FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 1997
Commission File Number 1-5767
CIRCUIT CITY STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-0493875
(State of Incorporation) (I.R.S. Employer
Identification No.)
9950 MAYLAND DRIVE, RICHMOND, VIRGINIA 23233
(Address of Principal Executive Offices and Zip Code)
(804) 527-4000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Class Outstanding at December 31,1997
Circuit City Stores, Inc. - Circuit City Group Common Stock, par value $0.50 98,749,064
Circuit City Stores, Inc. - CarMax Group Common Stock, par value $0.50 22,159,674
</TABLE>
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 30.
Page 1 of 31
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets -
November 30, 1997 and February 28, 1997 4
Consolidated Statements of Earnings -
Three Months and Nine Months Ended November 30, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Nine Months Ended November 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Circuit City Group Financial Statements:
Circuit City Group Balance Sheets -
November 30, 1997 and February 28, 1997 13
Circuit City Group Statements of Earnings -
Three Months and Nine Months Ended November 30, 1997 and 1996 14
Circuit City Group Statements of Cash Flows -
Nine Months Ended November 30, 1997 and 1996 15
Notes to Circuit City Group Financial Statements 16
CarMax Group Financial Statements:
CarMax Group Balance Sheets -
November 30, 1997 and February 28, 1997 22
CarMax Group Statements of Operations -
Three Months and Nine Months Ended November 30, 1997 and 1996 23
CarMax Group Statements of Cash Flows -
Nine Months Ended November 30, 1997 and 1996 24
Notes to CarMax Group Financial Statements 25
Item 2. Management's Discussion and Analysis:
Circuit City Stores, Inc. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Circuit City Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 18
CarMax Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 27
Page 2 of 31
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
</TABLE>
Page 3 of 31
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
<TABLE>
<S> <C>
Nov. 30, 1997 Feb. 28, 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 76,895 $ 202,643
Net accounts and notes receivable 552,923 531,974
Inventory 1,983,602 1,392,363
Deferred income taxes -- 21,340
Prepaid expenses and other current assets 49,513 14,813
-------------- -------------
Total current assets 2,662,933 2,163,133
Property and equipment, net 1,027,694 886,091
Other assets 39,404 31,949
-------------- -------------
TOTAL ASSETS $ 3,730,031 $ 3,081,173
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,086 $ 1,490
Accounts payable 1,000,223 720,754
Short-term debt 382,610 347
Accrued expenses and other current liabilities 91,608 105,500
Accrued income taxes 5,192 8,560
Deferred income taxes 2,389 --
-------------- -------------
Total current liabilities 1,483,108 836,651
Long-term debt, excluding current installments 424,695 430,290
Deferred revenue and other liabilities 133,379 166,295
Deferred income taxes 23,195 33,081
-------------- -------------
TOTAL LIABILITIES 2,064,377 1,466,317
-------------- -------------
Stockholders' equity:
Circuit City Group common stock, $0.50 par value;
175,000,000 shares authorized; 98,734,000 shares
issued and outstanding as of November 30, 1997 49,367 49,089
CarMax Group common stock, $0.50 par value;
175,000,000 shares authorized; 22,156,000 shares
issued and outstanding as of November 30, 1997 11,078 10,930
Capital in excess of par value 515,633 506,823
Retained earnings 1,089,576 1,048,014
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,665,654 1,614,856
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,730,031 $ 3,081,173
============== =============
See accompanying notes to consolidated financial statements.
Page 4 of 31
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Nine Months Ended
November 30, November 30,
1997 1996 1997 1996
-------------- ------------- ------------- --------------
Net sales and operating revenues $ 2,144,219 $ 1,863,947 6,021,695 $ 5,246,256
Cost of sales, buying and warehousing 1,662,466 1,441,088 4,649,235 4,064,799
-------------- ------------- ------------- --------------
Gross profit 481,753 422,859 1,372,460 1,181,457
-------------- ------------- ------------- --------------
Selling, general and administrative expenses 455,641 381,804 1,269,981 1,051,190
Interest expense 6,857 9,122 18,772 20,348
-------------- ------------- ------------- --------------
Total expenses 462,498 390,926 1,288,753 1,071,538
-------------- ------------- ------------- --------------
Earnings before income taxes 19,255 31,933 83,707 109,919
Provision for income taxes 7,318 12,146 31,810 41,766
-------------- ------------- ------------- --------------
Net earnings $ 11,937 $ 19,787 51,897 $ 68,153
============== ============= ============= ==============
Net earnings (loss) attributable to:
Circuit City Group common stock $ 14,012 $ 19,787 $ 54,640 $ 68,153
============= ==============
CarMax Group common stock (2,075) (2,743)
-------------- -------------
$ 11,937 $ 51,897
============== =============
Weighted average common shares and common share equivalents:
Circuit City Group common stock 100,200 99,489 99,979 99,335
============== ============= ============= ==============
CarMax Group common stock 22,118 21,968
============== =============
Net earnings (loss) per share:
Circuit City Group common stock $ 0.14 $ 0.20 $ 0.55 $ 0.69
============== ============= ============= ==============
CarMax Group common stock $ (0.09) $ (0.12)
============== =============
Dividends paid per common share:
Circuit City Group common stock $ 0.035 $ 0.035 $ 0.105 $ 0.100
============== ============= ============= ==============
CarMax Group common stock $ -- $ --
============== =============
See accompanying notes to consolidated financial statements.
Page 5 of 31
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Nine Months Ended
November 30,
1997 1996
-------------- -------------
Operating Activities:
Net earnings $ 51,897 $ 68,153
Adjustments to reconcile net earnings to net cash used
in operating activities:
Depreciation and amortization 92,947 74,614
Loss (gain) on sales of property and equipment 1,450 (1,117)
Provision for deferred income taxes 13,843 14,695
Decrease in deferred revenue and other liabilities (32,916) (39,958)
Increase in net accounts and notes receivable (20,949) (113,119)
Increase in inventory and prepaid expenses
and other current assets (625,939) (582,441)
Increase in other assets (7,455) (2,372)
Increase in accounts payable, accrued expenses and
other current liabilities, and accrued income taxes 262,209 246,297
-------------- -------------
Net cash used in operating activities (264,913) (335,248)
-------------- -------------
Investing Activities:
Purchases of property and equipment (438,080) (400,408)
Proceeds from sales of property and equipment 202,080 200,871
-------------- -------------
Net cash used in investing activities (236,000) (199,537)
-------------- -------------
Financing Activities:
Proceeds from issuance of short-term debt, net 382,263 501,101
Proceeds from issuance of long-term debt -- 32,088
Principal payments on long-term debt (5,999) (1,189)
Proceeds from issuance of common stock, net 9,236 10,161
Dividends paid on Circuit City Group common stock (10,335) (9,770)
-------------- -------------
Net cash provided by financing activities 375,165 532,391
-------------- -------------
Decrease in cash and cash equivalents (125,748) (2,394)
Cash and cash equivalents at beginning of year 202,643 43,704
-------------- -------------
Cash and cash equivalents at end of period $ 76,895 $ 41,310
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6 of 31
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
On January 24, 1997, Circuit City Stores, Inc. (the "Company") 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, 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). The CarMax
Group Common Stock is intended to track separately the performance of the
CarMax operations.
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 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 consolidated financial statements included herein
should be read in conjunction with the financial statements of each group
and with the notes to consolidated and group financial statements included
in the Company's 1997 annual report to shareholders.
2. Accounting Policies
The consolidated financial statements of the Company conform to generally
accepted accounting principles. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim consolidated financial statements have been
included. The fiscal year-end balance sheet data was derived from audited
financial statements.
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 the
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. In
order 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.
Page 7 of 31
<PAGE>
The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller in an
exchange for a financial asset are considered part of the proceeds and
recorded at fair value as a component of earnings. 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.
3. Gains on Securitizations
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," effective January 1, 1997. SFAS No. 125
requires the Company to recognize gains on securitizations which qualify as
sales. Gains recognized on securitizations for the Circuit City Group's
bank subsidiary increased servicing revenue by $7 million and $16 million
for the three and nine-month periods ended November 30, 1997, respectively,
compared with no gains recognized for the three and nine-month periods
ended November 30, 1996. Gains recognized on securitizations for the CarMax
Group's installment lending division increased servicing revenue by $1
million and $3 million for the three and nine-month periods ended November
30, 1997, respectively, compared to $2 million recognized under SFAS No.
77, "Reporting by Transferors for Transfers of Receivables with Recourse,"
for both the three and nine-month periods ended November 30, 1996.
4. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." The statement is effective for financial
statements for periods ending after December 15, 1997, and changes the
method in which earnings per share will be determined. Adoption of this
statement by the Company will not have a material impact on earnings per
share.
5. Interest Rate Swaps
On behalf of the Circuit City Group, the Company entered into five-year
interest rate swaps in October 1994, with notional amounts totaling $300
million related to the credit card bank subsidiary. These swaps were
entered into as part of the sale of receivables and are therefore included
in the gain on the sale of receivables.
Concurrent with the funding of the $175 million term loan in May 1995, the
Company entered into five-year interest rate swaps with notional amounts
aggregating $175 million. Recording the swaps at fair value would result in
a loss of $1.1 million at November 30, 1997, compared with a gain of $0.1
million at February 28, 1997.
On behalf of the CarMax Group, the Company, during the quarter, entered
into a new 40-month amortizing swap with a notional amount of approximately
$46 million related to an auto loan receivable securitization. The total
notional amount of all CarMax swaps was approximately $195 million at
November 30, 1997 and $114 million at February 28, 1997. These swaps were
entered into as part of the sale of receivables and are therefore included
in the gain on the sale of receivables.
Page 8 of 31
<PAGE>
ITEM 2.
CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Operating Revenues and General Comments
Sales for the third quarter of fiscal 1998 were $2.14 billion, an increase of 15
percent from $1.86 billion in the same period last year. Sales for the first
nine months of the fiscal year were $6.02 billion, an increase of 15 percent
from $5.25 billion in the same period last year. The total sales increase
reflects continued geographic growth of Circuit City Superstores, partly offset
by a comparable store sales decrease. For the third quarter, CarMax produced
strong sales at the two new-car franchises, but used-car sales were below
expectations, reflecting the strong promotional environment in the new-car
industry and the high percentage of new locations in partially stored markets.
Circuit City and CarMax comparable store sales (decreases) increases for the
third quarter and first nine months of fiscal years 1998 and 1997 were as
follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
FY '98 3rd Quarter Nine Months
----------------------------------------- --------------------------- ---------------------------
SEPT OCT NOV FY '98 FY '97 FY '98 FY '97
- --------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Circuit City Group (3%) 0% (3%) (2%) (10%) (2%) (7%)
- ------------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
CarMax Group 6% 5% 0% 4% 22% 9% 21%
- ------------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
Third quarter Circuit City comparable store sales continue to reflect industry
trends, especially lower average retail prices in most categories. Management
expects that Circuit City sales will remain soft as long as industry weakness
continues. The CarMax comparable store sales increase for the third quarter
ended November 30, 1997, reflects strong new-car sales, offset by lower than
expected used-car sales due to prolonged discounting and lower introductory
pricing in the new-car industry.
During the quarter, Circuit City opened a total of 33 new store locations, nine
of which are in the New York metropolitan market. During the quarter, Circuit
City also entered Toledo, Ohio, with two stores; Spokane, Wash., with two
stores; Columbus, Ohio, with three stores and Indianapolis, Ind., with three
stores. Circuit City added two stores in both Detroit, Mich., and Houston,
Texas. Circuit City also added one new store in each of the following cities:
Green Bay, Wisc.; Boise, Idaho; Burlington, Vt.; Jackson, Miss.; Kingsport,
Tenn.; New Orleans, La.; Boston, Mass.; Pittsburgh, Penn.; Denver, Colo.; and
Washington, D.C. Circuit City plans to have opened approximately 60 Superstores
and replaced approximately 15 existing stores by fiscal year end.
During the third quarter, CarMax opened its first Superstore in Dallas, Texas,
and its first two stores in South Florida. In early December, CarMax opened a
second location in Dallas, Texas, and reached a critical mass in Houston with
the opening of its third store. CarMax plans to have opened approximately 10
locations by the end of fiscal 1998.
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.4 percent of sales in the third quarter of fiscal 1998 and 6.1
percent in the third quarter of fiscal 1997. Third-party warranty revenue was
3.5 percent of sales in the third quarter of fiscal 1998 compared with 3.7
percent of sales in fiscal 1997. The total extended warranty revenue that is
reported in total sales was 4.5 percent of sales in this year's third quarter
versus 5.2 percent in the third quarter of last year.
Page 9 of 31
<PAGE>
For the CarMax Group, gross dollar sales from all extended warranty programs
were 3.8 percent of sales in this year's third quarter and 3.5 percent in the
same period last year. Third-party warranty revenue increased to 1.4 percent of
sales in this year's third quarter from 1.1 percent in the same period last
year. The total extended warranty revenue that is reported in total sales was
1.5 percent of sales in the third quarter of fiscal 1998 compared with 1.2
percent of sales for the same period last year.
The Company's operations, in common with other retailers in general, are subject
to seasonal influences. Historically, the Circuit City Group has realized more
of its net sales and net earnings in the final fiscal quarter, which includes
the Christmas season, than in any other fiscal quarter. CarMax stores, however,
have experienced more of their net sales in the first two quarters of the fiscal
year. The net earnings of any interim quarter are seasonally disproportionate to
net sales since administrative and certain operating expenses remain relatively
constant during the year. Therefore, interim results should not be relied upon
as necessarily indicative of results for the entire fiscal year.
Cost of Sales, Buying and Warehousing
The gross profit margin decreased to 22.5 percent of sales in the third quarter
of fiscal 1998 from 22.7 percent of sales in the same period last year. For the
nine months ended November 30, 1997, the gross profit margin increased to 22.8
percent of sales from 22.5 percent of sales in the first nine months of fiscal
1997.
For the quarter, the decrease in gross margin primarily reflects the increase in
CarMax sales as a percentage of total sales. Lower introductory pricing and
prolonged discounting by the new-car market pressured used-car pricing during
the quarter for the CarMax Group. For the Circuit City Group, gross margin
increased, reflecting strong inventory management and strength in higher profit
margin categories such as major appliances, digital satellite systems and
wireless communications. The gross margin increase for the nine months ended
November 30, 1997, reflects strong inventory management along with increased
sales of higher margin products for the Circuit City Group. This increase was
partly offset by the CarMax Group gross margin decrease, which reflects downward
pressure on pricing in the third quarter, partly offset by improved inventory
management early in the year. Management expects that the competitive climate in
the electronics business, changes in the Circuit City merchandise mix, and the
increased sales volume from CarMax will continue to affect gross margins.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expense ratio increased from
20.5 percent of sales in the third quarter of last year to 21.2 percent for the
same period this year. For the nine-month period ended November 30, 1997, the
expense ratio was 21.1 percent of sales compared with 20.0 percent in the same
period last year.
The higher ratio primarily reflects the impact of lower Circuit City comparable
store sales; a lower earnings contribution from the credit card bank subsidiary;
CarMax expansion and corporate overhead costs and CarMax third quarter sales
trends; and a third quarter impact from the Digital Video Express, L.P. ("Divx")
investment of approximately 38 basis points versus 16 basis points last year.
For the first nine months of fiscal 1998, the investment in Divx increased the
expense ratio by 29 basis points compared with 16 basis points for the same
period last year.
Interest Expense
Interest expense for the third quarter of fiscal 1998 decreased to 0.4 percent
of sales from 0.5 percent in last year's third quarter. For the nine-month
period, interest expense decreased from 0.4 percent of sales in fiscal 1997 to
0.3 percent this fiscal year.
Page 10 of 31
<PAGE>
Income Taxes
The effective income tax rate was 38.0 percent in the third quarter and also the
first nine months of both fiscal 1998 and fiscal 1997.
Net Earnings
Net earnings for the quarter ended November 30, 1997, decreased 40 percent to
$11.9 million from $19.8 million in the same period last year. Net earnings
decreased 24 percent to $51.9 million for the nine-month period ended November
30, 1997, from $68.2 million in the same period last year.
Liquidity and Capital Resources
Total assets at November 30, 1997, were $3,730.0 million, up $648.9 million or
21 percent since February 28, 1997. The largest contributor to the asset
increase was the $591.2 million growth in inventory to support new and planned
store openings and the Circuit City holiday season sales volume. Property and
equipment, net, increased $141.6 million to support new CarMax locations. Net
accounts and notes receivable increased $20.9 million, resulting from increased
auto loans made by First North American Credit Corporation, CarMax's installment
lending division.
To support new store openings for both Circuit City and CarMax and seasonal
inventory for the Circuit City Group, accounts payable and short-term debt
increased $279.5 million and $382.3 million, respectively, from the end of
fiscal 1997.
The Company's credit card bank subsidiary, included in the Circuit City Group,
has a master trust securitization facility for its private-label card that
allows the transfer of receivables through private placement and the public
market. The master trust vehicle permits further expansion of the securitization
program to meet future needs. As of November 30, 1997, the master trust program
had a total program capacity of $1.15 billion. During the quarter, the Company's
credit card bank subsidiary created a master trust securitization facility
related to its bankcard program. This master trust vehicle permits further
expansion of the securitization program in both the public and private markets.
As of November 30, 1997, the bankcard master trust program had a total program
capacity of $2.05 billion. As of November 30, 1997, the Company also had an
asset securitization program operated through a special purpose subsidiary on
behalf of the CarMax Group that allowed the transfer of up to $225 million in
auto loan receivables. This amount increased to $300 million following the end
of the third quarter. The Company anticipates that it will be able to expand its
securitization programs to meet future needs.
Between the second quarter of this fiscal year and the first quarter of next
fiscal year, the Company plans to invest an additional $100 million in Digital
Video Express, L.P., a partnership that has developed and will market a new home
digital video system that has won support from leading U.S. movie studios and
brand-name consumer electronics manufacturers. The Company holds the majority
ownership in the partnership. The remaining interest is held by the Los Angeles
entertainment law firm Ziffren, Brittenham, Branca & Fischer. The investment in
Divx is allocated to the Circuit City Group.
The Company generally expects to continue its existing long-term capitalization
strategy for the balance of the current fiscal year. Management anticipates that
capital expenditures will be funded through a combination of internally
generated funds, sale-leaseback transactions, operating leases, and proceeds of
the recent CarMax equity offering, and that securitization transactions will be
used to finance the growth in credit card and auto loan receivables. In
addition, management is considering other capitalization alternatives related to
Divx expansion and CarMax inventory. At November 30, 1997, the Company
maintained $410 million in seasonal lines that are renewed annually with various
banks as well as a $150 million revolving credit facility.
Page 11 of 31
<PAGE>
Year 2000 Conversion
In fiscal 1997, the Company began a year 2000 date conversion project to address
all necessary code changes, testing and implementation for all of its systems.
The Company has, and will continue, to evaluate appropriate courses of
corrective action, including replacement of certain systems for which the
associated costs are recorded as assets and amortized. Project completion is
expected by the end of fiscal 1999. The Company does not expect the amounts
required to be expensed over the next two years to have a material impact on its
financial position or results of operations. In addition, the Company is
coordinating with other entities with which it electronically interacts to
address potential year 2000 issues in order to minimize the potential adverse
consequences, if any, that could result from the failure of such entities to
address this issue.
Forward-Looking Statements
This report contains forward-looking statements, which are subject to risks and
uncertainties, including, but not limited to, risks associated with the
development of new concepts.
Divx, as a development stage enterprise, has had no product sales and there is
no assurance that its research and development efforts will be successful, that
it will ever have commercially accepted products, or that it will achieve
significant sales of any such products. Other risks include Divx's limited
operating history, history of operating losses, no assurance of successful
operations, early state of market development, acquiring and maintaining
licensing and manufacturing agreements, competition from substitute products and
services, rapid technological change, dependence on key personnel, development
or assertions by or against the Company relating to intellectual property
rights, and the uncertainty of availability of additional financing.
Additional discussion of factors that could cause actual results to differ
materially from management's projections, forecasts, estimates and expectations
is contained in the Company's 1997 SEC filings, including the Company's report
on Form 10-K for the year ended February 28, 1997.
Page 12 of 31
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Balance Sheets
(Amounts in thousands)
<TABLE>
<S> <C>
Nov. 30, 1997 Feb. 28, 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 65,635 $ 32,222
Net accounts and notes receivable 500,861 503,624
Inter-group note receivable 123,697 -
Merchandise inventory 1,856,422 1,310,103
Deferred income taxes 1,678 23,764
Prepaid expenses and other current assets 41,226 10,711
------------- -------------
Total current assets 2,589,519 1,880,424
Property and equipment, net 814,314 793,917
Inter-Group Interest in the CarMax Group 293,575 303,657
Other assets 37,793 30,258
------------- -------------
TOTAL ASSETS $ 3,735,201 $ 3,008,256
============= =============
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long-term debt $ 1,086 $ 1,490
Accounts payable 964,099 692,461
Short-term debt 382,610 347
Inter-group payable 137,081 48,147
Accrued expenses and other current liabilities 87,558 103,441
Accrued income taxes 5,192 8,560
------------- -------------
Total current liabilities 1,577,626 854,446
Long-term debt, excluding current installments 424,695 430,290
Deferred revenue and other liabilities 130,153 163,700
Deferred income taxes 23,284 33,123
------------- -------------
TOTAL LIABILITIES 2,155,758 1,481,559
GROUP EQUITY 1,579,443 1,526,697
------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY $ 3,735,201 $ 3,008,256
============= =============
See accompanying notes to group financial statements.
Page 13 of 31
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Nine Months Ended
November 30, November 30,
1997 1996 1997 1996
-------------- ------------- ------------- --------------
Net sales and operating revenues $ 1,917,133 $ 1,745,538 $ 5,410,622 $ 4,870,937
Cost of sales, buying and warehousing 1,450,737 1,330,934 4,089,018 3,720,801
-------------- ------------- ------------- -------------
Gross profit 466,396 414,604 1,321,604 1,150,136
-------------- ------------- ------------- -------------
Selling, general and administrative expenses 425,631 368,797 1,200,380 1,016,348
Interest expense 6,525 7,185 17,675 16,137
-------------- ------------- ------------- -------------
Total expenses 432,156 375,982 1,218,055 1,032,485
-------------- ------------- ------------- -------------
Earnings before income taxes and
Inter-Group Interest in the CarMax Group 34,240 38,622 103,549 117,651
Provision for income taxes 13,162 14,922 39,548 44,975
-------------- ------------- ------------- -------------
Earnings before Inter-Group Interest
in the CarMax Group 21,078 23,700 64,001 72,676
Net loss related to Inter-Group
Interest in the CarMax Group 7,066 3,913 9,361 4,523
-------------- ------------- ------------- -------------
Net earnings $ 14,012 $ 19,787 $ 54,640 $ 68,153
============== ============= ============= =============
Weighted average common shares
and common share equivalents 100,200 99,489 99,979 99,335
============== ============= ============= =============
Net earnings per share $ 0.14 $ 0.20 $ 0.55 $ 0.69
============== ============= ============= ==============
Dividends paid per common share $ 0.035 $ 0.035 $ 0.105 $ 0.100
============== ============= ============= ==============
See accompanying notes to group financial statements.
Page 14 of 31
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Nine Months Ended
November 30,
1997 1996
-------------- -------------
Operating Activities:
Net earnings $ 54,640 $ 68,153
Adjustments to reconcile net earnings to net cash used
in operating activities:
Net loss related to Inter-Group Interest
in the CarMax Group 9,361 4,523
Depreciation and amortization 89,577 73,307
Loss (gain) on sales of property and equipment 1,450 (1,117)
Provision for deferred income taxes 12,247 13,231
Decrease in deferred revenue and other liabilities (33,547) (40,808)
Decrease (increase) in net accounts and notes receivable 2,763 (103,476)
Increase in merchandise inventory and prepaid
expenses and other current assets (576,834) (573,107)
Increase in other assets (7,535) (184)
Increase in accounts payable, accrued expenses and
other current liabilities, and accrued income taxes 252,387 238,314
-------------- -------------
Net cash used in operating activities (195,491) (321,164)
-------------- -------------
Investing Activities:
Purchases of property and equipment (272,402) (339,903)
Proceeds from sales of property and equipment 160,978 195,435
Issuance of inter-group note receivable, net (123,697) --
-------------- -------------
Net cash used in investing activities (235,121) (144,468)
-------------- -------------
Financing Activities:
Increase in inter-group payable, net 88,934 --
Proceeds from issuance of short-term debt, net 382,263 419,393
(Principal payments on) proceeds from issuance of long-term debt, net (5,999) 36,852
Equity issuances, net 9,162 10,161
Dividends paid (10,335) (9,770)
-------------- -------------
Net cash provided by financing activities 464,025 456,636
-------------- -------------
Increase (decrease) in cash and cash equivalents 33,413 (8,996)
Cash and cash equivalents at beginning of year 32,222 41,485
-------------- -------------
Cash and cash equivalents at end of period $ 65,635 $ 32,489
============== =============
</TABLE>
See accompanying notes to group financial statements.
Page 15 of 31
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Notes to Group Financial Statements
(Unaudited)
1. Basis of Presentation
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, 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). The CarMax
Group Common Stock is intended to track separately the performance of the
CarMax operations.
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 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 consolidated and CarMax Group
financial statements and with the notes to the consolidated and group
financial statements included in the Company's 1997 annual report to
shareholders.
2. Accounting Policies
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. Except for the effects of not consolidating the
Circuit City Group and the CarMax Group, the financial statements of the
Circuit City Group conform to generally accepted accounting principles. The
interim period financial statements are unaudited; however, in the opinion
of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim group
financial statements have been included. The fiscal year-end balance sheet
data was derived from audited financial statements.
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 the
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. In
order 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.
Page 16 of 31
<PAGE>
The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller in an
exchange for a financial asset are considered part of the proceeds and
recorded at fair value as a component of earnings. 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.
3. Gains on Securitizations
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," effective January 1, 1997. SFAS No. 125
requires the Company to recognize gains on securitizations which qualify as
sales. Gains recognized on securitizations for the Circuit City Group's
bank subsidiary increased servicing revenue by $7 million and $16 million
for the three and nine-month periods ended November 30, 1997, respectively,
compared with no gains recognized for the three and nine-month periods
ended November 30, 1996.
4. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issue SFAS No.
128, "Earnings Per Share." The statement is effective for financial
statements for periods ending after December 15, 1997, and changes the
method in which earnings per share will be determined. Adoption of this
statement by the Company will not have a material impact on earnings per
share.
5. Inter-Group Note Receivable
During the first quarter, the Circuit City Group entered into an
inter-group note with the CarMax Group to finance CarMax inventory
purchases until a permanent inventory financing vehicle is established. The
note is payable upon demand and bears interest at the Company's average
borrowing rate. The balance as of November 30, 1997, was $123.7 million and
is included with current assets on the balance sheet.
6. Interest Rate Swaps
On behalf of the Circuit City Group, the Company entered into five-year
interest rate swaps in October 1994, with notional amounts totaling $300
million related to the credit card bank subsidiary. These swaps were
entered into as part of the sale of receivables and are therefore included
in the gain on the sale of receivables.
Concurrent with the funding of the $175 million term loan in May 1995, the
Company entered into five-year interest rate swaps with notional amounts
aggregating $175 million. Recording the swaps at fair value would result in
a loss of $1.1 million at November 30, 1997, compared with a gain of $0.1
million at February 28, 1997.
Page 17 of 31
<PAGE>
ITEM 2.
CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Operating Revenues and General Comments
Sales for the third quarter of fiscal 1998 were $1.92 billion, an increase of 10
percent from $1.75 billion in the same period last year. Sales for the first
nine months of fiscal 1998 were $5.41 billion, an increase of 11 percent from
$4.87 billion in the same period last year. The total sales increase reflects
the continued geographic growth of Circuit City Superstores, partly offset by a
comparable store sales decrease.
Circuit City comparable store sales changes for the third quarter and first nine
months of fiscal years 1998 and 1997 were as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
FY '98 3rd Quarter Nine Months
- --------------------------------- ------------------------- -------------- --------------
SEPT OCT NOV FY '98 FY '97 FY '98 FY '97
- ----------- ----------- --------- ------------ ------------ -------------- --------------
(3%) 0% (3%) (2%) (10%) (2%) (7%)
- ----------- ----------- --------- ------------ ------------ -------------- --------------
</TABLE>
In the third quarter, Circuit City comparable store sales continued to reflect
industry trends, especially lower average retail prices in most categories.
Management expects that Circuit City sales will remain soft as long as industry
weakness continues.
During the quarter, Circuit City opened a total of 33 new store locations, nine
of which are in the New York metropolitan market. During the quarter, Circuit
City also entered Toledo, Ohio, with two stores; Spokane, Wash., with two
stores; Columbus, Ohio, with three stores and Indianapolis, Ind., with three
stores. Circuit City added two stores in both Detroit, Mich., and Houston,
Texas. Circuit City also added one new store in each of the following cities:
Green Bay, Wisc.; Boise, Idaho; Burlington, Vt.; Jackson, Miss.; Kingsport,
Tenn.; New Orleans, La.; Boston, Mass.; Pittsburgh, Penn.; Denver, Colo.; and
Washington, D.C. Circuit City plans to have opened approximately 60 Superstores
and replaced approximately 15 existing stores by fiscal year end.
The table below details Circuit City retail units:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------
Stores Open At End of Quarter Estimate
---------------------------------------
Nov. 30, 1997 Nov. 30, 1996 Feb. 28, 1998 Feb. 28, 1997
Superstore
- -----------------------------------------------------------------------------------------------------------
"D" Superstore 110 94 115 95
- -----------------------------------------------------------------------------------------------------------
"C" Superstore 292 271 287 278
- -----------------------------------------------------------------------------------------------------------
"B" Superstore 69 51 75 54
- -----------------------------------------------------------------------------------------------------------
"A" Superstore 22 13 26 16
- -----------------------------------------------------------------------------------------------------------
Electronics-Only 4 5 4 5
- -----------------------------------------------------------------------------------------------------------
Circuit City Express 52 47 52 45
===========================================================================================================
TOTAL 549 481 559 493
===========================================================================================================
</TABLE>
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.4 percent of sales in the third quarter of fiscal 1998 and 6.1
percent in the third quarter of fiscal 1997. Third-party warranty revenue was
3.5 percent of sales in the third quarter of fiscal 1998 compared with 3.7
percent of sales in fiscal 1997. The total extended warranty revenue that is
reported in total sales was 4.5 percent of sales in this year's third quarter
versus 5.2 percent in the third quarter of last year.
Page 18 of 31
<PAGE>
The percentage of merchandise sales by category is listed below:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
3rd Quarter Nine Months
------------------------------- -----------------------------
Fiscal 1998 Fiscal 1997 Fiscal 1998 Fiscal 1997
------------- -------------- ------------- -------------
TV 20% 20% 18% 18%
- --------------------------------------------------------------------------------------------
VCR/Camcorders 12 13 13 14
- --------------------------------------------------------------------------------------------
Audio 16 17 16 17
- --------------------------------------------------------------------------------------------
Home Office 24 25 24 24
- --------------------------------------------------------------------------------------------
Appliances 17 15 18 17
- --------------------------------------------------------------------------------------------
Other 11 10 11 10
============================================================================================
TOTAL 100% 100% 100% 100%
============================================================================================
</TABLE>
Circuit City's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, the Group has realized more of its
net sales and net earnings in the final fiscal quarter, which includes the
Christmas season, than in any other fiscal quarter. The net earnings of any
interim quarter are seasonally disproportionate to net sales since
administrative and certain operating expenses remain relatively constant during
the year. Therefore, interim results should not be relied upon as necessarily
indicative of results for the entire fiscal year.
Cost of Sales, Buying and Warehousing
The gross profit margin increased to 24.3 percent of sales in the third quarter
of fiscal 1998 from 23.8 percent for the same period last year. For the nine
months ended November 30, 1997, the gross margin increased to 24.4 percent of
sales from 23.6 percent in the first nine months of fiscal 1997.
The gross profit margin increase reflects strong inventory management and
strength in higher profit margin categories such as major appliances, digital
satellite systems and wireless communications. Management expects that the
competitive climate in the electronics business and changes in the Circuit City
merchandise mix will continue to affect gross margins.
Selling, General and Administrative Expenses
The Group's selling, general and administrative expense ratio increased from
21.1 percent of sales in the third quarter of last year to 22.2 percent for the
same period this year. For the nine-month period ended November 30, 1997, the
expense ratio was 22.2 percent of sales compared with 20.9 percent in the same
period last year.
The higher ratio primarily reflects the impact of lower comparable store sales,
a lower earnings contribution from the credit card bank subsidiary and a third
quarter impact from the Group's Divx investment of approximately 43 basis points
versus 17 basis points for the same period last year. Divx increased the expense
ratio by 32 basis points in the first nine months of fiscal 1998 compared with
17 basis points for the same period last year.
Interest Expense
Interest expense for the third quarter of fiscal 1998 decreased to 0.3 percent
of sales from 0.5 percent in last year's third quarter. For the nine-month
period, interest expense was 0.3 percent of sales for both fiscal 1998 and
fiscal 1997.
Page 19 of 31
<PAGE>
Income Taxes
The effective income tax rate was 38.4 percent in the third quarter of fiscal
1998 compared with 38.6 percent for the same period last year. For the first
nine months, the effective income tax rate was 38.2 percent for both fiscal 1998
and fiscal 1997.
Earnings Before Inter-Group Interest in the CarMax Group
For the third quarter, earnings before Inter-Group Interest in the CarMax Group
decreased 11 percent from $23.7 million in fiscal 1997 to $21.1 million in
fiscal 1998. For the nine months ended November 30, 1997, earnings before
Inter-Group Interest in the CarMax Group were $64.0 million, a decrease of 12
percent from $72.7 million in the same period last year.
The results for both years include the investment in Divx. Excluding this
investment, third quarter earnings before Inter-Group Interest in CarMax were
$26.2 million, or 26 cents per share, compared with $25.6 million, or 26 cents
per share, in the same period last year. For the first nine months of fiscal
1998, earnings before Inter-Group Interest in CarMax and excluding the
investment in Divx were $74.9 million, or 75 cents per share, compared with
$77.9 million, or 78 cents per share, in the same period last year.
Net Loss Related to Inter-Group Interest in the CarMax Group
During the third quarter, the net loss attributable to the Circuit City Group's
Inter-Group Interest in the CarMax Group was $7.1 million compared with a net
loss of $3.9 million for the same period last year. For the nine- month period
ended November 30, 1997, the net loss attributable to the Circuit City Group's
Inter-Group Interest in the CarMax group was $9.4 million compared with a net
loss of $4.5 million for the same period last year.
Net Earnings
Net earnings for the quarter ended November 30, 1997, decreased 29 percent to
$14.0 million from $19.8 million in the same period last year. Net earnings per
share decreased 30 percent to 14 cents from 20 cents.
For the nine months ended November 30, 1997, net earnings decreased 20 percent
to $54.6 million from $68.2 million in the same period last year. Net earnings
per share decreased 20 percent to 55 cents from 69 cents.
Liquidity and Capital Resources
Total assets at November 30, 1997, were $3,735.2 million, up $726.9 million or
24 percent since February 28, 1997. The largest contributor to the asset
increase was the $546.3 million growth in merchandise inventory to support new
and planned store openings and the holiday season sales volume. The inter-group
note receivable increased $123.7 million. Property and equipment, net, increased
$20.4 million, largely because of new store openings offset by sale-leaseback
transactions.
The $271.6 million increase in accounts payable since the end of fiscal 1997 is
attributable to planned and completed store openings and seasonal inventory.
Short-term debt increased $382.3 million from the end of fiscal 1997 to also
support increased inventory needed for the holiday season sales volume.
The Company's credit card bank subsidiary, included in the Circuit City Group,
has a master trust securitization facility for its private-label card that
allows the transfer of receivables through private placement and the public
market. The master trust vehicle permits further expansion of the securitization
program to meet future needs. As of November 30, 1997, the master trust program
had a total program capacity of $1.15
Page 20 of 31
<PAGE>
billion. During the quarter, the Company's credit card bank subsidiary created a
master trust securitization facility related to its bankcard program. This
master trust vehicle permits further expansion of the securitization program in
both the public and private markets. As of November 30, 1997, the bankcard
master trust program had a total program capacity of $2.05 billion.
Between the second quarter of this fiscal year and the first quarter of next
fiscal year, the Company plans to invest an additional $100 million in Digital
Video Express, L.P., a partnership that has developed and will market a new
digital home video system that has won support from leading U.S. movie studios
and brand-name consumer electronics manufacturers. The Company holds the
majority ownership in the partnership. The remaining interest is held by the Los
Angeles entertainment law firm Ziffren, Brittenham, Branca & Fischer. The
investment in Divx is allocated to the Circuit City Group.
The Group relies on the Company's external debt allocated to the Circuit City
Group to provide working capital needed to fund net assets not otherwise
disposed of through sale-leasebacks or receivable securitizations. All
significant financial activities of the Group are managed on a centralized basis
and are dependent on the financial condition of the Company as a whole. Such
financial activities include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate. At November 30, 1997, the Company also maintained $410 million in
seasonal lines that are renewed annually with various banks as well as a $150
million revolving credit facility.
Management believes that proceeds from the sale of property and equipment and
receivables, future increases in the Company's debt allocated to the Circuit
City Group and cash generated by operations will be sufficient to fund the
Circuit City Group's capital expenditures and operations. In addition,
management is considering other capitalization alternatives related to Divx
expansion.
Year 2000 Conversion
In fiscal 1997, the Company began a year 2000 date conversion project to address
all necessary code changes, testing and implementation for all of its systems.
The Company has, and will continue, to evaluate appropriate courses of
corrective action, including replacement of certain systems whose associated
costs are recorded as assets and amortized. Project completion is expected for
the end of fiscal 1999. The Company does not expect the amounts required to be
expensed over the next two years to have a material impact on its financial
position or results of operations. In addition, the Company is coordinating with
other entities with which it electronically interacts to address potential year
2000 issues in order to minimize the potential adverse consequences, if any,
that could result from the failure of such entities to address this issue.
Forward-Looking Statements
This report contains forward-looking statements, which are subject to risks and
uncertainties, including, but not limited to, risks associated with the
development of new concepts.
Divx, as a development stage enterprise, has had no product sales and there is
no assurance that its research and development efforts will be successful, that
it will ever have commercially accepted products, or that it will achieve
significant sales of any such products. Other risks include Divx's limited
operating history, history of operating losses, no assurance of successful
operations, early state of market development, acquiring and maintaining
licensing and manufacturing agreements, competition from substitute products and
services, rapid technological change, dependence on key personnel, development
or assertions by or against the Company relating to intellectual property
rights, and the uncertainty of availability of additional financing.
Additional discussion of factors that could cause actual results to differ
materially from management's projections, forecasts, estimates and expectations
is contained in the Company's 1997 SEC filings, including the Company's report
on Form 10-K for the year ended February 28, 1997.
Page 21 of 31
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Balance Sheets
(Amounts in thousands)
<TABLE>
<S> <C>
Nov. 30, 1997 Feb. 28, 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,260 $ 170,421
Net accounts receivable 52,062 28,350
Inter-group receivable 137,081 48,147
Inventory 127,180 82,260
Prepaid expenses and other current assets 8,287 4,102
-------------- -------------
Total current assets 335,870 333,280
Property and equipment, net 213,380 92,174
Deferred income taxes 89 42
Other assets 1,611 1,691
-------------- -------------
TOTAL ASSETS $ 550,950 $ 427,187
============== =============
LIABILITIES AND GROUP EQUITY
Current liabilities:
Accounts payable 36,124 28,293
Inter-group note payable 123,697 --
Deferred income taxes 4,067 2,424
Accrued expenses and other current liabilities 4,050 2,059
-------------- -------------
Total current liabilities 167,938 32,776
Deferred revenue and other liabilities 3,226 2,595
-------------- -------------
TOTAL LIABILITIES 171,164 35,371
GROUP EQUITY 379,786 391,816
-------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY $ 550,950 $ 427,187
============== =============
See accompanying notes to group financial statements.
Page 22 of 31
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Nine Months Ended
November 30, November 30,
1997 1996 1997 1996
-------------- ------------- ------------- --------------
Net sales and operating revenues $ 227,086 $ 118,409 $ 611,073 $ 375,319
Cost of sales 211,729 110,154 560,217 343,998
-------------- ------------- ------------- --------------
Gross profit 15,357 8,255 50,856 31,321
-------------- ------------- ------------- --------------
Selling, general and administrative expenses 30,010 13,007 69,601 34,842
Interest expense 332 1,937 1,097 4,211
-------------- ------------- ------------- --------------
Total expenses 30,342 14,944 70,698 39,053
-------------- ------------- ------------- --------------
Loss before income tax benefit 14,985 6,689 19,842 7,732
Income tax benefit 5,844 2,776 7,738 3,209
-------------- ------------- ------------- --------------
Net loss $ 9,141 $ 3,913 $ 12,104 $ 4,523
============== ============= ============= ==============
Net loss attributable to:
Circuit City Group common stock $ 7,066 $ 3,913 $ 9,361 $ 4,523
============= ==============
CarMax Group common stock 2,075 2,743
-------------- -------------
$ 9,141 $ 12,104
============== =============
Weighted average common shares 22,118 21,968
============== =============
Net loss per share $ 0.09 $ 0.12
============== =============
Dividends paid per common share $ -- $ --
============== =============
See accompanying notes to group financial statements.
Page 23 of 31
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Nine Months Ended
November 30,
1997 1996
-------------- -------------
Operating Activities:
Net loss $ (12,104) $ (4,523)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,370 1,307
Provision for deferred income taxes 1,596 1,464
Increase in deferred revenue and other liabilities 631 850
Increase in net accounts receivable (23,712) (9,643)
Increase in inventory and prepaid expenses
and other current assets (49,105) (9,334)
Decrease (increase) in other assets 80 (2,188)
Increase in accounts payable and accrued expenses
and other current liabilities 9,822 7,983
-------------- -------------
Net cash used in operating activities (69,422) (14,084)
-------------- -------------
Investing Activities:
Purchases of property and equipment (165,678) (60,505)
Proceeds from sales of property and equipment 41,102 5,436
Increase in inter-group receivable, net (88,934) --
-------------- -------------
Net cash used in investing activities (213,510) (55,069)
------------- -------------
Financing Activities:
Proceeds from issuance of short-term debt, net -- 81,708
Principal payments on long-term debt, net -- (5,953)
Proceeds from issuance of inter-group note payable, net 123,697 --
Equity issuances, net 74 --
-------------- -------------
Net cash provided by financing activities 123,771 75,755
-------------- -------------
(Decrease) increase in cash and cash equivalents (159,161) 6,602
Cash and cash equivalents at beginning of year 170,421 2,219
-------------- -------------
Cash and cash equivalents at end of period $ 11,260 $ 8,821
============== =============
</TABLE>
See accompanying notes to group financial statements.
Page 24 of 31
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Notes to Group Financial Statements
(Unaudited)
1. Basis of Presentation
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, 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). The CarMax
Group Common Stock is intended to track separately the performance of the
CarMax operations.
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 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 consolidated and Circuit City Group
financial statements and with the notes to the consolidated and group
financial statements included in the Company's 1997 annual report to
shareholders.
2. Accounting Policies
The financial statements of the CarMax Group conform to generally accepted
accounting principles. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim group financial statements have been included.
The fiscal year-end balance sheet data was derived from audited financial
statements.
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 the
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. In
order 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.
Page 25 of 31
<PAGE>
The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller in an
exchange for a financial asset are considered part of the proceeds and
recorded at fair value as a component of earnings. 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.
3. Gains on Securitizations
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," effective January 1, 1997. SFAS No. 125
requires the Company to recognize gains on securitizations which qualify as
sales. Gains recognized on securitizations for the CarMax Group's
installment lending division increased servicing revenue by $1 million and
$3 million for the three and nine-month periods ended November 30, 1997,
respectively, compared to $2 million recognized under SFAS No. 77,
"Reporting by Transferors for Transfers of Receivables with Recourse," for
both the three and nine-month periods ended November 30, 1996.
4. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." The statement is effective for financial
statements for periods ending after December 15, 1997, and changes the
method in which earnings per share will be determined. Adoption of this
statement by the Company will not have a material impact on earnings per
share.
5. Inter-Group Note Payable
During the first quarter, the CarMax Group entered into an inter-group note
with the Circuit City Group to finance inventory purchases until a
permanent inventory financing vehicle is established. The note is payable
upon demand and bears interest at the Company's average borrowing rate. The
balance as of November 30, 1997, was $123.7 million and is included with
current liabilities on the balance sheet.
6. Interest Rate Swaps
Concurrent with the funding of the $175 million term loan in May 1995, the
Company entered into five-year interest rate swaps with notional amounts
aggregating $175 million. Recording the swaps at fair value would result in
a loss of $1.1 million at November 30, 1997, compared with a gain of $0.1
million at February 28, 1997.
On behalf of the CarMax Group, the Company, during the quarter, entered
into a new 40-month amortizing swap with a notional amount of approximately
$46 million related to an auto loan receivable securitization. The total
notional amount of all CarMax swaps was approximately $195 million at
November 30, 1997 and $114 million at February 28, 1997. These swaps were
entered into as part of the sale of receivables and are therefore included
in the gain on the sale of receivables.
Page 26 of 31
<PAGE>
ITEM 2.
CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Operating Revenues and General Comments
Sales for the third quarter of fiscal 1998 were $227.1 million, an increase of
92 percent from $118.4 million in the same period last year. CarMax produced
strong sales at the two new-car franchises during the quarter, but used-car
sales were below expectations, reflecting the strong promotional environment in
the new-car industry and the high percentage of new locations in partially
stored markets. For the nine months ended November 30, 1997, total sales for the
CarMax Group increased 63 percent to $611.1 million from $375.3 million in the
same period last year. The total sales increase reflects eight locations opened
since the third quarter of last year and a CarMax comparable store sales
increase. CarMax comparable store sales changes for the third quarter and first
nine months of fiscal years 1998 and 1997 were as follows:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
FY '98 3rd Quarter Nine Months
- --------------------------------- -------------------------- ----------------------------
SEPT OCT NOV FY '98 FY '97 FY '98 FY '97
- ---------- ------------ --------- ------------ ------------- ------------- --------------
6% 5% 0% 4% 22% 9% 21%
- ---------- ------------ --------- ------------ ------------- ------------- --------------
</TABLE>
The CarMax comparable store sales increase for the third quarter ended November
30, 1997, reflects strong new-car sales, offset by lower than expected used-car
sales due to prolonged discounting and lower introductory pricing in the new-car
industry. During the third quarter, CarMax opened its first Superstore in
Dallas, Texas, and its first two stores in South Florida. In early December,
CarMax opened a second location in Dallas, Texas, and reached a critical mass in
Houston with the opening of its third store. CarMax plans to have opened
approximately 10 new locations by the end of fiscal 1998.
The table below details CarMax retail units:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------
Stores Open At End of Quarter Estimate
---------------------------------------------
Nov. 30, 1997 Nov. 30, 1996 Feb. 28, 1998 Feb. 28, 1997
- -------------------------------------------------------------------------------------------------------------
"C" Superstore 4 1 5 1
- -------------------------------------------------------------------------------------------------------------
"B" Superstore 3 2 5 3
- -------------------------------------------------------------------------------------------------------------
"A" Superstore 7 3 7 3
=============================================================================================================
TOTAL 14 6 17 7
=============================================================================================================
</TABLE>
For the CarMax Group, gross dollar sales from all extended warranty programs
were 3.8 percent of sales in this year's third quarter and 3.5 percent in the
same period last year. Third-party warranty revenue increased to 1.4 percent of
sales in this year's third quarter from 1.1 percent in the same period last
year. The total extended warranty revenue that is reported in total sales was
1.5 percent of sales in the third quarter of fiscal 1998 compared with 1.2
percent of sales for the same period last year.
CarMax's operations, in common with other retailers in general, are subject to
seasonal influences. Historically, CarMax stores have realized more of their net
sales in the first two quarters of the fiscal year. The net earnings of any
interim quarter are seasonally disproportionate to each store's net sales since
administrative and certain operating expenses remain relatively constant during
the year. Therefore, interim results should not be relied upon as necessarily
indicative of results for the entire fiscal year.
Page 27 of 31
<PAGE>
Cost of Sales
The gross profit margin decreased to 6.8 percent of sales in the third quarter
of fiscal 1998 from 7.0 percent for the same period last year. For the nine
months ended November 30, 1997, gross margins decreased to 8.3 percent of sales
from 8.4 percent in the first nine months of fiscal 1997. The decrease in gross
margin reflects downward pressure placed on used-car pricing during the third
quarter. This pricing pressure offset the positive impact of improved inventory
management early in the year.
Selling, General and Administrative Expenses
For the quarter, the CarMax Group's selling, general and administrative expense
ratio increased to 13.2 percent of sales from 11.0 percent of sales for the same
period last year. For the nine-month period ended November 30, 1997, the expense
ratio increased to 11.4 percent of sales up from 9.3 percent of sales for the
same period last year. The increase in the expense ratio primarily reflects
increased expansion and overhead costs and lower-than-anticipated third quarter
sales.
Interest Expense
Interest expense decreased from 1.6 percent of sales in the third quarter of
fiscal 1997 to 0.2 percent of sales in the same period this year. For the nine
months ended November 30, 1997, interest expense was 0.2 percent of sales
compared with 1.1 percent in the same period last year. In fiscal 1997, interest
expense was incurred on allocated debt used primarily to fund store expansion,
inventory purchases and working capital. The decrease in interest expense as a
percent of sales in this year's third quarter and first nine months reflects the
repayment of Circuit City debt allocated to the CarMax Group, using funds raised
through the CarMax equity offering.
Income Taxes
The effective income tax rate was 39 percent for the third quarter of fiscal
1998 versus 41.5 percent in the same period last year. For the nine months ended
November 30, 1997, the effective income tax rate was 39 percent compared with
41.5 percent in the same period last year and primarily reflects lower effective
rates for state income taxes.
Net Loss
During the third quarter, the CarMax Group incurred a net loss of $9.1 million
versus a net loss of $3.9 million for the same period last year. The net loss
attributable to the CarMax Group stock outstanding was 9 cents per share in the
third quarter of this fiscal year; no CarMax Group stock was outstanding in the
third quarter of the prior fiscal year.
The net loss for the nine months ended November 30, 1997, was $12.1 million
compared with a net loss of $4.5 million for the same period last year. The net
loss attributable to the CarMax Group stock outstanding was 12 cents per share
in the first nine months of this fiscal year; no CarMax Group stock was
outstanding in the first nine months of the prior fiscal year.
Liquidity and Capital Resources
Total assets at November 30, 1997, were $551.0 million, up $123.8 million or 29
percent since February 28, 1997. The largest contributor to the asset increase
was a $121.2 million increase in property and equipment, net, largely because of
actual and planned store openings. Net accounts receivable increased by $23.7
million, resulting from increased auto loans made by First North American Credit
Corporation, the Group's installment lending division.
Page 28 of 31
<PAGE>
To support new store expansion and the purchase of inventory, accounts payable
increased $7.8 million and the inter-group note payable increased $123.7 million
from the end of fiscal 1997.
As of November 30, 1997, the Company had an asset securitization program
operated through a special purpose subsidiary on behalf of the CarMax Group that
allowed the transfer of up to $225 million in auto loan receivables. This amount
was increased to $300 million following the end of the third quarter. The
Company anticipates that it will be able to expand its securitization programs
to meet future needs.
The Group relies on the Company's external debt allocated to the CarMax Group to
fund operating deficits and to provide working capital needed to fund net assets
not otherwise disposed of through sale-leasebacks or receivable securitizations.
All significant financial activities of the Group are managed on a centralized
basis and are dependent on the financial condition of the Company as a whole.
Such financial activities include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate. At November 30, 1997, the Company also maintained $410 million in
seasonal lines that are renewed annually with various banks as well as a $150
million revolving credit facility.
Management believes that the proceeds from the recent equity offering, proceeds
from the sales of property and equipment and receivables, future increases in
the Company's 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 addition, management is considering other capitalization
alternatives related to CarMax inventory.
Year 2000 Conversion
In fiscal 1997, the Company began a year 2000 date conversion project to
address all necessary code changes, testing and implementation for all of its
systems. The Company has, and will continue, to evaluate appropriate courses of
corrective action, including replacement of certain systems whose associated
costs are recorded as assets and amortized. Project completion is expected for
the end of fiscal 1999. The Company does not expect the amounts required to be
expensed over the next two years to have a material impact on its financial
position or results of operations. In addition, the Company is coordinating with
other entities with which it electronically interacts to address potential year
2000 issues in order to minimize the potential adverse consequences, if any,
that could result from the failure of such entities to address this issue.
Forward-Looking Statements
This report contains forward-looking statements, which are subject to risks and
uncertainties, including, but not limited to, risks associated with the
development of a new retail concept. Additional discussion of factors that could
cause actual results to differ materially from management's projections,
forecasts, estimates and expectations is contained in the Company's 1997 SEC
filings, including the Company's report on Form 10-K for the year ended February
28, 1997.
Page 29 of 31
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
Page 30 of 31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRCUIT CITY STORES, INC.
By: s/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
January 13, 1998
Page 31 of 31
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> 9-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> Feb-28-1998 Feb-28-1998 Feb-28-1998
<PERIOD-END> Nov-30-1997 Nov-30-1997 Nov-30-1997
<CASH> 76,895 65,635 11,260
<SECURITIES> 0 0 0
<RECEIVABLES> 552,923 500,861 52,062
<ALLOWANCES> 0 0 0
<INVENTORY> 1,983,602 1,856,422 127,180
<CURRENT-ASSETS> 2,662,933 2,589,519 335,870
<PP&E> 1,463,128 1,243,582 219,546
<DEPRECIATION> 435,434 429,268 6,166
<TOTAL-ASSETS> 3,730,031 3,735,201 550,950
<CURRENT-LIABILITIES> 1,483,108 1,577,626 167,938
<BONDS> 424,695 424,695 0
0 0 0
0 0 0
<COMMON> 60,445 49,367 11,078
<OTHER-SE> 1,605,209 1,530,076 368,708
<TOTAL-LIABILITY-AND-EQUITY> 3,730,031 3,735,201 550,950
<SALES> 6,021,695 5,410,622 611,073
<TOTAL-REVENUES> 6,021,695 5,410,622 611,073
<CGS> 4,649,235 4,089,018 560,217
<TOTAL-COSTS> 4,649,235 4,089,018 560,217
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 18,772 17,675 1,097
<INCOME-PRETAX> 83,707 103,549 (19,842)
<INCOME-TAX> 31,810 39,548 (7,738)
<INCOME-CONTINUING> 51,897 64,001 (12,104)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 (9,361) 9,361
<NET-INCOME> 51,897 54,640 (2,743)
<EPS-PRIMARY> 0 0.55 (0.12)
<EPS-DILUTED> 0 0.55 (0.12)
</TABLE>
