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 May 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.
<TABLE>
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Class Outstanding at June 30,1998
Circuit City Stores, Inc. - Circuit City Group Common Stock, par value $0.50 100,005,400
Circuit City Stores, Inc. - CarMax Group Common Stock, par value $0.50 22,607,976
</TABLE>
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 31.
<PAGE>
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 -
May 31, 1998 and February 28, 1998 4
Consolidated Statements of Earnings -
Three Months Ended May 31, 1998 and 1997 5
Consolidated Statements of Cash Flows -
Three Months Ended May 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Circuit City Group Financial Statements:
Circuit City Group Balance Sheets -
May 31, 1998 and February 28, 1998 14
Circuit City Group Statements of Earnings -
Three Months Ended May 31, 1998 and 1997 15
Circuit City Group Statements of Cash Flows -
Three Months Ended May 31, 1998 and 1997 16
Notes to Circuit City Group Financial Statements 17
CarMax Group Financial Statements:
CarMax Group Balance Sheets -
May 31, 1998 and February 28, 1998 23
CarMax Group Statements of Operations -
Three Months Ended May 31, 1998 and 1997 24
CarMax Group Statements of Cash Flows -
Three Months Ended May 31, 1998 and 1997 25
Notes to CarMax Group Financial Statements 26
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 19
CarMax Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 28
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes In Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 31
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
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May 31, 1998 Feb. 28, 1998
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 85,773 $ 116,612
Net accounts receivable 601,287 598,035
Inventory 1,477,377 1,410,545
Deferred income taxes 13,324 --
Prepaid expenses and other current assets 33,298 21,157
-------------- -------------
Total current assets 2,211,059 2,146,349
Property and equipment, net 991,289 1,048,434
Other assets 29,717 36,918
-------------- -------------
TOTAL ASSETS $ 3,232,065 $ 3,231,701
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,346 $ 1,301
Accounts payable 781,963 765,391
Short-term debt 6,317 5,976
Accrued expenses and other current liabilities 94,642 132,802
Accrued income taxes 3,425 --
Deferred income taxes -- 356
-------------- -------------
Total current liabilities 887,693 905,826
Long-term debt, excluding current installments 423,587 424,292
Deferred revenue and other liabilities 138,176 145,107
Deferred income taxes 27,993 26,437
-------------- -------------
TOTAL LIABILITIES 1,477,449 1,501,662
-------------- -------------
Stockholders' equity:
Circuit City Group common stock, $0.50 par value;
175,000,000 shares authorized; 99,840,000 shares
issued and outstanding as of May 31, 1998 49,920 49,641
CarMax Group common stock, $0.50 par value;
175,000,000 shares authorized; 22,411,000 shares
issued and outstanding as of May 31, 1998 11,206 11,102
Capital in excess of par value 545,893 530,763
Retained earnings 1,147,597 1,138,533
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,754,616 1,730,039
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,232,065 $ 3,231,701
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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
May 31,
1998 1997
-------------- -------------
Net sales and operating revenues $ 2,271,090 $ 1,856,904
Cost of sales, buying and warehousing 1,766,576 1,438,626
-------------- -------------
Gross profit 504,514 418,278
-------------- -------------
Selling, general and administrative expenses 476,969 391,868
Interest expense 7,331 6,291
-------------- -------------
Total expenses 484,300 398,159
-------------- -------------
Earnings before income taxes 20,214 20,119
Provision for income taxes 7,681 7,645
-------------- -------------
Net earnings $ 12,533 $ 12,474
============== =============
Net earnings (loss) attributable to:
Circuit City Group common stock $ 13,269 $ 12,749
CarMax Group common stock (736) (275)
-------------- -------------
$ 12,533 $ 12,474
============== =============
Weighted average common shares:
Circuit City Group:
Basic 98,691 97,710
============== =============
Diluted 99,947 98,920
============== =============
CarMax Group 22,341 21,861
============== =============
Net earnings (loss) per share:
Circuit City Group:
Basic $ 0.13 $ 0.13
============== =============
Diluted $ 0.13 $ 0.13
============== =============
CarMax Group $ (0.03) $ (0.01)
============== =============
Dividends paid per common share:
Circuit City Group common stock $ 0.035 $ 0.035
============== =============
CarMax Group common stock $ -- $ --
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
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Three Months Ended
May 31,
1998 1997
-------------- -------------
Operating Activities:
Net earnings $ 12,533 $ 12,474
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 32,725 30,101
Loss on sales of property and equipment 810 412
Provision for deferred income taxes (12,124) 3,779
Decrease in deferred revenue and other liabilities (6,931) (9,673)
(Increase) decrease in net accounts receivable (3,252) 62,738
(Increase) decrease in inventory, prepaid expenses
and other current assets (78,973) 66,293
Decrease in other assets 7,151 5,521
Decrease in accounts payable, accrued expenses and
other current liabilities, and accrued income taxes (18,163) (78,119)
-------------- -------------
Net cash (used in) provided by operating activities (66,224) 93,526
-------------- -------------
Investing Activities:
Purchases of property and equipment (110,338) (111,226)
Proceeds from sales of property and equipment 133,998 71,728
-------------- -------------
Net cash provided by (used in) investing activities 23,660 (39,498)
-------------- -------------
Financing Activities:
Proceeds from issuance of short-term debt, net 341 4,352
Principal payments on long-term debt (660) (2,004)
Issuances of Circuit City Group common stock, net 14,386 3,915
Issuances of CarMax Group common stock, net 1,127 1
Dividends paid on Circuit City Group common stock (3,469) (3,435)
-------------- -------------
Net cash provided by financing activities 11,725 2,829
-------------- -------------
(Decrease) increase in cash and cash equivalents (30,839) 56,857
Cash and cash equivalents at beginning of year 116,612 202,643
-------------- -------------
Cash and cash equivalents at end of period $ 85,773 $ 259,500
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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). The CarMax Group Common Stock is intended to track separately
the performance of the CarMax operations. The Circuit City Group held a
77.1 percent interest in the CarMax Group at May 31, 1998; a 77.3 percent
interest at February 28, 1998; and a 77.5 percent interest at May 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 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 has been audited.
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>
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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(Amounts in thousands May 31,
except per share data) 1998 1997
-----------------------------------------------------------------------------------------
Circuit City Group:
Weighted average common shares................. 98,691 97,710
Dilutive potential common shares:
Options..................................... 958 900
Restricted stock............................ 298 310
--------------------------------------
Weighted average common shares and
dilutive potential common shares............ 99,947 98,920
======================================
Income available to common shareholders........ $ 13,269 $ 12,749
Basic net earnings per share................... $ 0.13 $ 0.13
Diluted net earnings per share................. $ 0.13 $ 0.13
CarMax Group:
Weighted average common shares................. 22,341 21,861
======================================
Loss available to common shareholders.......... $ 736 $ 275
Net loss per share............................. $ 0.03 $ 0.01
</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. 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 at May 31, 1998, and
1,018,297 shares ranging from $36.88 to $59.00 per share were not included
at May 31, 1997.
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. Amortization of prior
period gains on securitizations for the Circuit City Group's finance
operation exceeded current period gains by $1 million for the three-month
period ended May 31, 1998, compared with a net gain of $5.1 million for the
three-month period ended May 31, 1997. The net gain on sales of receivables
for the CarMax Group's finance operation totaled $2.6 million for the
three-month period ended May 31, 1998, compared with $868,000 for the
three-month period ended May 31, 1997.
<PAGE>
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 $1.7 million at May 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 $70
million related to the auto loan receivable securitization. The total
notional amount of the CarMax swaps was approximately $273 million at May
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>
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 first quarter of fiscal 1999 were $2.27 billion, an increase of 22
percent from $1.86 billion in the same period last year. For the Circuit City
Group, the total sales increase reflects strong comparable store sales across a
broad base of merchandise, covering personal computers, consumer electronics and
major appliances, and the continued geographic growth of Circuit City
Superstores. For the CarMax Group, first quarter sales were below expectations
and reflect the intensity of the new-car promotions with which CarMax must
compete, lower-than-anticipated sales at some new stores opened during the past
year and decreases in average retail prices. However, the total sales increase
also reflects strong new-car sales for the quarter, consistent with the
industry's performance, and the opening of 14 locations since the first quarter
of last fiscal year.
Comparable store sales increases (decreases) for the first quarter of fiscal
years 1999 and 1998 were as follows:
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- ------------------ ----------------------------------------- ---------------------------
FY '99 1st Quarter
- ------------------ ----------------------------------------- ---------------------------
MAR APR MAY FY '99 FY '98
- ------------------ ----------------------------------------- ---------------------------
Circuit City -- 1% 12% 4% (2%)
Group
- ------------------ ----------------------------------------- ---------------------------
CarMax Group 1% (9%) 5% (1%) 14%
- ------------------ ----------------------------------------- ---------------------------
</TABLE>
The comparable store sales increase for the Circuit City Group reflects
higher-than-anticipated sales in all major product categories. The comparable
store sales decrease for the CarMax Group reflects lower-than-anticipated
used-car sales, caused in part by the intense promotional environment in the
new-car industry and by decreases in average retail prices for used cars.
During the quarter, the Circuit City Group opened its 15th Superstore in the New
York metropolitan market and its first Superstores in Idaho Falls, Idaho;
Lafayette and Kokomo, Ind.; and Grand Junction, Colo. By fiscal year-end, the
Circuit City Group plans to have opened approximately 45 additional Superstore
locations.
During the quarter, the CarMax Group added two stores to the Chicago market,
bringing the total Chicago market store count to three, and also opened its
third store location in Dallas. The Group plans to open approximately seven
additional locations by the end of fiscal 1999.
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.8 percent of sales in the first quarter of fiscal 1999 and 6.1
percent of sales in the first quarter of fiscal 1998. Third-party warranty
revenue rose to 4.3 percent of sales in this year's first quarter from 3.9
percent in the same period last year. The total extended warranty revenue that
is reported in total sales was 5.1 percent of sales in this year's first quarter
versus 5.2 percent in the first quarter of last year.
For the CarMax Group, gross dollar sales from all extended warranty programs
were 4.2 percent of sales in the first quarter of fiscal 1999 and 3.4 percent in
the first quarter of fiscal 1998. The increase in fiscal 1999 is attributable to
pricing adjustments and a higher penetration rate achieved by extending warranty
coverage to more vehicles. Third-party warranty revenue increased to 1.9 percent
of sales in this year's first quarter from 1.1 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 first quarter versus 1.2 percent in the
first quarter of last year.
<PAGE>
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 22.2 percent of sales in the first quarter of fiscal
1999 compared with 22.5 percent of sales in 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 rose to 24.1 percent of
sales in the first quarter of fiscal 1999 from 23.9 percent for the same period
last year. The gross profit margin increase reflects effective inventory
management and the sales contribution from higher margin products.
For the CarMax Group, the gross profit margin increased to 11.5 percent of sales
in the first quarter of fiscal 1999 from 9.4 percent for the same period last
year. The increase in the gross margin reflects pricing adjustments on extended
service plans, the elimination of centralized reconditioning facilities, the
addition of vehicle documentation fees, and the contribution of consumer
electronics accessory sales.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expense ratio was 21.0 percent
in the first quarter of fiscal 1999 compared with 21.1 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.
For the Circuit City Group, the selling, general and administrative expense
ratio increased to 22.4 percent of sales for the first quarter of fiscal 1999
compared with 22.3 percent of sales for the same period last year. The higher
ratio primarily reflects the Company's investment in Digital Video Express, LP
and related operations offset by the expense leverage resulting from the
comparable store sales increase. The investment in Divx contributed
approximately 70 basis points to the expense ratio for the Circuit City Group
during the first quarter of fiscal 1999 compared with approximately 30 basis
points for the same period last year.
The CarMax Group's selling, general and administrative expense ratio increased
to 12.9 percent of sales in the first quarter of fiscal 1999 compared with 10.2
percent of sales for the same period last year. The increase primarily reflects
an increased number of new, immature stores, some of which underperformed sales
expectations, and the overall lower-than-anticipated used-car sales.
<PAGE>
Liquidity and Capital Resources
At May 31, 1998, total assets were $3.23 billion. Inventory increased $66.8
million to support new and planned store openings, mainly for the CarMax Group.
The $57.1 million decrease in property and equipment reflects sale-leaseback
transactions that were completed during the first quarter of fiscal 1999, offset
by purchases for new locations.
To support new store expansion and the purchase of inventory for both Circuit
City and CarMax, accounts payable increased $16.6 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 May 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 May 31, 1998, the bankcard master
trust program had a total program capacity of $2.0 billion. As of May 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 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. Management also intends to complete a
shelf registration of common stock for future acquisitions and other business
initiatives. After discussions with various banks, management also believes that
it can secure a financing program for CarMax inventory.
On June 8, 1998, San Francisco, Calif., and Richmond, Va., became the first two
markets to begin selling DVD players equipped with the Divx enhancement and
movie titles on Divx discs. Approximately 30 movie titles were available at
launch, and Divx plans to add approximately 50 titles per month to reach a
minimum of 150 titles by national launch. Additional funding will be needed to
support the national retail roll out of Divx during fiscal 1999. Management
expects to pursue various funding alternatives with a focus on those that would
remove future losses from the Circuit City Group's financial statements.
At May 31, 1998, the Company maintained $410 million in seasonal lines that are
renewed annually with various banks and 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.
<PAGE>
As of May 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.
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 May 31,
1998, and February 28, 1998, was as follows:
(Amounts in millions) May 31 Feb. 28
- ------------------------------------------------------------------------------
Fixed APR................................ $ 378 $ 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 May 31, 1998, and February 28, 1998, and related interest rates
were as follows:
(Amounts in millions) May 31 Feb. 28
- ------------------------------------------------------------------------------
Floating-rate securitizations
synthetically altered to fixed......... $ 273 $ 224
Floating-rate securitizations............. 72 44
Held by the Company:
For investment......................... 27 23
For sale............................... 6 6
------------------------------
Total .................................... $ 378 $ 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.
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 has not determined the
impact of SOP 98-5 on its financial position, 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. 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>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Balance Sheets
(Amounts in thousands)
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May 31, 1998 Feb. 28, 1998
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 70,251 $ 90,200
Net accounts receivable 530,683 537,169
Merchandise inventory 1,281,491 1,266,575
Deferred income taxes 12,240 --
Prepaid expenses and other current assets 29,783 19,798
-------------- -------------
Total current assets 1,924,448 1,913,742
Property and equipment, net 788,235 834,347
Inter-Group Interest in the CarMax Group 275,909 278,239
Other assets 27,889 35,290
-------------- -------------
TOTAL ASSETS $ 3,016,481 $ 3,061,618
============== =============
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long-term debt $ 1,346 $ 1,301
Accounts payable 716,144 714,171
Short-term debt 5,505 5,591
Accrued expenses and other current liabilities 86,809 129,198
Accrued income taxes 3,425 --
-------------- -------------
Total current liabilities 813,229 850,261
Long-term debt, excluding current installments 371,532 396,906
Deferred revenue and other liabilities 132,559 139,841
Deferred income taxes 26,494 26,278
-------------- -------------
TOTAL LIABILITIES 1,343,814 1,413,286
GROUP EQUITY 1,672,667 1,648,332
-------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY $ 3,016,481 $ 3,061,618
============== =============
</TABLE>
See accompanying notes to group financial statements.
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
<TABLE>
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Three Months Ended
May 31,
1998 1997
-------------- -------------
Net sales and operating revenues $ 1,924,727 $ 1,679,350
Cost of sales, buying and warehousing 1,460,109 1,277,701
-------------- -------------
Gross profit 464,618 401,649
-------------- -------------
Selling, general and administrative expenses 432,051 373,700
Interest expense 7,082 5,825
-------------- -------------
Total expenses 439,133 379,525
-------------- -------------
Earnings before income taxes and
Inter-Group Interest in the CarMax Group 25,485 22,124
Provision for income taxes 9,737 8,427
-------------- -------------
Earnings before Inter-Group Interest
in the CarMax Group 15,748 13,697
Net loss related to the Inter-Group
Interest in the CarMax Group 2,479 948
-------------- -------------
Net earnings $ 13,269 $ 12,749
============== =============
Weighted average common shares:
Basic 98,691 97,710
============== =============
Diluted 99,947 98,920
============== =============
Net earnings per share:
Basic $ 0.13 $ 0.13
============== =============
Diluted $ 0.13 $ 0.13
============== =============
Dividends paid per common share $ 0.035 $ 0.035
============== =============
</TABLE>
See accompanying notes to group financial statements.
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
<TABLE>
<S> <C>
Three Months Ended
May 31,
1998 1997
-------------- -------------
Operating Activities:
Net earnings $ 13,269 $ 12,749
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Net loss related to Inter-Group Interest in the CarMax Group 2,479 948
Depreciation and amortization 30,655 29,230
Loss on sales of property and equipment 810 412
Provision for deferred income taxes (12,024) 3,672
Decrease in deferred revenue and other liabilities (7,282) (10,000)
Decrease in net accounts receivable 6,486 70,077
(Increase) decrease in merchandise inventory, prepaid
expenses and other current assets (24,901) 61,948
Decrease in other assets 7,401 4,080
Decrease in accounts payable, accrued expenses
and other current liabilities, and accrued income taxes (36,991) (89,361)
-------------- -------------
Net cash (used in) provided by operating activities (20,098) 83,755
-------------- -------------
Investing Activities:
Purchases of property and equipment (56,029) (67,828)
Proceeds from sales of property and equipment 70,676 59,038
Issuance of inter-group note receivable, net -- (72,878)
-------------- -------------
Net cash provided by (used in) investing activities 14,647 (81,668)
-------------- -------------
Financing Activities:
Increase in inter-group payable, net -- 10,948
(Decrease) increase in allocated short-term debt, net (86) 4,352
Decrease in allocated long-term debt, net (25,329) (2,004)
Equity issuances, net 14,386 3,915
Dividends paid (3,469) (3,435)
-------------- -------------
Net cash (used in) provided by financing activities (14,498) 13,776
-------------- -------------
(Decrease) increase in cash and cash equivalents (19,949) 15,863
Cash and cash equivalents at beginning of year 90,200 32,222
-------------- -------------
Cash and cash equivalents at end of period $ 70,251 $ 48,085
============== =============
</TABLE>
See accompanying notes to group financial statements.
<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
77.1 percent interest in the CarMax Group at May 31, 1998; a 77.3 percent
interest at February 28, 1998; and a 77.5 percent interest at May 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>
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>
(Amounts in thousands May 31,
except per share data) 1998 1997
-----------------------------------------------------------------------------------------
Weighted average common shares................. 98,691 97,710
Dilutive potential common shares:
Options..................................... 958 900
Restricted stock............................ 298 310
--------------------------------------
Weighted average common shares and
dilutive potential common shares............ 99,947 98,920
======================================
Income available to common shareholders........ $ 13,269 $ 12,749
Basic net earnings per share................... $ 0.13 $ 0.13
Diluted net earnings per share................. $ 0.13 $ 0.13
</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. 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 at May 31, 1998, and
1,018,297 shares ranging from $36.88 to $59.00 per share were not included
at May 31, 1997.
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 operation. Amortization of prior
period gains on securitizations for the Circuit City Group's finance
operation exceeded current period gains by $1 million for the-three month
period ended May 31, 1998, compared with a net gain of $5.1 million for the
three-month period ended May 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 $1.7 million at May 31, 1998, compared with a loss of $1.9
million at February 28, 1998.
<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 first quarter of fiscal 1999 were $1.92 billion, an increase of 15
percent from $1.68 billion in the same period last year. The total sales
increase reflects strong sales across a broad base of merchandise, covering
personal computers, consumer electronics and major appliances, and the continued
geographic growth of Circuit City Superstores.
The percentage changes in Circuit City comparable store sales for the first
quarter of fiscal years 1999 and 1998 were as follows:
- ---------------------------------- ----------------------------
FY '99 1st Quarter
- ---------------------------------- ----------------------------
MAR APR MAY FY '99 FY '98
- ---------------------------------- ----------------------------
-- 1% 12% 4% (2%)
- ---------------------------------- ----------------------------
The comparable store sales increase for the first quarter reflects
higher-than-anticipated sales in all major product categories.
During the quarter, the Circuit City Group opened its 15th Superstore in the New
York metropolitan market and its first Superstores in Idaho Falls, Idaho;
Lafayette and Kokomo, Ind.; and Grand Junction, Colo. By fiscal year-end, the
Circuit City Group plans to have opened approximately 45 additional Superstore
locations.
The table below details Circuit City retail units:
<TABLE>
<S> <C>
--------------------------------------------------------------------------------------------------
Stores Open At End of Quarter Estimate
-----------------------------------
May 31, 1998 May 31, 1997 Feb. 28, 1999 Feb. 28, 1998
--------------------------------------------------------------------------------------------------
Superstore
--------------------------------------------------------------------------------------------------
"D" Superstore 115 101 116 114
--------------------------------------------------------------------------------------------------
"C" Superstore 288 275 298 289
--------------------------------------------------------------------------------------------------
"B" Superstore 73 55 86 72
--------------------------------------------------------------------------------------------------
"A" Superstore 29 19 50 25
--------------------------------------------------------------------------------------------------
Electronics-Only 4 4 4 4
--------------------------------------------------------------------------------------------------
Circuit City Express 52 50 52 52
--------------------------------------------------------------------------------------------------
TOTAL 561 504 606 556
==================================================================================================
</TABLE>
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.8 percent of sales in the first quarter of fiscal 1999 and 6.1
percent of sales in the first quarter of fiscal 1998. Third-party warranty
revenue rose to 4.3 percent of sales in this year's first quarter from 3.9
percent in the same period last year. The total extended warranty revenue that
is reported in total sales was 5.1 percent of sales in this year's first quarter
versus 5.2 percent in the first quarter of last year.
<PAGE>
The percentage of merchandise sales by category is listed below:
-------------------------------------------------------------
1st Quarter
-----------------------------
Fiscal 1999 Fiscal 1998
-------------------------------------------------------------
TV 17% 17%
-------------------------------------------------------------
VCR/Camcorders 13% 14%
-------------------------------------------------------------
Audio 16% 17%
-------------------------------------------------------------
Home Office 26% 24%
-------------------------------------------------------------
Appliances 17% 17%
-------------------------------------------------------------
Other 11% 11%
-------------------------------------------------------------
TOTAL 100% 100%
=============================================================
Circuit City's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, the Group has realized more of its
net sales and net earnings in the final fiscal quarter, which includes the
Christmas season, than in any other fiscal quarter. The net earnings of any
interim quarter are seasonally disproportionate to net sales since
administrative and certain operating expenses remain relatively constant during
the year. Therefore, interim results should not be relied upon as necessarily
indicative of results for the entire fiscal year.
Cost of Sales, Buying and Warehousing
The gross profit margin rose to 24.1 percent of sales in the first quarter of
fiscal 1999 from 23.9 percent for the same period last year. The gross profit
margin increase reflects effective inventory management and the sales
contribution from higher margin products.
Selling, General and Administrative Expenses
The Group's selling, general and administrative expense ratio increased to 22.4
percent of sales in the first quarter of fiscal 1999 compared with 22.3 percent
of sales for the same period last year. The higher ratio primarily reflects the
Company's investment in Divx, offset by the expense leverage resulting from the
comparable store sales increase. The investment in Divx contributed
approximately 70 basis points to the expense ratio during the first quarter of
fiscal 1999 compared with approximately 30 basis points for the same period last
year.
Earnings Before the Inter-Group Interest in the CarMax Group
For the first quarter, earnings before the Inter-Group Interest in the CarMax
Group increased 15 percent to $15.7 million in fiscal 1999 compared with $13.7
million in fiscal 1998.
Excluding the investment in Divx and the Group's retained interest in the CarMax
Group, earnings for the first quarter increased 43 percent to $23.8 million from
$16.7 million for the same period last year.
Net Loss Related to the Inter-Group Interest in the CarMax Group
During the first quarter, the net loss attributable to the Circuit City Group's
Inter-Group Interest in the CarMax Group was $2.5 million compared with a net
loss of $0.9 million for the same period last year.
<PAGE>
Net Earnings
Net earnings for the quarter ended May 31, 1998, increased 4 percent to $13.3
million from $12.7 million in the same period last year. Net earnings per share
was 13 cents for the first quarter of both fiscal 1999 and fiscal 1998.
Liquidity and Capital Resources
Total assets at May 31, 1998, were $3.02 billion. The $46.1 million decrease in
property and equipment reflects sale-leaseback transactions entered into during
the first quarter. The impact of these transactions was partly offset by
purchases of property and equipment for new locations. Merchandise inventory
increased $14.9 million to support new and planned store openings.
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 May 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 May 31, 1998, the bankcard master
trust program had a total program capacity of $2 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, proceeds of equity offerings and
sale-leasebacks of real estate. At May 31, 1998, the Company also maintained
$410 million in seasonal lines that are renewed annually with various banks as
well as a $150 million revolving credit facility.
Management believes that proceeds from the sale of property and equipment and
receivables, future increases in the Company's debt allocated to the Circuit
City Group and cash generated by operations will be sufficient to fund the
Circuit City Group's capital expenditures and operations. Management also
intends to complete a shelf registration of common stock for future acquisitions
and other business initiatives.
On June 8, 1998, San Francisco, Calif., and Richmond, Va., became the first two
markets to begin selling DVD players equipped with the Divx enhancement and
movie titles on Divx discs. Approximately 30 movie titles were available at
launch, and Divx plans to add approximately 50 titles per month to reach a
minimum of 150 titles by national launch. Additional funding will be needed to
support the national retail roll out of Divx during fiscal 1999. Management
expects to pursue various funding alternatives with a focus on those that would
remove future losses from the Circuit City Group's financial statements.
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.
<PAGE>
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 has not determined the
impact of SOP 98-5 on its financial position, 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 concepts. 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>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Balance Sheets
(Amounts in thousands)
<TABLE>
<S> <C>
May 31, 1998 Feb. 28, 1998
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 15,522 $ 26,412
Net accounts receivable 70,604 60,866
Inventory 195,886 143,970
Deferred income taxes 1,084 --
Prepaid expenses and other current assets 3,515 1,359
------------ -----------
Total current assets 286,611 232,607
Property and equipment, net 203,054 214,087
Other assets 1,828 1,628
------------ -----------
TOTAL ASSETS $ 491,493 $ 448,322
============ ===========
LIABILITIES AND GROUP EQUITY
Current liabilities:
Accounts payable $ 65,819 $ 51,220
Short-term debt 812 385
Deferred income taxes -- 370
Accrued expenses and other current liabilities 7,833 3,604
------------ -----------
Total current liabilities 74,464 55,579
Long-term debt 52,055 27,386
Deferred revenue and other liabilities 5,617 5,266
Deferred income taxes 1,499 145
------------ -----------
TOTAL LIABILITIES 133,635 88,376
GROUP EQUITY 357,858 359,946
------------ -----------
TOTAL LIABILITIES AND GROUP EQUITY $ 491,493 $ 448,322
============ ===========
</TABLE>
See accompanying notes to group financial statements.
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<S> <C>
Three Months Ended
May 31,
1998 1997
------------ -----------
Net sales and operating revenues $ 346,363 $ 177,554
Cost of sales 306,467 160,925
------------ -----------
Gross profit 39,896 16,629
------------ -----------
Selling, general and administrative expenses 44,918 18,168
Interest expense 249 466
------------ -----------
Total expenses 45,167 18,634
------------ -----------
Loss before income tax benefit 5,271 2,005
Income tax benefit 2,056 782
------------ -----------
Net loss $ 3,215 $ 1,223
============ ===========
Net loss attributable to:
Circuit City Group common stock $ 2,479 $ 948
CarMax Group common stock 736 275
------------ -----------
$ 3,215 $ 1,223
============ ===========
Weighted average common shares 22,341 21,861
============ ===========
Net loss per share $ 0.03 $ 0.01
============ ===========
Dividends paid per common share $ -- $ --
============ ===========
</TABLE>
See accompanying notes to group financial statements.
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
<TABLE>
<S> <C>
Three Months Ended
May 31,
1998 1997
------------ -----------
Operating Activities:
Net loss $ (3,215) $ (1,223)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 2,070 871
Provision for deferred income taxes (100) 107
Increase in deferred revenue and other liabilities 351 327
Increase in net accounts receivable (9,738) (7,339)
(Increase) decrease in inventory, prepaid expenses
and other current assets (54,072) 4,345
(Increase) decrease in other assets (250) 1,441
Increase in accounts payable, accrued expenses and other
current liabilities, and accrued income taxes 18,828 11,242
------------ -----------
Net cash (used in) provided by operating activities (46,126) 9,771
------------ -----------
Investing Activities:
Purchases of property and equipment (54,309) (43,398)
Proceeds from sales of property and equipment 63,322 12,690
Increase in inter-group receivable, net -- (10,948)
------------ -----------
Net cash provided by (used in) investing activities 9,013 (41,656)
------------ -----------
Financing Activities:
Increase in allocated short-term debt, net 427 --
Increase in allocated long-term debt, net 24,669 --
Issuance of inter-group note payable, net -- 72,878
Equity issuances, net 1,127 1
------------ -----------
Net cash provided by financing activities 26,223 72,879
------------ -----------
(Decrease) increase in cash and cash equivalents (10,890) 40,994
Cash and cash equivalents at beginning of year 26,412 170,421
------------ -----------
Cash and cash equivalents at end of period $ 15,522 $ 211,415
============ ===========
</TABLE>
See accompanying notes to group financial statements.
<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
77.1 percent interest in the CarMax Group at May 31, 1998; a 77.3 percent
interest at February 28, 1998; and a 77.5 percent interest at May 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>
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>
(Amounts in thousands May 31,
except per share data) 1998 1997
-----------------------------------------------------------------------------------------
Weighted average common shares................. 22,341 21,861
======================================
Loss available to common shareholders.......... $ 736 $ 275
Net loss per share............................. $ 0.03 $ 0.01
</TABLE>
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 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 totaled $2.6 million
for the three-month period ended May 31, 1998, compared with $868,000 for
the three-month period ended May 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 $1.7 million at May 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 $70
million related to the auto loan receivable securitization. The total
notional amount of the CarMax swaps was approximately $273 million at May
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>
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 first quarter of fiscal 1998 were $346.4 million, an increase of
95 percent from $177.6 million in the same period last year. First quarter sales
were below expectations and reflect the intensity of the new-car promotions with
which CarMax must compete, lower-than-anticipated sales at some new stores
opened during the past year and decreases in average retail prices. However, the
total sales increase reflects strong new-car sales for the quarter, consistent
with the industry's performance, and the opening of 14 locations since the first
quarter of last fiscal year offset by a one percent decrease in comparable store
sales. The percentage changes in CarMax comparable store sales for the first
quarter of fiscal 1999 and 1998 were as follows:
- ---------------------------------- ----------------------------
FY '99 1st Quarter
- ---------------------------------- ----------------------------
MAR APR MAY FY '99 FY '98
- ------ ------------- ------------- -------------- -------------
1% (9%) 5% (1%) 14%
- ------ ------------- ------------- -------------- -------------
The CarMax comparable store sales decrease for the first quarter reflects
lower-than-anticipated used-car sales caused in part by the intense promotional
environment in the new-car industry and decreases in average retail prices.
During the quarter, CarMax added two stores to the Chicago market, bringing the
total Chicago market store count to three, and also opened its third store in
Dallas. The Group plans to open approximately seven 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
----------------------------------
May 31, 1998 May 31, 1997 Feb. 28, 1999 Feb. 28, 1998
------------------------------------------------------------------------------------------------
"C" Superstore 7 1 8 5
------------------------------------------------------------------------------------------------
"B" Superstore 6 3 6 5
------------------------------------------------------------------------------------------------
"A" Superstore 8 3 14 8
------------------------------------------------------------------------------------------------
TOTAL 21 7 28 18
================================================================================================
</TABLE>
For the CarMax Group, gross dollar sales from all extended warranty programs
were 4.2 percent of sales in the first quarter of fiscal 1999 and 3.4 percent in
the first quarter of fiscal 1998. The increase in fiscal 1999 is attributable to
pricing adjustments and a higher penetration rate achieved by extending warranty
coverage to more vehicles. Third-party warranty revenue increased to 1.9 percent
of sales in this year's first quarter from 1.1 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 first quarter versus 1.2 percent in the
first quarter of last year.
CarMax's operations, in common with other retailers in general, are subject to
seasonal influences. Historically, CarMax stores have realized more of their net
sales in the first two quarters of the fiscal year. The net earnings of any
interim quarter are seasonally disproportionate to each store's net sales since
administrative and certain operating expenses remain relatively constant during
the year. Therefore, interim results should not be relied upon as necessarily
indicative of results for the entire fiscal year.
Cost of Sales
The gross profit margin increased to 11.5 percent of sales in the first quarter
of fiscal 1999 from 9.4 percent for the same period last year. The increase in
the gross margin reflects pricing adjustments on extended service plans, the
elimination of centralized reconditioning facilities, the addition of vehicle
documentation fees, and the contribution of consumer electronics accessory
sales.
<PAGE>
Selling, General and Administrative Expenses
The CarMax Group's selling, general and administrative expense ratio increased
to 12.9 percent of sales in the first quarter of fiscal 1999 compared with 10.2
percent of sales for the same period last year. The increase primarily reflects
an increased number of new, immature stores, some of which underperformed sales
expectations, and the overall lower-than-anticipated used-car sales.
Interest Expense
Interest expense decreased to 0.1 percent of sales in the first quarter of
fiscal 1999 compared with 0.3 percent of sales for the same period last year. 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
For the quarter ended May 31, 1998, the CarMax Group produced a net loss of $3.2
million compared with a net loss of $1.2 million for the same period last year.
The net loss attributable to the CarMax Group Common Stock was three cents per
share for the first quarter of fiscal 1999 compared with a net loss of one cent
per share for the same period last year.
Liquidity and Capital Resources
Total assets at May 31, 1998, were $491.5 million, an increase of $43.2 million,
or 9.6 percent, from $448.3 million at February 28, 1998. The largest
contributor to the asset increase was a $51.9 million increase in inventory to
support new stores opened during the quarter and planned openings for the second
quarter. Net accounts receivable increased by $9.7 million, reflecting an
increase in auto loans from other finance companies that offer financing to
CarMax customers.
To support new store expansion and the purchase of inventory, net allocated
long-term debt increased $24.7 million and accounts payable increased $14.6
million.
As of May 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 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 May 31, 1998, the Company also maintained
$410 million in seasonal lines that are renewed annually with various banks as
well as a $150 million revolving credit facility.
Management believes that the establishment of an 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. Management also intends
to complete a shelf registration of common stock for future acquisitions and
other business initiatives.
<PAGE>
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 May 31,
1998, and February 28, 1998, was as follows:
(Amounts in millions) May 31 Feb. 28
- ----------------------------------------------------------------------------
Fixed APR.............................. $ 378 $ 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 May 31, 1998, and February 28, 1998, and related interest rates
were as follows:
(Amounts in millions) May 31 Feb. 28
- ----------------------------------------------------------------------------
Floating-rate securitizations
synthetically altered to fixed...... $ 273 $ 224
Floating-rate securitizations.......... 72 44
Held by the Company:
For investment...................... 27 23
For sale............................ 6 6
--------------------------------
Total ................................. $ 378 $ 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.
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 has not determined the
impact of SOP 98-5 on its financial position, 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 retail concepts. 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>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(c) On June 5, 1998, the Company issued 32,344 shares of
unregistered Circuit City Group Common Stock to the Goldberg
Company, Inc ("Goldberg"), pursuant to an asset purchase
agreement between Goldberg and the Company. The shares were
issued to Goldberg pursuant to Section 4(2) of the
Securities Act of 1933. The transaction did not involve any
general solicitation or general advertising, and the shares
were issued solely to Goldberg. The Company received
$1,461,545 worth of assets of Goldberg in consideration for
issuance of the shares. The shares were subsequently
registered for resale on a form S-3 that became effective
June 18, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the Company's shareholders was held on
June 16, 1998.
(c) (i) At such annual meeting, the shareholders of the
Company elected Richard N. Cooper; Robert S.
Jepson, Jr.; Richard L. Sharp and Alan L. Wurtzel
as directors for three-year terms. The elections
were approved by the following votes:
================================================================================
Directors For Withheld
================================================================================
Richard N. Cooper 68,294,380 19,367,389
- --------------------------------------------------------------------------------
Robert S. Jepson, Jr. 75,895,313 11,766,456
- --------------------------------------------------------------------------------
Richard L. Sharp 75,890,279 11,771,490
- --------------------------------------------------------------------------------
Alan L. Wurtzel 75,884,079 11,777,690
================================================================================
(ii) At such annual meeting, the shareholders of the
Company voted against a shareholder proposal that
sought to require the Board of Directors to issue
a policy committing the Company to a more diverse
Board, including a program of steps and a time
line. This proposal was voted down by the
following votes:
================================================================================
Shareholder Broker
Proposal For Against Abstain Non-Votes
================================================================================
7,683,514 68,585,713 2,387,630 9,004,910
================================================================================
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRCUIT CITY STORES, INC.
By: s/Richard L. Sharp
Richard L. Sharp
Chairman of the Board and
Chief Executive Officer
By: s/Michael T. Chalifoux
Michael T. Chalifoux
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
July 15, 1998
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> 3-mos 3-mos 3-mos
<FISCAL-YEAR-END> Feb-28-1999 Feb-28-1999 Feb-28-1999
<PERIOD-END> May-31-1998 May-31-1998 May-31-1998
<CASH> 85,773 70,251 15,522
<SECURITIES> 0 0 0
<RECEIVABLES> 601,287 530,683 70,604
<ALLOWANCES> 0 0 0
<INVENTORY> 1,477,377 1,281,491 195,886
<CURRENT-ASSETS> 2,211,059 1,924,448 286,611
<PP&E> 1,477,402 1,265,154 212,248
<DEPRECIATION> 486,113 476,919 9,194
<TOTAL-ASSETS> 3,232,065 3,016,481 491,493
<CURRENT-LIABILITIES> 887,693 813,229 74,464
<BONDS> 423,587 371,532 52,055
0 0 0
0 0 0
<COMMON> 61,126 49,920 11,206
<OTHER-SE> 1,693,490 1,622,747 346,652
<TOTAL-LIABILITY-AND-EQUITY> 3,232,065 3,016,481 491,493
<SALES> 2,271,090 1,924,727 346,363
<TOTAL-REVENUES> 2,271,090 1,924,727 346,363
<CGS> 1,766,576 1,460,109 306,467
<TOTAL-COSTS> 1,766,576 1,460,109 306,467
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 7,331 7,082 249
<INCOME-PRETAX> 20,214 25,485 (5,271)
<INCOME-TAX> 7,681 9,737 (2,056)
<INCOME-CONTINUING> 12,533 15,748 (3,215)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 (2,479) 2,479
<NET-INCOME> 12,533 13,269 (736)
<EPS-PRIMARY> 0 0.13 (0.03)
<EPS-DILUTED> 0 0.13 (0.03)
</TABLE>
