
Installment receivables:
Held for sale............................ 5,816 920
Held for investment...................... 22,986 19,399
Retained interests....................... 12,762 6,566
----------------------
Total accounts receivable................... 64,649 30,212
Less allowance for doubtful accounts........ 3,783 1,862
----------------------
Net accounts receivable..................... $ 60,866 $ 28,350
======================
In fiscal 1996, the Company entered into a securitization transaction on
behalf of the CarMax Group to finance the installment receivables generated by
First North American Credit Corporation, the Group's finance operation. Proceeds
from the auto loan securitization transaction were $123 million during fiscal
1998 and $58 million during fiscal 1997. The seasoned portfolio and more
estimable losses allowed the CarMax Group to recognize gains on the sales of
these receivables beginning in fiscal 1997.
Receivables relating to the securitization facility consist of the
following at February 28:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Managed receivables......................... $ 291,294 $ 155,234
Receivables held by the CarMax Group:
For sale................................. (5,816) (920)
For investment........................... (17,478) (9,314)
----------------------
Net receivables sold........................ $ 268,000 $ 145,000
======================
Program capacity............................ $ 300,000 $ 175,000
======================
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. A restructuring of the facility
during fiscal 1997 resulted in the recourse provisions being eliminated.
The net gain on sales of receivables totaled $3.7 million for fiscal 1998
and $3.1 million for fiscal 1997. FNAC's revenue, including gains on sales of
receivables, totaled $11.2 million for fiscal 1998, $8.7 million for fiscal 1997
and $2.0 million for fiscal 1996. The servicing fee specified in the auto loan
securitization agreement adequately compensates FNAC for servicing the accounts.
Accordingly, no servicing asset or liability has been recorded. Rights recorded
for future interest income from serviced assets that exceed the contractually
specified servicing fees are carried at fair value and amounted to $6.8 million
at February 28, 1998, and $3.1 million at February 28, 1997, and are included in
net accounts receivable.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 28 is summarized as follows:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Land and buildings (20 to 25 years)......... $ 34,790 $ 15,489
Construction in progress.................... 150,826 64,052
Furniture, fixtures and equipment
(3 to 8 years)........................... 31,454 9,667
Leasehold improvements (10 to 15 years)..... 4,390 5,763
----------------------
221,460 94,971
Less accumulated depreciation............... 7,373 2,797
----------------------
Property and equipment, net................. $ 214,087 $ 92,174
======================
6. DEBT
Long-term pooled debt of the Company at February 28 is summarized as follows:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Total long-term debt (term loans)........... $ 405,000 $ 405,000
======================
Portion of long-term debt
allocated to CarMax Group................ $ 27,386 $ -
======================
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. The loan was restructured in August 1996 as a
$100,000,000, six-year unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 1998, the interest rate on the term loan was 6.08 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1998, the interest rate
on the term loan was 6.04 percent.
68
In June 1996, the Company entered into a five-year, $130,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1998, the interest rate
on the term loan was 6.01 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving
credit agreement with five banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.13 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2002. The agreement provides for annual one year extensions of the
final maturity each August 31. No amounts were outstanding under the revolving
credit agreement at February 28, 1998 or 1997.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 1998 and 1997.
Short-term debt of the Company includes committed lines of credit and
informal credit arrangements. Amounts outstanding and committed lines of credit
available are as follows:
Years Ended February 28
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Average short-term debt outstanding......... $ 48,254 $ 186,569
======================
Maximum short-term debt outstanding......... $ 414,000 $ 580,000
======================
Aggregate committed lines of credit......... $ 410,000 $ 415,000
======================
The weighted average interest rate on the outstanding short-term debt was
5.7 percent during fiscal 1998, 5.4 percent during fiscal 1997 and 5.9 percent
during fiscal 1996.
Interest expense allocated by the Company to the CarMax Group, excluding
interest capitalized, was $1,788,993 in fiscal 1998, $6,278,472 in fiscal 1997
and $4,074,737 in fiscal 1996. The CarMax Group capitalizes interest in
connection with the construction of certain facilities. In fiscal 1998, interest
capitalized amounted to $4,879,000 ($898,000 in fiscal 1997 and $1,314,000 in
fiscal 1996).
7. INCOME TAXES
The components of the income tax benefit on loss before income tax benefit are
as follows:
Years Ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- -------------------------------------------------------------------------
Current:
Federal.......................... $ (17,101) $ (6,976) $ (3,670)
State............................ (2,913) (1,301) (1,147)
-----------------------------------
(20,014) (8,277) (4,817)
-----------------------------------
Deferred:
Federal.......................... (1,259) 1,689 844
State............................ (608) (23) 266
-----------------------------------
(1,867) 1,666 1,110
-----------------------------------
Income tax benefit.................. $ (21,881) $ (6,611) $ (3,707)
===================================
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
Years Ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
Federal statutory income
tax rate............................. 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit............... 4.0 6.5 6.5
-------------------------------
Effective income tax rate............... 39.0% 41.5% 41.5%
===============================
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 28, 1998 and 1997 are as follows:
<PAGE>
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Deferred tax assets:
Deferred revenue......................... $ 231 $ 583
Organization cost capitalization......... - 116
Accrued expenses......................... 6,106 195
Other.................................... - 664
----------------------
Total gross deferred tax assets....... 6,337 1,558
----------------------
Deferred tax liabilities:
Depreciation............................. 1,488 657
Prepaid expenses......................... - 631
Inventory capitalization................. 2,807 1,228
Gain on sales of receivables............. 1,950 1,424
Other.................................... 607 -
----------------------
Total gross deferred tax liabilities.. 6,852 3,940
----------------------
Net deferred tax liability.................. $ 515 $ 2,382
======================
In assessing the realizability of deferred tax assets, management considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies. Based on these considerations, management
believes that it is more likely than not that the gross deferred tax assets at
February 28, 1998 and 1997, will be realized by the CarMax Group; therefore, no
valuation allowance is necessary.
8. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) Preferred Stock: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of CarMax Stock. The rights are
exercisable only upon the attainment of, or the commencement of a tender offer
to attain, a specified ownership interest in the Company by a person or group.
When exercisable, each CarMax Group right would entitle shareholders to buy one
four-hundredth of a share of Cumulative Participating Preferred Stock, Series F,
$20 par value, at an exercise price of $22 per share subject to adjustment. A
total of 500,000 shares of such preferred stock,
69
which have preferential dividend and liquidation rights, have been designated
and reserved. No such shares are outstanding. In the event that an acquiring
person or group acquires the specified ownership percentage of the Company's
common stock (except pursuant to a cash tender offer for all outstanding shares
determined to be fair by continuing directors) or engages in certain
transactions with the Company after the rights become exercisable, each right
will be converted into a right to purchase, for half the current market price at
that time, shares of the related Group stock valued at two times the exercise
price.
The Company also has 1,000,000 shares of undesignated preferred stock
authorized of which no shares are outstanding and an additional 500,000 shares
of preferred stock designated as Series E which are related to similar rights
held by Circuit City Group shareholders.
(B) Voting Rights: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters as to
which common shareholders generally are entitled to vote other than a matter on
which the common stock or either series thereof or any series of preferred stock
would be entitled to vote as a separate voting group. On all matters on which
both series of common stock would vote together as a single voting group, (i)
each outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes based on the
weighted average ratio of the market value of a share of CarMax Stock to a share
of Circuit City Stock. If shares of only one series of common stock are
outstanding, each share of that series shall be entitled to one vote. If either
series of common stock is entitled to vote as a separate voting group with
respect to any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
(C) Restricted Stock: The Company has issued restricted stock under the
provisions of the 1994 Stock Incentive Plan whereby management and key employees
are granted restricted shares of CarMax Stock. Shares are awarded in the name of
the employee, who has all the rights of a stockholder, subject to certain
restrictions or forfeitures. Restrictions on the awards generally expire five
years from the date of grant. In fiscal 1998, restricted stock awards for 20,000
shares were granted to eligible employees. No restricted stock awards were
granted in fiscal 1997 or 1996. The market value at the date of grant of these
shares has been recorded as unearned compensation and is a component of Group
equity. Unearned compensation is expensed over the restriction periods. In
fiscal 1998, a total of $77,700 was charged to CarMax Group operations. As of
February 28, 1998, 20,000 restricted shares were outstanding.
(D) Employee Stock Purchase Plan: The Company has Employee Stock Purchase Plans
for all employees meeting certain eligibility criteria. The CarMax Plan was
started in April 1997 and allows eligible employees to purchase shares of CarMax
Stock, subject to certain limitations, at 85 percent of market value. Purchases
are limited to 10 percent of an employee's eligible compensation, up to a
maximum of $7,500 per year. At February 28, 1998, a total of 407,225 shares
remained available under the CarMax Plan. During fiscal 1998, 92,775 shares were
issued to or purchased on the open market on behalf of the employees. The
average price per share was $12.73 in fiscal 1998. The purchase price discount
is charged to CarMax Group operations and totaled $160,900 in fiscal 1998.
(E) Stock Incentive Plans: In fiscal 1998, options that were outstanding as of
February 28, 1997, to purchase shares of stock of the corporate entity
comprising the CarMax Group were converted into options to purchase CarMax
Stock. Under the Company's stock incentive plans, incentive and nonqualified
stock options may be granted to management, key employees, and outside directors
to purchase shares of CarMax stock. The exercise price for nonqualified options
granted under the 1994 plan is equal to, or greater than, the market value at
the date of grant. Options generally are exercisable over various periods
ranging from one to seven years from the date of grant.
A summary of the status of the CarMax Group's stock options and changes
during the years ended February 28, 1998 and 1997, and February 29, 1996, are
shown in Table 1. Table 2 summarizes information about stock options outstanding
as of February 28, 1998.
70
<TABLE>
<S> <C>
TABLE 1 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year........ 4,769 $ 0.51 4,278 $ 0.22 3,518 $ 0.22
Granted................................. 413 13.04 961 1.68 796 0.22
Exercised............................... (273) 0.22 - - - -
Cancelled............................... (87) 6.36 (470) 0.27 (36) 0.22
----- ------ ------
Outstanding at end of year............. 4,822 $ 1.49 4,769 $ 0.51 4,278 $ 0.22
===== ====== ======
Options exercisable at end of year...... 762 $ 0.37 - $ - - $ -
===== ====== ======
TABLE 2 Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
$ 0.22................................. 4,241 4.0 $ 0.22 754 $ 0.22
6.25 to 9.19......................... 291 5.0 7.28 - -
12.94 to 16.31........................ 290 6.3 14.32 8 15.00
----- ----
Total.................................. 4,822 4.2 $ 1.49 762 $ 0.37
===== ====
</TABLE>
The CarMax Group applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the CarMax
Group's net loss and net loss per share would have been increased to the pro
forma amounts indicated below. In accordance with the transition provisions of
SFAS No. 123, the pro forma amounts reflect options with grant dates subsequent
to March 1, 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
earnings amounts presented below because compensation cost is reflected over the
options' vesting periods and compensation cost of options granted prior to March
1, 1995, is not considered. The pro forma effect on fiscal year 1998 may not be
representative of the pro forma effects on net earnings for future years.
(Amounts in thousands Years Ended February 28
except per share data) 1998 1997
- -----------------------------------------------------------------------
Net loss-as reported..................... $ 7,763 $ 266
Net loss-pro forma....................... 7,824 268
Net loss per share-as reported........... $ 0.35 $ 0.01
Net loss per share-pro forma............. 0.36 0.01
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model. The weighted average assumptions used in the
model are as follows:
1998 1997
- ---------------------------------------------------------------------
Expected dividend yield..................... - -
Expected stock volatility................... 50% 40%
Risk-free interest rates.................... 6% 6%
Expected lives (in years)................... 3 4
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted for the CarMax Group is $6 in fiscal 1998 and
$0.70 in fiscal 1997.
9. NET LOSS PER SHARE
On December 15, 1997, the Company adopted SFAS No. 128, "Earnings per Share."
Prior period loss per share data has been restated in accordance with SFAS No.
128. The calculation of net loss per share is presented below:
(Amounts in thousands except per share data) 1998 1997
- --------------------------------------------------------------------
Weighted average common shares.............. 22,001 21,860
======================
Loss available to common shareholders....... $ 7,763 $ 266
======================
Net loss per share.......................... $ 0.35 $ 0.01
======================
The CarMax Group had no diluted net loss per share because the Group had
net losses for the periods presented. No net loss per share is presented for
fiscal 1996 because CarMax Stock was not part of the capital structure of the
Company for that fiscal year.
10. PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of
Circuit City Stock at February 28, 1998 and 1997.
Eligible employees of the CarMax Group participate in the Company's plan.
Pension costs for these employees have been allocated to the CarMax Group based
on its proportionate share of the projected benefit obligation.
71
The components of net pension expense for the CarMax Group are as follows:
Years Ended February 28 or 29
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Service cost of benefits earned
during the year...................... $ 219 $ 162 $ 140
Interest cost on projected
benefit obligation................... 39 34 26
Actual return on plan assets............ (185) (120) (128)
Net amortization........................ 125 78 87
-----------------------------------
Net pension expense..................... $ 198 $ 154 $ 125
===================================
The following table sets forth the CarMax Group's share of the Plan's
financial status and amounts recognized in the balance sheets as of February 28:
(Amounts in thousands) 1998 1997
- ---------------------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested................................... $ 217 $ 201
Nonvested................................ 339 111
----------------------
Total benefits.............................. 556 312
Additional amounts related to projected
salary increases......................... 402 209
----------------------
Projected benefit obligation for services
rendered to date......................... 958 521
Plan assets at fair value................... (1,242) (895)
-----------------------
Plan assets in excess of projected
benefit obligation....................... (284) (374)
Unrecognized gain from past experience...... 2 52
Unrecognized prior service cost............. 9 10
Unrecognized net asset being
recognized over 15 years................. 11 14
----------------------
Prepaid pension cost........................ $ (262) $ (298)
======================
Assumptions used in the accounting for the pension plan were:
Years Ended February 28 or 29
1998 1997 1996
- -----------------------------------------------------------------------------
Weighted average discount rate.............. 7.0% 7.5% 7.0%
Rate of increase in compensation levels..... 5.0% 5.5% 6.0%
Rate of return on plan assets............... 9.0% 9.0% 9.0%
==============================
11. LEASE COMMITMENTS
The CarMax Group conducts substantially all of its business in leased premises.
The CarMax Group's lease obligations are based upon contractual minimum rates.
Rental expenses for all operating leases were $11,421,000 in fiscal 1998,
$6,019,000 in fiscal 1997 and $3,850,000 in fiscal 1996. Most leases provide
that the CarMax Group pay taxes, maintenance, insurance and certain other
operating expenses applicable to the premises.
The initial term of real property leases will expire within the next 22
years; however, most of the leases have options providing for additional lease
terms of from 10 years to 20 years at terms similar to the initial terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the CarMax Group, as of February 28, 1998, were:
Operating
(Amounts in thousands) Lease
Fiscal Commitments
- -------------------------------------------------------
1999 ...................................... $ 15,000
2000 ...................................... 14,970
2001 ...................................... 14,970
2002 ...................................... 14,970
2003 ...................................... 14,970
After 2003.................................. 233,063
---------
Total minimum lease payments................ $ 307,943
=========
In fiscal 1998, the Company entered into sale-leaseback transactions on
behalf of the CarMax Group with unrelated parties at an aggregate selling price
of $98,098,000 ($16,450,000 in fiscal 1997 and $25,750,000 in fiscal 1996).
Neither the Company nor the CarMax Group has continuing involvement under the
sale-leaseback transactions.
12. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
(A) Advertising Expense: Advertising expense, which is included in selling,
general and administrative expenses in the accompanying statements of
operations, amounted to $29,621,000 (3.4 percent of net sales and operating
revenues) in fiscal 1998, $11,493,000 (2.3 percent of net sales and operating
revenues) in fiscal 1997 and $7,154,000 (2.6 percent of net sales and operating
revenues) in fiscal 1996.
(B) Impairment Loss: In the fourth quarter of fiscal 1998, CarMax recorded an
impairment loss of $11.5 million related to the closure and eventual disposal of
its centralized reconditioning facilities and costs associated with excess
property at some locations. The centralized reconditioning facilities were
closed in fiscal 1998 when experience proved that in-store reconditioning was
more efficient. The excess property was purchased as part of retail sites. Both
the reconditioning facilities and the excess property are expected to be
disposed of within the next fiscal year.
Of the total impairment loss, the CarMax Group recorded a $9.7 million loss
for impairment of long-lived assets as required by SFAS No. 121. The charge
represents the difference between the carrying value and the estimated fair
value of the assets less any disposal costs. The estimated fair value is based
on sales prices for comparable assets or expected future cash flows. In
addition, CarMax recorded a $1.8 million long-term liability for an operating
lease where events indicated that the lease value was impaired. This loss is
calculated as the difference between the present value of the required rental
payments on the original lease obligations and the present value of the future
rental receipts that are expected from subleasing the property.
13. INTEREST RATE SWAPS
The Company enters into amortizing swaps relating to the auto loan receivable
securitization to convert variable-rate financing costs to fixed-rate
obligations to better match funding costs to the receivables being securitized.
In November 1995, the Company
72
entered into a 50-month amortizing swap with a notional amount of $75 million
and, in October 1996, entered into a 40-month amortizing swap with a notional
amount of $64 million. During fiscal 1998, the Company entered into four new
40-month amortizing swaps with notional amounts totaling approximately $162
million. These swaps were entered into as part of sales of receivables and are
included in the gain on sales of receivables. The remaining total notional
amount of all swaps related to the auto loan receivable securitization was
approximately $224 million at February 28, 1998, and $114 million at February
28, 1997.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year interest rate swaps with notional
amounts aggregating $175 million. These swaps effectively converted the
variable-rate obligation into a fixed-rate obligation. The fair value of the
swaps is the amount at which they could be settled. This value is based on
estimates obtained from the counterparties, which are two banks highly rated by
several financial rating agencies. The swaps are held for hedging purposes and
are not recorded at fair value. Recording the swaps at fair value at February
28, 1998, would have resulted in a loss of $1.9 million and at February 28,
1997, would have resulted in a gain of $0.1 million.
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Company does not anticipate significant market risk from swaps, since their
use is to more closely match funding costs to the use of the funding. Credit
risk is the exposure to nonperformance of another party to an agreement. Credit
risk is mitigated by dealing with highly rated counterparties.
14. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the CarMax Group's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the CarMax Group's
financial position, liquidity or results of operations.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<S> <C>
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Net sales and operating
revenues.......... $177,554 $124,694 $ 206,433 $132,216 $227,086 $118,409 $263,133 $134,930 $874,206 $510,249
----------------------------------------------------------------------------------------------------
Gross profit......... $ 16,629 $ 12,119 $ 18,870 $10,947 $ 15,357 $ 8,255 $ 22,651 $ 12,140 $ 73,507 $ 43,461
----------------------------------------------------------------------------------------------------
Net (loss) earnings.. $ (1,223) $ 438 $ (1,740) $(1,048) $ (9,141) $ (3,913) $(22,119) $ (4795) $(34,223)$ (9,318)
----------------------------------------------------------------------------------------------------
Net loss attributable to
CarMax Stock...... $ (275) $ - $ (393) $ - $ (2,075) $ - $(5,020) $ (266) $ (7,763)$ (266)
----------------------------------------------------------------------------------------------------
Net loss per share... $ (0.01) $ - $ (0.02) $ - $ (0.09) $ - $ (0.23) $ (0.01) $ (0.35)$ (0.01)
----------------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the CarMax Group (as defined
in Note 1) as of February 28, 1998 and 1997 and the related statements of
operations, group equity (deficit) and cash flows for each of the fiscal years
in the three-year period ended February 28, 1998. These financial statements are
the responsibility of Circuit City Stores, Inc.'s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully discussed in Note 1, the financial statements of the CarMax
Group should be read in conjunction with the consolidated financial statements
of Circuit City Stores, Inc. and subsidiaries and the financial statements of
the Circuit City Group.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the CarMax Group as of
February 28, 1998 and 1997 and the results of its operations and its cash flows
for each of the fiscal years in the three-year period ended February 28, 1998 in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1998
73
Exhibit 21
CIRCUIT CITY STORES, INC.
Subsidiaries of the Company
Jurisdiction of
Incorporation
Subsidiary or Organization
CC Distribution Company of Virginia, Inc. Virginia
Circuit City Stores West Coast, Inc. California
First North American National Bank National Bank
Located in Georgia
Northern National Insurance Ltd. Bermuda
Patapsco Designs, Inc. Maryland
CarMax, Inc. Virginia
CarMax Auto Superstores, Inc. Virginia
C-Max Auto Superstores, Inc. California
DIVX Entertainment, Inc. California
DIVX Management, Inc. Virginia
DIVX Direct, Inc. Virginia
DIVX Securities, Inc. Virginia
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Circuit City Stores, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-56697, 33-50144, 33-36650, 33-22874, 33-64757, 333-02971, 333-20303,
333-22759, 333-25451, 333-27933, 333-34539 and 333-52935) on Form S-8 of Circuit
City Stores, Inc. of our reports dated April 3, 1998, relating to the
consolidated balance sheets of Circuit City Stores, Inc. and subsidiaries (the
Company) as of February 28, 1998 and 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
fiscal years in the three-year period ended February 28, 1998, and the related
financial statement schedule, which reports are included, or incorporated by
reference from the annual report to stockholders, in the February 28, 1998
annual report on Form 10-K of Circuit City Stores, Inc.
We also consent to incorporation by reference in the foregoing registration
statements of our reports dated April 3, 1998, relating to the balance sheets of
the Circuit City Group as of February 28, 1998 and 1997, and the related
statements of earnings, group equity and cash flows for each of the fiscal years
in the three-year period ended February 28, 1998, and the related financial
statement schedule, which reports are included, or incorporated by reference
from the annual report to stockholders, in the February 28, 1998 annual report
on Form 10-K of Circuit City Stores, Inc. Our reports on the Circuit City Group
dated April 3, 1998, include a qualification related to the effects of not
consolidating the CarMax Group with the Circuit City Group as required by
generally accepted accounting principles.
We also consent to incorporation by reference in the foregoing registration
statements of our reports dated April 3, 1998, relating to the balance sheets of
the CarMax Group as of February 28, 1998 and 1997, and the related statements of
operations, group equity (deficit) and cash flows for each of the fiscal years
in the three-year period ended February 28, 1998, and the related financial
statement schedule, which reports are included, or incorporated by reference
from the annual report to stockholders, in the February 28, 1998 annual report
on Form 10-K of Circuit City Stores, Inc.
s/KPMG Peat Marwick LLP
Richmond, Virginia
May 27, 1998
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Richard L. Sharp, my true and lawful attorney-in-fact
to sign on my behalf, as an individual and in the capacity stated below, the
Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year
ended February 28, 1998, and any amendment with such attorney-in-fact may deem
appropriate or necessary.
Signature: /s/Michael T. Chalifoux
Print Name: Michael T. Chalifoux
Title: Sr. Vice President
Chief Financial Officer
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1998, and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Richard N. Cooper
Print Name: Richard N. Cooper
Title: Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1998, and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Barbara S. Feigin
Print Name: Barbara S. Feigin
Title: Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1998, and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Robert S. Jepson Jr.
Print Name: Robert S. Jepson Jr.
Title: Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1998, and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Hugh G. Robinson
Print Name: Hugh G. Robinson
Title: Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1998, and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Walter J. Salmon
Print Name: Walter J. Salmon
Title: Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1998, and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Mikael Salovaara
Print Name: Mikael Salovaara
Title: Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1998, and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/John W. Snow
Print Name: John W. Snow
Title: Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1998, and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Edward Villanueva
Print Name: Edward Villanueva
Title: Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1998, and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Alan Wurtzel
Print Name: Alan Wurtzel
Title: Vice-Chairman
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Column 1 = CONSOLIDATED
Column 2 = CIRCUIT CITY GROUP
Column 3 = CARMAX GROUP
Changes Caption = Allocation of Inter-Group Interest in CarMax losses
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> Feb-28-1998 Feb-28-1998 Feb-28-1998
<PERIOD-END> Feb-28-1998 Feb-28-1998 Feb-28-1998
<CASH> 116,612 90,200 26,412
<SECURITIES> 0 0 0
<RECEIVABLES> 598,035 537,169 60,866
<ALLOWANCES> 0 0 0
<INVENTORY> 1,410,545 1,266,575 143,970
<CURRENT-ASSETS> 2,146,349 1,913,742 232,607
<PP&E> 1,503,815 1,282,355 221,460
<DEPRECIATION> 455,381 448,008 7,373
<TOTAL-ASSETS> 3,231,701 3,061,618 448,322
<CURRENT-LIABILITIES> 905,826 850,261 55,579
<BONDS> 424,292 396,906 27,386
0 0 0
0 0 0
<COMMON> 60,743 49,641 11,102
<OTHER-SE> 1,669,296 1,598,691 348,844
<TOTAL-LIABILITY-AND-EQUITY> 3,231,701 3,061,618 448,322
<SALES> 8,870,797 7,996,591 874,206
<TOTAL-REVENUES> 8,870,797 7,996,591 874,206
<CGS> 6,827,133 6,026,434 800,699
<TOTAL-COSTS> 6,827,133 6,026,434 800,699
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 26,861 25,072 1,789
<INCOME-PRETAX> 168,244 224,348 (56,104)
<INCOME-TAX> 63,933 85,814 (21,881)
<INCOME-CONTINUING> 104,311 138,534 (34,223)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 (26,460) 26,460
<NET-INCOME> 104,311 112,074 (7,763)
<EPS-PRIMARY> 0.00 1.14 (0.35)
<EPS-DILUTED> 0.00 1.13 (0.35)
</TABLE>
