UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1998
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.
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Class Outstanding at September 30,1998
Circuit City Stores, Inc. - Circuit City Group Common Stock, par value $0.50 100,332,163
Circuit City Stores, Inc. - CarMax Group Common Stock, par value $0.50 22,787,278
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An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 33.
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CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX
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Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets -
August 31, 1998 and February 28, 1998 4
Consolidated Statements of Earnings -
Three Months and Six Months Ended August 31, 1998 and 1997 5
Consolidated Statements of Cash Flows -
Six Months Ended August 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Circuit City Group Financial Statements:
Circuit City Group Balance Sheets -
August 31, 1998 and February 28, 1998 15
Circuit City Group Statements of Earnings -
Three Months and Six Months Ended August 31, 1998 and 1997 16
Circuit City Group Statements of Cash Flows -
Six Months Ended August 31, 1998 and 1997 17
Notes to Circuit City Group Financial Statements 18
CarMax Group Financial Statements:
CarMax Group Balance Sheets -
August 31, 1998 and February 28, 1998 24
CarMax Group Statements of Operations -
Three Months and Six Months Ended August 31, 1998 and 1997 25
CarMax Group Statements of Cash Flows -
Six Months Ended August 31, 1998 and 1997 26
Notes to CarMax Group Financial Statements 27
Item 2. Management's Discussion and Analysis:
Circuit City Stores, Inc. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
Circuit City Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 20
CarMax Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 29
Page 2 of 34
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 33
Page 3 of 34
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
Aug. 31, 1998 Feb. 28, 1998
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 93,570 $ 116,612
Net accounts receivable 607,584 598,035
Inventory 1,557,054 1,410,545
Deferred income taxes 12,149 --
Prepaid expenses and other current assets 42,473 21,157
-------------- -------------
Total current assets 2,312,830 2,146,349
Property and equipment, net 1,053,118 1,048,434
Other assets 27,238 36,918
-------------- -------------
TOTAL ASSETS $ 3,393,186 $ 3,231,701
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,392 $ 1,301
Accounts payable 861,361 765,391
Short-term debt 21,932 5,976
Accrued expenses and other current liabilities 128,015 132,802
Accrued income taxes 1,879 --
Deferred income taxes -- 356
-------------- -------------
Total current liabilities 1,014,579 905,826
Long-term debt, excluding current installments 423,344 424,292
Deferred revenue and other liabilities 132,370 145,107
Deferred income taxes 28,722 26,437
-------------- -------------
TOTAL LIABILITIES 1,599,015 1,501,662
-------------- -------------
Stockholders' equity:
Circuit City Group common stock, $0.50 par value;
175,000,000 shares authorized; 100,164,000 shares
issued and outstanding as of August 31, 1998 50,082 49,641
CarMax Group common stock, $0.50 par value;
175,000,000 shares authorized; 22,754,000 shares
issued and outstanding as of August 31, 1998 11,377 11,102
Capital in excess of par value 557,147 530,763
Retained earnings 1,175,565 1,138,533
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,794,171 1,730,039
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,393,186 $ 3,231,701
============== =============
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See accompanying notes to consolidated financial statements.
Page 4 of 34
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CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
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Three Months Ended Six Months Ended
August 31, August 31,
1998 1997 1998 1997
-------------- ------------- ------------- --------------
Net sales and operating revenues $ 2,517,154 $ 2,020,572 $ 4,788,244 $ 3,877,476
Cost of sales, buying and warehousing 1,945,482 1,548,143 3,712,058 2,986,769
-------------- -------------- ------------- --------------
Gross profit 571,672 472,429 1,076,186 890,707
-------------- -------------- ------------- --------------
Selling, general and administrative expenses 514,613 422,472 991,582 814,340
Interest expense 6,314 5,624 13,645 11,915
-------------- -------------- ------------- --------------
Total expenses 520,927 428,096 1,005,227 826,255
-------------- -------------- ------------- --------------
Earnings before income taxes 50,745 44,333 70,959 64,452
Provision for income taxes 19,283 16,847 26,964 24,492
-------------- -------------- ------------- --------------
Net earnings $ 31,462 $ 27,486 $ 43,995 $ 39,960
============== ============== ============= ==============
Net earnings (loss) attributable to:
Circuit City Group common stock $ 32,147 $ 27,879 $ 45,416 $ 40,628
CarMax Group common stock (685) (393) (1,421) (668)
-------------- -------------- ------------- --------------
$ 31,462 $ 27,486 $ 43,995 $ 39,960
============== ============== ============= ==============
Weighted average common shares:
Circuit City Group:
Basic 99,095 98,040 98,893 97,874
============== ============== ============= ==============
Diluted 100,423 99,171 100,185 99,045
============== ============== ============= ==============
CarMax Group 22,580 21,895 22,461 21,878
============== ============== ============= ==============
Net earnings (loss) per share:
Circuit City Group:
Basic $ 0.32 $ 0.28 $ 0.46 $ 0.42
============== ============== ============= ==============
Diluted $ 0.32 $ 0.28 $ 0.45 $ 0.41
============== ============== ============= ==============
CarMax Group $ (0.03) $ (0.02) $ (0.06) $ (0.03)
============== ============= ============= ==============
Dividends paid per common share:
Circuit City Group common stock $ 0.035 $ 0.035 $ 0.070 $ 0.070
============== ============== ============= ==============
CarMax Group common stock $ -- $ -- $ -- $ --
============== ============== ============= ==============
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See accompanying notes to consolidated financial statements.
Page 5 of 34
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CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
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Six Months Ended
August 31,
1998 1997
------------ -----------
Operating Activities:
Net earnings $ 43,995 $ 39,960
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 68,364 61,894
Loss on sales of property and equipment 1,126 450
Provision for deferred income taxes (10,220) 5,961
Decrease in deferred revenue and other liabilities (12,737) (22,515)
Increase in net accounts receivable (9,549) (35,389)
Increase in inventory, prepaid expenses
and other current assets (167,825) (46,026)
Decrease in other assets 9,580 7,882
Increase in accounts payable, accrued expenses and
other current liabilities, and accrued income taxes 93,062 74,857
----------- -----------
Net cash provided by operating activities 15,796 87,074
----------- -----------
Investing Activities:
Purchases of property and equipment (209,046) (284,848)
Proceeds from sales of property and equipment 134,972 161,412
----------- -----------
Net cash used in investing activities (74,074) (123,436)
----------- -----------
Financing Activities:
Proceeds from issuance of short-term debt, net 15,956 7,864
Principal payments on long-term debt (857) (4,840)
Issuances of Circuit City Group common stock, net 25,425 6,350
Issuances of CarMax Group common stock, net 1,675 (5)
Dividends paid on Circuit City Group common stock (6,963) (6,880)
----------- -----------
Net cash provided by financing activities 35,236 2,489
----------- -----------
Decrease in cash and cash equivalents (23,042) (33,873)
Cash and cash equivalents at beginning of year 116,612 202,643
----------- -----------
Cash and cash equivalents at end of period $ 93,570 $ 168,770
=========== ===========
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See accompanying notes to consolidated financial statements.
Page 6 of 34
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CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Circuit City Stores, Inc. and its subsidiaries (the "Company") has two
series of common stock - the Circuit City Group Stock and the CarMax Group
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 and related
operations ("Divx")). The CarMax Group Common Stock is intended to track
separately the performance of the CarMax operations. The Circuit City Group
held a 76.8 percent interest in the CarMax Group at August 31, 1998; a 77.3
percent interest at February 28, 1998; and a 77.4 percent interest at
August 31, 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 subject
to all of the risks associated with an investment in the Company and all of
its businesses, assets and liabilities. Such attribution 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 the consolidated and group financial
statements included in the Company's 1998 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.
3. Accounting for Costs of Computer Software
Effective March 1, 1998, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires certain software development costs to be
capitalized. Generally, once the capitalization criteria of the SOP have
been met, external direct costs of materials and services used in the
development of internal-use software and payroll and payroll-related costs
for employees directly involved in the development of internal-use software
are to be capitalized. The adoption of this SOP did not have a material
effect on the Company's consolidated financial position, results of
operations or cash flows.
Page 7 of 34
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4. Net Earnings (Loss) per Share
On December 15, 1997, the Company adopted Statement of Financial Accounting
Standard ("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:
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Three Months Ended Six Months Ended
(Amounts in thousands August 31, August 31,
except per share data) 1998 1997 1998 1997
--------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
Weighted average common shares............................. 99,095 98,040 98,893 97,874
Dilutive potential common shares:
Options................................................. 993 819 975 860
Restricted stock........................................ 335 312 317 311
--------------------------- ---------------------------
Weighted average common shares and
dilutive potential common shares........................ 100,423 99,171 100,185 99,045
=========================== ===========================
Income available to common shareholders.................... $ 32,147 $ 27,879 $ 45,416 $ 40,628
Basic net earnings per share............................... $ 0.32 $ 0.28 $ 0.46 $ 0.42
Diluted net earnings per share............................. $ 0.32 $ 0.28 $ 0.45 $ 0.41
CarMax Group:
Weighted average common shares............................. 22,580 21,895 22,461 21,878
=========================== ===========================
Loss available to common shareholders...................... $ 685 $ 393 $ 1,421 $ 668
Net loss per share......................................... $ 0.03 $ 0.02 $ 0.06 $ 0.03
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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. For the three-month and
six-month periods ended August 31, 1998, options to purchase 1,000,000
shares of Circuit City Group Stock at $59.00 per share were outstanding and
not included in the calculation. For the three-month and the six-month
periods ended August 31, 1997, options to purchase 1,018,297 shares ranging
from $36.88 to $59.00 per share were outstanding and not included in the
calculation.
The CarMax Group had no diluted net loss per share because the Group had
net losses for the periods presented.
5. Gain or Loss on Securitizations
For transfers that qualify as sales, the Company recognizes gains or losses
as a component of the Company's finance operations. The net gain on sales
of receivables for the Circuit City Group's finance operation was $500,000
for the second quarter of this fiscal year compared with a net gain of $4.0
million for the same period last fiscal year. Amortization of prior period
gains on securitizations for the Circuit City Group's finance operation
exceeded current period gains by $500,000 for the six-month period ended
August 31, 1998, compared with a net gain of $9.1 million for the six-month
period ended August 31, 1997. The net gain on sales of receivables for the
CarMax Group's finance operation was $2.2 million for the second quarter of
this fiscal year compared with a net gain of $1.0 million for the same
period last fiscal year. The net gain on sales of receivables for the
CarMax Group's finance operation totaled $4.8 million for the six-month
period ended August 31, 1998, compared with a net gain of $1.9 million for
the six-month period ended August 31, 1997.
Page 8 of 34
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 its finance operation. These swaps were entered into as
part of the sales of receivables and are, therefore, included in the gain
or loss on sales 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 $2.8 million at August 31, 1998, compared with a loss of $1.9
million at February 28, 1998.
On behalf of the CarMax Group, the Company, during the quarter, entered
into a 40-month amortizing swap with a notional amount of approximately $97
million related to the auto loan receivable securitization. The total
notional amount of the CarMax swaps was approximately $343 million at
August 31, 1998, and $224 million at February 28, 1998. These swaps were
entered into as part of the sales of receivables and are, therefore,
included in the gain or loss on sales of receivables.
Page 9 of 34
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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 second quarter of fiscal 1999 were $2.52 billion, an increase of
25 percent from $2.02 billion in the same period last year. For the six months
ended August 31, 1998, total sales were $4.79 billion, a 23 percent increase
from $3.88 billion for the same period last year. For the Circuit City Group,
the total sales increase reflects strong sales of consumer electronics,
especially in areas such as DirecTV, big-screen televisions and wireless
communications; major appliances; and personal computers, in part because of
effective inventory management through the Windows 98 product transition. The
continued geographic growth of Circuit City Superstores also contributed to the
total sales increase. For the CarMax Group, total sales remain below
expectations and reflect the intensity of the new-car promotions with which
CarMax must compete and decreases in average retail prices. Strong new-car sales
for CarMax early in the quarter resulted in low inventory of key models prior to
the introduction of new-model-year vehicles and thus weakened new-car sales for
CarMax as the quarter ended. The CarMax Group sales increase is attributable to
the addition of 12 store locations since the second quarter of last fiscal year.
Comparable store sales changes for the second quarter and first six months of
fiscal years 1999 and 1998 were as follows:
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FY 99 2nd Quarter Six Months
----------------------------------------- --------------------------- ---------------------------
JUN JUL AUG FY 99 FY 98 FY 99 FY 98
- ------------------------------------ ------------- ------------- ------------- ------------- ------------- -------------
Circuit City Group 6% 9% 4% 6% (2%) 5% (2%)
- ------------------------------------ ------------- ------------- ------------- ------------- ------------- -------------
CarMax Group 2% 5% (6%) 0% 9% 0% 11%
- ------------------------------------ ------------- ------------- ------------- ------------- ------------- -------------
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The Circuit City Group's comparable store sales increase for the second quarter
and six months ended August 31, 1998, reflects higher-than-anticipated sales
across all product categories, but especially strong sales in personal
computers. The unchanged CarMax comparable store sales reflect
lower-than-anticipated used-car sales at some locations caused in part by the
intense promotional environment in the new-car industry. Decreases in average
retail prices resulted from an increased mix of ValueMax vehicles in addition to
an overall decrease in CarMax retails. CarMax new-car sales were strong through
the first five months of the fiscal year, partially offsetting the used-car
comparable sales shortfall.
During the quarter, the Circuit City Group opened two stores in the New York
metropolitan market and one store in each of the following markets: Odessa,
Texas; Fort Smith, Ark.; Fayetteville, Ark.; Clarksville, Tenn.; Los Angeles,
Calif.; Tulsa, Okla.; and Jensen Beach, Fla. During the remainder of the fiscal
year, the Circuit City Group plans to open approximately 36 additional
Superstore locations.
During the quarter, the CarMax Group opened its fourth store in Chicago, Ill.,
and its first store in San Antonio, Texas. In July 1998, CarMax announced that
it has agreed to acquire the Toyota franchise rights now owned by Laurel
Automotive Group, Inc. in Laurel, Md.; Mauro Auto Mall, Inc., a Kenosha,
Wis.-based dealer that operates 10 new-car franchises and a used-vehicle center
from a multi-showroom auto mall; and the Nissan franchise rights now owned by
Nissan of Greenville in Greenville, S.C. Each of the acquisitions is subject to
manufacturer approvals. Earlier this year, CarMax and Nissan Motor Corporation
USA signed a framework agreement that allows CarMax to own and operate Nissan
franchises throughout the United States. The Greenville acquisition is subject
to manufacturer approval consistent with the terms of that agreement. CarMax and
Toyota Motor Sales, U.S.A., Inc. are in discussions aimed at establishing a
framework agreement to cover the Laurel acquisition and similar acquisitions.
The Mauro Auto Mall facilities include separate new-car showrooms for its BMW,
Cadillac, Chevrolet, Ford, Jeep, Mitsubishi, Nissan, Subaru, Toyota and Volvo
franchises. Not including these new-car locations, CarMax plans to open
approximately five additional locations by the end of fiscal 1999.
Page 10 of 34
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.7 percent of sales in both the second quarter of fiscal 1999 and
fiscal 1998. Third-party warranty revenue rose to 4.5 percent of sales in this
year's second quarter from 3.7 percent in the same period last year. The
increase reflects the conversion of stores in 10 additional states to
third-party warranty sales in June 1998. The total extended warranty revenue
that is reported in total sales was 5.1 percent of sales in this year's second
quarter versus 4.9 percent in the second quarter of last year.
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For the CarMax Group, gross dollar sales from all extended warranty programs
were 4.3 percent of sales in the second quarter of fiscal 1999 and 3.5 percent
in the second quarter of fiscal 1998. The increase in the second quarter is
attributable to pricing adjustments and a higher penetration rate achieved by
extending warranty coverage to more vehicles. Third-party warranty revenue
increased to 2.0 percent of sales in this year's second quarter from 1.2 percent
in the same period last year. The total extended warranty revenue that is
reported in total sales was 2.0 percent of sales in this year's second quarter
versus 1.3 percent in the second quarter of 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 was 22.7 percent of sales in the second quarter of
fiscal 1999 compared with 23.4 percent of sales in the same period last year.
For the six months ended August 31, 1998, the gross profit margin was 22.5
percent compared with 23.0 percent for the same period last year. The change in
the gross profit margin reflects an increase in the CarMax Group's sales
contribution. Because CarMax operates with lower gross profit margins than the
Circuit City Group, the increased sales contribution from CarMax decreases the
Company's overall gross profit margin.
For the Circuit City Group, the gross profit margin decreased to 24.8 percent of
sales in the second quarter from 25.0 percent in the same period last year. The
gross profit margin was 24.5 percent of sales for the first six months of both
fiscal 1999 and fiscal 1998. The decrease in the gross profit margin for the
quarter primarily reflects the impact of strong personal computer sales, which
generally have below average margins, partly offset by ongoing improvements in
inventory management and a better sales mix within the various product
categories.
For the CarMax Group, the gross profit margin increased to 11.5 percent of sales
in the second quarter of fiscal 1999 from 9.1 percent for the same period last
year. For the six months ended August 31, 1998, the gross profit margin was 11.5
percent compared with 9.2 percent for the same period last year. The increase in
the gross profit margin reflects the elimination of centralized reconditioning
facilities and better inventory management at all facilities; pricing
adjustments on documentation fees, financing and extended service plans; and the
contribution from consumer electronic accessory sales.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expense ratio was 20.4 percent
in the second quarter of fiscal 1999 compared with 20.9 percent for the same
period last year. For the six-month period ended August 31, 1998, the Company's
selling, general and administrative expense ratio was 20.7 percent compared with
21.0 percent for the same period last year. The change in selling, general and
administrative expenses reflects an increase in the CarMax Group's sales
contribution. Because CarMax operates with lower selling, general and
administrative expenses than the Circuit City Group, the increased sales
contribution from the CarMax Group decreases the Company's overall selling,
general and administrative expense ratio.
Page 11 of 34
For the Circuit City Group, the selling, general and administrative expense
ratio decreased to 22.0 percent of sales in the second quarter of fiscal 1999
from 22.1 percent of sales for the same period last year. For the first six
months of both fiscal years, the expense ratio was 22.2 percent of sales.
The decrease in the Circuit City Group's expense ratio for the second quarter
reflects the expense leverage created by the comparable store sales increase and
a higher-than-expected contribution from the Company's finance operation,
partially offset by an increase in selling, general and administrative expenses
for Digital Video Express, LP. The investment in Divx added approximately 83
basis points to the expense ratio during the second quarter of fiscal 1999
compared with approximately 25 basis points for the same period last year. For
the six months ended August 31, 1998, the Company's investment in Divx added
approximately 75 basis points to the expense ratio compared with approximately
27 basis points for the same period last year.
The CarMax Group's selling, general and administrative expense ratio was 12.4
percent of sales in the second quarter of fiscal 1999 compared with 10.4 percent
of sales for the same period last year. For the six-month period ended August
31, 1998, the expense ratio was 12.7 percent of sales compared with 10.3 percent
in the same period last year. The quarter and six-month increase reflects the
sales shortfall and a higher number of immature large-sized stores. Going
forward, virtually all new stores, including those opening in Los Angeles next
fiscal year, will be based on smaller prototypes. These stores should
accommodate CarMax's industry-leading sales volumes while also improving the
productivity of fixed expenses.
Liquidity and Capital Resources
At August 31, 1998, total assets were $3.39 billion. Inventory increased $146.5
million to support new and planned store openings for both the Circuit City
Group and the CarMax Group and to support the Labor Day holiday weekend for the
Circuit City Group.
To support new store expansion and the purchase of inventory, accounts payable
increased $96.0 million from the end of fiscal 1998.
The Company's finance operation, 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 August 31, 1998, the master trust program had a total
program capacity of $925 million. The Company's finance operation also has 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 August 31, 1998, the bankcard master
trust program had a total program capacity of $2.0 billion. As of August 31,
1998, 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 $400 million in auto loan receivables. The program capacity
was increased to $475 million following the end of the second quarter. The
Company anticipates that it will be able to expand its securitization programs
to meet future needs.
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
equity offerings. Securitization transactions will be used to finance growth in
credit card and auto loan receivables. After discussions with various banks,
management also believes that it can secure a favorable financing program for
CarMax inventory.
On June 8, 1998, San Francisco, Calif., and Richmond, Va., became the first two
markets to sell DVD players equipped with the Divx enhancement and movie titles
on Divx discs. Approximately 30 movie titles were available at launch. Divx's
national launch began September 25, 1998, and more than 150 titles were
available. In addition to Circuit City locations, Divx products are available
through the good guys!, Ultimate Electronics, Inc. and all U.S. stores of the
Future Shop Ltd. Management continues to explore various financing options for
Divx with a focus on those that would limit dilution of returns for Circuit City
stockholders and reduce future losses attributable to Circuit City. The Company
remains in discussions with a number of entities, but has not obtained any
acceptable commitments to date. If additional funding is not secured before
Page 12 of 34
the end of the fiscal year, management estimates that Divx will reduce the
Circuit City Group's net earnings by approximately 45 cents per share during the
second half of the fiscal year.
At August 31, 1998, the Company maintained $360 million in seasonal lines that
are renewed annually with various banks, as well as a $150 million revolving
credit facility.
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 ("FNACC"). 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.
As of August 31, 1998, the private-label and bankcard portfolios managed by the
Circuit City Group had not changed significantly since February 28, 1998.
However, as part of CarMax's growth, the auto installment loan portfolio has
increased.
<PAGE>
Many of the automobiles that CarMax sells are financed through FNACC. All
receivables represent fixed-rate installment loans with a principal weighted
average life of approximately 20 months. Total principal outstanding at August
31, and February 28, 1998, was as follows:
(Amounts in millions) August 31 February 28
- -------------------------------------------------------------------------------
Fixed APR............................... $ 448 $ 297
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 August 31, and February 28, 1998 were as follows:
(Amounts in millions) August 31 February 28
- -------------------------------------------------------------------------------
Floating-rate securitizations
synthetically altered to fixed....... $ 343 $ 224
Floating-rate securitizations........... 52 44
Held by the Company:
For investment....................... 31 23
For sale............................. 22 6
-------------------------------
Total ................................. $ 448 $ 297
===============================
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.
Year 2000
The Year 2000 issue arises because many computer programs use two digits rather
than four to define the applicable year. Using two digits to define dates after
January 1, 2000, 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. This project
includes internally developed information technology systems, purchased and
leased software, embedded systems, and electronic data interchange transaction
processing. The Company has employed both internal and external resources to
reprogram or replace and test the software for Year 2000 modifications. The
Company has completed approximately 72 percent of its remediation and testing
efforts of its internally developed systems. The Company expects that the
remaining renovation and replacement work, including system testing, will be
completed by March 1999 and enterprise-level testing will be completed by
approximately July 1999.
Page 13 of 34
The Company has identified its key third-party business partners and is
coordinating with them to address potential Year 2000 issues. Year 2000
questionnaires were sent to these entities to monitor their progress and to
minimize any adverse consequences that might result if an entity is not Year
2000 compliant. Responses have been received from approximately 65 percent of
these partners with no major potential problems identified. Risk assessment,
readiness evaluation, and action plans related to these third parties are
expected to be completed by December 1998. Upon completion of these steps, the
Company will begin developing contingency plans. However, if certain vendors are
unable to provide product in a timely basis, due to their own Year 2000 issues,
the Company anticipates other vendors will be able to deliver similar goods.
Since the project began, the Company has spent $8.5 million, including $5.2
million in the current fiscal year. The remaining cost of the Year 2000 project
is estimated at $7.9 million. These costs are in addition to the normal budget
for information systems and are 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.
As a component of its Year 2000 project, the Company is assessing the
consequences if its Year 2000 initiative is not completed on schedule or its
remediation efforts are not successful. Upon completion of this assessment, the
Company will begin contingency planning.
<PAGE>
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's 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, Year 2000 issues present a number of risks that are beyond the
Company's reasonable control, such as the failure of utility companies to
deliver electricity, the failure of telecommunications companies to provide
voice and data services, the failure of financial institutions to process
transactions and transfer funds, and the collateral effects on the Company of
the effects of Year 2000 issues on the economy in general or on the Company's
business partners and customers. Although the Company believes that its Year
2000 compliance program is designed to appropriately identify and address those
Year 2000 issues that are subject to the Company's reasonable control, the
Company can make no assurance that its efforts will be fully effective or that
the Year 2000 issues will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and requires that an entity recognize those items as either
assets or liabilities and measure them at fair value. The Company has not
determined the impact of SFAS No. 133 on its financial position, results of
operations or cash flows.
In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-Up
Activities." SOP 98-5 is effective for fiscal years beginning after December 15,
1998. It requires costs of start-up activities, including organization and
pre-opening costs to be expensed as incurred. The Company does not expect SOP
98-5 to have a material impact on its financial position, annual results of
operations or cash flows.
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 businesses and risks associated with Year 2000 issues.
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 1998 SEC filings, including the Company's report
on Form 10-K for the year ended February 28, 1998.
Page 14 of 34
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Balance Sheets
(Amounts in thousands)
<TABLE>
<S> <C>
Aug. 31, 1998 Feb. 28, 1998
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 74,762 $ 90,200
Net accounts receivable 518,200 537,169
Merchandise inventory 1,376,220 1,266,575
Deferred income taxes 10,964 --
Prepaid expenses and other current assets 39,238 19,798
-------------- -------------
Total current assets 2,019,384 1,913,742
Property and equipment, net 812,706 834,347
Inter-Group Interest in the CarMax Group 272,979 278,239
Other assets 24,260 35,290
-------------- -------------
TOTAL ASSETS $ 3,129,329 $ 3,061,618
============== =============
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long-term debt $ 1,392 $ 1,301
Accounts payable 807,934 714,171
Short-term debt 16,115 5,591
Accrued expenses and other current liabilities 121,077 129,198
Accrued income taxes 1,879 --
-------------- -------------
Total current liabilities 948,397 850,261
Long-term debt, excluding current installments 315,926 396,906
Deferred revenue and other liabilities 126,274 139,841
Deferred income taxes 27,023 26,278
-------------- -------------
TOTAL LIABILITIES 1,417,620 1,413,286
GROUP EQUITY 1,711,709 1,648,332
-------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY $ 3,129,329 $ 3,061,618
============== =============
</TABLE>
See accompanying notes to group financial statements.
Page 15 of 34
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
August 31, August 31,
1998 1997 1998 1997
-------------- ------------- ------------- --------------
Net sales and operating revenues $ 2,117,123 $ 1,814,139 $ 4,041,850 $ 3,493,489
Cost of sales, buying and warehousing 1,591,653 1,360,580 3,051,762 2,638,281
-------------- -------------- ------------- --------------
Gross profit 525,470 453,559 990,088 855,208
-------------- -------------- ------------- --------------
Selling, general and administrative expenses 464,867 401,049 896,918 774,749
Interest expense 4,998 5,325 12,080 11,150
-------------- -------------- ------------- --------------
Total expenses 469,865 406,374 908,998 785,899
-------------- -------------- ------------- --------------
Earnings before income taxes and
Inter-Group Interest in the CarMax Group 55,605 47,185 81,090 69,309
Provision for income taxes 21,178 17,959 30,915 26,386
-------------- -------------- ------------- --------------
Earnings before Inter-Group Interest
in the CarMax Group 34,427 29,226 50,175 42,923
Net loss related to Inter-Group
Interest in the CarMax Group 2,280 1,347 4,759 2,295
-------------- -------------- ------------- --------------
Net earnings $ 32,147 $ 27,879 $ 45,416 $ 40,628
============== ============== ============= ==============
Weighted average common shares:
Basic 99,095 98,040 98,893 97,874
============== ============== ============= ==============
Diluted 100,423 99,171 100,185 99,045
============== ============== ============= ==============
Net earnings per share:
Basic $ 0.32 $ 0.28 $ 0.46 $ 0.42
============== ============== ============= ==============
Diluted $ 0.32 $ 0.28 $ 0.45 $ 0.41
============== ============== ============= ==============
Dividends paid per common share $ 0.035 $ 0.035 $ 0.070 $ 0.070
============== ============== ============= ==============
</TABLE>
See accompanying notes to group financial statements.
Page 16 of 34
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
<TABLE>
<S> <C>
Six Months Ended
August 31,
1998 1997
------------- ------------
Operating Activities:
Net earnings $ 45,416 $ 40,628
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net loss related to Inter-Group Interest in the CarMax Group 4,759 2,295
Depreciation and amortization 64,043 59,992
Loss on sales of property and equipment 1,126 450
Provision for deferred income taxes (10,219) 6,203
Decrease in deferred revenue and other liabilities (13,567) (23,029)
Decrease (increase) in net accounts receivable 18,969 (17,822)
(Increase) decrease in merchandise inventory, prepaid
expenses and other current assets (129,085) 3,898
Decrease in other assets 11,030 7,842
Increase in accounts payable, accrued expenses and
other current liabilities, and accrued income taxes 87,521 48,538
------------- ------------
Net cash provided by operating activities 79,993 128,995
------------- ------------
Investing Activities:
Purchases of property and equipment (115,178) (171,245)
Proceeds from sales of property and equipment 71,650 120,310
Issuance of inter-group note receivable, net -- (123,911)
------------- ------------
Net cash used in investing activities (43,528) (174,846)
------------- ------------
Financing Activities:
Increase in inter-group payable, net -- 49,859
Increase in allocated short-term debt, net 10,524 7,864
Decrease in allocated long-term debt, net (80,889) (4,840)
Equity issuances, net 25,425 6,350
Dividends paid (6,963) (6,880)
------------- ------------
Net cash (used in) provided by financing activities (51,903) 52,353
------------- ------------
(Decrease) increase in cash and cash equivalents (15,438) 6,502
Cash and cash equivalents at beginning of year 90,200 32,222
------------- ------------
Cash and cash equivalents at end of period $ 74,762 $ 38,724
============= ============
</TABLE>
See accompanying notes to group financial statements.
Page 17 of 34
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Notes to Group Financial Statements
1. Basis of Presentation
Circuit City Stores, Inc. and its subsidiaries (the "Company") has two
series of common stock - the Circuit City Group Stock and the CarMax Group
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 and related
operations). The CarMax Group Common Stock is intended to track separately
the performance of the CarMax operations. The Circuit City Group held a
76.8 percent interest in the CarMax Group at August 31, 1998; a 77.3
percent interest at February 28, 1998; and a 77.4 percent interest at
August 31, 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 subject
to all of the risks associated with an investment in the Company and all of
its businesses, assets and liabilities. Such attribution 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
1998 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.
3. Accounting for Costs of Computer Software
Effective March 1, 1998, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires certain software development costs to be
capitalized. Generally, once the capitalization criteria of the SOP have
been met, external direct costs of materials and services used in the
development of internal-use software and payroll and payroll-related costs
for employees directly involved in the development of internal-use software
are to be capitalized. The adoption of this SOP did not have a material
effect on the Circuit City Group's financial position, results of
operations or cash flows.
Page 18 of 34
<PAGE>
4. Net Earnings per Share
On December 15, 1997, the Company adopted Statement of Financial Accounting
Standard ("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:
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
(Amounts in thousands August 31, August 31,
except per share data) 1998 1997 1998 1997
--------------------------------------------------------------------------------------------------------------------------
Weighted average common shares............................. 99,095 98,040 98,893 97,874
Dilutive potential common shares:
Options................................................. 993 819 975 860
Restricted stock........................................ 335 312 317 311
--------------------------- ---------------------------
Weighted average common shares and
dilutive potential common shares........................ 100,423 99,171 100,185 99,045
=========================== ===========================
Income available to common shareholders.................... $ 32,147 $ 27,879 $ 45,416 $ 40,628
Basic net earnings per share............................... $ 0.32 $ 0.28 $ 0.46 $ 0.42
Diluted net earnings per share............................. $ 0.32 $ 0.28 $ 0.45 $ 0.41
</TABLE>
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. For the three-month and
six-month periods ended August 31, 1998, options to purchase 1,000,000
shares of Circuit City Group Stock at $59.00 per share were outstanding and
not included in the calculation. For the three-month and six-month periods
ended August 31, 1997, options to purchase 1,018,297 shares ranging from
$36.88 to $59.00 per share were outstanding and not included in the
calculation.
5. Gain or Loss on Securitizations
For transfers that qualify as sales, the Company recognizes gains or losses
as a component of the Company's finance operations. The net gain on sales
of receivables for the Circuit City Group's finance operation was $500,000
for the second quarter of this fiscal year compared with a net gain of $4.0
million for the same period last fiscal year. Amortization of prior period
gains on securitizations for the Circuit City Group's finance operation
exceeded current period gains by $500,000 for the six-month period ended
August 31, 1998, compared with a net gain of $9.1 million for the six-month
period ended August 31, 1997.
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 its finance operation. These swaps were entered into as
part of the sales of receivables and are, therefore, included in the gain
or loss on sales 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 $2.8 million at August 31, 1998, compared with a loss of $1.9
million at February 28, 1998.
Page 19 of 34
<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 second quarter of fiscal 1999 were $2.12 billion, an increase of
17 percent from $1.81 billion in the same period last year. For the six months
ended August 31, 1998, total sales were $4.04 billion, an increase of 16 percent
from $3.49 billion in the same period last year. The total sales increase
reflects strong sales of consumer electronics, especially in areas such as
DirecTV, big-screen televisions and wireless communications; major appliances;
and personal computers, in part because of effective inventory management
through the Windows 98 product transition. The continued geographic growth of
Circuit City Superstores also contributed to the total sales increase.
The percentage changes in Circuit City comparable store sales for the second
quarter and first six months of fiscal years 1999 and 1998 were as follows:
<TABLE>
<S> <C>
------------ ------------ ------------- ------------ ------------ ------------ ----------
FY 99 2nd Quarter Six Months
------------ ------------ ------------- ------------ ------------ ------------ ----------
JUN JUL AUG FY 99 FY 98 FY 99 FY 98
------------ ------------ ------------- ------------ ------------ ------------ -----------
6% 9% 4% 6% (2%) 5% (2%)
------------ ------------ ------------- ------------ ------------ ------------ -----------
</TABLE>
The comparable store sales increase for the second quarter and six months ended
August 31, 1998, reflects higher-than-anticipated sales across all product
categories, but especially strong sales in personal computers.
During the quarter, the Circuit City Group opened two stores in the New York
metropolitan market and one store in each of the following markets: Odessa,
Texas; Fort Smith, Ark.; Fayetteville, Ark.; Clarksville, Tenn.; Los Angeles,
Calif.; Tulsa, Okla.; and Jensen Beach, Fla. During the remainder of the fiscal
year, the Circuit City Group plans to open approximately 36 additional
Superstore locations.
The table below details Circuit City retail units:
<TABLE>
<S> <C>
====================================================================================================================
Stores Open At End of Quarter Estimate
---------------------------------------------
Aug. 31, 1998 Aug. 31, 1997 Feb. 28, 1999 Feb. 28, 1998
====================================================================================================================
Superstore
--------------------------------------------------------------------------------------------------------------------
"D" Superstore 116 103 116 114
--------------------------------------------------------------------------------------------------------------------
"C" Superstore 289 278 298 289
--------------------------------------------------------------------------------------------------------------------
"B" Superstore 75 59 86 72
--------------------------------------------------------------------------------------------------------------------
"A" Superstore 34 20 50 25
--------------------------------------------------------------------------------------------------------------------
Electronics-Only 4 4 4 4
--------------------------------------------------------------------------------------------------------------------
Circuit City Express 50 52 48 52
=====================================================================================================================
TOTAL 568 516 602 556
=====================================================================================================================
</TABLE>
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.7 percent of sales in both the second quarter of fiscal 1999 and
fiscal 1998. Third-party warranty revenue rose to 4.5 percent of sales in this
year's second quarter from 3.7 percent in the same period last year. The
increase reflects the conversion of stores in 10 additional states to
third-party warranty sales in June 1998. The total extended warranty revenue
that is reported in total sales was 5.1 percent of sales in this year's second
quarter versus 4.9 percent in the second quarter of last year.
Page 20 of 34
<PAGE>
The percentage of merchandise sales represented by each category is listed
below:
<TABLE>
<S> <C>
==========================================================================================
2nd Quarter Six Months
----------------------------- -----------------------------
Fiscal 1999 Fiscal 1998 Fiscal 1999 Fiscal 1998
==========================================================================================
TV 16% 16% 17% 16%
------------------------------------------------------------------------------------------
VCR/Camcorders 13 14 13 14
------------------------------------------------------------------------------------------
Audio 15 16 15 17
------------------------------------------------------------------------------------------
Home Office 26 23 26 24
------------------------------------------------------------------------------------------
Appliances 19 19 18 18
------------------------------------------------------------------------------------------
Other 11 12 11 11
==========================================================================================
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
For the quarter ended August 31, 1998, the gross profit margin decreased to 24.8
percent of sales from 25.0 percent in the same period last year. The gross
profit margin was 24.5 percent of sales for the first six months of both fiscal
1999 and fiscal 1998. The decrease in the gross profit margin for the quarter
primarily reflects the impact of strong personal computer sales, which generally
have below average margins, offset by ongoing improvements in inventory
management and a better sales mix within the various product categories.
Selling, General and Administrative Expenses
The Group's selling, general and administrative expense ratio decreased to 22.0
percent of sales in the second quarter of fiscal 1999 from 22.1 percent of sales
for the same period last year. For the first six months of both fiscal years,
the expense ratio was 22.2 percent of sales.
The decrease in the expense ratio for the second quarter reflects the expense
leverage created by the comparable store sales increase and a
higher-than-expected contribution from the Company's finance operation,
partially offset by an increase in selling, general and administrative expenses
for Digital Video Express, LP. The investment in Divx added approximately 83
basis points to the expense ratio during the second quarter of fiscal 1999
compared with approximately 25 basis points for the same period last year. For
the six months ended August 31, 1998, the Company's investment in Divx added
approximately 75 basis points to the expense ratio compared with approximately
27 basis points for the same period last year.
Earnings Before the Inter-Group Interest in the CarMax Group
For the second quarter, earnings before the Inter-Group Interest in the CarMax
Group increased 18 percent to $34.4 million in fiscal 1999 compared with $29.2
million in fiscal 1998. For the six-month period, earnings before the
Inter-Group Interest in the CarMax Group were $50.2 million, an increase of 17
percent from $42.9 million for the same period last year.
Page 21 of 34
The results for both years include the Company's investment in Divx. Excluding
the Company's investment in Divx and the Group's retained interest in the CarMax
Group, Circuit City's consumer electronics business earnings for the second
quarter increased 44 percent to $46.1 million from $32.0 million for the same
period last year. The consumer electronics business produced earnings per share
of 46 cents in the second quarter this year compared with 32 cents for the same
period last year. Excluding the Company's investment in Divx and the Group's
retained interest in the CarMax Group, Circuit City's consumer electronics
business earnings for the six months ended August 31, 1998, increased 44 percent
to $69.9 million from $48.7 million in last year's first half. For the six-month
period ended August 31, 1998, the consumer electronics business produced
earnings per share of 70 cents compared with 49 cents for the same period last
year.
<PAGE>
Net Loss Related to the Inter-Group Interest in the CarMax Group
During the second quarter, the net loss attributable to the Circuit City Group's
Inter-Group Interest in the CarMax Group was $2.3 million compared with a net
loss of $1.3 million for the same period last year.
For the six-month period ending August 31, 1998, the net loss attributable to
the Circuit City Group's Inter-Group Interest in the CarMax Group was $4.8
million compared with $2.3 million for the same period last year.
Net Earnings
Net earnings for the quarter ended August 31, 1998, increased 15 percent to
$32.1 million from $27.9 million in the same period last year. Net earnings per
share increased 14 percent to 32 cents from 28 cents for the same period last
year.
For the six months ended August 31, 1998, net earnings increased 12 percent to
$45.4 million from $40.6 million in the same period last year. Net earnings per
share increased 10 percent to 45 cents from 41 cents for the same period last
year.
Liquidity and Capital Resources
Total assets at August 31, 1998, were $3.13 billion. Merchandise inventory
increased $109.6 million to support new and planned store openings and the Labor
Day holiday weekend. The $21.6 million decrease in property and equipment
reflects sale-leaseback transactions entered into during the first quarter of
the fiscal year, partially offset by purchases of property and equipment for new
locations.
To support new store expansion and the purchase of inventory, accounts payable
increased $93.8 million from the end of fiscal 1998.
The Company's finance operation, 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 August 31, 1998, the master trust program had a total
program capacity of $925 million. The Company's finance operation also has 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 August 31, 1998, the bankcard master
trust program had a total program capacity of $2.0 billion. 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 Circuit City
Group to provide working capital needed to fund net assets not otherwise
financed 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
August 31, 1998, the Company also maintained $360 million in seasonal lines that
are renewed annually with various banks, as well as a $150 million revolving
credit facility.
Page 22 of 34
Management believes that proceeds from sales 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.
On June 8, 1998, San Francisco, Calif., and Richmond, Va., became the first two
markets to sell DVD players equipped with the Divx enhancement and movie titles
on Divx discs. Approximately 30 movie titles were available at launch. Divx's
national launch began September 25, 1998, and more than 150 titles were
available. In addition to Circuit City locations, Divx products are available
through the good guys!, Ultimate Electronics, Inc. and all U.S. stores of the
Future Shop Stores, Ltd. Management continues to explore various financing
options for Divx with a focus on those that would limit dilution of returns for
Circuit City stockholders and reduce future losses attributable to Circuit City.
The Company remains in discussions with a number of entities, but has not
obtained any acceptable commitments to date. If additional funding is not
obtained before the end of the fiscal year, management estimates that Divx will
reduce the Circuit City Group's net earnings by approximately 45 cents per share
during the second half of the fiscal year.
<PAGE>
Year 2000
Refer to the "Circuit City Stores, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the Year 2000
issue and its impact on the Group's financial statements.
Recent Accounting Pronouncements
Refer to the "Circuit City Stores, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of Recent
Accounting Pronouncements and their impact on the Group's financial statements.
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 and risks associated with Year 2000 issues.
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 1998 SEC filings, including the Company's report
on Form 10-K for the year ended February 28, 1998.
Page 23 of 34
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Balance Sheets
(Amounts in thousands)
<TABLE>
<S> <C>
Aug. 31, 1998 Feb. 28, 1998
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 18,808 $ 26,412
Net accounts receivable 89,384 60,866
Inventory 180,834 143,970
Deferred income taxes 1,185 --
Prepaid expenses and other current assets 3,235 1,359
------------ -----------
Total current assets 293,446 232,607
Property and equipment, net 240,412 214,087
Other assets 2,978 1,628
------------ -----------
TOTAL ASSETS $ 536,836 $ 448,322
============ ===========
LIABILITIES AND GROUP EQUITY
Current liabilities:
Accounts payable $ 53,427 $ 51,220
Short-term debt 5,817 385
Deferred income taxes -- 370
Accrued expenses and other current liabilities 6,938 3,604
------------ -----------
Total current liabilities 66,182 55,579
Long-term debt 107,418 27,386
Deferred revenue and other liabilities 6,096 5,266
Deferred income taxes 1,699 145
------------ -----------
TOTAL LIABILITIES 181,395 88,376
GROUP EQUITY 355,441 359,946
------------ -----------
TOTAL LIABILITIES AND GROUP EQUITY $ 536,836 $ 448,322
============ ===========
</TABLE>
See accompanying notes to group financial statements.
Page 24 of 34
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
August 31, August 31,
1998 1997 1998 1997
------------ ----------- ----------- ------------
Net sales and operating revenues $ 400,031 $ 206,433 $ 746,394 $ 383,987
Cost of sales 353,829 187,563 660,296 348,488
------------ ----------- ----------- ------------
Gross profit 46,202 18,870 86,098 35,499
------------ ----------- ----------- ------------
Selling, general and administrative expenses 49,746 21,423 94,664 39,591
Interest expense 1,316 299 1,565 765
------------ ----------- ----------- ------------
Total expenses 51,062 21,722 96,229 40,356
------------ ----------- ----------- ------------
Loss before income tax benefit 4,860 2,852 10,131 4,857
Income tax benefit 1,895 1,112 3,951 1,894
------------ ----------- ----------- ------------
Net loss $ 2,965 $ 1,740 $ 6,180 $ 2,963
============ =========== =========== ============
Net loss attributable to:
Circuit City Group common stock $ 2,280 $ 1,347 $ 4,759 $ 2,295
CarMax Group common stock 685 393 1,421 668
------------ ----------- ----------- ------------
$ 2,965 $ 1,740 $ 6,180 $ 2,963
============ =========== =========== ============
Weighted average common shares 22,580 21,895 22,461 21,878
============ =========== =========== ============
Net loss per share $ 0.03 $ 0.02 $ 0.06 $ 0.03
============ =========== =========== ============
Dividends paid per common share $ -- $ -- $ -- $ --
============ =========== =========== ============
</TABLE>
See accompanying notes to group financial statements.
Page 25 of 34
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
<TABLE>
<S> <C>
Six Months Ended
August 31,
1998 1997
------------ -----------
Operating Activities:
Net loss $ (6,180) $ (2,963)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,321 1,902
Provision for deferred income taxes (1) (242)
Increase in deferred revenue and other liabilities 830 514
Increase in net accounts receivable (28,518) (17,567)
Increase in inventory, prepaid expenses
and other current assets (38,740) (49,924)
(Increase) decrease in other assets (1,450) 40
Increase in accounts payable and accrued expenses
and other current liabilities 5,541 26,319
------------- ------------
Net cash used in operating activities (64,197) (41,921)
------------- ------------
Investing Activities:
Purchases of property and equipment (93,868) (113,603)
Proceeds from sales of property and equipment 63,322 41,102
Increase in inter-group receivable, net -- (49,859)
------------- ------------
Net cash used in investing activities (30,546) (122,360)
------------- ------------
Financing Activities:
Increase in allocated short-term debt, net 5,432 --
Increase in allocated long-term debt, net 80,032 --
Issuance of inter-group note payable, net -- 123,911
Equity issuances, net 1,675 (5)
------------- ------------
Net cash provided by financing activities 87,139 123,906
------------- ------------
Decrease in cash and cash equivalents (7,604) (40,375)
Cash and cash equivalents at beginning of year 26,412 170,421
------------- ------------
Cash and cash equivalents at end of period $ 18,808 $ 130,046
============= ============
</TABLE>
See accompanying notes to group financial statements.
Page 26 of 34
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Notes to Group Financial Statements
1. Basis of Presentation
Circuit City Stores, Inc. and its subsidiaries (the "Company") has two
series of common stock - the Circuit City Group Stock and the CarMax Group
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 and related
operations). The CarMax Group Common Stock is intended to track separately
the performance of the CarMax operations. The Circuit City Group held a
76.8 percent interest in the CarMax Group at August 31, 1998; a 77.3
percent interest at February 28, 1998; and a 77.4 percent interest at
August 31, 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 subject
to all of the risks associated with an investment in the Company and all of
its businesses, assets and liabilities. Such attribution 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 1998
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.
3. Accounting for Costs of Computer Software
Effective March 1, 1998, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires certain software development costs to be
capitalized. Generally, once the capitalization criteria of the SOP have
been met, external direct costs of materials and services used in the
development of internal-use software and payroll and payroll-related costs
for employees directly involved in the development of internal-use software
are to be capitalized. The adoption of this SOP did not have a material
effect on the CarMax Group's consolidated financial position, results of
operations or cash flows.
Page 27 of 34
4. Net Loss per Share
On December 15, 1997, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 128, "Earnings per Share." Prior period net loss per
share data has been restated in accordance with SFAS No. 128. The
calculation of net loss per share is presented below:
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
(Amounts in thousands August 31, August 31,
except per share data) 1998 1997 1998 1997
--------------------------------------------------------------------------------------------------------------------
Weighted average common shares....................... 22,580 21,895 22,461 21,878
=========================== ===========================
Loss available to common shareholders................ $ 685 $ 393 $ 1,421 $ 668
Net loss per share................................... $ 0.03 $ 0.02 $ 0.06 $ 0.03
</TABLE>
The CarMax Group had no diluted net loss per share because the Group had
net losses for the periods presented.
<PAGE>
5. Gain or Loss on Securitizations
For transfers that qualify as sales, the Group recognizes gains or losses
as a component of the Group's finance operations. The net gain on sales of
receivables for the CarMax Group's finance operation was $2.2 million for
the second quarter of this fiscal year compared with a net gain of $1.0
million for the same period last fiscal year. The net gain on sales of
receivables for the CarMax Group's finance operation totaled $4.8 million
for the six-month period ended August 31, 1998, compared with a net gain of
$1.9 million for the six-month period ended August 31, 1997.
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 $2.8 million at August 31, 1998, compared with a loss of $1.9
million at February 28, 1998.
On behalf of the CarMax Group, the Company, during the quarter, entered
into a 40-month amortizing swap with a notional amount of approximately $97
million related to the auto loan receivable securitization. The total
notional amount of the CarMax swaps was approximately $343 million at
August 31, 1998, and $224 million at February 28, 1998. These swaps were
entered into as part of the sales of receivables and are, therefore,
included in the gain or loss on sales of receivables.
Page 28 of 34
<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 second quarter of fiscal 1998 were $400.0 million, an increase of
94 percent from $206.4 million in the same period last year. For the six months
ended August 31, 1998, total sales were $746.4 million, an increase of 94
percent from $384.0 million in the same period last year. Total sales remain
below expectations and reflect the intensity of the new-car promotions with
which CarMax must compete and decreases in average retail prices. Strong new-car
sales for CarMax early in the quarter resulted in low inventory of key models
prior to the introduction of new-model-year vehicles and thus weakened new-car
sales for CarMax as the quarter ended. The total sales increase is attributable
to the addition of 12 store locations since the second quarter of last fiscal
year.
CarMax comparable store sales changes for the second quarter and first six
months of fiscal years 1999 and 1998 were as follows:
<TABLE>
<S> <C>
================================= =========================== ============================
FY 99 2nd Quarter Six Months
================================= =========================== ============================
JUN JUL AUG FY 99 FY 98 FY 99 FY 98
----------- ----------- --------- ------------ -------------- ------------- --------------
2% 5% (6%) 0% 9% 0% 11%
----------- ----------- --------- ------------ -------------- ------------- --------------
</TABLE>
The unchanged CarMax comparable store sales reflect lower-than-anticipated
used-car sales at some locations caused in part by the intense promotional
environment in the new-car industry. Decreases in average retail prices resulted
from an increased mix of ValueMax vehicles in addition to an overall decrease in
CarMax retails. CarMax new-car sales were strong through the first five months
of the fiscal year, partially offsetting the used-car comparable sales
shortfall.
During the quarter, the CarMax Group opened its fourth store in Chicago, Ill.,
and its first store in San Antonio, Texas. In July 1998, CarMax announced that
it has agreed to acquire the Toyota franchise rights now owned by Laurel
Automotive Group, Inc. in Laurel, Md.; Mauro Auto Mall, Inc., a Kenosha,
Wis.-based dealer that operates 10 new-car franchises and a used-vehicle center
from a multi-showroom auto mall; and the Nissan franchise rights now owned by
Nissan of Greenville in Greenville, S.C. Each of the acquisitions is subject to
manufacturer approvals. Earlier this year, CarMax and Nissan Motor Corporation
USA signed a framework agreement that allows CarMax to own and operate Nissan
franchises throughout the United States. The Greenville acquisition is subject
to manufacturer approval consistent with the terms of that agreement. CarMax and
Toyota Motor Sales, U.S.A., Inc. are in discussions aimed at establishing a
framework agreement to cover the Laurel acquisition and similar acquisitions.
The Mauro Auto Mall facilities include separate new-car showrooms for its BMW,
Cadillac, Chevrolet, Ford, Jeep, Mitsubishi, Nissan, Subaru, Toyota and Volvo
franchises. Not including these new-car locations, CarMax plans to open
approximately five additional locations by the end of fiscal 1999.
The table below details CarMax retail units:
<TABLE>
<S> <C>
==================================================================================================================
Stores Open At End of Quarter Estimate
---------------------------------- -------------
Aug. 31, 1998 Aug. 31, 1997 Feb. 28, 1999 Feb. 28, 1998
==================================================================================================================
"C" Superstore 8 2 8 5
------------------------------------------------------------------------------------------------------------------
"B" Superstore 6 3 6 5
------------------------------------------------------------------------------------------------------------------
"A" Superstore 9 6 14 8
==================================================================================================================
TOTAL 23 11 28 18
==================================================================================================================
</TABLE>
Page 29 of 34
For the CarMax Group, gross dollar sales from all extended warranty programs
were 4.3 percent of sales in the second quarter of fiscal 1999 and 3.5 percent
in the second quarter of fiscal 1998. The increase in the second quarter is
attributable to pricing adjustments and a higher penetration rate achieved by
extending warranty coverage to more vehicles. Third-party warranty revenue
increased to 2.0 percent of sales in this year's second quarter from 1.2 percent
in the same period last year. The total extended warranty revenue that is
reported in total sales was 2.0 percent of sales in this year's second quarter
versus 1.3 percent in the second quarter of last year.
<PAGE>
CarMax's operations, in common with other retailers in general, are subject to
seasonal influences. Historically, CarMax stores 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
The gross profit margin increased to 11.5 percent of sales in the second quarter
of fiscal 1999 from 9.1 percent for the same period last year. For the six
months ended August 31, 1998, the gross profit margin was 11.5 percent compared
with 9.2 percent for the same period last year. The increase in the gross profit
margin reflects the elimination of centralized reconditioning facilities and
better inventory management at all facilities; pricing adjustments on
documentation fees, financing and extended service plans; and the contribution
from consumer electronic accessory sales.
Selling, General and Administrative Expenses
The CarMax Group's selling, general and administrative expense ratio was 12.4
percent of sales in the second quarter of fiscal 1999 compared with 10.4 percent
of sales for the same period last year. For the six-month period ended August
31, 1998, the expense ratio was 12.7 percent of sales compared with 10.3 percent
in the same period last year. The quarter and six-month increase reflects the
sales shortfall and a higher number of immature large-sized stores. Going
forward, virtually all new stores, including those opening in Los Angeles next
fiscal year, will be based on smaller prototypes. These stores should
accommodate CarMax's industry-leading sales volumes while also improving the
productivity of fixed expenses.
Interest Expense
Interest expense increased to 0.3 percent of sales in the second quarter of
fiscal 1999 compared with 0.1 percent of sales for the same period last year.
For the six-month period interest expense was 0.2 percent of sales in both
fiscal years. In fiscal 1999, interest expense primarily was incurred on
allocated debt used to fund store expansion and working capital. In fiscal 1998,
interest expense primarily was incurred on an inter-group note used to finance
inventory.
Net Loss
During the second quarter, the CarMax Group incurred a net loss of $3.0 million
versus a net loss of $1.7 million for the same period last year. The net loss
attributable to the CarMax Group Common Stock was 3 cents per share for the
second quarter of fiscal 1999 compared with a net loss of 2 cents per share for
the same period last year.
The net loss for the six-month period ended August 31, 1998, was $6.2 million
compared with $3.0 million for the same period last year. The net loss
attributable to the CarMax Group Common Stock was 6 cents per share this year
compared with 3 cents per share last year.
Page 30 of 34
Liquidity and Capital Resources
Total assets at August 31, 1998, were $536.8 million, an increase of $88.5
million, or 19.7 percent, from $448.3 million at February 28, 1998. The largest
contributor to the asset increase was a $36.9 million increase in inventory to
support new stores opened during the quarter and planned openings for the third
quarter. Net accounts receivable increased by $28.5 million, reflecting an
increase in auto loans.
As of August 31, 1998, 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 $400 million in auto loan receivables. The program
capacity was increased to $475 million following the end of the second 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 financed 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, proceeds of equity offerings
and sale-leasebacks of real estate. At August 31, 1998, the Company also
maintained $360 million in seasonal lines that are renewed annually with various
banks, as well as a $150 million revolving credit facility.
<PAGE>
Management believes that the establishment of a favorable inventory financing
program for CarMax, proceeds from the sales of property and equipment and
receivables, proceeds of equity offerings, 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.
Market Risk
The Company manages the installment loan portfolio of First North American
Credit Corporation ("FNACC"). Portions of this portfolio 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.
Many of the automobiles that CarMax sells are financed through FNACC. All
receivables represent fixed-rate installment loans with a principal weighted
average life of approximately 20 months. Total principal outstanding at August
31, and February 28, 1998, was as follows:
(Amounts in millions) August 31 February 28
- -------------------------------------------------------------------------------
Fixed APR............................... $ 448 $ 297
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 August 31, and February 28, 1998 were as follows:
(Amounts in millions) August 31 February 28
- -------------------------------------------------------------------------------
Floating-rate securitizations
synthetically altered to fixed....... $ 343 $ 224
Floating-rate securitizations........... 52 44
Held by the Company:
For investment....................... 31 23
For sale............................. 22 6
-------------------------------
Total ................................. $ 448 $ 297
===============================
Because of the programs 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.
Page 31 of 34
Year 2000
Refer to the "Circuit City Stores, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the Year 2000
issue and its impact on the Group's financial statements.
Recent Accounting Pronouncements
Refer to the "Circuit City Stores, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of Recent
Accounting Pronouncements and their impact on the Group's financial statements.
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 retail concepts and risks associated with Year 2000 issues.
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 1998 SEC filings, including the Company's report
on Form 10-K for the year ended February 28, 1998.
Page 32 of 34
<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 33 of 34
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
Executive 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
October 15, 1998
Page 34 of 34
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> 6-mos 6-mos 6-mos
<FISCAL-YEAR-END> Feb-28-1999 Feb-28-1999 Feb-28-1999
<PERIOD-END> Aug-31-1998 Aug-31-1998 Aug-31-1998
<CASH> 93,570 74,762 18,808
<SECURITIES> 0 0 0
<RECEIVABLES> 607,584 518,200 89,384
<ALLOWANCES> 0 0 0
<INVENTORY> 1,557,054 1,376,220 180,834
<CURRENT-ASSETS> 2,312,830 2,019,384 293,446
<PP&E> 1,574,819 1,323,012 251,807
<DEPRECIATION> 521,701 510,306 11,395
<TOTAL-ASSETS> 3,393,186 3,129,329 536,836
<CURRENT-LIABILITIES> 1,014,579 948,397 66,182
<BONDS> 423,344 315,926 107,418
0 0 0
0 0 0
<COMMON> 61,459 50,082 11,377
<OTHER-SE> 1,732,712 1,661,627 344,064
<TOTAL-LIABILITY-AND-EQUITY> 3,393,186 3,129,329 536,836
<SALES> 4,788,244 4,041,850 746,394
<TOTAL-REVENUES> 4,788,244 4,041,850 746,394
<CGS> 3,712,058 3,051,762 660,296
<TOTAL-COSTS> 3,712,058 3,051,762 660,296
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 13,645 12,080 1,565
<INCOME-PRETAX> 70,959 81,090 (10,131)
<INCOME-TAX> 26,964 30,915 (3,951)
<INCOME-CONTINUING> 43,995 50,175 (6,180)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 (4,759) 4,759
<NET-INCOME> 43,995 45,416 (1,421)
<EPS-PRIMARY> 0 0.46 (0.06)
<EPS-DILUTED> 0 0.45 (0.06)
</TABLE>
