UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________ to _________
Commission File No.: 1-5767
CIRCUIT CITY STORES, INC.
(Exact name of Registrant as specified in its charter)
VIRGINIA 54-0493875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9950 Mayland Drive
Richmond, VA 23233
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (804) 527-4000
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on Which Registered
Circuit City Stores, Inc.-Circuit City Group Common Stock, Par Value $0.50 New York Stock Exchange
Circuit City Stores, Inc.-CarMax Group Common Stock, Par Value $0.50 New York Stock Exchange
Rights to Purchase Preferred Stock,
Series E, Par Value $20.00 New York Stock Exchange
Series F, Par Value $20.00 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
On April 30, 1999, the Company had outstanding 101,159,903 Circuit
City Group common shares and 23,326,533 CarMax Group common shares. The
aggregate market value of the common shares held by non-affiliates (without
admitting that any person whose shares are not included in determining such
value is an affiliate) was $6,221,334,034 for the Circuit City Group and
$104,969,399 for the CarMax Group based upon the closing price of these shares
as reported by the New York Stock Exchange on April 30, 1999.
Page 1 of 18
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
Parts I, II, III and IV of this Form 10-K Report: (1) Pages 23 through 81 of the
Company's Annual Report to Shareholders for the fiscal year ended February 28,
1999, (Parts I, II and IV) and (2) "Item One-Election of Directors," "Beneficial
Ownership of Securities," "Executive Compensation," "Employment Agreements and
Change-in-Control Arrangements," "Compensation of Directors" and "Section 16(a)
Compliance" in the May 12, 1999, Proxy Statement, furnished to shareholders of
the Company in connection with the 1999 Annual Meeting of such shareholders
(Part III).
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TABLE OF CONTENTS
Item Page
PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 12
Executive Officers of the Company 12
PART II
5. Market for the Company's Common Equity and Related Stockholder Matters 13
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Results of Operations and Financial Condition 14
7a. Quantitative and Qualitative Disclosure about Market Risk 14
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14
PART III
10. Directors and Executive Officers of the Company 14
11. Executive Compensation 15
12. Security Ownership of Certain Beneficial Owners and Management 15
13. Certain Relationships and Related Transactions 15
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15
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Page 2 of 18
PART I
Item 1. Business.
Circuit City Stores, Inc. was incorporated under the laws of Virginia
in 1949. Its corporate headquarters is located at 9950 Mayland Drive, Richmond,
Va. Its retail operations consist of Circuit City Superstores, Circuit City
electronics-only stores and mall-based Circuit City Express stores. Certain of
Circuit City Stores, Inc. subsidiaries operate CarMax Auto Superstores, a used-
and new-car retail business. In addition, as of February 28, 1999, Circuit City
Stores, Inc. owned approximately 75 percent of Digital Video Express. The
Company has been allocated 100 percent of the losses since inception. Digital
Video Express primarily is engaged in the business of replicating and
distributing specially encrypted DVD discs at wholesale. The Company has wholly
owned finance operations that provide consumer revolving credit and automobile
installment loans.
Changes in Capital Structure. On January 24, 1997, shareholders of
Circuit City Stores, Inc. and subsidiaries approved the creation of two common
stock series. The Company's existing common stock was subsequently redesignated
as Circuit City Stores, Inc.-Circuit City Group Common Stock. In an initial
public offering, which was completed February 7, 1997, the Company sold 21.86
million shares of Circuit City Stores, Inc.-CarMax Group Common Stock.
The Circuit City Group Common Stock is intended to track the
performance of the Circuit City store-related operations, the Company's
investment in Digital Video Express and the Group's retained interest in the
CarMax Group. The CarMax Group Common Stock is intended to track the performance
of the CarMax operations.
Notwithstanding the attribution of the Company's assets and
liabilities (including contingent liabilities) and stockholders' equity between
the Circuit City Group and the CarMax Group for the purposes of preparing their
respective financial statements, holders of Circuit City Group Common Stock and
holders of CarMax Group Common Stock are shareholders of the Company and
continue to be subject to all of the risks associated with an investment in the
Company and all of its businesses, assets and liabilities. Such attribution and
the change in the equity structure of the Company does not affect title to the
assets or responsibility for the liabilities of the Company or any of its
subsidiaries. The results of operations or financial condition of one Group
could affect the results of operations or financial condition of the other
Group. Accordingly, the Company's consolidated financial statements should be
read in conjunction with the financial statements of each Group.
In this document, the following terms and definitions are used:
The Company refers to Circuit City Stores, Inc. and subsidiaries,
which includes Circuit City retail stores and related operations, the
CarMax retail stores and related operations, and the Company's
investment in Digital Video Express.
Circuit City refers to the retail operations bearing the Circuit City
name and to all related operations such as product service and its
finance operation.
Circuit City Group refers to the Circuit City operations, the
Company's investment in Digital Video Express and the retained
interest in the CarMax Group.
CarMax Group and CarMax refer to retail locations bearing the CarMax
name and to all related operations such as its finance operation.
Circuit City Group:
This section describes the Circuit City business and the Company's
investment in Digital Video Express. It excludes the retained interest in the
CarMax business, which is discussed separately beginning on page 7. Divx is
discussed in more detail at the end of the Circuit City Group section on page 6.
Page 3 of 18
General. Circuit City is a leading national retailer of brand-name
consumer electronics, personal computers, major appliances and entertainment
software. It sells video equipment, including televisions, digital satellite
systems, video cassette recorders, camcorders and digital video disc players;
audio equipment, including home stereo systems, compact disc players, tape
recorders and tape players; mobile electronics, including car stereo systems and
security systems; home office products, including personal computers, printers,
peripherals, software and facsimile machines; other consumer electronics
products, including cellular phones, telephones and portable audio and video
products; major appliances, including washers, dryers, refrigerators, microwave
ovens and ranges; and entertainment software.
Each Circuit City store location follows detailed operating
procedures and merchandising programs. Included are procedures for inventory
maintenance, advertising, customer relations, store administration, merchandise
display, store security and the demonstration and sale of products. Merchandise
lines vary from location to location based on store size and market
characteristics. Most merchandise is supplied directly to the stores by regional
warehouse distribution facilities.
Expansion. As of April 30, 1999, Circuit City operated 590 retail
locations throughout the United States. Circuit City has established its
presence in virtually all of the nation's top 100 markets and will continue
adding to the existing store base as attractive market opportunities arise. In
fiscal 2000, Circuit City expects to open approximately 35 additional
Superstores and remodel another 50 to include its most recent merchandising
innovations. Management estimates that it has the opportunity to open
approximately 250 additional stores. Circuit City's goal is to maximize
profitability in each market it serves by capturing large market shares that
produce high sales volumes across a broad merchandise mix.
Merchandising. Because management believes that local markets have
individual characteristics which vary greatly by the advertising, merchandising
and pricing strategies of competitors, Circuit City has organized its marketing
function to focus on markets with similar competitive conditions. Circuit City's
operating regions benefit from a centralized buying organization. The central
buying staff reduces costs by purchasing in large volumes, structures a sound
basic merchandising program and is supported by advanced management information
and distribution systems.
Circuit City's merchandising strategy emphasizes a broad selection of
products, including the industry's newest technologies, and a wide range of
prices. Merchandise mix and displays are controlled centrally to help ensure a
high level of consistency from store to store. Merchandise pricing and selling
strategies vary by market to reflect competitive conditions.
Although suggested retail prices are established by the corporate
merchandising department, each store manager is responsible for shopping the
local competition on a regular basis and is empowered to adjust retail prices to
meet in-market conditions. As part of its competitive strategy, Circuit City
advertises low prices and provides customers with a low-price guarantee. Circuit
City will beat any price from a local store stocking the same new item,
available for sale with a manufacturer's warranty and in a factory-sealed box.
In most cases, if a customer finds a lower price, including Circuit City's own
sale price, within 30 days, Circuit City will refund 110 percent of the
difference to the customer.
Suppliers. During fiscal 1999, Circuit City's 10 largest suppliers
accounted for approximately 55 percent of merchandise purchased. Circuit City's
major suppliers include Sony Electronics, Thomson, Panasonic, Whirlpool, Compaq,
JVC, Packard Bell, Hewlett Packard, IBM, and Maytag. Brand-name advertised
products are sold by all of Circuit City's retail locations. Circuit City has no
significant long-term contracts for the purchase of merchandise.
In the past, Circuit City has not experienced any continued or
ongoing difficulty obtaining satisfactory sources of supply and believes that
adequate sources of supply exist for the types of merchandise sold in its
stores.
Advertising. The Circuit City Group relies on considerable amounts of
advertising to maintain high levels of consumer awareness. Advertising
expenditures were 4.5 percent of sales in fiscal 1999, 4.6 percent of sales in
fiscal 1998 and 4.8 percent of sales in fiscal 1997. Circuit City is generally
one of the largest newspaper advertisers in the markets that it serves. Circuit
City primarily uses print advertising, including multi-page vehicles and
run-of-press newspaper ads, for Superstore and electronics-only store
advertising. Circuit City emphasizes the use of multi-page vehicles to allow a
more extensive presentation of the broad selection of products and price ranges
it carries. These multi-page vehicles are generally distributed in newspapers.
Circuit City advertisements are regularly seen in USA Today and on top-rated
sports and entertainment programs.
Page 4 of 18
Competition. From mid-fiscal 1996 through fiscal 1998, a lack of
significant product introductions resulted in lower average retail prices and
weak sales throughout the industry. This industry weakness resulted in a highly
competitive climate, and a significant number of regional competitors closed
stores. In fiscal 1999, the industry began to emerge from this period of
declining sales. Despite the improvement, the consumer electronics industry
remains highly competitive. Circuit City's primary competitors are large
specialty, discount or warehouse retailers with generally lower levels of
service.
Circuit City uses selection, service and pricing to differentiate
itself from the competition. As part of its competitive strategy, Circuit City
Superstores offer a broad selection of top-quality merchandise that includes
3,200 to 4,000 brand-name items (excluding entertainment software), depending on
the selling square footage of the Superstore. Professionally trained sales
counselors, convenient credit options, factory-authorized product repair, home
delivery, installation centers for automotive electronics, exchange and no-lemon
policies, reflect a strong commitment to customer service. Circuit City strives
to maintain highly competitive prices and offers customers the low-price
guarantee previously described.
Customer Satisfaction. Extensive market research is conducted to
measure Circuit City's customer service record and to refine its consumer offer.
Over 375,000 customer surveys were conducted last year to track satisfaction
among Circuit City's existing customers. These surveys, conducted from customer
transaction records, measure satisfaction with all points of interaction,
including sales counselors, cashiers, warehouse staff, Roadshop installers, home
delivery personnel and product service specialists. Quick feedback enables
management to identify issues that need to be addressed, ensuring that store and
individual performance remain focused on providing the highest possible level of
customer service.
Training. Circuit City staffs its Superstores with commissioned sales
counselors, support personnel (cashiers and stockpersons), a store manager, one
or more sales managers and an operations manager. New sales counselors complete
an in-market training program focused on product knowledge, customer service and
store operations. These programs also provide experienced Associates with
ongoing training in new technologies and merchandising opportunities. In
addition, every month sales counselors are required to test their knowledge of
important products through Training Tracker, an online test administration
program. Market training facilities are utilized for classroom sessions taught
by professional trainers, and a state-of-the-art, in-house video studio produces
video-based training materials. Formalized training for store, sales and
operations managers focuses on human resource management, sales management and
critical operating procedures. Individual development plans address personal
training needs, giving Associates advancement opportunity.
Consumer Credit. Because consumer electronics, personal computers and
major appliances represent relatively large purchases for the average consumer,
Circuit City's business is affected by consumer credit availability, which
varies with the state of the economy and the location of a particular store. In
fiscal 1999, approximately 15 percent of Circuit City's total sales were made
through its private-label credit card and 45 percent through third-party credit
sources.
In fiscal 1991, the Company established a credit card finance
operation to issue its private-label credit card. The credit card finance
operation is located in Kennesaw, Ga. This credit program enhances customer
service with increased credit availability, on-line links between the stores and
the credit operation and better control over customer interactions. Interfacing
the finance operation with Circuit City's point-of-sale (POS) system has
produced a rapid customer credit approval process. A customer's application can
be electronically scored, and qualified customers can generally receive approval
in under one minute. In addition to increased credit availability, the
private-label credit card program provides Circuit City with additional
marketing opportunities, including direct mail campaigns to credit card
customers and special financing programs for promotions. The finance operation's
credit extension, customer service and collection operations are fully automated
with state-of-the-art technology to maintain a high level of profitability and
customer service. This technology aids its collection philosophy of contacting
cardholders in the preliminary days of delinquency to resolve any past due
status.
The credit card finance operation also manages a bankcard portfolio.
Receivables generated by both the private-label credit card and bankcard
programs are sold to non-affiliated entities under asset securitization
programs.
Systems. Circuit City's in-store POS system maintains an on-line
record of all transactions and allows management to track performance by region,
store and individual sales counselor. The information gathered by the system
supports automatic replenishment of in-store inventory from the regional
distribution centers and is incorporated into product buying decisions. The POS
system is interfaced with the finance operation's credit approval system. In the
stores, electronic signature capture for all credit card purchases, bar-code
scanning for product returns and repairs, automatic price tag printing for price
changes and computerized home delivery scheduling enhance Circuit City's
customer service, eliminating time-consuming administrative tasks for store
Associates and reducing costs through smoother store-level execution.
Page 5 of 18
Circuit City's Customer Service Information System maintains an
on-line history of customer purchases and enables sales counselors to better
assist customers with purchases by ensuring that new products can be integrated
with existing products in the home. This system also facilitates product returns
and product repair.
Distribution. At April 30, 1999, Circuit City operated nine automated
electronics distribution centers. These centers are designed to serve stores
within a 500-mile range. They utilize conveyor systems and laser bar-code
scanners to reduce labor requirements, prevent inventory damage and maintain
inventory control. Circuit City also operates smaller distribution centers
handling primarily appliances and larger electronics products. Management
believes that the use of the distribution centers enables it to efficiently
distribute a broad selection of merchandise to its stores, reduce inventory
requirements at individual stores, benefit from volume purchasing and maintain
accounting control. Circuit City also operates an automated, centralized
distribution center for entertainment software. Most of Circuit City's store
merchandise is distributed through its distribution centers.
Service. Circuit City offers service and repair for nearly all the
products it sells. Customers also are able to purchase extended warranty plans
on most of the merchandise Circuit City sells.
At April 30, 1999, Circuit City had 38 regional, factory-authorized
repair facilities. To meet customer needs, merchandise that requires service or
repair usually is moved by truck from the stores to the nearest regional service
facility and is returned to the customer at the store after repair. Circuit City
also has in-home technicians who service large items not conveniently carried to
a store.
Extended warranty plans provide coverage beyond the normal
manufacturer's warranty period, usually with terms of coverage (including the
manufacturer's warranty period) between 12 and 60 months. Circuit City sells two
extended warranty programs on behalf of unrelated third parties that provide
these plans for merchandise sold by Circuit City and other retailers. One of
these programs is sold in most major markets and features in-home service for
personal computer products. The second program covers consumer electronics and
major appliances and is also sold in most major markets. In states where
third-party warranty sales are not permitted, Circuit City sells its own
extended warranty.
Seasonality. Like many retail businesses, the Circuit City Group's
sales are greater in the fourth quarter of the fiscal year than in other periods
of the fiscal year because of holiday buying patterns. A corresponding
pre-seasonal inventory build-up is associated with this sales volume. This
increased sales volume results in a lower ratio of fixed costs to sales and a
higher ratio of operating income to sales in the fourth fiscal quarter. Circuit
City Group's sales for the fourth fiscal quarter (which includes the Christmas
season) were $3,029,343,000 in fiscal 1999, $2,585,969,000 in fiscal 1998 and
$2,282,625,000 in fiscal 1997. Fourth quarter sales represented approximately 32
percent of total sales in fiscal 1999, 1998 and 1997.
Divx. The Divx system includes DVD players with the Divx feature and
Divx discs. Divx offers the consumer a convenient no-return, rental-like system.
For a suggested retail price of $4.49, consumers get high-quality digital
picture and sound, plus a more convenient, flexible, viewing time than offered
by VHS or DVD rental or by pay-per-view. Consumers buy Divx discs whenever it is
convenient to shop. Unlike video rentals, the Divx viewing period begins not
when consumers leave the store, but when they first insert the disc into their
player and push play. After that point, consumers have a 48-hour window in which
they can watch the movie as many times as they want. Unlike pay-per-view, the
consumer can rewind, scan or pause the movie or even finish watching it the next
day. And, in contrast to video rental, the movie never has to be returned, which
eliminates all late fees and allows consumers to build an inexpensive home
library. Subsequent two-day viewing periods cost only about $3.25, and selected
favorite movies can be converted to unlimited viewing for play on any
Divx-equipped player registered to their account. On a regular basis, the
Divx-equipped player uses the phone connection to automatically transfer viewing
information to the Divx billing system. Payment is made through the customer's
credit or debit card. This entire process takes place with no customer
involvement, and the call never interferes with normal phone usage. No phone
connection is ever required during movie play.
After passing key technological tests and securing agreements with
consumer electronics manufacturers and major motion picture studios, the Company
introduced the Divx concept in September 1997. Digital Video Express has secured
agreements with major movie studios to provide titles. At April 30, 1999,
approximately 440 titles were available, with up to 40 titles being added each
month. The system was launched in two markets in June 1998 with Zenith-Inteq
brand players. National roll out began in late September 1998 with the
introduction of the RCA brand player. The addition of ProScan and Panasonic
players gave Divx four brand selections by early December. JVC, Pioneer, Harman
Kardon and Kenwood have announced plans to manufacture DVD players with the Divx
feature in fiscal 2000. Divx-equipped players and Divx discs were available in
approximately 800 retail stores at the end of fiscal 1999.
Page 6 of 18
In April 1998, Divx opened its Customer Satisfaction Center in Rocky
Mount, N.C. This center assists Divx customers with the registration of their
players and provides general help and trouble-shooting on any customer issues.
In May 1998, Divx opened a distribution center in Jackson, Tenn. That center
distributes Divx discs to retailers and directly to customers ordering through
DivxFlix, its on-line store at www.divx.com. In January 1999, Divx launched an
on-line retail distribution program, called divxwholesale.com for Divx discs.
This program allows smaller retailers to quickly and efficiently order new Divx
inventory.
In May 1995, the Company agreed to invest $30.0 million in Divx. That
commitment was increased to $130.0 million in September 1997. Although that
commitment was fulfilled during fiscal 1999, the Company continues to fund the
operations of Divx as management continues to explore various financing options.
As of February 28, 1999, the Company owned approximately 75 percent of the
partnership and has been allocated 100 percent of the losses since inception.
The Company allocates its investment in Divx to the Circuit City Group. As of
February 28, 1999, the Company had funded approximately $207 million for the
operations of Divx.
CarMax Group:
General. In 1993, CarMax pioneered the used-car Superstore concept
when it opened its first location in Richmond, Va. In fiscal 1998 and fiscal
1999, CarMax continued the first phase of its national roll out plan. CarMax
allows customers to purchase vehicles the same way they can buy virtually every
other retail product, with friendly service and non-negotiated low prices.
CarMax purchases and sells used vehicles at each of its stores. CarMax
reconditions vehicles at most of its stores and sells new vehicles at nine of
its locations under sales and service agreements with DaimlerChrysler, Nissan,
Mitsubishi, Toyota, Ford, Chevrolet, Cadillac, Subaru and BMW.
Expansion. As of April 30, 1999, CarMax operated 32 store locations,
including 29 used-car superstores and 17 new-car franchises. In fiscal 1999,
CarMax began testing a hub/satellite operating process. Under the hub/satellite
process, a satellite store shares reconditioning, purchasing and business office
operations with a nearby hub store. The consumer offer is identical in both the
hub and satellite stores. In fiscal 2000, management will focus on improving
profitability in existing multi-store markets through the addition of satellite
stores and new-car franchises. CarMax expects to open three additional used-car
superstores, including one with a new-car franchise in fiscal 2000.
Merchandising. Each CarMax location features a broad selection of
top-quality domestic and import used cars and trucks, with a wide range of
prices appealing to a large range of potential customers. CarMax's selection
covers the most popular brands, such as Ford, General Motors, Chrysler, Toyota,
Honda, Nissan and Mitsubishi and specialty brands like Lexus and BMW. To appeal
to the vast array of consumer preferences and budgets, CarMax offers its used
vehicles under two programs - the CarMax program and the ValuMax program. CarMax
used cars are generally in the current model year through five years old with
fewer than 60,000 miles and range in price from $6,000 to $30,000. Through the
ValuMax program, CarMax sells high-quality used vehicles that are either older
or have higher mileage and generally range in price from $3,000 to $18,000. To
ensure that CarMax quality standards are maintained, vehicles under both
programs undergo a comprehensive, certified quality inspection by CarMax service
technicians. CarMax backs its commitment to quality with a five-day or 250-mile,
money-back guarantee and a limited warranty.
Most CarMax used cars are priced below retail book value. For new
cars, CarMax's goal is to be competitive with the lowest available price in the
market. All customers receive the same low price with no negotiating required.
CarMax has extended its "no-haggle" philosophy to every stage of the vehicle
transaction, including trade-ins, financing rates, extended warranty pricing and
low vehicle documentation fees. CarMax has replaced the traditional "trade-in"
transaction with a process in which trained CarMax buyers appraise any vehicle
and provide the vehicle's owner with a written guaranteed cash offer that is
good for seven days or 300 miles. The appraisal process is available to
everyone, whether or not the individual is purchasing a vehicle from CarMax. In
conjunction with Circuit City's in-store Roadshops, CarMax sells electronic
accessories at its store locations.
Suppliers. In stores open for more than one year, CarMax acquires
more than 50 percent of its used-vehicle inventory from consumers or from local
and regional auctions in the markets that it serves. This buying strategy
provides an inventory of makes and models that reflect the tastes of the market.
CarMax appraises and makes an offer to purchase any properly documented vehicle
from an individual. CarMax also acquires used vehicles directly from other
sources, including wholesalers, franchised and independent dealers and fleet
owners, such as leasing companies and rental companies. Based on consumer
acceptance of the appraisal process at existing CarMax stores and the experience
and success of CarMax to date in acquiring vehicles from auctions and other
sources, management believes that its sources of used vehicles will continue to
be sufficient to meet current needs and to support planned expansion.
Page 7 of 18
New-car inventory for the franchise locations is provided under the
terms of the sales and service agreements with DaimlerChrysler, Nissan,
Mitsubishi, Toyota, Ford, Chevrolet, Cadillac, Subaru and BMW.
Reconditioning. An integral part of CarMax's used-car consumer offer
is the reconditioning process. In fiscal 1998, management closed its centralized
reconditioning facilities after experience proved that in-store reconditioning
is more efficient and produces a higher quality vehicle for the consumer.
In-market reconditioning by trained CarMax service technicians provides direct
accountability to the customer, eliminates potential transportation damage to
the vehicle and reduces transportation costs.
Advertising. Television and radio advertisements are designed to
enhance consumer awareness of the CarMax name and key components of the CarMax
offer. These advertisements are distinctly different from those placed by most
auto dealers. Newspaper ads promote CarMax's selection and price leadership,
targeting consumers with immediate purchase intentions. Advertising expenditures
were 3.4 percent of sales in fiscal 1999 and 1998 and 2.3 percent of sales in
fiscal 1997. Although markets were fully stored in fiscal 1999, advertising did
not decline as a percentage of sales as originally anticipated. In fiscal 1999,
new-car manufacturers intensified their promotional activities throughout the
year resulting in sales below CarMax's expectations in all markets. The impact
of lower sales resulting from the intense new-car competition substantially
offsets the anticipated leverage of having more fully stored markets in fiscal
1999. During fiscal 1998, expansion left CarMax with five markets that were
partially stored for much of the second half of the year. Because these new
markets were not completely stored, initial advertising levels were below those
of a fully stored market. While this approach worked successfully for the
Atlanta entry three years ago, it did not create sufficient consumer awareness
to drive expected levels of consumer traffic in fiscal 1998. As a consequence,
CarMax instituted stepped-up awareness building campaigns in the third quarter
of fiscal 1998 and advertising expense as a percentage of sales was above the
fiscal 1997 level.
Franchises. CarMax operates new-car dealerships under separate
franchise or dealer agreements with DaimlerChrysler, Nissan, Mitsubishi, Toyota,
Ford, Chevrolet, Cadillac, Subaru and BMW. The agreements generally grant CarMax
the right to sell the manufacturer's brand of vehicles and provide related parts
and services within a specified market area. The designation of specified market
areas generally does not guarantee exclusivity within a specified territory. The
agreements govern the relationship between the dealership and the manufacturer
and generally impose certain operational requirements and restrictions. These
requirements include inventory levels, working capital, monthly financial
reporting, signage and cooperation with marketing strategies. A manufacturer may
terminate a dealer agreement under certain circumstances, including a change in
ownership without prior manufacturer approval, failure to maintain adequate
customer satisfaction ratings or a material breach or other provisions of the
agreement. CarMax has also entered into framework agreements with several major
vehicle manufacturers. These agreements generally contain provisions relating to
the acquisition, ownership structure, management and operation of a dealership
franchised by such manufacturers.
There are also various federal and state laws governing the
relationship between automotive dealerships and vehicle manufacturers which
might affect CarMax. These laws include statutes prohibiting manufacturers from
terminating or failing to renew franchise agreements without proper cause and
unreasonably withholding approval for proposed ownership changes.
Competition. The $650 billion used- and new-car retail business is
highly competitive. In the used-vehicle market, CarMax competes with existing
franchised and independent dealers, rental companies and private parties. Many
franchised new-car dealerships also have increased their focus on the
used-vehicle market. Part of CarMax's business strategy is to position itself as
a low-price operator in the industry. In fiscal 1999, CarMax's used-car sales
were negatively impacted by an intensely competitive new-car industry and
insufficient customer traffic in a number of multi-store metropolitan markets.
In the new-vehicle market, CarMax competes with other franchised
dealers offering vehicles produced by the same or other manufacturers and with
auto brokers and leasing companies. As is typical of such arrangements, CarMax's
existing franchise agreements do not guarantee exclusivity within a specified
territory. Aggressive discounting by manufacturers of new cars, which typically
occurs in the fall during the close-out of prior year models, may result in
lower retail sales prices and margins for used vehicles during such discounting.
In fiscal 1999, CarMax's new-car sales were strong resulting in part from the
highly promotional climate in the new-car industry.
Page 8 of 18
Customer Satisfaction. The elements of the CarMax offer are designed
to create a customer-friendly experience. The "no-haggle" pricing allows the
sales consultant to focus solely on the customer's needs. CarMax sales personnel
play a significant role in ensuring a customer-friendly sales process. All sales
consultants, including both full- and part-time employees, are compensated
solely on a commission basis. The amount of the commission is a fixed dollar
amount per vehicle sold. The entire purchase process, including a test-drive and
financing, can be completed in less than one hour. Extensive market research is
conducted to measure CarMax's customer service record and to refine its consumer
offer.
Training. All of CarMax's Associates complete an initial orientation
program entitled "The CarMax Way." This program is designed to ensure that all
CarMax Associates deliver on its mission statement, which is to provide all
customers with great quality cars at great prices with exceptional customer
service. At the completion of fiscal 1999, the 30 location general managers
averaged almost three years of CarMax experience and 12 years of prior
management experience. Each store has eight to 18 inventory buyers. Each buyer
undergoes a 12- to 24- month apprenticeship under the tutelage of an experienced
buyer and appraises thousands of cars before making his or her first independent
purchase. All sales consultants complete three weeks of additional training and
receive ongoing training as new products and services become available. Most of
CarMax's service technicians are ASE-certified, the industry standard for
technician training.
Consumer Credit. CarMax provides prime financing for its customers'
vehicle purchases through its finance operation or Bank of America. In addition,
Chrysler Financial, BMW Financial, Ford Motor Credit, General Motors Acceptance,
Mitsubishi Motors Credit, Nissan Motors Acceptance, Subaru American Credit and
Toyota Motor Credit provide prime financing to customers purchasing new vehicles
at applicable CarMax locations. Sub-prime financing is provided by TransSouth
Financial at all CarMax locations and Franklin Acceptance on a regional basis,
with no financial recourse to CarMax. Sales consultants use AutoMation(R) to
electronically submit financing applications and receive responses from multiple
lenders, generally in less than eight minutes.
Systems. AutoMation(R) is a unique, proprietary and enterprise-wide
inventory management and sales system. Using a touch screen, CarMax customers
can electronically search the inventory for cars that meet their specific needs.
AutoMation(R) displays a color picture of the car and generates a vehicle
information sheet for customer reference. After the selection process is
complete, financing applications are submitted electronically and purchase and
title forms are systematically generated, reducing customer wait time. The
inventory management system includes bar codes on each vehicle and each on-site
parking place. Daily scanning tracks movement of vehicles on the lot. An
electronic gate helps track test drives for vehicles and sales consultants. This
combination of systems allows inventory and sales performance to be closely
monitored, enabling management to quickly resolve any issues.
Service. During fiscal 1998, CarMax completed the roll out of retail
repair service to all locations. In fiscal 2000, CarMax intends to expand its
retail service operations as its customer base expands. Extended warranty sales
prior to July 1997 include third-party contracts and CarMax's own extended
warranty contracts. In most states, CarMax sells warranties on behalf of an
unrelated third party and has no contractual liability to the customer under the
warranty programs. In states where third-party warranty sales are not permitted,
CarMax has sold its own extended warranty. CarMax expects to continue selling
this warranty where state law restricts third-party warranty sales. Contracts
usually have terms of coverage between 12 and 72 months.
Seasonality. The business of CarMax is seasonal, with each location
generally experiencing more of its net sales in the first half of the fiscal
year. During the fall quarter, new-model-year introductions and discounting on
close-out vehicles can cause rapid depreciation on used-car prices, especially
on late-model vehicles. CarMax anticipates that the seasonality of its business
may vary from region to region as its operations expand geographically.
Employees:
On April 30, 1999, the Company had 33,484 hourly and salaried
employees and 20,946 sales employees working on a commission basis. None of the
Company's employees are subject to a collective bargaining agreement. Additional
personnel are employed during peak selling seasons. The Circuit City Group
accounted for 30,000 of the Company's hourly and salaried employees and 19,362
of the Company's sales employees working on a commission basis. The CarMax Group
accounted for 3,484 of the Company's hourly and salaried employees and 1,584 of
the Company's sales employees working on a commission basis.
Page 9 of 18
Item 2. Properties.
At April 30, 1999, the Company's Circuit City retail operations were
conducted in 590 locations. The Company operates four Circuit City Superstore
formats with square footage and merchandise assortments tailored to population
and volume expectations for specific trade areas. The "D" format was developed
to serve the most populous trade areas. At the end of fiscal 1999, selling space
in the "D" format averaged approximately 23,000 square feet with total square
footage averaging 43,042. The "C" format constitutes the largest percent of the
store base. At the end of fiscal 1999 selling square footage in this format
averaged 15,000 square feet with total square footage for all "C" stores
averaging 34,036. The "B" format is often located in smaller markets or in trade
areas that are on the fringes of larger metropolitan markets. At the end of
fiscal 1999, selling space in these stores averaged approximately 12,500 square
feet with an average total square footage of 26,651. The "B" stores offer a
broad merchandise assortment that maximizes return on investment in these lower
volume areas. The "A" format serves the least populated trade areas. Selling
space in these stores averaged approximately 9,500 square feet at the end of
fiscal 1999, and total square footage averaged 19,558. The "A" stores feature a
layout, staffing levels and merchandise assortment that creates high
productivity in the smallest markets.
The Company's 48 mall-based Circuit City Express stores are located
in regional malls, are approximately 2,000 to 3,000 square feet in size and
specialize in leading-edge technology.
The Company's CarMax operations were conducted in 32 locations as of
April 30, 1999. In larger, metropolitan markets, CarMax has begun testing a
hub/satellite operating process. Under the hub/satellite process, a satellite
store shares reconditioning, purchasing and business office operations with a
nearby hub store. The consumer offer is identical in both the hub and satellite
stores. Prototypical satellite stores are expected to be approximately 12,000
square feet on four-to-six acre sites. CarMax opened one prototypical satellite
store late in fiscal 1999. All other fiscal 1999 satellite stores are larger
stores and are therefore classified by size, with "C" stores representing the
largest store format. Going forward, management expects primarily to open
smaller format "A" stores and satellite stores. In fiscal 1999, two locations
were reclassed from "B" stores to "A" stores. The "Other" category in the
following table under the CarMax Group includes two prototype satellite stores
and three stand-alone, new-car stores.
Page 10 of 18
The following table summarizes the Company's Circuit City and CarMax
stores as of April 30, 1999:
<TABLE>
<S> <C>
Circuit City Group CarMax Group
---------------------------------------------------------- ---------------------------------
Superstores Electronics - Mall Superstores
------------------------ -------------
D C B A Only Stores Total C B A Other Total
- - - - ---- ------ ----- -------------- ----- -----
Alabama 1 4 - 1 - 1 7 - - - - -
Arizona 2 6 2 - - 1 11 - - - - -
Arkansas - 2 - 2 - - 4 - - - - -
California 16 52 11 2 - 4 85 - - - - -
Colorado 5 2 1 2 - - 10 - - - - -
Connecticut 3 3 1 - - 1 8 - - - - -
Delaware - 2 - - - 1 3 - - - - -
District of Columbia - - - - - 1 1 - - - - -
Florida 5 23 8 1 - 1 38 1 2 3 1 7
Georgia 4 7 5 - - 3 19 1 - 2 - 3
Hawaii 1 - - - - - 1 - - - - -
Idaho 1 - - 1 - - 2 - - - - -
Illinois 6 19 4 - - 4 33 3 - 1 - 4
Indiana 1 5 3 4 - - 13 - - - - -
Kansas 1 3 - - - - 4 - - - - -
Kentucky - 5 - 1 - - 6 - - - - -
Louisiana - 5 - 2 - 1 8 - - - - -
Maine - - 1 - - - 1 - - - - -
Maryland 1 12 2 - - 4 19 1 - 1 2 4
Massachusetts 1 9 3 - - 6 19 - - - - -
Michigan 8 6 5 3 - 1 23 - - - - -
Minnesota 1 7 1 - - 1 10 - - - - -
Mississippi - 1 - - - - 1 - - - - -
Missouri 1 9 1 - - 1 12 - - - - -
Nebraska 1 1 - - - - 2 - - - - -
Nevada 1 3 - - - - 4 - - - - -
New Hampshire - 4 - - - 2 6 - - - - -
New Jersey 1 6 2 - - - 9 - - - - -
New Mexico 1 - - - - - 1 - - - - -
New York 11 7 4 3 - 2 27 - - - - -
North Carolina 6 5 4 2 - 2 19 - - 2 - 2
Ohio 7 12 5 - - 3 27 - - - - -
Oklahoma - 2 1 1 - - 4 - - - - -
Oregon 2 5 - 1 - - 8 - - - - -
Pennsylvania 2 12 3 2 - 2 21 - - - - -
Rhode Island - 1 - - - - 1 - - - - -
South Carolina 2 4 1 - - 1 8 - - 1 - 1
Tennessee 4 5 1 3 - - 13 - - - - -
Texas 7 27 4 7 - 2 47 2 2 3 - 7
Utah 5 - - - - - 5 - - - - -
Vermont - - 1 - - - 1 - - - - -
Virginia 2 13 5 5 - 3 28 - - 2 - 2
Washington 4 3 3 1 - - 11 - - - - -
West Virginia - - 1 - 2 - 3 - - - - -
Wisconsin 4 2 1 - - - 7 - - - 2 2
------------------------------------------------------------------------------------------------
118 294 84 44 2 48 590 8 4 15 5 32
================================================================================================
</TABLE>
Of the stores open at April 30, 1999, the Company owns four Circuit
City store locations and five CarMax store locations. The Company leases the
remaining 586 Circuit City locations and 27 CarMax locations. During fiscal
2000, the Company anticipates entering into sale-leaseback transactions for one
of the Circuit City locations and for all of the CarMax locations that were
owned by the Company and open as of April 30, 1999.
Page 11 of 18
For information with respect to obligations for Circuit City leases,
see note 10 of the Notes to Circuit City Group Financial Statements on page 60
of the Company's 1999 Annual Report to Stockholders, which is incorporated
herein by reference. For information with respect to obligations for CarMax
leases, see note 12 of the Notes to CarMax Group Financial Statements on page 78
of the Company's 1999 Annual Report to Stockholders, which is incorporated
herein by reference.
The Company owns a 388,000-square-foot consumer electronics/appliance
distribution center in Doswell, Va., and a 387,000-square-foot consumer
electronics/appliance distribution center in Atlanta, Ga. These distribution
centers have been financed with Industrial Development Revenue Bonds.
The Company owns most of the land but leases the three buildings in
which its corporate headquarters is located. The Company leases space for all
warehouse, service and office facilities except for the aforementioned
properties.
Item 3. Legal Proceedings.
In the normal course of business, the Company is involved in various
legal proceedings. Based upon the Company's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the Company's
financial position, liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year ended February 28, 1999.
Executive Officers of the Company.
The following table identifies the present executive officers of the
Company. The Company is not aware of any family relationship between any
executive officers of the Company or any executive officer and any director of
the Company. All executive officers are generally elected annually and serve for
one year or until their successors are elected and qualify. The next general
election of officers will occur in June 1999.
<TABLE>
<S> <C>
Name Age Office
Richard L. Sharp 52 Chairman of the Board and
Chief Executive Officer
W. Alan McCollough 49 President and
Chief Operating Officer
Richard S. Birnbaum 46 Executive Vice President
Operations
Michael T. Chalifoux 52 Executive Vice President,
Chief Financial Officer and
Corporate Secretary
Dennis J. Bowman 45 Senior Vice President and
Chief Information Officer
W. Stephen Cannon 47 Senior Vice President and
General Counsel
John A. Fitzsimmons 56 Senior Vice President
Administration
John W. Froman 45 Senior Vice President
Merchandising
W. Austin Ligon 48 Senior Vice President
Automotive
Gary Mierenfeld 47 Senior Vice President
Distribution and National Service
Jeffrey S. Wells 53 Senior Vice President
Human Resources
</TABLE>
Page 12 of 18
Mr. Sharp is a director and a member of the Company's executive
committee. He joined the Company in 1982 as executive vice president and was
elected president in 1984, chief executive officer in 1986 and chairman of the
board in 1994.
Mr. McCollough joined the Company in 1987 as general manager of
corporate operations. He was elected assistant vice president in 1989, vice
president and Central Division president in 1991, senior vice president -
merchandising in 1994 and president and chief operating officer in 1997.
Mr. Birnbaum joined the Company in 1972. He was elected vice
president in 1985, Central Division president in 1986, senior vice president -
marketing in 1991 and executive vice president - operations in 1994.
Mr. Chalifoux is a director and a member of the Company's executive
committee. He joined the Company in 1983 as corporate controller and was elected
vice president and chief financial officer in 1988. He was elected senior vice
president in 1991, corporate secretary in 1993 and executive vice president in
1998.
Mr. Bowman joined the Company in 1996 as vice president and chief
information officer. He was elected senior vice president and chief information
officer in 1997. Prior to joining the Company, he had served as senior vice
president - information services for Rite Aid Corporation since 1993 and from
1984 to 1993 was a consultant with McKinsey & Company.
Mr. Cannon joined the Company in 1994 as senior vice president and
general counsel. Prior to joining the Company, he had been, since 1986, a
partner in Wunder, Diefenderfer, Ryan, Cannon & Thelen, a Washington, D.C., law
firm.
Mr. Fitzsimmons joined the Company in 1987 as senior vice president -
administration.
Mr. Froman joined the Company in 1986 as a store manager and general
manager in training. In 1987, he was promoted to general manager and in 1989 was
named assistant vice president. He was promoted to director of corporate
operations in 1990 and in 1992 added the title of vice president. In 1994, he
was elected president of the Company's Central Division and in 1997 was named
senior vice president - merchandising.
Mr. Ligon joined the Company in 1990 as vice president - corporate
planning and communications. He was elected senior vice president - corporate
planning and communications in 1991, senior vice president - corporate planning
and automotive in 1994 and senior vice president-automotive and CarMax president
in 1996.
Mr. Mierenfeld joined the Company in 1993 as vice president -
distribution. He was elected senior vice president - distribution and national
service in 1999.
Mr. Wells joined the Company in 1996 as senior vice president - human
resources. Prior to joining the Company, he had served as a senior vice
president of Toys "R" Us, Inc. since 1992.
Part II
With the exception of the information incorporated by reference from
the 1999 Annual Report to Stockholders in Item 2 of Part I and Items 5, 6, 7, 7a
and 8 of Part II and Item 14 of Part IV of this Form 10-K, the Company's 1999
Annual Report to Stockholders is not to be deemed filed as a part of this
Report.
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
Incorporated herein by reference is the information appearing under
the heading "Common Stock" on page 81 of the Company's 1999 Annual Report to
Stockholders.
As of April 30, 1999, there were 8,296 shareholders of record of the
Circuit City Group common stock and 543 shareholders of record of the CarMax
Group common stock.
Item 6. Selected Financial Data.
Incorporated herein by reference is the information appearing under
the heading "Reported Historical Information" on page 23 of the Company's 1999
Annual Report to Stockholders.
Page 13 of 18
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Incorporated herein by reference is the information appearing under
the heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition" on pages 23 through 29 for Circuit City Stores, Inc., pages
46 through 49 for the Circuit City Group, and pages 64 through 67 for the CarMax
Group of the Company's 1999 Annual Report to Stockholders.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk.
Incorporated herein by reference is the information appearing under
the sub-heading "Market Risk" on page 27 for Circuit City Stores, Inc., page 49
for the Circuit City Group and page 67 for the CarMax Group of the Company's
1999 Annual Report to Stockholders.
Item 8. Financial Statements and Supplementary Data.
Incorporated herein by reference is the information appearing under
the headings "Consolidated Statements of Earnings," "Consolidated Balance
Sheets," "Consolidated Statements of Cash Flows," "Consolidated Statements of
Stockholders' Equity," "Notes to Consolidated Financial Statements," and
"Independent Auditors' Report," on pages 30 through 45 of the Company's 1999
Annual Report to Stockholders.
Incorporated herein by reference is the information appearing under
the headings "Circuit City Group Statements of Earnings," "Circuit City Group
Balance Sheets," "Circuit City Group Statements of Cash Flows," "Circuit City
Group Statements of Group Equity," "Notes to Circuit City Group Financial
Statements," and "Independent Auditors' Report," on pages 50 through 63 of the
Company's 1999 Annual Report to Stockholders.
Incorporated herein by reference is the information appearing under
the headings "CarMax Group Statements of Operations," "CarMax Group Balance
Sheets," "CarMax Group Statements of Cash Flows," "CarMax Group Statements of
Group Equity (Deficit)," "Notes to CarMax Group Financial Statements," and
"Independent Auditors' Report," on pages 68 through 80 of the Company's 1999
Annual Report to Stockholders.
Incorporated herein by reference is the information appearing under
the heading "Quarterly Financial Data (Unaudited)" on page 44 for Circuit City
Stores, Inc., page 63 for the Circuit City Group and page 80 for the CarMax
Group of the Company's 1999 Annual Report to Stockholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
With the exception of the information incorporated by reference from
the Company's Proxy Statement in Items 10, 11 and 12 of Part III of this Form
10-K, the Company's Proxy Statement dated May 12, 1999, is not to be deemed
filed as a part of this Report.
Item 10. Directors and Executive Officers of the Company.
The information concerning the Company's directors required by this
Item is incorporated by reference to the section entitled "Item One - Election
of Directors" appearing on pages 2 through 4 of the Company's Proxy Statement
dated May 12, 1999.
The information concerning the Company's executive officers required
by this Item is incorporated by reference to the section in Part I hereof
entitled "Executive Officers of the Company" appearing on pages 12 and 13.
The information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 required by this Item is incorporated by
reference to the section entitled "Section 16(a) Compliance" appearing on page
16 of the Company's Proxy Statement dated May 12, 1999.
Page 14 of 18
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the sections entitled "Executive Compensation," "Employment Agreements and
Change-in-Control Arrangements," and "Compensation of Directors," appearing on
pages 8 through 10 and pages 15 through 16 of the Company's Proxy Statement
dated May 12, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to
the section entitled "Beneficial Ownership of Securities" appearing on pages 5
through 7 of the Company's Proxy Statement dated May 12, 1999.
Item 13. Certain Relationships and Related Transactions.
None.
Part IV
<TABLE>
<S> <C>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following Financial Statements of
Circuit City Stores, Inc., the Circuit City Group and the CarMax
Group, and the related notes to Financial Statements and the
Independent Auditors' Reports are incorporated by reference to
pages 30 through 45 for Circuit City Stores, Inc., pages 50
through 63 for the Circuit City Group, and pages 68 through 80
for the CarMax Group of the Company's 1999 Annual Report to
Shareholders:
Consolidated Statements of Earnings for the fiscal years ended February 28, 1999, 1998 and 1997.
Circuit City Group Statements of Earnings for the fiscal years ended February 28, 1999, 1998 and 1997.
CarMax Group Statements of Operations for the fiscal years ended February 28, 1999, 1998 and 1997.
Consolidated Balance Sheets at February 28, 1999 and 1998.
Circuit City Group Balance Sheets at February 28, 1999 and 1998.
CarMax Group Balance Sheets at February 28, 1999 and 1998.
Consolidated Statements of Cash Flows for the fiscal years ended February 28, 1999, 1998 and 1997.
Circuit City Group Statements of Cash Flows for the fiscal years ended February 28, 1999, 1998 and 1997.
CarMax Group Statements of Cash Flows for the fiscal years ended February 28, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity for the fiscal years ended February 28, 1999, 1998 and 1997.
Circuit City Group Statements of Group Equity for the fiscal years ended February 28, 1999, 1998 and 1997.
CarMax Group Statements of Group Equity (Deficit) for the fiscal years ended February 28, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Notes to Circuit City Group Financial Statements.
Notes to CarMax Group Financial Statements.
Independent Auditors' Report, Circuit City Stores, Inc.
Page 15 of 18
Independent Auditors' Report, Circuit City Group.
Independent Auditors' Report, CarMax Group.
</TABLE>
2. Financial Statement Schedule. The following financial statement
schedules of Circuit City Stores, Inc., Circuit City Group and
CarMax Group for the fiscal years ended February 28, 1999, 1998
and 1997, are filed as part of this Report and should be read in
conjunction with the Financial Statements of Circuit City Stores,
Inc., Circuit City Group and CarMax Group.
<TABLE>
<S> <C>
II Valuation and Qualifying Accounts and Reserves, Circuit City Stores, Inc. S-1
II Valuation and Qualifying Accounts and Reserves, Circuit City Group S-1
II Valuation and Qualifying Accounts and Reserves, CarMax Group S-1
Independent Auditors' Report on Circuit City Stores, Inc. Financial Statement Schedule S-2
Independent Auditors' Report on Circuit City Group Financial Statement Schedule S-2
Independent Auditors' Report on CarMax Group Financial Statement Schedule S-2
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits. The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedules
are filed as part of, or incorporated by reference into, this
Report.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the last
fiscal quarter covered by this Report.
Page 16 of 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CIRCUIT CITY STORES, INC.
(Registrant)
By s/ Richard L. Sharp
Richard L. Sharp
Chairman of the Board and
Chief Executive Officer
By s/ Michael T. Chalifoux
Michael T. Chalifoux
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
May 25, 1999
Page 17 of 18
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
<TABLE>
<S> <C>
Signature Title Date
Michael T. Chalifoux* Director May 25, 1999
Michael T. Chalifoux
Richard N. Cooper* Director May 25, 1999
Richard N. Cooper
Barbara S. Feigin* Director May 25, 1999
Barbara S. Feigin
James F. Hardymon* Director May 25, 1999
James F. Hardymon
Robert S. Jepson Jr.* Director May 25, 1999
Robert S. Jepson Jr.
Hugh G. Robinson* Director May 25, 1999
Hugh G. Robinson
Walter J. Salmon* Director May 25, 1999
Walter J. Salmon
Mikael Salovaara* Director May 25, 1999
Mikael Salovaara
s/ Richard L. Sharp Director May 25, 1999
Richard L. Sharp
John W. Snow* Director May 25, 1999
John W. Snow
Edward Villanueva* Director May 25, 1999
Edward Villanueva
Alan L. Wurtzel* Director May 25, 1999
Alan L. Wurtzel
By: s/ Richard L. Sharp
Richard L. Sharp,
Attorney-In-Fact
</TABLE>
*The original powers of attorney authorizing Richard L. Sharp and Michael T.
Chalifoux, or either of them, to sign this annual report on behalf of certain
directors and officers of the Company are included as Exhibit 24.
Page 18 of 18
<PAGE>
S-1
Schedule II
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
<TABLE>
<S> <C>
Balance at Charged Charge-offs Balance at
Beginning to less End of
Description of Year Income Recoveries Year
Circuit City Stores, Inc.:
Year ended February 28, 1997:
Allowance for doubtful accounts $ 10,025 $ 8,773 $ (3,402) $ 15,396
======== ======== ========= =========
Year ended February 28, 1998:
Allowance for doubtful accounts $ 15,396 $ 8,464 $ (5,554) $ 18,306
======== ======== ========= =========
Year ended February 28, 1999:
Allowance for doubtful accounts $ 18,306 $ 3,918 $ (5,942) $ 16,282
======== ======== ========= =========
Circuit City Group:
Year ended February 28, 1997:
Allowance for doubtful accounts $ 9,580 $ 6,817 $ (2,863) $ 13,534
======== ======== ========= =========
Year ended February 28, 1998:
Allowance for doubtful accounts $ 13,534 $ 5,616 $ (4,627) $ 14,523
======== ======== ========= =========
Year ended February 28, 1999:
Allowance for doubtful accounts $ 14,523 $ 1,374 $ (4,828) $ 11,069
======== ======== ========= =========
CarMax Group:
Year ended February 28, 1997:
Allowance for doubtful accounts $ 445 $ 1,956 $ (539) $ 1,862
======== ======== ========= =========
Year ended February 28, 1998:
Allowance for doubtful accounts $ 1,862 $ 2,848 $ (927) $ 3,783
======== ======== ========= =========
Year ended February 28, 1999:
Allowance for doubtful accounts $ 3,783 $ 2,544 $ (1,114) $ 5,213
======== ======== ========= =========
</TABLE>
<PAGE>
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 2, 1999, we reported on the consolidated balance
sheets of Circuit City Stores, Inc. and subsidiaries (the Company) as
of February 28, 1999 and 1998, and the related consolidated statements
of earnings, stockholders' equity and cash flows for each of the fiscal
years in the three-year period ended February 28, 1999, as contained in
the February 28, 1999 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the year ended February
28, 1999. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related
Circuit City Stores, Inc. financial statement schedule as listed in
Item 14(a)2 of this Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our
audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
s/KPMG LLP
Richmond, Virginia
April 2, 1999
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 2, 1999, we reported on the balance sheets of the
Circuit City Group as of February 28, 1999 and 1998, and the related
statements of earnings, group equity and cash flows for each of the
fiscal years in the three-year period ended February 28, 1999, as
contained in the February 28, 1999 annual report to stockholders. Our
report dated April 2, 1999 includes a qualification related to the
effects of not consolidating the CarMax Group with the Circuit City
Group as required by generally accepted accounting principles. These
financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K of Circuit City Stores,
Inc. for the year ended February 28, 1999. In connection with our
audits of the aforementioned financial statements, we also have audited
the related Circuit City Group financial statement schedule as listed
in Item 14(a)2 of this Form 10-K. This financial statement schedule is
the responsibility of Circuit City Stores, Inc.'s management. Our
responsibility is to express an opinion on this financial statement
schedule based on our audits.
In our opinion, except for the effects of not consolidating the CarMax
Group with the Circuit City Group as discussed in the preceding
paragraph, such schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
s/KPMG LLP
Richmond, Virginia
April 2, 1999
<PAGE>
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 2, 1999, we reported on the balance sheets of the
CarMax Group as of February 28, 1999 and 1998, and the related
statements of operations, group equity (deficit) and cash flows for
each of the fiscal years in the three-year period ended February 28,
1999, as contained in the February 28, 1999 annual report to
stockholders. These financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K of Circuit
City Stores, Inc. for the year ended February 28, 1999. In connection
with our audits of the aforementioned financial statements, we also
have audited the related CarMax Group financial statement schedule as
listed in Item 14(a)2 of this Form 10-K. This financial statement
schedule is the responsibility of Circuit City Stores, Inc.'s
management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
s/KPMG LLP
Richmond, Virginia
April 2, 1999
<PAGE>
Circuit City Stores, Inc.
Annual Report on Form 10-K
INDEX TO EXHIBITS
(3) Articles of Incorporation and Bylaws
(a) Amended and Restated Articles of Incorporation of the
Company, effective February 3, 1997, filed as Exhibit
3(I) to the Company's Quarterly Report on Form 10-Q
for the quarter ended November 30, 1998, (File No.
1-5767) are expressly incorporated herein by this
reference.
(b) Articles of Amendment to the Company's Amended and
Restated Articles of Incorporation, effective April
28, 1998, filed as Exhibit 3(I)(a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended
November 30, 1998, (File No. 1-5767) are expressly
incorporated herein by this reference.
(c) Bylaws of the Company, as amended and restated
October 13, 1998, filed as Exhibit 3(II) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 1998, (File No. 1-5767)
are expressly incorporated herein by this reference.
(4) Instruments Defining the Rights of Security Holders, Including Indentures
(a) First Amended and Restated Rights Agreement dated as
of February 16, 1999, between the Company and Norwest
Bank Minnesota, N.A., as Rights Agent, filed as
Exhibit 1 to the Company's Form 8-A/A filed on May 7,
1999, is expressly incorporated herein by this
reference.
(b) $100,000,000 term loan agreement dated July 28, 1994,
between the Company, The Long-Term Credit Bank of
Japan, Limited, as agent, and the banks named
therein. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
(c) First Amendment to Term Loan Agreement dated October
24, 1995, to the $100,000,000 term loan agreement
dated July 28, 1994, between the Company, The
Long-Term Credit Bank of Japan, Limited, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(d) Second Amendment to Term Loan Agreement dated August
21, 1996, to the $100,000,000 term loan agreement
dated July 28, 1994, between the Company, The
Long-Term Credit Bank of Japan, Limited, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(e) $175,000,000 term loan agreement dated May 26, 1995,
between the Company, LTCB Trust Company, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
Page 1 of 3
(f) First Amendment to Term Loan Agreement dated October
24, 1995, to the $175,000,000 term loan agreement
dated May 26, 1995, between the Company, LTCB Trust
Company, as agent, and the banks named therein.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in
lieu of filing a copy of such agreement, the Company
agrees to furnish a copy of such agreement to the
Commission upon request.
(g) $130,000,000 term loan agreement dated June 14, 1996,
between the Company, Royal Bank of Canada, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(h) $150,000,000 Credit Agreement dated August 31, 1996,
between the Company, Crestar Bank, as agent, and the
banks named therein. Pursuant to Item 601(b)(4)(iii)
of Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
(i) First Amendment to Credit Agreement dated May 1,
1998, to the $150,000,000 Credit Agreement dated
August 31, 1996, between the Company, Crestar Bank,
as agent, and the banks named therein. Pursuant to
Item 601(b)(4)(iii) of Regulation S-K, in lieu of
filing a copy of such agreement, the Company agrees
to furnish a copy of such agreement to the Commission
upon request.
(10) Material Contracts*
(a) The Company's Amended and Restated 1989 Non-Employee
Directors Stock Option Plan, filed as Exhibit A to
the Company's Definitive Proxy Statement dated May 9,
1997, for the Annual Meeting of Stockholders held on
June 17, 1997, is expressly incorporated herein by
this reference.
(b) Amendments adopted June 17, 1997, to the Company's
Amended and Restated 1989 Non-Employee Directors
Stock Option Plan filed as Exhibit 10(ii) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1997 is expressly incorporated
herein by this reference.
(c) The Company's 1994 Stock Incentive Plan, as amended
as of January 24, 1997, filed as Annex III to the
Company's Definitive Proxy Statement dated December
24, 1996, for a Special Meeting of Shareholders held
on January 24, 1997, (File No. 1-5767) is expressly
incorporated herein by this reference.
(d) Letter agreement and non-compete agreement dated
January 30, 1996, (revised February 12, 1996),
between the Company and Alan L. Wurtzel filed as
Exhibit 10(g) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1995,
(File No. 1-5767) is expressly incorporated herein by
this reference.
(e) Employment agreement between the Company and Richard
L. Sharp dated October 17, 1986, and amendment dated
August 1, 1989, to the employment agreement, filed as
Exhibit 10(m) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1993,
(File No. 1-5767) is expressly incorporated herein by
this reference.
(f) Employment agreement dated June 1, 1988, between the
Company and John A. Fitzsimmons, filed as Exhibit
10(n) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1989, (File No.
1-5767) is expressly incorporated herein by this
reference.
Page 2 of 3
(g) Amendment dated August 1, 1989, to employment
agreement dated June 1, 1988, between the Company and
John A. Fitzsimmons, filed as Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1993, (File No. 1-5767) is
expressly incorporated herein by this reference.
(h) Employment agreement dated May 25, 1989, between the
Company and Michael T. Chalifoux, filed as Exhibit
10(x) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1991, (File No.
1-5767) is expressly incorporated herein by this
reference.
(i) Employment agreement dated April 24, 1995, between
the Company and W. Alan McCollough filed as Exhibit
10(l) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, (File No.
1-5767), is expressly incorporated herein by this
reference.
(j) Amended and restated employment agreement dated May
12, 1995, between the Company and Richard S. Birnbaum
filed as Exhibit 10(s) to the Company's Annual Report
on Form 10-K for the fiscal year ended February 28,
1995, (File No. 1-5767) is expressly incorporated
herein by this reference.
(k) The Company's Annual Performance-Based Bonus Plan, as
amended as of January 24, 1997, filed as Annex IV to
the Company's Definitive Proxy Statement dated
December 24, 1996, for a Special Meeting of
Shareholders held on January 24, 1997, (File No.
1-5767) is expressly incorporated herein by this
reference.
(l) Program for deferral of director compensation
implemented October 1995 filed as Exhibit 10(i) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 1995, (Filed No. 1-5767)
is expressly incorporated herein by this reference.
(m) Benefit Restoration Plan, effective February 28,
1999, is filed herewith.
(13) Annual Report to Stockholders
(21) Subsidiaries of the Company
(23) Consents of Experts and Counsel
Consent of KPMG LLP to Incorporation by Reference of Independent
Auditors' Reports into the Company's Registration Statements on Form
S-8.
(24) Powers of Attorney
(27) Financial Data Schedule
* All contracts listed under Exhibit 10 are management contracts, compensatory
plans or arrangements of the Company required to be filed as an exhibit.
Page 3 of 3
Exhibit 10(m)
CIRCUIT CITY STORES, INC.
BENEFIT RESTORATION PLAN
Effective February 28, 1999
TABLE OF CONTENTS
Page
Section I
Purpose of the Plan
1.1 Purpose...................................................................1
1.2 Structure.................................................................1
1.3 Definitions...............................................................1
Section II
Eligibility
2.1 Eligible Employees........................................................1
2.2 Duplication of Benefits...................................................2
Section III
Benefits
3.1 Retirement Benefit........................................................2
3.2 Maximum Benefit...........................................................2
Section IV
Computation and Payment of Retirement Benefit
4.1 Computation...............................................................2
4.2 Payment...................................................................2
4.3 Distribution of Accrued Benefit...........................................3
Section V
Computation and Payment of Survivor Benefit
5.1 Survivor Benefit..........................................................3
5.2 Computation...............................................................4
5.3 Payment .................................................................4
Section VI
Administration
6.1 Effective Date, Amendment and Termination.................................4
6.2 Plan Administrator........................................................4
6.3 Claims Procedure..........................................................5
i
<PAGE>
Section VII
Miscellaneous
7.1 Withholding...............................................................6
7.2 Rights Under the Plan.....................................................6
7.3 Effect on Employment......................................................6
7.4 Successors; Governing Law.................................................6
ii
CIRCUIT CITY STORES, INC.
BENEFIT RESTORATION PLAN
Section I
Purpose of the Plan
1.1 Purpose. Circuit City Stores, Inc. (the "Company") maintains this
Benefit Restoration Plan (the "Plan") to provide deferred compensation for
certain key employees of the Company and its subsidiaries who are expected to
contribute significantly to the growth of the Company and its subsidiaries. The
Board of Directors of the Company (the "Board") has determined that the benefits
to be provided under the Plan are reasonable and appropriate compensation for
the services rendered and to be rendered.
1.2 Structure. This Plan provides a benefit as set forth in Section III
below for a select group of management or highly compensated employees with
compensation in excess of the $150,000 limit on compensation, as adjusted under
Section 401(a)(17) of the Code, and whose benefits are limited under the
Retirement Plan by the maximum benefit limit under Section 415 of the Code.
1.3 Definitions. Whenever used in the Plan, the following terms shall have
the meanings set forth below.
(a) "Beneficiary" means the Participant's surviving spouse.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Retirement Plan" means the Retirement Plan of Circuit City
Stores, Inc. as in effect from time to time.
(d) "Tax Limits" means both (1) the $150,000 (as adjusted) limit on
compensation under Section 401(a)(17) of the Code, and (2) the maximum
benefit limit of $90,000 (as adjusted) under Section 415(b)(1)(A) of the
Code.
Section II
Eligibility
2.1 Eligible Employees. Each employee of the Company and a subsidiary who
is a vested participant in the Retirement Plan and an employee of the company on
or after the effective date of the plan, and whose retirement benefits under the
Retirement Plan are limited by the Tax Limits shall be a Participant.
1
2.2 Duplication of Benefits. All benefits described in the Plan are subject
to the provisions of Section 4.3. Notwithstanding anything in the Plan to the
contrary, there shall be no duplication of benefits under this Plan and the
Retirement Plan.
Section III
Benefits
3.1 Retirement Benefit. If a Participant begins receiving an annual
retirement benefit from the Retirement Plan, the Participant shall receive an
annual supplemental benefit under this Plan equal to the amount (if any)
determined as follows:
(a) The annual retirement benefit that would have been paid from the
Retirement Plan had the Participant's benefit not been limited by the Tax
Limits,
REDUCED BY
(b) The total annual retirement benefit that is payable to the
Participant under the Retirement Plan.
3.2 Maximum Benefit. Notwithstanding any other provision of the Plan to the
contrary, the maximum annual supplemental benefit payable to a Participant or
Beneficiary under this Plan shall be $300,000 as adjusted below. The $300,00
maximum benefit shall be adjusted at the same times and in the same proportions
as the Section 415 dollar limit is adjusted under Section 415(d) of the Code.
Section IV
Computation and Payment of Retirement Benefit
4.1 Computation. The amount of the annual supplemental retirement benefit
described in Section III will initially be determined by assuming that the
benefits payable under this Plan and the Retirement Plan are paid in the form of
a single life annuity payable for the Participant's lifetime, beginning on the
date on which payments actually begin to be made to the Participant from the
Retirement Plan and ending at the Participant's death. The actuarial assumptions
used for purposes of the Retirement Plan will be used to determine the amount of
benefits payable for purposes of this Plan.
4.2 Payment. A Participant's supplemental retirement benefit under this
Plan will be paid in the same form of payment as benefits for the Participant
under the Retirement Plan, except as provided in Section 4.3. If the benefit is
to be paid in a form other than the single life annuity form described above,
the annual supplemental retirement benefit described in Section III will be
2
actuarially adjusted, using the actuarial assumptions then in effect under the
Retirement Plan. Except as provided below, a Participant's supplemental benefit
will begin to be paid on the date on which the Participant begins receiving
benefits under the Retirement Plan and will be paid in cash. Alternatively at
least 6 months prior to receiving benefits, the participant may elect to have
the actuarially adjusted supplemental benefit paid out over a 5 year period.
4.3 Distribution of Accrued Benefit.
(a) Notwithstanding anything in the Plan to the contrary, the Company
may distribute, or cause to be distributed, to a Participant (or, after his
death, to his Beneficiary) all or part of the accrued benefit of the
Participant (or Beneficiary) under the Plan as of a specified date. The
distribution may be made at any time deemed appropriate by the Company. The
benefit may be distributed in cash or in kind (including, without
limitation, distribution of one or more annuity contracts). The Company
shall indicate in writing that the distribution is intended to be a
distribution of the Participant's (or Beneficiary's) accrued benefit under
the Plan. The Company may take into account the tax consequences of the
distribution when computing the amount to be distributed under this Section
4.3.
(b) In the event of a distribution under this Section 4.3, the accrued
benefit of the Participant (or Beneficiary) under the Plan shall be reduced
by the accrued benefit distributed, and the Company shall have no further
liability with respect to the benefit distributed. The Company will reduce
any benefit otherwise payable under this Plan by the accrued benefit
distributed under this Section 4.3. To the extent that a distribution is
made in a lump sum cash payment, the actuarial assumptions then in effect
under the Retirement Plan shall be used to determine the present value of
the Participant's (or Beneficiary's) accrued benefit under this Plan.
(c) The Company has the sole discretion to determine when and if a
distribution is to be made under this Section 4.3, and to determine the
amount of any distribution, and no Participant or Beneficiary shall have
any right to receive a distribution under this Section 4.3.
Section V
Computation and Payment of Survivor Benefit
5.1 Survivor Benefit. If a Participant elects an option other than the
Joint and Spouse's Survivor Annuity under the Retirement Plan, benefits under
the Restoration Plan will be paid as if the Joint and Spouse's Survivor Annuity
was elected. If a Participant dies when a survivor annuity is payable to the
Participant's Beneficiary under the Retirement Plan, the Beneficiary will be
entitled to receive an annual supplemental survivor benefit from this Plan equal
to the amount (if any) determined as follows:
3
(a) The annual survivor benefit that would have been payable to the
Beneficiary under the Retirement Plan had the Beneficiary's benefit not
been limited by the Tax Limits,
REDUCED BY
(b) The total annual benefit that is payable to the Beneficiary under
the Retirement Plan.
5.2 Computation.The supplemental survivor benefit described in Section 5.1
will be computed as if the survivor benefits under this Plan and, the Retirement
Plan, were paid in an annuity for the lifetime of the Beneficiary, beginning on
the date on which the Beneficiary's benefits commence under the Retirement Plan.
The actuarial assumptions used for purposes of the Retirement Plan will be used
to determine the benefits payable under this Plan, and the Retirement Plan for
purposes of this Plan.
5.3 Payment. Except as provided in Section 4.3, the supplemental survivor
benefit will be paid to the Beneficiary at the same times and for the same
duration as payments under the Retirement Plan, commencing at the time the
Beneficiary's benefits commence under the Retirement Plan, and the benefit will
be paid in cash.
Section VI
Administration
6.1 Effective Date, Amendment and Termination. The Plan shall be effective
as of February 28, 1999. The Board of the Company may amend or terminate the
Plan at any time; provided, however, that no amendment or termination of the
Plan shall reduce a Participant's accrued benefit under the Plan as of the date
of the amendment or termination. For this purpose, a Participant's accrued
benefit under the Plan shall be computed based on the formulas in this Plan and
his accrued benefits under the Retirement Plan as of the date of the
computation.
6.2 Plan Administrator. The Plan will be administered by one or more
persons appointed by the Board to be responsible for administering the Plan (the
"Plan Administrator"). Unless the Board determines otherwise, the Plan shall be
administered by the committee which administers the Retirement Plan. The
decisions of the Plan Administrator shall be final and binding on all persons.
The Plan Administrator will have the express discretionary authority to
interpret and administer the Plan, and to make all decisions with respect to the
interpretation and administration of the Plan.
4
6.3 Claims Procedure. Each Participant or Beneficiary of a deceased
Participant shall be entitled to file with the Plan Administrator a written
claim for benefits under the Plan. The Plan Administrator will review the claim,
and, if the claim is denied, in whole or in part, the Plan Administrator will
furnish the claimant, within 90 days after the Plan Administrator's receipt of
the claim (or within 180 days after such receipt, if special circumstances
require an extension of time), a written notice of denial of the claim
containing the following:
(a) Specific reasons for the denial,
(b) Specific reference to the pertinent Plan provisions on which the
denial is based,
(c) A description of any additional material or information necessary
for the claimant to perfect the claim, and an explanation of why the
material or information is necessary, and
(d) An explanation of the claims review procedure.
The claimant may request a review of the claim by an appeals committee appointed
by the Board. The review may be requested in writing at any time within 90 days
after the claimant receives written notice of the denial of his claim. The
appeals committee shall afford the claimant a full and fair review of the
decision denying the claim and, if so requested, shall:
(a) Permit the claimant to review any documents that are pertinent to
the claim,
(b) Permit the claimant to submit to the committee issues and comments
and writing, and
(c) Afford the claimant an opportunity to meet with a quorum of the
appeals committee as part of the review procedure.
The appeals committee's decision on review shall be made in writing and shall be
issued within 60 days following receipt of the request for review. The period
for decision may be extended to a date not later than 120 days after such
receipt if the committee determines that special circumstances require an
extension. The decision on review shall include specific reasons for the
decision and specific references to the Plan provisions on which the decision of
the committee is based.
5
Section VII
Miscellaneous
7.1 Withholding. All benefits payable under this Plan will be reduced by
any amounts that are required to be withheld on account of income or payroll tax
withholding or other reasons.
7.2 Rights Under the Plan. This Plan is an unfunded deferred compensation
plan. Title to and beneficial ownership of all benefits described in the Plan
shall at all times remain with the Company. Participation in the Plan and the
right to receive payments under the Plan shall not give a Participant or
Beneficiary any proprietary interest in the Company or any of its assets.
Benefits under the Plan shall be payable from the general assets of the Company.
No trust fund may be created in connection with the Plan (other than a trust
that, under applicable law, does not affect the characterization of this Plan as
an unfunded plan), and there shall be no required funding of amounts that may
become payable under the Plan. A Participant and his Beneficiary shall, for all
purposes, be general creditors of the Company. The interest of a Participant and
his spouse in the Plan cannot be assigned, anticipated, sold, encumbered or
pledged and shall not be subject to the claims of their creditors.
7.3 Effect on Employment.The Plan will not affect the right of the Company
or a subsidiary to terminate an employee's employment at any time. Benefits
payable under the Plan will not be considered compensation for purposes of other
retirement or benefit plans maintained by the Company or a subsidiary.
7.4 Successors; Governing Law. The Plan is binding on the Company and its
successors and assigns and on Participants and their Beneficiaries, successors,
estates, and distributees. The Plan will be administered according to the laws
of the Commonwealth of Virginia.
WITNESS the following signature as of February 28, 1999.
CIRCUIT CITY STORES, INC.
By /s/Michael T. Chalifoux
6
REPORTED HISTORICAL INFORMATION
<TABLE>
<S> <C>
(Amounts in thousands except per share data) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues........................... $10,804,447 $8,870,797 $7,663,811 $7,029,123 $5,582,947
Net earnings............................................... $ 142,924 $ 104,311 $ 136,414 $ 179,375 $ 167,875
Net earnings (loss) per share:
Circuit City Group:
Basic................................................ $ 1.50 $ 1.14 $ 1.40 $ 1.86 $ 1.75
Diluted.............................................. $ 1.48 $ 1.13 $ 1.39 $ 1.84 $ 1.74
CarMax Group............................................ $ (0.24) $ (0.35) $ (0.01) $ - $ -
Total assets............................................... $ 3,445,266 $3,231,701 $3,081,173 $2,526,022 $2,004,055
Long-term debt, excluding current installments............. $ 426,585 $ 424,292 $ 430,290 $ 399,161 $ 178,605
Deferred revenue and other liabilities..................... $ 112,085 $ 145,107 $ 166,295 $ 214,001 $ 241,866
Cash dividends per share paid on
Circuit City Group common stock......................... $ 0.14 $ 0.14 $ 0.14 $ 0.12 $ 0.10
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On January 24, 1997, shareholders of Circuit City Stores, Inc. approved the
creation of two common stock series. The Company's existing common stock was
subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common
Stock. In an initial public offering, which was completed February 7, 1997, the
Company sold 21.86 million shares of Circuit City Stores, Inc.-CarMax Group
Common Stock.
The Circuit City Group Common Stock is intended to track the performance of
the Circuit City store-related operations, the Company's investment in Digital
Video Express and the Group's retained interest in the CarMax Group. The effects
of this retained interest on the Circuit City Group's financial statements are
identified by the term "Inter-Group."
The CarMax Group Common Stock is intended to track the performance of the
CarMax operations. The Inter-Group Interest is not considered outstanding CarMax
Group stock. Therefore, any net earnings or loss attributed to the Inter-Group
Interest is not included in the CarMax Group's per share calculations.
The following discussion and analysis refers to Circuit City Stores, Inc., which
includes the operations related to both the Circuit City Group and the CarMax
Group. All financial statements reflect consummation of the CarMax Group stock
offering on February 7, 1997. For additional information, refer to the
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" for the Circuit City Group and for the CarMax Group.
RESULTS OF OPERATIONS
Sales Growth
Total sales for Circuit City Stores, Inc. increased 22 percent in fiscal 1999 to
$10.80 billion. In fiscal 1998, total sales were $8.87 billion, a 16 percent
increase from $7.66 billion in fiscal 1997.
PERCENTAGE SALES CHANGE FROM PRIOR YEAR
Circuit City Circuit City CarMax
Stores, Inc. Group Group
---------------------------------------------------
Fiscal Total Total Comparable Total Comparable
- -------------------------------------------------------------
1999........ 22% 17% 8 % 68% (2)%
1998........ 16% 12% (1)% 71% 6 %
1997........ 9% 6% (8)% 85% 23 %
1996........ 26% 23% 5 % 258% 12 %
1995........ 35% 34% 15 % 376% 43 %
THE CIRCUIT CITY GROUP. Industry sales in Circuit City's retail segments have
varied significantly over the past five years, resulting in wide variations in
the Group's sales growth. Geographic expansion and the addition of product
categories such as personal computers were the primary contributors to the
Circuit City Group's total sales growth early in the period. From mid-fiscal
1996 through fiscal 1998, a lack of significant product introductions resulted
in lower average retails and weak sales throughout the industry. In fiscal 1999,
the industry began to emerge from this period of declining sales. For Circuit
City, the fiscal 1999 sales reflected strong sales across all major categories
with especially strong sales in personal computers and new high technology areas
such as DIRECTV; wireless communications; DVD players, especially players with
the Divx feature; and digital camcorders. The addition of 37 Superstores also
contributed to the total sales growth.
The industry weakness in fiscal 1997 and 1998 resulted in a highly
competitive climate, and a significant number of regional competitors closed
stores. Despite the improvement in fiscal 1999, the consumer electronics
industry remains highly competitive. Circuit City's primary competitors are
large specialty, discount or warehouse retailers with generally lower levels of
service. Because of Circuit City's long history of providing exceptional
customer service, management believes that the Circuit City locations can
continue to maintain share in existing markets and build comparable shares in
new markets.
23
The Circuit City Group sells two extended warranty programs on behalf of
unrelated third parties that issue these plans for merchandise sold by the Group
and other retailers. These third-party programs are sold in most major markets.
In states where third-party warranty sales are not permitted, the Group sells a
Circuit City extended warranty. Gross dollar sales from all extended warranty
programs were 5.4 percent of the Group's total sales in fiscal year 1999,
compared with 5.5 percent in fiscal 1998 and 6.0 percent in fiscal 1997. The
lower percentages in fiscal years 1999 and 1998 reflect the impact of lower
average retail prices on consumer demand for the related warranties in many
categories and increased sales of some products that carry lower warranty
penetration rates. Total extended warranty revenue, which is reported in the
Group's total sales, was 4.6 percent of sales in fiscal years 1999 and 1998 and
5.1 percent of sales in fiscal year 1997. The gross profit margins on products
sold with extended warranties are higher than the gross profit margins on
products sold without extended warranties. Third-party extended warranty revenue
was 4.1 percent of the Group's total sales in fiscal year 1999 and 3.6 percent
of the Group's total sales in fiscal years 1998 and 1997. The fiscal 1999
increase in third-party extended warranty revenue reflects the conversion of
stores in 10 states to third-party warranty sales in June 1998.
THE CARMAX GROUP. The CarMax Group's fiscal 1999 total sales growth reflects the
addition of 12 locations, three of which opened in the last week of the fiscal
year, and a 2 percent decrease in comparable store sales. CarMax opened 10
used-car superstores in fiscal 1999. The Group grand-opened the Chicago, Ill.,
market with three stores that opened early in fiscal 1999 and one that opened
late in fiscal 1998. The Group also entered San Antonio, Texas; and Greenville,
S.C.; and added stores in the Washington, D.C./Baltimore, Md.; Tampa, Fla.; and
Dallas/Ft. Worth, Texas, markets. The Group also acquired franchise rights or
was awarded new franchise points for six new-car stores, including the
nine-franchise Mauro Auto Mall, now operating as the CarMax Auto Mall, in
Kenosha, Wis.
CarMax's fiscal 1999 comparable store sales reflect used-car sales that
were below expectations and continued strength in CarMax's new-car comparable
store sales. The disappointing used-car sales resulted from an intensely
price-competitive new-car industry, with which CarMax must compete, and
insufficient customer traffic in a number of multi-store metropolitan markets.
CarMax is producing strong store-level returns in single-store markets and in
the multi-store Atlanta, Ga., and Washington D.C./Baltimore, Md., markets.
In larger, metropolitan markets, CarMax has begun testing a hub/satellite
operating process. Under the hub/satellite process, a satellite store shares
reconditioning, purchasing and business office operations with a nearby hub
store. The consumer offer is identical in both the hub and satellite stores. The
hub/satellite process significantly reduced overhead and operating costs for
existing stores that were designated as satellite stores in fiscal 1999.
Management believes this operating concept will allow it to efficiently open
more but smaller stores in metropolitan markets. Prototypical satellite stores
are expected to be approximately 12,000 square feet on four- to six-acre sites.
CarMax opened one prototypical satellite store late in fiscal 1999. All other
fiscal 1999 satellite stores are larger stores and are therefore classified by
size, with "C" stores representing CarMax's largest store format. Going forward,
management expects primarily to open smaller format "A" stores and satellite
stores.
The fiscal 1998 sales growth reflects the addition of 11 locations, two of
which opened in the last week of the fiscal year, and a 6 percent comparable
store sales increase. The Group's used-car sales began to fall below
management's expectations during the second half of fiscal 1998. New-car sales
remained strong throughout that fiscal year. In June 1997, CarMax acquired its
second Chrysler-Plymouth-Jeep franchise, which was relocated and opened in
conjunction with the opening of the CarMax superstore in Stockbridge, Ga.
The fiscal 1997 sales growth includes the addition of three stores and a 23
percent comparable store sales increase for the two locations classified as
comparable stores throughout the year and the two locations classified as
comparable stores for a portion of the year.
Extended warranty sales prior to July 1997 include third-party contracts
and CarMax's own extended warranty contracts. In most states, CarMax sells
warranties on behalf of an unrelated third party and has no contractual
liability to the customer under the warranty programs. In states where
third-party warranty sales are not permitted, CarMax has sold its own extended
warranty. CarMax expects to continue selling this warranty where state law
restricts third-party warranty sales. Gross dollar sales from all extended
warranty programs were 4.3 percent of the Group's total sales in fiscal 1999,
3.8 percent in fiscal 1998 and 3.5 percent in fiscal 1997. The fiscal 1999
increase reflects pricing adjustments and a higher penetration rate achieved by
extending warranty coverage to more vehicles. Total extended warranty revenue,
which is reported in the Group's total sales, was 2.0 percent of total sales in
fiscal 1999, 1.5 percent in fiscal 1998 and 1.2 percent in fiscal 1997.
Third-party extended warranty revenue was 1.9 percent of total sales in fiscal
1999, 1.4 percent in fiscal 1998 and 1.1 percent in fiscal 1997.
IMPACT OF INFLATION. Inflation has not been a significant contributor to the
Company's results. For the Circuit City Group, the average retail price declined
in virtually all product categories during the past two years. Although new
product introductions could help reverse this trend in selected areas,
management expects no significant short-term change overall. Because the Group
purchases substantially all products in U.S. dollars, prices are not directly
impacted by the value of the dollar in relation to other foreign currencies,
including the Japanese yen.
For the CarMax Group, inflation has not been a significant contributor to
the Group's results. The Group's profitability is based on achieving specific
gross profit dollars per unit rather than on average retail prices. Because the
wholesale market generally adjusts to reflect retail price trends, management
believes that if the stores meet inventory turn objectives, then changes in
average retail prices will have only a short-term impact on the Group's gross
margin and thus profitability.
Digital Video Express
Digital Video Express has developed and is marketing a new digital video system
for watching movies at home. Circuit City Stores, Inc. holds the majority
interest in the business. The remaining
24
interest is held by the prominent Los Angeles law firm Ziffren, Brittenham,
Branca & Fischer. The Company's investment in Divx is allocated to the Circuit
City Group. Through the end of the fiscal year, the Company had invested $207
million in Divx, $120 million of which was invested in fiscal 1999. The
investment in Divx impacts the Company's and the Circuit City Group's gross
profit margin and selling, general and administrative expense ratio.
Cost of Sales, Buying and Warehousing
The gross profit margin was 22.6 percent of sales in fiscal 1999 compared with
23.0 percent in fiscal years 1998 and 1997. The fiscal 1999 gross profit margin
reflects a lower gross profit margin for the Circuit City Group and the higher
percentage of sales from the CarMax Group. The Circuit City Group's gross profit
margin was reduced by the strength of the personal computer business, which
carries lower gross margins; the continued highly competitive price environment;
and costs associated with Divx. Better inventory management and increased sales
of new technologies and more fully featured products partly offset these
factors. Because the CarMax business produces lower gross margins than the
Circuit City business, the increased sales contribution from CarMax reduces the
Company's overall gross profit margin even though the CarMax Group's gross
profit margin increased from fiscal 1998 to fiscal 1999. The Company's fiscal
1998 gross margin reflects better inventory management and a stronger sales
performance in higher margin categories for the Circuit City Group, offset by
the higher sales contribution from the CarMax Group.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 20.2 percent of sales in
fiscal 1999 compared with 20.8 percent in fiscal 1998 and 19.7 percent in fiscal
1997. The fiscal 1999 decrease primarily reflects the sales leverage gained from
the Circuit City Group's comparable store sales increase, partly offset by the
impact of selling, general and administrative expenses related to Divx. CarMax's
lower expense structure reduces the Company's overall expense-to-sales ratio.
The higher ratio in fiscal 1998 compared with fiscal 1997, reflects the impact
of lower comparable store sales for the Circuit City Group, a decline in profits
from the Circuit City Group's finance operation and the expenses related to
Divx. Operating profits generated by the Company's finance operations are
recorded as a reduction to selling, general and administrative expenses.
Interest Expense
Interest expense was 0.3 percent of sales in fiscal years 1999 and 1998 compared
with 0.4 percent in fiscal 1997. Interest expense was incurred on debt used to
fund store expansion, working capital and the investment in Divx.
Net Earnings
Net earnings for Circuit City Stores, Inc. increased 37 percent to $142.9
million in fiscal 1999. The increase reflects the 48 percent earnings increase
achieved by the Circuit City business, partly offset by the investment in
Digital Video Express and the CarMax Group losses. In fiscal 1998, net earnings
were $104.3 million, a decrease of 24 percent from $136.4 million in fiscal
1997. Net earnings for all three fiscal years reflect the results of the Circuit
City business, the Company's investment in Digital Video Express and the losses
incurred by the CarMax Group.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 does not expect SFAS No.
133 to have a material impact 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
determined that SOP 98-5 will not have a material impact on its financial
position, annual results of operations or cash flows.
FINANCIAL CONDITION
Liquidity and Capital Resources
In fiscal 1999, net cash provided by operating activities was $254.2 million
compared with $194.6 million in fiscal 1998 and $14.2 million in fiscal 1997.
The fiscal 1999 increase primarily reflects a decrease in net accounts
receivable and higher earnings for the Circuit City business, partly offset by
increased inventory for CarMax and the increased investment in Digital Video
Express. The fiscal 1998 increase primarily reflects a reduction in inventory
related to the Circuit City business, a smaller increase in net accounts
receivable and a slight earnings increase for the Circuit City business, partly
offset by the investment in Digital Video Express, greater automotive inventory
to support a larger number of CarMax superstore openings and a higher loss from
the CarMax business.
Most financial activities, including the investment of surplus cash and the
issuance and repayment of short-term and long-term debt, are managed by the
Company on a centralized basis. Interest-bearing loans, with terms determined by
the board of directors, are used to manage cash between the Groups. These loans
are reflected as inter-group receivables or payables on the financial statements
of each Group.
Capital expenditures have been funded through sale-leaseback transactions,
landlord reimbursements, proceeds from the CarMax Group equity offering and
short- and long-term debt. Capital expenditures of $367.0 million in fiscal 1999
reflect Circuit City and CarMax stores opened or remodeled during the year and a
portion of the stores opening in fiscal 2000. The sale-leaseback and landlord
reimbursement transactions completed in fiscal 1999 totaled $273.6 million.
Capital expenditures of $588.1 million in fiscal 1998 and $542.0 million in
fiscal 1997 were largely incurred in connection with the Company's expansion
programs. Sale-leaseback and landlord reimbursement transactions were $297.1
million in fiscal 1998 and $332.7 million in fiscal 1997.
25
During fiscal 1999, the CarMax Group acquired the Toyota franchise rights
and the related assets of Laurel Automotive Group, Inc.; the franchise rights
and the related assets of Mauro Auto Mall, Inc.; the franchise rights and the
related assets of Nissan of Greenville, Inc.; and the Mitsubishi franchise
rights and the related assets of Boomershine Automotive, Inc. for a total of
$49.6 million. The acquisitions were financed through cash payments totaling
$41.6 million and the issuance of two promissory notes totaling $8.0 million.
Costs in excess of the acquired net tangible assets, which are primarily
inventory, have been recorded as goodwill and covenants not to compete.
Receivables generated by the consumer finance operations are funded through
securitization transactions that allow the operations to sell their receivables
while retaining a small interest in them. The Circuit City Group's finance
operation has a master trust securitization facility for its private-label
credit card that allows the transfer of up to $1.38 billion in receivables
through both private placement and the public market. A second master trust
securitization program allows for the transfer of up to $1.75 billion in
receivables related to the operation's bankcard programs. Receivables
securitized under the master trust facilities totaled $2.76 billion at February
28, 1999. In fiscal 1996, Circuit City Stores, Inc. initiated an asset
securitization program on behalf of the CarMax Group. At the end of fiscal 1999,
that program allowed for the transfer of up to $575.0 million in auto loan
receivables. At February 28, 1999, securitized receivables totaled $539.0
million. Under the securitization programs, receivables are sold to an
unaffiliated third party with the servicing retained. Management expects that
these securitization programs can be expanded to accommodate future receivables
growth.
In fiscal 1999, CarMax entered into a $200.0 million one-year, renewable
inventory financing arrangement with an asset-backed commercial paper conduit.
The arrangement provides funding for the acquisition of vehicle inventory
through the use of a non-affiliated special purpose company. As of February 28,
1999, CarMax had not yet used the financing facility; however, management
expects the facility to be phased in during fiscal 2000 as various state
regulatory requirements are met.
Capital Structure
Total assets at February 28, 1999, were $3.45 billion, up $213.6 million or 7
percent, since February 28, 1998. A $107.1 million increase in inventory
contributed to the rise in total assets.
Over the past three years, expansion for the Groups has been funded with
internally generated cash, sale-leaseback transactions, proceeds from the CarMax
equity offering, operating leases and long-term debt. Consumer receivables have
been funded through securitization transactions. Late in fiscal 1997, Circuit
City Stores, Inc. raised a net of $412.3 million through the initial public
offering of 21.86 million shares of newly created CarMax Group Common Stock. In
fiscal 1997, the CarMax Group used approximately $187 million of the net
proceeds to repay its allocated portion of Circuit City Stores, Inc.
indebtedness. Management has used the remainder of the net proceeds to help
finance the CarMax expansion. In fiscal 1997, the Company also entered into a
five-year, $130 million unsecured bank term loan agreement.
During the period from fiscal 1995 to fiscal 1999, stockholders' equity
grew substantially. From fiscal 1998 to fiscal 1999, stockholders' equity
increased 10 percent to $1.91 billion. Capitalization for the past five years is
illustrated in the "Capitalization" table below. Higher earnings for the Circuit
City business, partly offset by the investment in Digital Video Express and
losses from the CarMax Group, produced a return on equity of 7.9 percent in
fiscal 1999 compared with 6.2 percent in fiscal 1998. The returns are below the
Company's long-term objective but reflect the investments in the development and
launch of the Divx system and the expansion of CarMax in fiscal years 1999 and
1998. In fiscal 1998, the challenging environment for Circuit City also
contributed to the below-objective return.
Management believes that proceeds from sales of property and equipment and
receivables, operating leases, equity issuances, CarMax's use of the renewable
inventory financing facility and cash generated by operations will be sufficient
to fund the capital expenditures of the Company. In fiscal 2000, management
anticipates capital expenditures of approximately $315 million. At the end of
fiscal 1999, the Company maintained a multi-year $150.0 million unsecured
revolving credit agreement and $370.0 million in seasonal lines that are renewed
annually with various banks.
Management remains in discussions with potential financing partners for
Divx, but has not obtained any acceptable commitments to date. The Company has
provided guarantees relating to licensing agreements with motion picture
distributors for use of their films by the Divx system. The licensing fees are
based on varying percentages of consumer viewing and wholesale receipts and
require minimum distributor compensation commencing from the operational date of
each agreement through the following one to five years.
The Groups rely on the external debt or equity of Circuit City Stores, Inc.
to provide working capital needed to fund net assets not otherwise financed
through operating income, sale-leasebacks or the securitization of receivables.
All significant financial activities of each Group are managed by the Company on
a centralized basis and are dependent on the financial condition of the Company.
These financial activities include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate.
CAPITALIZATION
<TABLE>
<S> <C>
Fiscal 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions) $ % $ % $ % $ % $ %
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding
current installments............. 426.6 17 424.3 18 430.3 19 399.2 23 178.6 14
Other long-term liabilities......... 149.7 6 171.5 7 199.4 9 231.8 14 241.9 19
Total stockholders' equity.......... 1,905.1 77 1,730.0 75 1,614.8 72 1,063.9 63 877.4 67
-----------------------------------------------------------------------------------------
Total capitalization................ 2,481.4 100 2,325.8 100 2,244.5 100 1,694.9 100 1,297.9 100
-----------------------------------------------------------------------------------------
</TABLE>
26
MARKET RISK
The Company manages the private-label and bankcard revolving loan portfolios of
the Circuit City Group's finance operation and the installment loan portfolio of
the CarMax Group's finance operation. Portions of these portfolios are
securitized and, therefore, are not presented on the Company's balance sheet.
Interest rate exposure relating to these receivables represents a market risk
exposure that the Company has managed with matched funding and interest rate
swaps.
Revolving Loans
Interest rates charged on the managed private-label and bankcard portfolios are
primarily indexed to the prime rate, adjustable on a monthly basis, with the
balance at a fixed annual percentage rate. Total principal outstanding at
February 28 had the following APR structure:
(Amounts in millions) 1999 1998
- -------------------------------------------------------------
Indexed to prime rate.................... $2,714 $2,523
Fixed APR................................ 243 227
------------------
Total.................................... $2,957 $2,750
------------------
Financing for the securitization programs is achieved primarily through the
issuance of public market debt, which is issued either at floating rates based
on LIBOR or at fixed rates. Certain of the fixed-rate issuances have been
swapped to LIBOR. Receivables held by the Company for investment or sale are
financed with working capital. At February 28, financings were as follows:
(Amounts in millions) 1999 1998
- -------------------------------------------------------------
Floating-rate (including synthetic
alteration) securitizations........... $2,568 $2,211
Fixed-rate securitizations............... 187 290
Held by the Company:
For investment........................ 162 204
For sale.............................. 40 45
------------------
Total.................................... $2,957 $2,750
------------------
Automobile Installment Loans
Total principal outstanding for fixed-rate automobile loans at February 28 was
as follows:
(Amounts in millions) 1999 1998
- -------------------------------------------------------------
Fixed APR.................................. $592 $297
----------------
<PAGE>
Financing for these receivables is achieved through bank conduit
securitizations that, in turn, issue floating-rate securities. Interest rate
exposure is hedged through the use of interest rate swaps matched to projected
payoffs. Receivables held by the Company for investment or sale are financed
with working capital.
Financings at February 28 and related interest rates were as follows:
(Amounts in millions) 1999 1998
- -------------------------------------------------------------
Floating-rate securitizations
synthetically altered to fixed.......... $500 $224
Floating-rate securitizations.............. 39 44
Held by the Company:
For investment.......................... 38 23
For sale................................ 15 6
----------------
Total...................................... $592 $297
----------------
The Company has analyzed its interest rate exposure and has concluded that
it did not represent a material market risk at February 28, 1999 or 1998.
Because programs are in place to manage interest rate exposure relating to the
consumer loan portfolios, the Company expects to experience relatively little
impact as interest rates fluctuate in the future. The Company also has the
ability to adjust fixed-APR revolving cards and the index on floating-rate
cards, subject to cardholder ratification, but does not currently anticipate the
need to do so.
YEAR 2000 CONVERSION
The following disclosure is a Year 2000 readiness disclosure statement pursuant
to the Year 2000 Readiness Disclosure Act. 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, process
invoices or engage in similar normal business activities. In addition to
computer systems, any equipment with embedded systems that involve
date-sensitive functions are at risk if two digits have been used rather than
four. Embedded systems are specialized microchips used to control, monitor or
assist the operation of electrical equipment.
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 and hardware, 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 its remediation, forward-date testing
and production implementation efforts for its internally developed and
externally purchased systems. Replacement work and enterprise-level testing is
scheduled to be completed by approximately July 1999.
With regard to embedded systems, the Company has identified approximately
200 distinct makes and models used for environmental controls, fire detection
and monitoring, burglar detection and monitoring, elevators, office equipment
and uninterruptible power supplies. As of February 28, 1999, approximately 98
percent of these embedded systems are believed to be Year 2000 compliant. The
remaining 2 percent are expected to be compliant by June 1999, except for
certain low-impact embedded systems that will be left untested because the cost
of compliance testing is believed to far exceed the risk or cost of an outage.
27
The Company also 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 90 percent of
these partners with no major potential problems identified. Risks and business
impacts have been assigned to all vendor products and services. Current action
statements and contingency plans have been developed by the Company's business
areas for products and services believed to be at high or medium risk of
non-compliance.
Since the project began, the Company has expensed $14.0 million, including
$9.9 million in fiscal 1999. The remaining cost of the Year 2000 project is
estimated at $2.6 million. These costs principally have been incurred for the
Circuit City Group and are in addition to the normal budget for information
systems. The costs are being funded through operating cash flows. Because
CarMax's computer systems were developed in recent years, the Company does not
expect the CarMax Group to incur any material costs related to the Year 2000
issue.
With respect to Year 2000 risks, the Company believes it has identified all
critical areas and is in the process of developing contingency plans and
conducting end-to-end testing for those critical areas identified. Critical is
defined as any business process or application failure that would result in a
material financial, legal or operational impact. If the Company's remediation
efforts and the remediation efforts of third parties fail (which the Company
believes is the most reasonably likely worst case scenario), the Company's
contingency plans include performing certain processes manually while working to
assess and correct any errors in the current systems and possibly changing
suppliers. These plans are intended to enable the Company to continue operating
even if a degree of business interruption occurs at Year 2000. However, the
Company believes that because of the widespread nature of potential Year 2000
issues, the contingency planning process is an ongoing one that will require
further modifications as the Company obtains additional information.
The costs of the project and the dates on which the Company plans to
complete its 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.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of 1995, which
became law in December 1995, provide companies with a "safe harbor" when making
forward-looking statements. This "safe harbor" encourages companies to provide
prospective information about their companies without fear of litigation. The
Company wishes to take advantage of the "safe harbor" provisions of the Act.
Company statements that are not historical facts, including statements about
management's expectations for fiscal 2000 and beyond, are forward-looking
statements and involve various risks and uncertainties. Factors that could cause
the Company's actual results to differ materially from management's projections,
forecasts, estimates and expectations include, but are not limited to, the
following:
(a) changes in the amount and degree of promotional intensity exerted by
current competitors and potential new competition from both retail stores and
alternative methods or channels of distribution such as electronic and telephone
shopping services and mail order;
(b) changes in general U.S. or regional U.S. economic conditions including,
but not limited to, consumer credit availability, consumer credit delinquency
and default rates, interest rates, inflation, personal discretionary spending
levels and consumer sentiment about the economy in general;
(c) the presence or absence of new products or product features in the
merchandise categories the Company sells and changes in the Company's actual
merchandise sales mix;
(d) significant changes in retail prices for products sold by any of the
Company's businesses, including changes in prices for new and used cars and the
relative consumer demand for new or used cars;
(e) lack of availability or access to sources of supply for appropriate
Circuit City or CarMax inventory;
(f) the ability to retain and grow an effective management team in a
dynamic environment or changes in the cost or availability of a suitable work
force to manage and support the Company's service-driven operating strategies;
(g) changes in availability or cost of capital expenditure and working
capital financing, including the availability of long-term financing to support
development of the Company's businesses and the availability of securitization
financing for credit card and auto installment loan receivables;
(h) changes in production or distribution costs or cost of materials for
the Company's advertising;
(i) availability of appropriate real estate locations for expansion;
(j) the imposition of new restrictions or regulations regarding the sale of
products or services the Company sells, changes in tax rules and regulations
applicable to the Company, the imposition of new environmental restrictions,
regulations or laws or the discovery of environmental conditions at current or
future locations or any failure to comply with such laws or any adverse change
in such laws;
(k) adverse results in significant litigation matters;
(l) changes in levels of competition in the car business from either
traditional competitors or new nontraditional competitors utilizing auto
superstore or other formats;
28
(m) the inability of the CarMax business to reach expected mature sales and
earnings potential;
(n) limited or lack of availability of new-car franchises within a suitable
radius of existing and proposed CarMax stores or limited manufacturer approval
of franchise acquisitions;
(o) availability of long-term financing to support Divx;
(p) the early stage of market development and absence of operating history
for Divx and therefore lack of assurance that this business will achieve
significant sales or profits;
(q) the early stage of Divx market development and therefore lack of
assurance that the product support systems will work as expected on a large
scale;
(r) ability to maintain and acquire additional long-term agreements for
title releases on Divx discs, manufacturing of Divx discs and licensing of the
proprietary Divx hardware architecture;
(s) developments or assertions by or against Divx, relating to intellectual
property rights;
(t) difficulty securing long-term agreements for the distribution of Divx
discs through retail outlets; and
(u) development of alternative and highly competitive means of distributing
movies for in-home viewing.
The United States retail industry and the specialty retail industry in
particular are dynamic by nature and have undergone significant changes over the
past several years. The Company's ability to anticipate and successfully respond
to continuing challenges is key to achieving its expectations.
29
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<S> <C>
Years Ended February 28
(Amounts in thousands except per share data) 1999 % 1998 % 1997 %
- ------------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES.............................$10,804,447 100.0 $8,870,797 100.0 $7,663,811 100.0
Cost of sales, buying and warehousing........................ 8,359,428 77.4 6,827,133 77.0 5,902,711 77.0
-----------------------------------------------------------------
GROSS PROFIT................................................. 2,445,019 22.6 2,043,664 23.0 1,761,100 23.0
-----------------------------------------------------------------
Selling, general and administrative
expenses [NOTE 11]........................................ 2,186,177 20.2 1,848,559 20.8 1,511,294 19.7
Interest expense [NOTE 5].................................... 28,319 0.3 26,861 0.3 29,782 0.4
-----------------------------------------------------------------
TOTAL EXPENSES............................................... 2,214,496 20.5 1,875,420 21.1 1,541,076 20.1
-----------------------------------------------------------------
Earnings before income taxes................................. 230,523 2.1 168,244 1.9 220,024 2.9
Provision for income taxes [NOTE 6].......................... 87,599 0.8 63,933 0.7 83,610 1.1
-----------------------------------------------------------------
NET EARNINGS................................................. $142,924 1.3 $104,311 1.2 $136,414 1.8
-----------------------------------------------------------------
Net earnings (loss) attributed to [NOTES 1 AND 2]:
Circuit City Group common stock........................... $148,381 $112,074 $136,680
CarMax Group common stock................................. (5,457) (7,763) (266)
----------- ---------- ----------
$142,924 $104,311 $136,414
----------- ---------- ----------
Weighted average common shares [NOTES 2 AND 8]:
Circuit City Group:
Basic.................................................. 99,152 98,027 97,311
----------- ---------- ----------
Diluted................................................ 100,406 99,204 98,472
----------- ---------- ----------
CarMax Group.............................................. 22,604 22,001 21,860
----------- ---------- ----------
NET EARNINGS (LOSS) PER SHARE [NOTES 2 AND 8]:
Circuit City Group:
Basic.................................................. $1.50 $1.14 $1.40
----------- ---------- ----------
Diluted................................................ $1.48 $1.13 $1.39
----------- ---------- ----------
CarMax Group.............................................. $(0.24) $(0.35) $(0.01)
----------- ---------- ----------
See accompanying notes to consolidated financial statements.
30
<PAGE>
CONSOLIDATED BALANCE SHEETS
At February 28
(Amounts in thousands except share data) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $265,880 $116,612
Net accounts receivable [NOTE 12]....................................................... 574,316 598,035
Inventory............................................................................... 1,517,675 1,410,545
Prepaid expenses and other current assets............................................... 36,644 21,157
----------------------------------
TOTAL CURRENT ASSETS.................................................................... 2,394,515 2,146,349
Property and equipment, net [NOTES 4 AND 5]............................................. 1,005,773 1,048,434
Other assets............................................................................ 44,978 36,918
----------------------------------
TOTAL ASSETS............................................................................ $3,445,266 $3,231,701
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTES 5 AND 10]................................. $2,707 $1,301
Accounts payable........................................................................ 799,733 765,391
Short-term debt [NOTE 5]................................................................ 8,016 5,976
Accrued expenses and other current liabilities.......................................... 143,585 132,802
Deferred income taxes [NOTE 6].......................................................... 9,764 356
----------------------------------
TOTAL CURRENT LIABILITIES............................................................... 963,805 905,826
Long-term debt, excluding current installments [NOTES 5 AND 10]......................... 426,585 424,292
Deferred revenue and other liabilities.................................................. 112,085 145,107
Deferred income taxes [NOTE 6].......................................................... 37,661 26,437
----------------------------------
TOTAL LIABILITIES....................................................................... 1,540,136 1,501,662
----------------------------------
STOCKHOLDERS' EQUITY [NOTES 1 AND 7]:
Circuit City Group common stock, $0.50 par value; 175,000,000 shares authorized;
100,820,000 shares issued and outstanding (99,282,000 in 1998)....................... 50,410 49,641
CarMax Group common stock, $0.50 par value; 175,000,000 shares authorized;
23,116,000 shares issued and outstanding (22,204,000 in 1998)........................ 11,558 11,102
Capital in excess of par value.......................................................... 575,686 530,763
Retained earnings....................................................................... 1,267,476 1,138,533
----------------------------------
TOTAL STOCKHOLDERS' EQUITY.............................................................. 1,905,130 1,730,039
----------------------------------
Commitments and contingent liabilities [NOTES 1, 9, 10, 12, 13 AND 14]
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................................. $3,445,266 $3,231,701
----------------------------------
See accompanying notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings............................................................ $142,924 $104,311 $136,414
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................................ 140,293 116,326 98,977
Loss (gain) on disposition of property and equipment................. 3,087 14,093 (1,540)
Provision for deferred income taxes.................................. 20,632 15,052 20,973
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Decrease in deferred revenue and other liabilities................ (33,022) (23,024) (47,706)
Decrease (increase) in net accounts receivable.................... 23,719 (66,061) (207,579)
Increase in inventory, prepaid expenses and other current assets.. (97,642) (24,526) (66,594)
Decrease (increase) in other assets............................... 9,132 (4,969) (15,869)
Increase in accounts payable, accrued expenses and
other current liabilities...................................... 45,125 63,379 97,162
------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................... 254,248 194,581 14,238
------------------------------------------------
INVESTING ACTIVITIES:
Cash used in business acquisitions [NOTE 3]............................. (41,562) - -
Purchases of property and equipment..................................... (366,971) (588,052) (541,989)
Proceeds from sales of property and equipment........................... 273,647 297,126 332,726
------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................... (134,886) (290,926) (209,263)
------------------------------------------------
FINANCING ACTIVITIES:
(Payments on) proceeds from issuance of short-term debt, net............ (960) 5,629 (91,740)
Proceeds from issuance of long-term debt................................ - - 32,619
Principal payments on long-term debt.................................... (1,301) (6,187) (1,436)
Issuances of Circuit City Group common stock, net....................... 42,165 22,311 15,385
Issuances of CarMax Group common stock, net............................. 3,983 2,353 412,335
Dividends paid on Circuit City Group common stock....................... (13,981) (13,792) (13,199)
------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................... 29,906 10,314 353,964
------------------------------------------------
Increase (decrease) in cash and cash equivalents........................... 149,268 (86,031) 158,939
Cash and cash equivalents at beginning of year............................. 116,612 202,643 43,704
------------------------------------------------
Cash and cash equivalents at end of year................................... $265,880 $116,612 $202,643
------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................................ $31,858 $26,697 $29,925
Income taxes............................................................ $53,528 $47,936 $73,113
See accompanying notes to consolidated financial statements.
32
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Shares Outstanding Common Stock Capital In
Circuit City CarMax Circuit City CarMax Excess of Retained
(Amounts in thousands except per share data) Group Group Group Group Par Value Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1996......................... 97,380 - $48,690 $- $90,432 $924,799 $1,063,921
---------------------------------------------------------------------------
Net earnings.................................. - - - - - 136,414 136,414
Exercise of common stock options [NOTE 7]..... 786 - 393 - 13,497 - 13,890
Shares issued under Employee
Stock Purchase Plan [NOTE 7]............... 78 - 39 - 2,491 - 2,530
Shares issued under the 1994 Stock
Incentive Plan [NOTE 7].................... 255 - 127 - 7,455 - 7,582
Tax benefit from stock issued................. - - - - 3,080 - 3,080
Shares issued in the CarMax Group stock
offering................................... - 21,860 - 10,930 401,405 - 412,335
Shares cancelled upon reacquisition by Company (321) - (160) - (9,654) - (9,814)
Unearned compensation-restricted stock........ - - - - (1,883) - (1,883)
Cash dividends-Circuit City Group common
stock ($0.14 per share).................... - - - - - (13,199) (13,199)
---------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1997..................... 98,178 21,860 49,089 10,930 506,823 1,048,014 1,614,856
---------------------------------------------------------------------------
Net earnings.................................. - - - - - 104,311 104,311
Exercise of common stock options [NOTE 7]..... 483 273 241 136 6,790 - 7,167
Shares issued under Employee
Stock Purchase Plans [NOTE 7].............. 173 51 87 26 6,648 - 6,761
Shares issued under the 1994 Stock
Incentive Plan [NOTE 7].................... 605 20 302 10 20,214 - 20,526
Tax benefit from stock issued................. - - - - 8,013 - 8,013
Shares cancelled upon reacquisition by Company (157) - (78) - (4,470) - (4,548)
Unearned compensation-restricted stock........ - - - - (13,255) - (13,255)
Cash dividends-Circuit City Group common
stock ($0.14 per share).................... - - - - - (13,792) (13,792)
---------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1998..................... 99,282 22,204 49,641 11,102 530,763 1,138,533 1,730,039
---------------------------------------------------------------------------
Net earnings.................................. - - - - - 142,924 142,924
Exercise of common stock options [NOTE 7]..... 1,004 543 502 272 16,945 - 17,719
Shares issued under Employee
Stock Purchase Plans [NOTE 7].............. 429 269 215 134 19,431 - 19,780
Shares issued under the 1994 Stock
Incentive Plan [NOTE 7].................... 360 100 180 50 14,588 - 14,818
Tax benefit from stock issued................. - - - - 9,523 - 9,523
Other......................................... 32 - 16 - 1,445 - 1,461
Shares cancelled upon reacquisition by Company (287) - (144) - (14,239) - (14,383)
Unearned compensation-restricted stock........ - - - - (2,770) - (2,770)
Cash dividends-Circuit City Group common
stock ($0.14 per share).................... - - - - - (13,981) (13,981)
---------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1999..................... 100,820 23,116 $50,410 $11,558 $575,686 $1,267,476 $1,905,130
---------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On January 24, 1997, shareholders of Circuit City Stores, Inc. and its
subsidiaries approved the creation of two common stock series. The Company's
existing common stock was subsequently redesignated as Circuit City Stores,
Inc.-Circuit City Group Common Stock. In an initial public offering, which was
completed February 7, 1997, the Company sold 21.86 million shares of Circuit
City Stores, Inc.-CarMax Group Common Stock.
The Circuit City Group Common Stock is intended to track the performance of
the Circuit City store-related operations, the Company's investment in Digital
Video Express and the Group's retained interest in the CarMax Group. The CarMax
Group Common Stock is intended to track the performance of the CarMax
operations. The Circuit City Group held a 76.6 percent interest in the CarMax
Group at February 28, 1999, a 77.3 percent interest at February 28, 1998, and a
77.5 percent interest at February 28, 1997.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the Circuit
City Group and the CarMax Group for the purposes of preparing their respective
financial statements, holders of Circuit City Stock and holders of CarMax Stock
are shareholders of the Company and continue to be subject to all of the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. Such attribution and the change in the equity structure of the
Company does not affect title to the assets or responsibility for the
liabilities of the Company or any of its subsidiaries. The results of operations
or financial condition of one Group could affect the results of operations or
financial condition of the other Group. Accordingly, the Company's consolidated
financial statements included herein should be read in conjunction with the
financial statements of each Group.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Circuit City Group, including Divx, and the CarMax Group,
which combined comprise all accounts of the Company. All significant
intercompany balances and transactions have been eliminated in consolidation.
(B) CASH AND CASH EQUIVALENTS: Cash equivalents of $216,129,000 at February 28,
1999, and $71,750,000 at February 28, 1998, consist of highly liquid debt
securities with original maturities of three months or less.
(C) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: The Company adopted Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," effective
January 1, 1997. For transfers that qualify as sales, the Company recognizes
gains or losses as a component of the Company's finance operations. For
transfers of financial assets to qualify for sale accounting, control over the
assets must be surrendered at the time of sale. Multiple estimates are used to
calculate the gain or loss on sales of receivables under SFAS No. 125. Finance
charge income, default rates and payment rates are estimated using projections
developed from the prior 12 months of operating history. These estimates are
adjusted for any industry or portfolio trends that have been observed. The
resulting cash flow projections are present valued at a discount rate
appropriate for the type of asset and risk. Retained interests (such as residual
interests in a securitization trust, cash reserve accounts and rights to future
interest from serviced assets that exceed contractually specified servicing
fees) are included in net accounts receivable and are carried at fair value with
changes in fair value reflected in earnings. Loan receivables held for sale are
carried at the lower of cost or market, whereas loan receivables held for
investment are carried at cost less an allowance for losses. At February 28,
1999 and 1998, cost approximates fair value.
(D) FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of the Company's
financial instruments, excluding interest rate swaps held for hedging purposes,
approximates fair value. Credit risk is the exposure created by the potential
nonperformance of another material party to an agreement due to changes in
economic, industry or geographic factors. The Company mitigates credit risk by
dealing only with counterparties that are highly rated by several financial
rating agencies. Accordingly, the Company does not anticipate material loss for
nonperformance. The Company broadly diversifies all financial instruments along
industry, product and geographic areas.
(E) INVENTORY: Inventory is stated at the lower of cost or market. Cost is
determined by the average cost method for the Circuit City Group's inventory and
by specific identification for the CarMax Group's vehicle inventory. Parts and
labor used to recondition vehicles, as well as transportation and other
incremental expenses associated with acquiring vehicles, are included in the
CarMax Group's inventory.
(F) PREPAID ROYALTIES AND EXECUTION FEES: Prepaid royalties represent fixed
minimum advance payments made to licensors for digital video disc distribution
rights. Divx retains a licensor's share of distribution revenues until the share
equals the advance paid to the licensor. Thereafter, any excess distribution
revenue is paid to the licensor. Prepaid royalties are charged to operations as
revenues are earned. Execution fees are one-time payments made to licensors at
the time the related licensing agreements are executed and are amortized over
the shorter of the initial terms of the licensing agreements or five years. Both
the prepaid royalties and execution fees are stated at the lower of amortized
cost or estimated net realizable value on a license-agreement basis.
(G) PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the assets' estimated useful
lives.
Property held under capital lease is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or market
value and is amortized on a straight-line basis over the lease term or the
estimated useful life of the asset, whichever is shorter.
34
(H) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the Company adopted the
American Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." 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 capitalized.
Amounts capitalized are amortized on a straight-line basis over a period of
three to five years.
(I) INTANGIBLE ASSETS: Amounts paid for acquired businesses in excess of the
fair value of the net tangible assets acquired are recorded as goodwill, which
is amortized on a straight-line basis over 15 years, and covenants not to
compete, which are amortized on a straight-line basis over the life of the
covenant not to exceed five years. Both goodwill and covenants not to compete
are included in other assets on the accompanying consolidated balance sheets.
The carrying value of intangible assets is periodically reviewed by the Company
and impairments are recognized when the expected future undiscounted operating
cash flows derived from such intangible assets are less than the carrying value.
<PAGE>
(J) PRE-OPENING EXPENSES: Expenses associated with the opening of new stores are
deferred and amortized ratably over the period from the date of the store
opening to the end of the fiscal year.
(K) INCOME TAXES: The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the impact
of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and the amounts recognized for
income tax purposes, measured by applying currently enacted tax laws. The
Company recognizes deferred tax assets if it is more likely than not that a
benefit will be realized.
(L) DEFERRED REVENUE: The Circuit City Group sells its own extended warranty
contracts and extended warranty contracts on behalf of unrelated third parties.
The contracts extend beyond the normal manufacturer's warranty period, usually
with terms (including the manufacturer's warranty period) between 12 and 60
months. All revenue from the sale of the Circuit City Group's own extended
warranty contracts is deferred and amortized on a straight-line basis over the
life of the contracts. Incremental direct costs related to the sale of contracts
are deferred and charged to expense in proportion to the revenue recognized.
Commission revenue for the unrelated third-party extended warranty plans is
recognized at the time of sale.
The CarMax Group sells service contracts on behalf of unrelated third
parties and, prior to July 1997, sold its own contracts at one location where
third-party warranty sales were not permitted. Contracts usually have terms of
coverage between 12 and 72 months. All revenue from the sale of the CarMax
Group's own service contracts is deferred and amortized over the life of the
contracts consistent with the pattern of repair experience of the industry.
Incremental direct costs related to the sale of contracts are deferred and
charged to expense in proportion to the revenue recognized. Commission revenue
for the unrelated third-party service contracts is recognized at the time of
sale.
(M) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating profits generated by
the Company's finance operations are recorded as a reduction to selling, general
and administrative expenses.
(N) ADVERTISING EXPENSES: All advertising costs are expensed as incurred.
(O) NET EARNINGS (LOSS) PER SHARE: On December 15, 1997, the Company adopted
SFAS No. 128, "Earnings per Share." All prior period earnings per share data
presented has been restated to conform with the provisions of SFAS No. 128.
Basic net earnings per share for Circuit City Stock is computed by dividing
net earnings attributed to Circuit City Stock, including the Circuit City
Group's 100 percent interest in the losses of the CarMax Group for periods prior
to the offering and the Circuit City Group's retained interest in the CarMax
Group subsequent to the offering, by the weighted average number of shares of
Circuit City Stock outstanding. Diluted net earnings per share for Circuit City
Stock is computed by dividing net earnings attributed to Circuit City Stock,
which includes the Circuit City Group's retained interest in CarMax, by the
weighted average number of shares of Circuit City Stock outstanding and dilutive
potential Circuit City Stock.
Net loss per share for CarMax Stock is computed by dividing the net loss
attributed to CarMax Stock by the weighted average number of shares of CarMax
Stock outstanding. Diluted net loss per share for CarMax Stock is not calculated
since CarMax has a net loss for the periods presented.
(P) STOCK-BASED COMPENSATION: On March 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue applying the provisions of the Accounting Principles Board Opinion No.
25, "Accounting For Stock Issued to Employees," and to provide the pro forma
disclosures of SFAS No. 123.
(Q) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into interest rate swap
agreements to manage exposure to interest rates and to more closely match
funding costs to the use of funding. Interest rate swaps relating to long-term
debt are classified as held for purposes other than trading and are accounted
for on a settlement basis. To qualify for this accounting treatment, the swap
must synthetically alter the nature of a designated underlying financial
instrument. Under this method, payments or receipts due or owed under the swap
agreement are accrued through each settlement date and recorded as a component
of interest expense. If a swap designated as a synthetic alteration were to be
terminated, any gain or loss on the termination would be deferred and recognized
over the shorter of the original contractual life of the swap or the related
life of the designated long-term debt.
The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller as part of a sale
of financial assets are considered proceeds at fair value in the determination
of the gain or loss on the sale. If such a swap were terminated, the impact on
the fair value of the financial asset created by the sale of the related
receivables would be estimated and included in earnings.
35
(R) RISKS AND UNCERTAINTIES: Circuit City is a leading national retailer of
brand-name consumer electronics, personal computers, major appliances and
entertainment software. The diversity of Circuit City's products, customers,
suppliers and geographic operations significantly reduces the risk that a severe
impact will occur in the near term as a result of changes in its customer base,
competition, sources of supply or markets. It is unlikely that any one event
would have a severe impact on the Company's operating results.
<PAGE>
Because of its investment in Divx, the Company is subject to additional
risks and uncertainties. Divx was formed to develop and launch an enhancement
for DVD players that provides significant copyright protection for movies
released on Divx digital discs and sets a new standard for home video
convenience. While management believes this product will gain widespread
acceptance, there is no assurance that Divx ever will achieve significant sales
of such product. Other risks include limited operating history, no assurance of
successful operations, early state of market development, acquiring and
maintaining licensing and manufacturing agreements, minimum compensation
requirements under studio license agreements, competition from substitute
products and services, rapid technological change, dependence on key personnel
and vendors, development or assertions by or against Divx relating to
intellectual property rights, and the uncertainty of availability of additional
financing.
The CarMax Group is a used- and new-car retail business. The diversity of
the CarMax Group's customers and suppliers reduces the risk that a severe impact
will occur in the near term as a result of changes in its customer base or
sources of supply. However, due to the CarMax Group's limited overall size,
management cannot assure that unanticipated events will not have a negative
impact on the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
(S) CORPORATE ALLOCATIONS: The Company manages corporate general and
administrative costs and other shared services on a centralized basis.
Allocations of these corporate activities and their related expenses to the
Groups is based on methods that the Company believes to be reasonable.
The provision for federal income taxes is determined on a consolidated
basis. The financial statement provision is reflected in each Group's financial
statements in accordance with the Company's tax allocation policy. In general,
this policy provides that the consolidated tax provision be allocated between
the Groups based principally upon the financial income, taxable income, credits
and other amounts directly related to the respective Group. Tax benefits that
cannot be used by the Group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the Group that generated such benefits.
(T) RECLASSIFICATIONS: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 1999.
3. BUSINESS ACQUISITIONS
During fiscal 1999, CarMax acquired the franchise rights and the related assets
of four new-car dealerships for an aggregate cost of $49.6 million. The
acquisitions were financed through available cash resources and the issuance of
two promissory notes aggregating $8.0 million. Costs in excess of the fair value
of the net tangible assets acquired (primarily inventory) have been recorded as
goodwill and covenants not to compete. These acquisitions were accounted for
under the purchase method and the results of the operations of the acquired
franchises have been included in the accompanying consolidated financial
statements since the date of acquisition. Unaudited pro-forma information
related to these acquisitions is not included as the impact of these
acquisitions on the accompanying consolidated financial statements is not deemed
to be material.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 28 is summarized as follows:
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------
Land and buildings (20 to 25 years).. $107,310 $143,905
Land held for development............ 28,781 11,601
Construction in progress............. 179,664 237,205
Furniture, fixtures and equipment
(3 to 8 years).................... 705,660 615,564
Leasehold improvements
(10 to 15 years).................. 549,673 483,069
Capital leases, primarily buildings
(20 years)........................ 12,471 12,471
----------------------
1,583,559 1,503,815
Less accumulated depreciation and
amortization...................... 577,786 455,381
----------------------
Property and equipment, net.......... $1,005,773 $1,048,434
----------------------
<PAGE>
5. DEBT
Long-term debt at February 28 is summarized as follows:
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------
Term loans............................... $405,000 $405,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest
ranging from 5.0% to 7.0%............. 6,564 7,665
Obligations under capital leases [NOTE 10] 12,728 12,928
Note payable............................. 5,000 -
------------------
Total long-term debt..................... 429,292 425,593
Less current installments................ 2,707 1,301
------------------
Long-term debt, excluding
current installments.................. $426,585 $424,292
------------------
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. The loan was restructured in August 1996 as a
$100,000,000, six-year unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 1999, the interest rate on the term loan was 5.76 percent.
36
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1999, the interest rate
on the term loan was 5.67 percent.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1999, the interest rate
on the term loan was 5.29 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving
credit agreement with four banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.13 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2002. No amounts were outstanding under the revolving credit
agreement at February 28, 1999 or 1998.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$10,740,000 at February 28, 1999, and $10,879,000 at February 28, 1998.
In November 1998, CarMax entered into a four-year, unsecured $5,000,000
promissory note. Principal is due annually with interest payable periodically at
8.25 percent.
In fiscal 1999, CarMax entered into a $200,000,000 one-year, renewable
inventory financing arrangement with an asset-backed commercial paper conduit.
The arrangement will provide funding for the acquisition of vehicle inventory
through the use of a non-affiliated special purpose company. During fiscal 1999,
no inventory was financed by CarMax under this arrangement.
The scheduled aggregate annual principal payments on long-term obligations
for the next five fiscal years are as follows: 2000 - $2,707,000; 2001 -
$177,344,000; 2002 - $132,485,000; 2003 - $102,594,000; 2004 - $1,507,000.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 1999 and 1998.
Short-term debt is funded through committed lines of credit and informal
credit arrangements, as well as the revolving agreement. Amounts outstanding and
committed lines of credit available are as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998
- ----------------------------------------------------------------
Average short-term debt outstanding...... $54,505 $48,254
------------------
Maximum short-term debt outstanding...... $463,000 $414,000
------------------
Aggregate committed lines of credit...... $370,000 $410,000
------------------
The weighted average interest rate on the outstanding short-term debt was
5.1 percent during fiscal 1999, 5.7 percent during fiscal 1998 and 5.4 percent
during fiscal 1997.
The Company capitalizes interest in connection with the construction of
certain facilities and software developed or obtained for internal use. In
fiscal 1999, interest capitalized amounted to $5,423,000 ($9,638,000 in fiscal
1998 and $6,970,000 in fiscal 1997).
<PAGE>
6. INCOME TAXES
The Company files a consolidated federal income tax return. The components of
the provision for income taxes are as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- -------------------------------------------------------------
Current:
Federal........................ $59,134 $46,475 $55,673
State.......................... 7,833 2,406 6,964
-------------------------
66,967 48,881 62,637
-------------------------
Deferred:
Federal........................ 20,013 12,801 19,839
State.......................... 619 2,251 1,134
-------------------------
20,632 15,052 20,973
-------------------------
Provision for income taxes........ $87,599 $63,933 $83,610
-------------------------
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
Years Ended February 28
1999 1998 1997
- -------------------------------------------------------------
Federal statutory income
tax rate......................... 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit........... 3.0 3.0 3.0
-----------------------
Effective income tax rate........... 38.0% 38.0% 38.0%
-----------------------
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 28, 1999 and 1998, are as follows:
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------
Deferred tax assets:
Deferred revenue........................ $8,332 $1,360
Inventory capitalization................ 2,578 4,976
Accrued expenses........................ 27,080 42,554
Other................................... 5,430 3,638
----------------
Total gross deferred tax assets...... 43,420 52,528
----------------
Deferred tax liabilities:
Depreciation and amortization........... 48,035 45,118
Gain on sales of receivables............ 14,990 11,439
Other prepaid expenses.................. 12,062 10,569
Other................................... 15,758 12,195
----------------
Total gross deferred tax liabilities. 90,845 79,321
----------------
Net deferred tax liability................. $47,425 $26,793
----------------
Based on the Company's historical and current pretax earnings, management
believes the amount of gross deferred tax assets will be realized through future
taxable income; therefore, no valuation allowance is necessary.
37
7. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) PREFERRED STOCK: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of Circuit City Stock and
CarMax Stock. The rights are exercisable only upon the attainment of, or the
commencement of a tender offer to attain, a specified ownership interest in the
Company by a person or group. When exercisable, each Circuit City right would
entitle shareholders to buy one four-hundredth of a share of Cumulative
Participating Preferred Stock, Series E, $20 par value, at an exercise price of
$250 per share subject to adjustment. Each CarMax right, when exercisable, would
entitle shareholders to buy one four-hundredth of a share of Cumulative
Participating Preferred Stock, Series F, $20 par value, at an exercise price of
$100 per share subject to adjustment. A total of 1,000,000 shares of such
preferred stock, which have preferential dividend and liquidation rights, have
been designated. No such shares are outstanding. In the event that an acquiring
person or group acquires the specified ownership percentage of the Company's
common stock (except pursuant to a cash tender offer for all outstanding shares
determined to be fair by the board of directors) or engages in certain
transactions with the Company after the rights become exercisable, each right
will be converted into a right to purchase, for half the current market price at
that time, shares of the related Group stock valued at two times the exercise
price.
The Company also has 1,000,000 shares of undesignated preferred stock
authorized of which no shares are outstanding.
(B) VOTING RIGHTS: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters on which
common shareholders generally are entitled to vote other than a matter on which
the common stock or either series thereof or any series of preferred stock would
be entitled to vote as a separate voting group. On all matters on which both
series of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes based on the
weighted average ratio of the market value of a share of CarMax Stock to a share
of Circuit City Stock. If shares of only one series of common stock are
outstanding, each share of that series shall be entitled to one vote. If either
series of common stock is entitled to vote as a separate voting group with
respect to any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
(C) RESTRICTED STOCK: The Company has issued restricted stock under the
provisions of the 1994 Stock Incentive Plan whereby management and key employees
are granted restricted shares of Circuit City Stock or CarMax Stock. Shares are
awarded in the name of the employee, who has all the rights of a stockholder,
subject to certain restrictions or forfeitures. Restrictions on the awards
generally expire three to seven years from the date of grant. In fiscal 1999,
certain members of management of the Circuit City Group were granted 131,350
restricted shares of Circuit City Stock that vest seven years from the date of
grant. These awards provide accelerated vesting if certain performance factors
are met. Total restricted stock awards of 360,346 shares of Circuit City Stock
and 100,000 shares of CarMax Stock were granted to eligible employees in fiscal
1999. The market value at the date of grant of these shares has been recorded as
unearned compensation and is a component of stockholders' equity. Unearned
compensation is expensed over the restriction periods. In fiscal 1999, a total
of $9,167,700 was charged to operations ($5,073,100 in fiscal 1998 and
$3,790,200 in fiscal 1997). As of February 28, 1999, 966,053 restricted shares
of Circuit City Stock and 120,000 restricted shares of CarMax Stock were
outstanding.
(D) EMPLOYEE STOCK PURCHASE PLANS: The Company has Employee Stock Purchase Plans
for all employees meeting certain eligibility criteria. Under the Circuit City
Plan and, starting in April 1997, under the CarMax Plan, eligible employees may
purchase shares of Circuit City Stock or CarMax Stock, subject to certain
limitations, at 85 percent of market value. Purchases are limited to 10 percent
of an employee's eligible compensation, up to a maximum of $7,500 per year. At
February 28, 1999, a total of 683,015 shares remained available under the
Circuit City Plan and 138,693 shares remained available under the CarMax Plan.
During fiscal 1999, 429,355 shares of Circuit City Stock were issued to or
purchased on the open market for employees (450,698 shares in fiscal 1998 and
499,338 shares in fiscal 1997), and 268,532 shares of CarMax Stock were issued
to or purchased on the open market on behalf of employees (92,775 in fiscal
1998). The average price per share of Circuit City Stock was $43.38 in fiscal
1999, $36.78 in fiscal 1998 and $32.68 in fiscal 1997. The average price per
share of CarMax Stock was $7.56 in fiscal 1999 and $12.73 in fiscal 1998. The
purchase price discount is charged to operations and totaled $2,984,500 in
fiscal 1999, $2,670,400 in fiscal 1998 and $2,433,600 in fiscal 1997.
(E) STOCK INCENTIVE PLANS: Under the Company's stock incentive plans, incentive
and nonqualified stock options may be granted to management, key employees and
outside directors to purchase shares of Circuit City Stock or CarMax Stock. The
exercise price for incentive stock options for employees and nonqualified
options for outside directors is equal to, or greater than, the market value at
the date of grant; for nonqualified options granted under the 1988 Plan for
employees, it is at least 85 percent of the market value at the date of grant
(100 percent under the 1994 Plan). Options generally are exercisable over a
period of from one to 10 years from the date of grant. In fiscal 1998, options
that were outstanding as of February 28, 1997, to purchase shares of stock of
the corporate entity comprising the CarMax Group were converted into options to
purchase CarMax Stock.
A summary of the status of the Company's stock options and changes during
the years ended February 28, 1999, 1998 and 1997 are shown in Table 1. Table 2
summarizes information about stock options outstanding as of February 28, 1999.
38
<PAGE>
<TABLE>
<S> <C>
TABLE 1 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
Outstanding at beginning of year........ 4,994 $32.00 4,828 $29.76 3,563 $18.63
Granted................................. 540 42.33 726 35.21 2,159 43.38
Exercised............................... (1,004) 17.53 (483) 15.00 (786) 17.67
Cancelled............................... (83) 33.59 (77) 29.42 (108) 21.90
------ ----- -----
Outstanding at end of year.............. 4,447 $36.49 4,994 $32.00 4,828 $29.76
------ ----- -----
Options exercisable at end of year...... 1,483 $24.03 1,754 $19.68 1,629 $17.24
------ ----- -----
CarMax Group:
Outstanding at beginning of year........ 4,822 $1.49 4,769 $0.51 4,278 $0.22
Granted................................. 205 8.63 413 13.04 961 1.68
Exercised............................... (543) 0.22 (273) 0.22 - -
Cancelled............................... (104) 10.54 (87) 6.36 (470) 0.27
------ ----- -----
Outstanding at end of year.............. 4,380 $1.77 4,822 $1.49 4,769 $0.51
------ ----- -----
Options exercisable at end of year...... 1,566 $0.96 762 $0.37 - $ -
------ ----- -----
- -------------------------------------------------------------------------------------------------------------------------------
TABLE 2 Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
$15.69 to 20.13.............................. 474 2.0 $18.34 474 $18.34
22.50 to 29.13.............................. 701 2.1 23.49 617 23.63
29.50 to 38.00.............................. 1,748 5.2 31.97 392 31.55
38.38 to 48.56.............................. 524 7.1 42.40 - -
59.00....................................... 1,000 3.1 59.00 - -
----- -----
Total........................................ 4,447 4.1 $36.49 1,483 $24.03
----- -----
CarMax Group:
$ 0.22....................................... 3,692 3.0 $0.22 1,476 $0.22
4.00 to 9.19.............................. 448 5.0 7.84 23 9.17
12.94 to 16.31.............................. 240 5.2 14.34 67 14.39
----- -----
Total........................................ 4,380 3.3 $1.77 1,566 $0.96
----- -----
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the Circuit City
Group's and the CarMax Group's net earnings or loss and net earnings or loss per
share would have been changed to the pro forma amounts indicated in the next
column. In accordance with the transition provisions of SFAS No. 123, the pro
forma amounts reflect options with grant dates subsequent to March 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net earnings amounts
presented because compensation cost is reflected over the options' vesting
periods and compensation cost of options granted prior to March 1, 1995, is not
considered. The pro forma effect on fiscal year 1999 may not be representative
of the pro forma effects on net earnings or loss for future years.
<PAGE>
(Amounts in thousands Years Ended February 28
except per share data) 1999 1998 1997
- -------------------------------------------------------------
Circuit City Group:
Net earnings-as reported.... $148,381 $112,074 $136,680
Net earnings-pro forma...... 142,479 107,399 133,326
Basic net earnings per
share-as reported........ $1.50 $1.14 $1.40
Basic net earnings per
share-pro forma.......... 1.44 1.10 1.37
Diluted net earnings per
share-as reported........ $1.48 $1.13 $1.39
Diluted net earnings per
share-pro forma.......... 1.42 1.08 1.35
CarMax Group:
Net loss-as reported........ $5,457 $7,763 $266
Net loss-pro forma.......... 5,537 7,824 268
Net loss per share-as reported $0.24 $0.35 $0.01
Net loss per share-pro forma 0.24 0.36 0.01
39
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model. The weighted average assumptions used in the
model are as follows:
1999 1998 1997
- -------------------------------------------------------------
Circuit City Group:
Expected dividend yield........... 0.4% 0.4% 0.4%
Expected stock volatility......... 33% 33% 33%
Risk-free interest rates.......... 6% 6% 6%
Expected lives (in years)......... 5 4 4
CarMax Group:
Expected dividend yield........... - - -
Expected stock volatility......... 50% 50% 40%
Risk-free interest rates.......... 6% 6% 6%
Expected lives (in years)......... 3 3 4
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted for the Circuit City Group is $15 in fiscal 1999,
$13 in fiscal 1998 and $8 in fiscal 1997; and for the CarMax Group, $3 in fiscal
1999, $6 in fiscal 1998 and $0.70 in fiscal 1997.
8. NET EARNINGS (LOSS) PER SHARE
Reconciliations of the numerator and denominator of basic and diluted net
earnings (loss) per share are presented below:
(Amounts in thousands Years Ended February 28
except per share data) 1999 1998 1997
- -------------------------------------------------------------
Circuit City Group:
Weighted average common
shares...................... 99,152 98,027 97,311
Dilutive potential common shares:
Options..................... 850 842 889
Restricted stock............ 404 335 272
----------------------------
Weighted average common shares
and dilutive potential
common shares............... 100,406 99,204 98,472
----------------------------
Income available to common
shareholders................ $148,381 $112,074 $136,680
----------------------------
Basic net earnings per share... $1.50 $1.14 $1.40
----------------------------
Diluted net earnings per share. $1.48 $1.13 $1.39
----------------------------
CarMax Group:
Weighted average common
shares...................... 22,604 22,001 21,860
----------------------------
Loss available to common
shareholders................ $5,457 $7,763 $266
----------------------------
Net loss per share............. $0.24 $0.35 $0.01
----------------------------
Certain options were not included in the computation of diluted net
earnings per share because the options' exercise prices were greater than the
average market price of the common shares. Options to purchase 1,000,000 shares
of Circuit City Stock at $59.00 per share were outstanding and not included in
the calculation at the end of fiscal 1999; 1,510,000 shares ranging from $35.47
to $59.00 per share at the end of fiscal 1998; and 1,076,000 shares ranging from
$32.25 to $59.00 per share at the end of fiscal 1997.
The CarMax Group had no diluted net loss per share because the Group had a
net loss for the periods presented.
9. PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of
Circuit City Stock at February 28, 1999 and 1998. Contributions required were
$10,306,000 in fiscal 1999, $11,642,000 in fiscal 1998 and $6,603,000 in fiscal
1997. The following tables set forth the Plan's financial status and amounts
recognized in the consolidated balance sheets as of February 28:
(Amounts in thousands) 1999 1998
- ---------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year.......... $89,124 $70,576
Service cost..................................... 11,004 8,584
Interest cost.................................... 6,202 5,260
Actuarial loss................................... 9,526 7,782
Benefits paid.................................... (3,290) (3,078)
------------------
Benefit obligation at end of year................ $112,566 $89,124
------------------
Change in plan assets:
Fair value of plan assets at beginning of year... $84,251 $62,928
Actual return on plan assets..................... 4,411 12,759
Employer contributions........................... 10,306 11,642
Benefits paid.................................... (3,290) (3,078)
-----------------
Fair value of plan assets at end of year $95,678 $84,251
-----------------
Reconciliation of funded status:
Funded status.................................... $(16,888) $(4,873)
Unrecognized actuarial loss (gain)............... 9,720 (3,189)
Unrecognized transition asset.................... (606) (808)
Unrecognized prior service benefit............... (560) (665)
------------------
Net amount recognized............................ $(8,334) $(9,535)
------------------
40
The components of net pension expense are as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- ------------------------------------------------------------
Service cost...................... $11,004 $8,584 $9,389
Interest cost..................... 6,202 5,260 4,701
Expected return on plan assets.... (7,794) (5,133) (3,929)
Amortization of prior service cost (105) (105) (105)
Amortization of transitional asset (202) (202) (202)
Recognized actuarial loss......... - 17 1,240
------------------------
Net pension expense............... $9,105 $8,421 $11,094
------------------------
Assumptions used in the accounting for the pension plan were:
Years Ended February 28
1999 1998 1997
- -----------------------------------------------------------------
Weighted average discount rate............ 6.8% 7.0% 7.5%
Rate of increase in compensation levels... 5.0% 5.0% 5.5%
Expected rate of return on plan assets.... 9.0% 9.0% 9.0%
- ----------------------------------------------------------------
<PAGE>
10. LEASE COMMITMENTS
The Company conducts a substantial portion of its business in leased premises.
The Company's lease obligations are based upon contractual minimum rates. For
certain locations, amounts in excess of these minimum rates are payable based
upon specified percentages of sales. Rental expense and sublease income for all
operating leases are summarized as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- ------------------------------------------------------------
Minimum rentals............... $302,724 $248,383 $184,618
Rentals based on sales volume. 1,247 730 2,322
Sublease income............... (20,875) (12,879) (11,121)
----------------------------
Net........................... $283,096 $236,234 $175,819
----------------------------
The Company computes rent based on a percentage of sales volumes in excess
of defined amounts in certain store locations. Most of the Company's other
leases are fixed-dollar rental commitments, with many containing rent
escalations based on the Consumer Price Index. Most provide that the Company pay
taxes, maintenance, insurance and certain other operating expenses applicable to
the premises.
The initial term of most real property leases will expire within the next
25 years; however, most of the leases have options providing for additional
lease terms of five years to 25 years at terms similar to the initial terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Company, as of February 28, 1999, were:
Operating Operating
(Amounts in thousands) Capital Lease Sublease
Fiscal Leases Commitments Income
- ------------------------------------------------------------
2000......................... $1,662 $296,674 $(14,684)
2001......................... 1,681 293,961 (12,817)
2002......................... 1,725 289,553 (11,605)
2003......................... 1,726 285,710 (10,624)
2004......................... 1,768 283,422 (9,123)
After 2004................... 16,464 3,289,107 (55,144)
------------------------------
Total minimum lease
payments.................. 25,026 $4,738,427 $(113,997)
---------------------
Less amounts representing
interest.................. 12,298
-------
Present value of net
minimum capital lease
payments [NOTE 5]......... $12,728
-------
In fiscal 1999, the Company entered into sale-leaseback transactions with
unrelated parties at an aggregate selling price of $235,500,000 ($218,768,000 in
fiscal 1998 and $201,694,000 in fiscal 1997). The Company does not have
continuing involvement under the sale-leaseback transactions.
11. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Advertising expense, which is included in selling, general and administrative
expenses in the accompanying consolidated statements of earnings, amounted to
$467,661,000 (4.3 percent of net sales and operating revenues) in fiscal 1999,
$400,346,000 (4.5 percent of net sales and operating revenues) in fiscal 1998
and $354,270,000 (4.6 percent of net sales and operating revenues) in fiscal
1997.
12. SECURITIZATIONS
(A) CREDIT CARD SECURITIZATIONS: The Company enters into securitization
transactions, which allow for the sale of credit card receivables to unrelated
entities, to finance the consumer revolving credit receivables generated by its
wholly owned finance operation. Proceeds from securitization transactions were
$224.6 million for fiscal 1999, $331.4 million for fiscal 1998 and $551.1
million for fiscal 1997.
41
<PAGE>
Receivables relating to the securitization facilities consist of the
following at February 28:
(Amounts in thousands) 1999 1998
- ------------------------------------------------------------
Managed receivables.............. $2,957,132 $2,749,793
Receivables/residual interests held
by the Company:
For sale...................... (39,948) (44,622)
For investment................ (161,996) (203,921)
-------------------------
Net receivables sold............. $2,755,188 $2,501,250
-------------------------
Net receivables sold
with recourse................. $322,000 $726,000
-------------------------
Program capacity................. $3,127,000 $3,075,000
-------------------------
Private-label credit card receivables are financed through securitization
programs employing a master trust structure. As of February 28, 1999, this
securitization program had a capacity of $1.38 billion. The agreement has no
recourse provisions.
During fiscal 1998, a bank card master trust securitization facility was
established and issued two series from the trust. Provisions under the master
trust agreement provide recourse to the Company for any cash flow deficiencies
on $322 million of the receivables sold. The finance charges from the
transferred receivables are used to fund interest costs, charge-offs, servicing
fees and other related costs. The Company believes that as of February 28, 1999,
no liability existed under these recourse provisions. The bank card
securitization program has a total program capacity of $1.75 billion.
The net gain on sales of receivables totaled $2.3 million for fiscal 1999,
$21.8 million for fiscal 1998 and $3.2 million for fiscal 1997. The finance
operation's servicing revenue, including gains on sales of receivables, totaled
$200.6 million for fiscal 1999, $195.7 million for fiscal 1998 and $197.0
million for fiscal 1997. Rights recorded for future interest income from
serviced assets that exceed the contractually specified servicing fees are
carried at fair value and amounted to $27.3 million at February 28, 1999, $25.0
million at February 28, 1998, and $3.2 million at February 28, 1997, and are
included in net accounts receivable. The servicing fees specified in the credit
card securitization agreements adequately compensate the finance operation for
servicing the accounts. Accordingly, no servicing asset or liability has been
recorded.
In determining the fair value of retained interests, the Company estimates
future cash flows from finance charge collections, reduced by net defaults,
servicing cost and interest cost. The Company employs a risk-based pricing
strategy that increases the stated annual percentage rate for accounts that have
a higher predicted risk of default. Accounts with a lower risk profile also may
qualify for promotional financing.
The private-label card programs, excluding promotional balances, range from
21 percent to 24 percent APR, with default rates varying based on portfolio
composition, but generally aggregating from 6 percent to 10 percent. Principal
payment rates vary widely both seasonally and by credit terms but are in the
range of 9 percent to 12 percent.
The bank card APRs are based on the prime rate and generally range from 7
percent to 22 percent, with default rates varying by portfolio composition, but
generally aggregating from 8 percent to 12 percent. Principal payment rates vary
widely both seasonally and by credit terms but are in the range of 5 percent to
8 percent.
Interest cost paid by the master trusts varies between series and ranges
from 5.0 percent to 6.3 percent.
(B) AUTOMOBILE LOAN SECURITIZATION: In fiscal 1996, the Company entered into a
securitization agreement to finance the consumer installment credit receivables
generated by its automobile loan finance operation. Proceeds from the automobile
loan securitization transaction were $271 million during fiscal 1999, $123
million during fiscal 1998 and $58 million during fiscal 1997.
Receivables relating to the securitization facility consist of the
following at February 28:
(Amounts in thousands) 1999 1998
- ------------------------------------------------------------
Managed receivables.................. $589,032 $291,294
Receivables held by the Company:
For sale.......................... (14,690) (5,816)
For investment*................... (35,342) (17,478)
---------------------
Net receivables sold................. $539,000 $268,000
---------------------
Program capacity..................... $575,000 $300,000
---------------------
*Held by a bankruptcy remote special purpose company
<PAGE>
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. A restructuring of the facility
during fiscal 1997 resulted in the recourse provisions being eliminated.
The net gain on sales of receivables totaled $7.9 million for fiscal 1999,
$3.7 million for fiscal 1998 and $3.1 million for fiscal 1997. Rights recorded
for future interest income from serviced assets that exceed the contractually
specified servicing fees are carried at fair value and amounted to $14.7 million
at February 28, 1999, $6.8 million at February 28, 1998, and $3.1 million at
February 28, 1997, and are included in net accounts receivable. The finance
operation's servicing revenue, including gains on sales of receivables, totaled
$28.2 million for fiscal 1999, $11.2 million for fiscal 1998 and $8.7 million
for fiscal 1997. The servicing fee specified in the auto loan securitization
agreement adequately compensates the finance operation for servicing the
accounts. Accordingly, no servicing asset or liability has been recorded.
In determining the fair value of retained interests, the Company estimates
future cash flows from finance charge collections, reduced by net defaults,
servicing cost and interest cost. The Company employs a risk-based pricing
strategy that increases the stated APR for accounts that have a higher predicted
risk of default. Accounts with a lower risk profile also may qualify for
promotional financing.
42
The APRs range from 6 percent to 12 percent fixed, with default rates
varying based on credit quality, but generally aggregating 0.75 percent to 1.25
percent. Weighted average life of the receivables is expected to be in the 18
month to 20 month range.
Interest cost depends on the time at which accounts were originated, but is
in the range of 5 percent to 7 percent.
13. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year interest rate swap
agreements with notional amounts totaling $300 million relating to a public
issuance of securities by the master trust. As part of this issuance, $344
million of five-year, fixed-rate certificates were issued to fund consumer
credit receivables. The credit card finance operation is servicer for the
accounts, and as such, receives its monthly cash portfolio yield after deducting
interest, charge-offs and other related costs. The underlying receivables are
based on a floating rate. The swaps were put in place to better match funding
costs to the receivables being securitized. As a result, the master trust pays
fixed-rate interest, and the Company utilizes the swaps to convert the
fixed-rate obligation to a floating-rate, LIBOR-based obligation. These swaps
were entered into as part of the sales of receivables and are included in the
gain on sales of receivables.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year interest rate swaps with notional
amounts aggregating $175 million. These swaps effectively converted the
variable-rate obligation into a fixed-rate obligation. The fair value of the
swaps is the amount at which they could be settled. This value is based on
estimates obtained from the counterparties, which are two banks highly rated by
several financial rating agencies. The swaps are held for hedging purposes and
are not recorded at fair value. Recording the swaps at fair value at February
28, 1999, would result in a loss of $2.2 million and at February 28, 1998, would
result in a loss of $1.9 million.
The Company enters into amortizing swaps relating to the auto loan
receivable securitization to convert variable-rate financing costs to fixed-rate
obligations to better match funding costs to the receivables being securitized.
In November 1995, the Company entered into a 50-month amortizing swap with a
notional amount of $75 million and, in October 1996, entered into a 40-month
amortizing swap with a notional amount of $64 million. The Company entered into
four 40-month amortizing swaps with notional amounts totaling approximately $162
million during fiscal 1998 and four 40-month amortizing swaps with notional
amounts totaling approximately $387 million in fiscal 1999. These swaps were
entered into as part of sales of receivables and are included in the gain on
sales of receivables. The remaining total notional amount of all swaps related
to the auto loan receivable securitization was approximately $499 million at
February 28, 1999, $224 million at February 28, 1998, and $114 million at
February 28, 1997.
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Company does not anticipate significant market risk from swaps, since their
use is to more closely match funding costs to the use of the funding. Credit
risk is the exposure to nonperformance of another party to an agreement. The
Company mitigates credit risk by dealing with highly rated counterparties.
14. COMMITMENTS AND CONTINGENT LIABILITIES
(A) INVESTMENT IN DIVX: In May 1995, the Company agreed to invest $30.0 million
in Divx, a partnership that has developed and is marketing a new home digital
video system. That commitment was increased to $130.0 million in September 1997.
Although that commitment was fulfilled during fiscal 1999, the Company continues
to fund the operations of Divx as management continues to explore various
financing options. As of February 28, 1999, the Company owned approximately 75
percent of the partnership. The Company has been allocated 100 percent of the
losses since inception. The Company allocates its investment in Divx to the
Circuit City Group. As of February 28, 1999, the Company had funded
approximately $207 million for the operations of Divx.
<PAGE>
(B) LICENSING AGREEMENTS: Divx has entered into licensing agreements with motion
picture distributors for use of their feature-length films for the Divx system.
The Company guarantees Divx's performance under these commitments. The licensing
fees are based on varying percentages of consumer viewing and wholesale receipts
and require minimum distributor compensation commencing from the operational
date of each agreement through the following one to five years. As of February
28, 1999, the minimum compensation due from Divx to the distributors is $101.0
million ($26.0 million in fiscal 2000, $32.0 million in fiscal 2001, $20.5
million in fiscal 2002, $14.5 million in fiscal 2003 and $8.0 million in fiscal
2004).
(C) LEGAL PROCEEDINGS: In the normal course of business, the Company is involved
in various legal proceedings. Based upon the Company's evaluation of the
information presently available, management believes that the ultimate
resolution of any such proceedings will not have a material adverse effect on
the Company's financial position, liquidity or results of operations.
15. OPERATING SEGMENT INFORMATION The Company conducts business in three
operating segments: Circuit City, Divx and CarMax. These segments are identified
and managed by the Company based on the different products and services offered
by each. Circuit City refers to the retail operations bearing the Circuit City
name and to all related operations such as its finance operation. This segment
is engaged in the business of selling brand-name consumer electronics, personal
computers, major appliances and entertainment software. Divx primarily is
engaged in the business of selling specially encrypted
43
DVD at wholesale. CarMax refers to the used- and new-car retail locations
bearing the CarMax name and to all related operations such as its finance
operation. Financial information for these segments for fiscal 1999, 1998 and
1997 are shown in Table 3.
<TABLE>
<S> <C>
TABLE 3
- ------------------------------------------------------------------------------------------------------------------------------
1999
Total
(Amounts in thousands) Circuit City Divx CarMax Elimination Segments
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers......................... $9,335,298 $2,851 $1,466,298 $- $10,804,447
Intersegment revenues.................................... 8,872 6,830 - (15,702) -
Interest expense......................................... 21,926 - 6,393 - 28,319
Depreciation and amortization............................ 119,724 10,566 10,003 - 140,293
Earnings (loss) before income taxes...................... 379,630 (110,558) (38,549) - 230,523
Provision for income taxes (income tax benefit).......... 144,646 (42,012) (15,035) - 87,599
Net earnings (loss)...................................... 234,984 (68,546) (23,514) - 142,924
Total assets............................................. $2,813,635 $60,433 $571,198 $- $3,445,266
1998
Total
(Amounts in thousands) Circuit City Divx CarMax Elimination Segments
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers......................... $7,996,591 $- $874,206 $- $8,870,797
Interest expense......................................... 25,072 - 1,789 - 26,861
Depreciation and amortization............................ 110,282 1,467 4,577 - 116,326
Earnings (loss) before income taxes...................... 257,632 (33,284) (56,104) - 168,244
Provision for income taxes (income tax benefit).......... 98,462 (12,648) (21,881) - 63,933
Net earnings (loss)...................................... 159,170 (20,636) (34,223) - 104,311
Total assets............................................. $2,752,402 $30,977 $448,322 $- $3,231,701
1997
Total
(Amounts in thousands) Circuit City Divx CarMax Elimination Segments
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers......................... $7,153,562 $- $510,249 $- $7,663,811
Interest expense......................................... 23,503 - 6,279 - 29,782
Depreciation and amortization............................ 97,006 307 1,664 - 98,977
Earnings (loss) before income taxes...................... 248,567 (12,614) (15,929) - 220,024
Provision for income taxes (income tax benefit).......... 95,014 (4,793) (6,611) - 83,610
Net earnings (loss)...................................... 153,553 (7,821) (9,318) - 136,414
Total assets............................................. $2,699,907 $4,692 $427,187 $(50,613) $3,081,173
</TABLE>
Net earnings (loss) and total assets for Circuit City exclude the Inter-Group
Interest in the CarMax Group.
<PAGE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<S> <C>
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales and operating
revenues..........$2,271,090 $1,856,904 $2,517,154 $2,020,572 $2,612,896 $2,144,219 $3,403,307 $2,849,102 $10,804,447 $8,870,797
--------------------------------------------------------------------------------------------------------------
Gross profit......... $504,514 $418,278 $571,672 $472,429 $592,105 $481,753 $776,728 $671,204 $2,445,019 $2,043,664
--------------------------------------------------------------------------------------------------------------
Net earnings (loss)
attributed to:
Circuit City Stock $13,269 $12,749 $32,147 $27,879 $15,945 $14,012 $87,020 $57,434 $148,381 $112,074
--------------------------------------------------------------------------------------------------------------
CarMax Stock...... $(736) $(275) $(685) $(393) $(1,701) $(2,075) $(2,335) $(5,020) $(5,457) $(7,763)
--------------------------------------------------------------------------------------------------------------
Net earnings (loss)
per share:
Circuit City Stock:
Basic.......... $0.13 $0.13 $0.32 $0.28 $0.16 $0.14 $0.87 $0.58 $1.50 $1.14
--------------------------------------------------------------------------------------------------------------
Diluted........ $0.13 $0.13 $0.32 $0.28 $0.16 $0.14 $0.86 $0.58 $1.48 $1.13
--------------------------------------------------------------------------------------------------------------
CarMax Stock...... $(0.03) $(0.01) $(0.03) $(0.02) $(0.07) $(0.09) $(0.10) $(0.23) $(0.24) $(0.35)
--------------------------------------------------------------------------------------------------------------
</TABLE>
44
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Circuit City
Stores, Inc. and subsidiaries as of February 28, 1999 and 1998 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the fiscal years in the three-year period ended February 28, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Circuit City
Stores, Inc. and subsidiaries as of February 28, 1999 and 1998 and the results
of their operations and their cash flows for each of the fiscal years in the
three-year period ended February 28, 1999 in conformity with generally accepted
accounting principles.
/s/KPMG LLP
Richmond, Virginia
April 2, 1999
45
CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On January 24, 1997, shareholders of Circuit City Stores, Inc. approved the
creation of two common stock series. The Company's existing common stock was
subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common
Stock. In an initial public offering, which was completed February 7, 1997, the
Company sold 21.86 million shares of Circuit City Stores, Inc.-CarMax Group
Common Stock.
The Circuit City Group Common Stock is intended to track the performance of
the Circuit City store-related operations, the Company's investment in Digital
Video Express and the Group's retained interest in the CarMax Group. The effects
of this retained interest on the Circuit City Group's financial statements are
identified by the term "Inter-Group."
The CarMax Group Common Stock is intended to track the performance of the
CarMax operations. The Inter-Group Interest is not considered outstanding CarMax
Group stock. Therefore, any net earnings or loss attributed to the Inter-Group
Interest is not included in the CarMax Group's per share calculations.
The following discussion and analysis relates to the Circuit City Group.
Reported earnings reflect the Circuit City Group's 100 percent interest in the
losses of the CarMax Group prior to the consummation of the offering on February
7, 1997, and the lower Inter-Group Interest since that time. For additional
information, refer to the "Management's Discussion and Analysis of Results of
Operations and Financial Condition" for Circuit City Stores, Inc. and for the
CarMax Group.
<PAGE>
RESULTS OF OPERATIONS
Sales Growth
Total sales for the Circuit City Group increased 17 percent in fiscal 1999 to
$9.34 billion. In fiscal 1998, total sales were $8.00 billion, a 12 percent
increase from $7.15 billion in fiscal 1997.
PERCENTAGE SALES CHANGE FROM PRIOR YEAR
Circuit City Group
------------------
Fiscal Total Comparable Industry*
- --------------------------------------------------------------
1999........................... 17% 8 % 5 %
1998........................... 12% (1)% (3)%
1997........................... 6% (8)% (8)%
1996........................... 23% 5 % 6 %
1995........................... 34% 15 % 11 %
* The industry sales rates are derived from Electronic Industries Alliance,
Recording Industry Association of America and Company estimates of audio, video,
home office, telecommunications, appliance and music software sales.
The fiscal 1999 total sales increase reflects an 8 percent comparable store
sales increase, which was in part caused by an acceleration in industry growth,
and the continued geographic expansion of the Group's Circuit City Superstores.
In fiscal 1999, the Group opened 37 Superstores. The Group entered a number of
one- and two-store markets; added stores to existing markets, including the New
York metropolitan market that was entered in fiscal 1998; replaced three
Superstores; and closed two consumer electronics-only stores. In addition, the
Group remodeled 30 stores to reflect its most recent merchandising initiatives.
The Group operates four Circuit City Superstore formats with square footage
and merchandise assortments tailored to volume expectations for specific trade
areas. The "D" format serves the most populous trade areas. At the end of fiscal
1999, selling space for the "D" format stores averaged about 23,000 square feet
and total square footage for all "D" stores averaged 43,042. The "C" format
constitutes the largest percentage of the store base. At the end of fiscal 1999,
selling space in the "C" format stores averaged about 15,000 square feet with
total square footage for all "C" stores averaging 34,036. The "B" format often
is located in smaller markets or in smaller trade areas within larger
metropolitan markets. At the end of fiscal 1999, selling space in these stores
averaged approximately 12,500 square feet with an average total square footage
of 26,651. The "B" stores offer a broad merchandise assortment that maximizes
return on investment in lower volume areas. The "A" format serves the least
populated trade areas. Selling space for all "A" stores averaged approximately
9,500 square feet at the end of fiscal 1999, and total square footage averaged
19,558. These stores feature a layout, staffing level and merchandise assortment
that creates high productivity in the smallest markets.
The Group also operates 48 mall-based Circuit City Express stores. These
stores are located in regional malls and are approximately 2,000 to 3,000 square
feet in size.
STORE MIX
Retail Units at Year-End
- -------------------------------------------------------------
Fiscal 1999 1998 1997 1996 1995
- -------------------------------------------------------------
Superstore
"D" Superstore........ 118 114 95 61 12
"C" Superstore........ 294 289 278 259 257
"B" Superstore........ 82 72 54 46 37
"A" Superstore........ 43 25 16 12 6
Electronics-Only......... 2 4 5 5 5
Circuit City Express..... 48 52 45 36 35
----------------------------------
Total.................... 587 556 493 419 352
----------------------------------
Industry sales in Circuit City's retail segments have varied significantly
over the past five years, resulting in wide variations in the Group's sales
growth. Geographic expansion and the addition of product categories such as
personal computers were the primary contributors to the Circuit City Group's
total sales growth early in the period. From mid-fiscal 1996 through fiscal
1998, a lack of significant product introductions resulted in lower average
retails and weak sales throughout the industry. In fiscal 1999, the industry
began to emerge from this period of declining sales. For Circuit City, the
fiscal 1999 sales reflected strong sales across all major categories with
especially strong sales in personal computers and in new high technology areas
such as DIRECTV; wireless communications; DVD players, especially players with
the Divx feature; and digital camcorders. The continued Superstore additions
also contributed to the total sales growth.
The industry weakness in fiscal 1997 and 1998 resulted in a highly
competitive climate, and a significant number of regional competitors closed
stores. Despite the improvement in fiscal
46
<PAGE>
1999, the consumer electronics industry remains highly competitive. Circuit
City's primary competitors are large specialty, discount or warehouse retailers
with generally lower levels of service. Because of Circuit City's long history
of providing exceptional customer service, management believes that the Circuit
City locations can continue to maintain share in existing markets and build
comparable shares in new markets.
SALES BY MERCHANDISE CATEGORIES
Fiscal 1999 1998 1997 1996 1995
- -------------------------------------------------------------
TV.................... 18% 18% 18% 17% 19%
VCR/Camcorders........ 13% 13% 14% 13% 14%
Audio................. 16% 17% 18% 19% 22%
Home Office........... 27% 25% 24% 26% 20%
Appliance............. 15% 15% 15% 14% 15%
Other................. 11% 12% 11% 11% 10%
-------------------------------------
Total................. 100% 100% 100% 100% 100%
-------------------------------------
The Group sells two extended warranty programs on behalf of unrelated third
parties that issue these plans for merchandise sold by the Group and other
retailers. These third-party programs are sold in most major markets. In states
where third-party warranty sales are not permitted, the Group sells a Circuit
City extended warranty. Gross dollar sales from all extended warranty programs
were 5.4 percent of the Group's total sales in fiscal year 1999, compared with
5.5 percent in fiscal 1998 and 6.0 percent in fiscal 1997. The lower percentages
in fiscal years 1999 and 1998 reflect the impact of lower average retail prices
on consumer demand for the related warranties in many categories and increased
sales of some products that carry lower warranty penetration rates. Total
extended warranty revenue, which is reported in the Group's total sales, was 4.6
percent of sales in fiscal years 1999 and 1998 and 5.1 percent of sales in
fiscal year 1997. The gross profit margins on products sold with extended
warranties are higher than the gross profit margins on products sold without
extended warranties. Third-party extended warranty revenue was 4.1 percent of
the Group's total sales in fiscal year 1999 and 3.6 percent of the Group's total
sales in fiscal years 1998 and 1997. The fiscal 1999 increase in third-party
extended warranty revenue reflects the conversion of stores in 10 states to
third-party warranty sales in June 1998.
SUPERSTORE SALES PER TOTAL SQUARE FOOT
Fiscal
- -------------------------------------------------------------
1999................................................... $514
1998................................................... $478
1997................................................... $499
1996................................................... $577
1995................................................... $584
SUPERSTORE SALES PER TOTAL SQUARE FOOT. Over the last five years, the Group has
significantly increased the percentage of store square footage devoted to
selling space. In fiscal 1995, the Group introduced the larger format "D" stores
in some markets. These stores are intended to generate high sales volumes in
specific trade areas but lower sales per total square foot than smaller
Superstores. These stores and the declines in comparable store sales produced
lower Superstore sales per total square foot in the period from fiscal 1996
through fiscal 1998. The fiscal 1999 sales per square foot increase primarily
reflects the comparable store sales increase.
IMPACT OF INFLATION. Inflation has not been a significant contributor to the
Group's results. In fact, during the past two years, the average retail price
has declined in virtually all of the Group's product categories. Although new
product introductions could help reverse this trend in selected areas,
management expects no significant short-term change overall. Because the Group
purchases substantially all products in U.S. dollars, prices are not directly
impacted by the value of the dollar in relation to other foreign currencies,
including the Japanese yen.
Digital Video Express
Digital Video Express has developed and is marketing a new digital video system
for watching movies at home. Circuit City Stores, Inc. holds the majority
interest in the business. The remaining interest is held by the prominent Los
Angeles law firm Ziffren, Brittenham, Branca & Fischer. The Company's investment
in Divx is allocated to the Circuit City Group. Through the end of fiscal 1999,
the Company had invested $207 million in Divx, $120 million of which was
invested in fiscal 1999. The investment in Divx impacts the Circuit City Group's
gross profit margin and selling, general and administrative expense ratio.
Cost of Sales, Buying and Warehousing
The gross profit margin was 24.3 percent of sales in fiscal 1999, 24.6 percent
in fiscal 1998 and 24.0 percent in fiscal 1997. The lower gross margin in fiscal
1999 reflects the strength of the personal computer business, which carries
lower gross margins; the continued highly competitive price environment for the
Circuit City business; and costs associated with Divx. Better inventory
management and increased sales of new technologies and more fully featured
products partly offset these factors. The Group gradually has reduced its
assortment in a variety of product categories to more closely match consumer
demand and has carefully managed product transitions, especially in the personal
computer business. As a result, mark-downs have decreased, reducing their impact
on the gross margin. Excluding Divx, the gross margin for the Circuit City
business was 24.4 percent of sales in fiscal 1999. Because Divx was not selling
any product in fiscal 1998 and fiscal 1997, it had no impact on gross margins in
those periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 21.2 percent of sales in
fiscal 1999 compared with 21.5 percent in fiscal 1998 and 20.4 percent in fiscal
1997. The improved ratio in fiscal 1999 primarily reflects the expense leverage
gained from the comparable store sales increase, partly offset by selling,
general and administrative expenses related to Divx. Operating profits generated
by the Group's finance operation are recorded as a reduction to the selling,
general and administrative expenses. Excluding Divx, the expense ratio for the
Circuit City business was 20.1 percent in fiscal 1999, 21.1 percent in fiscal
1998 and 20.2 percent in fiscal 1997.
Interest Expense
Interest expense was 0.2 percent of sales in fiscal 1999 and 0.3 percent of
sales in fiscal 1998 and 1997. Interest expense was incurred
47
on allocated debt used to fund store expansion, working capital and the
investment in Divx.
Income Taxes
The Group's effective income tax rate was 38.1 percent in fiscal year 1999, 38.3
percent in fiscal year 1998 and 38.2 percent in fiscal 1997. The shifts in the
tax rate reflect the state tax impact of variations in taxable income produced
by the Group's separate legal operating entities.
Earnings before the Inter-Group Interest in the CarMax Group
Earnings before the Inter-Group Interest in the CarMax Group increased 20
percent to $166.4 million in fiscal 1999. In fiscal 1998, earnings before the
Inter-Group Interest in the CarMax Group were $138.5 million, a 5 percent
decrease from $145.7 million in fiscal 1997. The results for all three years
include the Company's investment in Digital Video Express. Excluding the
Company's investment in Divx, earnings for the Circuit City Group before the
Inter-Group Interest in the CarMax Group increased 48 percent to $235.0 million
in fiscal 1999 compared with $159.2 million in fiscal 1998 and $153.6 million in
fiscal 1997.
Net Loss Related to the Inter-Group Interest in the CarMax Group
The CarMax Group has incurred losses since its startup in fiscal 1994. The net
loss attributed to the Circuit City Group's Inter-Group Interest in the CarMax
Group was $18.1 million in fiscal 1999, $26.5 million in fiscal 1998 and $9.1
million in fiscal 1997.
Net Earnings
Net earnings for the Circuit City Group were $148.4 million in fiscal 1999,
$112.1 million in fiscal 1998 and $136.7 million in fiscal 1997. Net earnings
per share were $1.48 in fiscal 1999, $1.13 in fiscal 1998 and $1.39 in fiscal
1997. The improved results in fiscal 1999 primarily reflect the renewed strength
in the Company's Circuit City business, which was partly offset by the increased
investment in Divx and the losses incurred by the CarMax Group. The lower
earnings in fiscal year 1998 compared with fiscal year 1997 reflect the
challenging industry environment faced by the Circuit City business at that
time, the Company's higher investment in Digital Video Express and increased
losses incurred by the CarMax Group.
Operations Outlook
Management expects that industry growth will be the primary contributor to sales
and earnings growth for the Circuit City business during the coming decade.
Management anticipates that growth in the household penetration of products such
as DIRECTV, wireless communications, digital camcorders, DVD players and
personal computers will be the major contributors to this growth. Management
also believes that the introductions of digital and high-definition televisions
and multi-functional set top boxes will help drive industry sales to new levels.
Management expects to focus its attention on maximizing store volumes in the
existing Circuit City Superstores. These efforts will include the remodeling of
approximately 50 Superstores in fiscal 2000 to include the Group's new
merchandising initiatives.
Circuit City has established its presence in virtually all of the nation's
top 100 markets and will continue adding to the existing store base as
attractive market opportunities arise. Management believes that the Group has
the opportunity to operate approximately 800 Superstores within the United
States. In fiscal 2000, the Group will continue to expand its Superstore concept
into new trade areas, adding approximately 35 stores that are either new-market
entries or fill-in locations in existing Circuit City markets, including
approximately seven additional stores in the New York metropolitan area.
Management anticipates that the industry's growth, ongoing expansion and
continued strong operating controls will enable the Circuit City business to
generate earnings growth of 20 percent to 25 percent in fiscal 2000.
Management continues to be encouraged by the long-term profit potential of
the Company's investment in Digital Video Express. The early sales results
exceeded management's expectations, as DVD players with the Divx feature
captured a 20 percent to 25 percent share of DVD player sales during the last
quarter of the fiscal year. Titles are available from major studios. Divx
expects eight player brands to be available in calendar 1999. At February 28,
1999, approximately 370 titles were available on Divx discs and Divx plans to
add 30 to 40 titles each month in fiscal 2000. Management remains in active
discussions with potential financing and distribution partners for Divx and is
optimistic that the Company will complete one or more transactions in fiscal
2000. However, in the event that additional financing is not obtained,
management does not expect the costs associated with Divx in fiscal 2000 to
exceed those incurred in fiscal 1999.
Management expects that CarMax's financial performance will improve to a
modest loss or to break-even in fiscal 2000. The CarMax results will be partly
reflected in the Circuit City Group's Inter-Group Interest.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the "Circuit City Stores, Inc. Management's Discussion and Analysis of
Results of Operations and Financial Condition" for a review of recent accounting
pronouncements.
FINANCIAL CONDITION
In fiscal 1999, net cash provided by operating activities was $336.2 million
compared with $280.7 million provided by operating activities in fiscal 1998 and
$39.7 million provided by operating activities in fiscal 1997. The fiscal 1999
increase primarily reflects a decrease in net accounts receivable and the
improvement in net earnings for the Circuit City business, partly offset by the
higher investment in Digital Video Express. The fiscal 1998 increase reflects a
reduction in inventory, a smaller increase in net accounts receivable and a
slight earnings increase for the Circuit City business, partly offset by the
investment in Digital Video Express.
Most financial activities, including the investment of surplus cash and the
issuance and repayment of short-term and long-term debt, are managed by the
Company on a centralized basis. Allocated debt of the Circuit City Group
consists of (1) Company debt, if any, that has been allocated in its entirety to
the Circuit City Group and (2) a portion of the Company's debt that is allocated
between the Groups. This pooled debt bears interest at a rate based on the
average pooled debt balance. Expenses related to increases in pooled debt are
reflected in the weighted average interest rate of the pooled debt.
48
In addition to the allocation of cash and debt, interest-bearing loans,
with terms determined by the board of directors, are used to manage cash between
the Groups. These loans are reflected as inter-group payables or receivables on
the financial statements of each Group. During fiscal 1998, an inter-group note
was issued by the Circuit City Group on behalf of the CarMax Group as a
temporary financing vehicle for CarMax inventory. At the end of fiscal 1999 and
1998, the Circuit City Group maintained no inter-group notes, payables or
receivables with the CarMax Group. At February 28, 1997, the Circuit City Group
had an inter-group payable totaling $48.1 million.
Capital expenditures for the Circuit City Group have been funded through
sale-leaseback transactions, landlord reimbursements and allocated short- and
long-term debt. Capital expenditures of $228.7 million during fiscal 1999
primarily reflect Superstores opened or remodeled during the fiscal year and a
portion of the Superstores opening in fiscal 2000. Sale-leaseback and landlord
reimbursement transactions completed in fiscal 1999 totaled $134.3 million.
Capital expenditures of $353.8 million in fiscal 1998 and $451.6 million in
fiscal 1997 largely were incurred in connection with the Superstore expansion
program. Sale-leaseback and landlord reimbursement transactions were $199.0
million in fiscal 1998 and $316.3 million in fiscal 1997.
The Group's finance operation primarily funds its credit card programs
through securitization transactions that allow the operation to sell its
receivables while retaining a small interest in them. For its private-label
credit card, the finance operation has a master trust securitization facility
that allows the transfer of up to $1.38 billion in receivables through both
private placement and the public market. A second master trust securitization
program allows for the transfer of up to $1.75 billion in receivables related to
the operation's bankcard programs. Securitized receivables totaled $2.76 billion
at February 28, 1999. Under the securitization programs, receivables are sold to
an unaffiliated third party with the servicing retained. Management expects that
both securitization programs can be expanded to accommodate future receivables
growth.
Late in fiscal 1997, Circuit City Stores, Inc. raised a net of $412.3
million through the initial public offering of 21.86 million shares of newly
created CarMax Group Common Stock. At the end of fiscal 1999, the Circuit City
Group retained a 76.6 percent interest in the equity of the CarMax Group. As of
February 28, 1999, the Circuit City Group's equity in the CarMax Group was
$260.8 million.
Management believes that proceeds from sales of property and equipment and
receivables, future increases in Circuit City Stores, Inc. debt allocated to the
Circuit City Group, equity issuances and cash generated by operations will be
sufficient to fund the capital expenditures and operations of the Circuit City
business. In fiscal 2000, the Group anticipates capital expenditures of
approximately $265 million, primarily related to the Circuit City business.
Management remains in discussions with potential financing partners for
Divx, but has not obtained any acceptable commitments to date. The Company has
provided guarantees relating to licensing agreements with motion picture
distributors for use of their films by the Divx system. The licensing fees are
based on varying percentages of consumer viewing and wholesale receipts and
require minimum distributor compensation commencing from the operational date of
each agreement through the following one to five years.
MARKET RISK
The Company manages the private-label and bankcard revolving loan portfolios of
the Group's finance operation. Portions of these portfolios are securitized and,
therefore, are not presented on the Group's balance sheet. Interest rate
exposure relating to these receivables represents a market risk exposure that
the Company has managed with matched funding and interest rate swaps.
Interest rates charged on the managed private-label and bankcard portfolios
are primarily indexed to the prime rate, adjustable on a monthly basis, with the
balance at a fixed annual percentage rate. Total principal outstanding at
February 28 had the following APR structure:
(Amounts in millions) 1999 1998
- -------------------------------------------------------------
Indexed to prime rate.................... $2,714 $2,523
Fixed APR................................ 243 227
------------------
Total.................................... $2,957 $2,750
------------------
Financing for the securitization programs is achieved primarily through the
issuance of public market debt, which is issued either at floating rates based
on LIBOR or at fixed rates. Certain of the fixed-rate issuances have been
swapped to LIBOR. Receivables held by the Company for investment or sale are
financed with working capital. At February 28, financings were as follows:
(Amounts in millions) 1999 1998
- -------------------------------------------------------------
Floating-rate (including synthetic
alteration) securitizations........... $2,568 $2,211
Fixed-rate securitizations............... 187 290
Held by the Company:
For investment........................ 162 204
For sale.............................. 40 45
------------------
Total.................................... $2,957 $2,750
------------------
The Company has analyzed its interest rate exposure and has concluded that
it did not represent a material market risk at February 28, 1999 or 1998.
Because programs are in place to manage interest rate exposure relating to the
consumer loan portfolios, the Company expects to experience relatively little
impact as interest rates fluctuate in the future. The Company also has the
ability to adjust fixed-APR revolving cards and the index on floating-rate
cards, subject to cardholder ratification, but does not currently anticipate the
need to do so.
YEAR 2000 CONVERSION
Refer to the "Circuit City Stores, Inc. Management's Discussion and Analysis of
Results of Operations and Financial Condition" for a discussion of the Year 2000
issue and its impact on the Group's financial statements.
FORWARD-LOOKING STATEMENTS
Company statements that are not historical facts, including statements about
management's expectations for fiscal year 2000 and beyond, are forward-looking
statements and involve various risks and uncertainties. Refer to the "Circuit
City Stores, Inc. Management's Discussion and Analysis of Results of Operations
and Financial Condition" for a review of possible risks and uncertainties.
49
<PAGE>
CIRCUIT CITY GROUP STATEMENTS OF EARNINGS
<TABLE>
<S> <C>
Years Ended February 28
(Amounts in thousands except per share data) 1999 % 1998 % 1997 %
- ------------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES..............................$9,338,149 100.0 $7,996,591 100.0 $7,153,562 100.0
Cost of sales, buying and warehousing......................... 7,065,396 75.7 6,026,434 75.4 5,435,923 76.0
----------------------------------------------------------------
GROSS PROFIT.................................................. 2,272,753 24.3 1,970,157 24.6 1,717,639 24.0
----------------------------------------------------------------
Selling, general and administrative
expenses [NOTES 3 AND 11].................................. 1,981,755 21.2 1,720,737 21.5 1,458,183 20.4
Interest expense [NOTES 3 AND 5].............................. 21,926 0.2 25,072 0.3 23,503 0.3
----------------------------------------------------------------
TOTAL EXPENSES................................................ 2,003,681 21.4 1,745,809 21.8 1,481,686 20.7
----------------------------------------------------------------
Earnings before income taxes and Inter-Group
Interest in the CarMax Group............................... 269,072 2.9 224,348 2.8 235,953 3.3
Provision for income taxes [NOTES 3 AND 6].................... 102,634 1.1 85,814 1.1 90,221 1.3
----------------------------------------------------------------
EARNINGS BEFORE INTER-GROUP INTEREST
IN THE CARMAX GROUP........................................ 166,438 1.8 138,534 1.7 145,732 2.0
Net loss related to Inter-Group Interest in the
CarMax Group [NOTES 1 AND 2]............................... 18,057 0.2 26,460 0.3 9,052 0.1
----------------------------------------------------------------
NET EARNINGS.................................................. $148,381 1.6 $112,074 1.4 $136,680 1.9
----------------------------------------------------------------
Weighted average common shares [NOTES 2 AND 8]:
Basic...................................................... 99,152 98,027 97,311
---------- ---------- ----------
Diluted.................................................... 100,406 99,204 98,472
---------- ---------- ----------
NET EARNINGS PER SHARE [NOTES 2 AND 8]:
Basic...................................................... $1.50 $1.14 $1.40
---------- ---------- ----------
Diluted.................................................... $1.48 $1.13 $1.39
---------- ---------- ----------
See accompanying notes to group financial statements.
50
<PAGE>
CIRCUIT CITY GROUP BALANCE SHEETS
At February 28
(Amounts in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $248,201 $90,200
Net accounts receivable [NOTE 12]....................................................... 476,952 537,169
Merchandise inventory................................................................... 1,292,215 1,266,575
Prepaid expenses and other current assets............................................... 36,024 19,798
----------------------------------
TOTAL CURRENT ASSETS.................................................................... 2,053,392 1,913,742
Property and equipment, net [NOTES 4 AND 5]............................................. 801,827 834,347
Inter-Group Interest in the CarMax Group [NOTE 2]....................................... 260,758 278,239
Other assets............................................................................ 18,849 35,290
----------------------------------
TOTAL ASSETS............................................................................ $3,134,826 $3,061,618
----------------------------------
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTES 5 AND 10]................................. $1,457 $1,301
Accounts payable........................................................................ 739,895 714,171
Short-term debt [NOTE 5]................................................................ 3,411 5,591
Accrued expenses and other current liabilities.......................................... 135,029 129,198
Deferred income taxes [NOTE 6].......................................................... 2,090 -
----------------------------------
TOTAL CURRENT LIABILITIES............................................................... 881,882 850,261
Long-term debt, excluding current installments [NOTES 5 AND 10]......................... 286,865 396,906
Deferred revenue and other liabilities.................................................. 107,070 139,841
Deferred income taxes [NOTE 6].......................................................... 33,536 26,278
----------------------------------
TOTAL LIABILITIES....................................................................... 1,309,353 1,413,286
GROUP EQUITY............................................................................ 1,825,473 1,648,332
----------------------------------
Commitments and contingent liabilities [NOTES 1, 9, 10, 12, 14 AND 15]
TOTAL LIABILITIES AND GROUP EQUITY...................................................... $3,134,826 $3,061,618
----------------------------------
See accompanying notes to group financial statements.
51
<PAGE>
CIRCUIT CITY GROUP STATEMENTS OF CASH FLOWS
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings............................................................ $148,381 $112,074 $136,680
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net loss related to Inter-Group Interest in the CarMax Group......... 18,057 26,460 9,052
Depreciation and amortization........................................ 130,290 111,749 97,313
Loss (gain) on sales of property and equipment....................... 3,087 2,593 (1,540)
Provision for deferred income taxes.................................. 9,348 16,919 19,307
Decrease in deferred revenue and other liabilities................... (32,771) (23,859) (48,863)
Decrease (increase) in net accounts receivable....................... 60,217 (33,545) (195,791)
(Increase) decrease in merchandise inventory, prepaid expenses
and other current assets.......................................... (41,866) 34,441 (42,676)
Decrease (increase) in other assets.................................. 9,941 (5,032) (14,178)
Increase in accounts payable, accrued expenses and
other current liabilities......................................... 31,555 38,907 80,373
------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................... 336,239 280,707 39,677
------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (228,672) (353,800) (451,561)
Proceeds from sales of property and equipment........................... 134,315 199,028 316,276
------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................... (94,357) (154,772) (135,285)
------------------------------------------------
FINANCING ACTIVITIES:
(Decrease) increase in allocated short-term debt, net................... (2,180) 5,244 (73,690)
(Decrease) increase in inter-group payable.............................. - (48,147) 48,147
(Decrease) increase in allocated long-term debt, net.................... (109,885) (33,573) 109,702
Equity issuances, net................................................... 42,165 22,311 15,385
Dividends paid.......................................................... (13,981) (13,792) (13,199)
------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES..................... (83,881) (67,957) 86,345
------------------------------------------------
Increase (decrease) in cash and cash equivalents........................... 158,001 57,978 (9,263)
Cash and cash equivalents at beginning of year............................. 90,200 32,222 41,485
------------------------------------------------
Cash and cash equivalents at end of year................................... $248,201 $90,200 $32,222
------------------------------------------------
See accompanying notes to group financial statements.
52
<PAGE>
CIRCUIT CITY GROUP STATEMENTS OF GROUP EQUITY
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1996.......................................................................................... $1,063,921
----------
Net earnings................................................................................................... 136,680
Equity issuances, net.......................................................................................... 15,385
Cash dividends................................................................................................. (13,199)
Inter-Group Interest adjustment resulting from the offering [NOTE 2]........................................... 323,910
----------
BALANCE AT FEBRUARY 28, 1997...................................................................................... 1,526,697
----------
Net earnings................................................................................................... 112,074
Equity issuances, net.......................................................................................... 22,311
Cash dividends................................................................................................. (13,792)
Inter-Group Interest adjustment [NOTE 2]....................................................................... 1,042
----------
BALANCE AT FEBRUARY 28, 1998...................................................................................... 1,648,332
----------
Net earnings................................................................................................... 148,381
Equity issuances, net.......................................................................................... 42,165
Cash dividends................................................................................................. (13,981)
Inter-Group Interest adjustment [NOTE 2]....................................................................... 576
----------
BALANCE AT FEBRUARY 28, 1999...................................................................................... $1,825,473
----------
See accompanying notes to group financial statements.
53
</TABLE>
NOTES TO CIRCUIT CITY GROUP FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On January 24, 1997, shareholders of Circuit City Stores, Inc. and its
subsidiaries approved the creation of two common stock series. The Company's
existing common stock was subsequently redesignated as Circuit City Stores,
Inc.-Circuit City Group Common Stock. In an initial public offering, which was
completed February 7, 1997, the Company sold 21.86 million shares of Circuit
City Stores, Inc.-CarMax Group Common Stock.
The Circuit City Group Common Stock is intended to track the performance of
the Circuit City store-related operations, the Company's investment in Digital
Video Express and the Group's retained interest in the CarMax Group. The effects
of this retained interest on the Circuit City Group's financial statements are
identified by the term "Inter-Group." The CarMax Group Common Stock is intended
to track the performance of the CarMax operations. The Inter-Group Interest is
not considered outstanding CarMax Stock. Therefore, any net earnings or loss
attributed to the Inter-Group Interest is not included in the CarMax Group's per
share calculations. The Circuit City Group held a 76.6 percent interest in the
CarMax Group at February 28, 1999, a 77.3 percent interest at February 28, 1998,
and a 77.5 percent interest at February 28, 1997.
The Circuit City Group financial statements give effect to the management
and allocation policies adopted by the board of directors as described under
"Corporate Activities." The Circuit City Group financial statements have been
prepared on a basis that management believes to be reasonable and appropriate
and include (i) the historical financial position, results of operations and
cash flows of the Circuit City Group, (ii) an allocated portion of the Company's
cash equivalents and debt, including the related effects upon results of
operations and cash flows, (iii) an allocated portion of the Company's corporate
general and administrative costs and (iv) the Inter-Group Interest held by the
Circuit City Group in the CarMax Group.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the Circuit
City Group and the CarMax Group for the purposes of preparing their respective
financial statements, holders of Circuit City Stock and holders of CarMax Stock
are shareholders of the Company and continue to be subject to all of the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. Such attribution and the change in the equity structure of the
Company does not affect title to the assets or responsibility for the
liabilities of the Company or any of its subsidiaries. The results of operations
or financial condition of one Group could affect the results of operations or
financial condition of the other Group. Accordingly, the Circuit City Group
financial statements included herein should be read in conjunction with the
Company's consolidated financial statements and the CarMax Group financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS: Allocated cash equivalents of $201,379,000 at
February 28, 1999, and $55,215,000 at February 28, 1998, consist of highly
liquid debt securities with original maturities of three months or less.
(B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: The Company adopted Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," effective
January 1, 1997. For transfers that qualify as sales, the Company recognizes
gains or losses as a component of the Company's finance operations. For
transfers of financial assets to qualify for sale accounting, control over the
assets must be surrendered at the time of sale. Multiple estimates are used to
calculate the gain or loss on sales of receivables under SFAS No. 125. Finance
charge income, default rates and payment rates are estimated using projections
developed from the prior 12 months of operating history. These estimates are
adjusted for any industry or portfolio trends that have been observed. The
resulting cash flow projections are present valued at a discount rate
appropriate for the type of asset and risk. Retained interests (such as residual
interests in a securitization trust, cash reserve accounts and rights to future
interest from serviced assets that exceed contractually specified servicing
fees) are included in net accounts receivable and are carried at fair value with
changes in fair value reflected in earnings. Loan receivables held for sale are
carried at the lower of cost or market, whereas loan receivables held for
investment are carried at cost less an allowance for losses. At February 28,
1999 and 1998, cost approximates fair value.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company enters into financial
instruments on behalf of the Circuit City Group. The carrying value of the
Circuit City Group's financial instruments, excluding interest rate swaps held
for hedging purposes, approximates fair value. Credit risk is the exposure to
the potential nonperformance of another material party to an agreement due to
changes in economic, industry or geographic factors and is mitigated by dealing
only with counterparties that are highly rated by several financial rating
agencies. Accordingly, the Circuit City Group does not anticipate material loss
for nonperformance. All financial instruments are broadly diversified along
industry, product and geographic areas.
(D) MERCHANDISE INVENTORY: Inventory is stated at the lower of cost or market.
Cost is determined by the average cost method.
(E) PREPAID ROYALTIES AND EXECUTION FEES: Prepaid royalties represent fixed
minimum advance payments made to licensors for digital video disc distribution
rights. Divx retains a licensor's share of distribution revenues until the share
equals the advance paid to the licensor. Thereafter, any excess distribution
revenue is paid to the licensor. Prepaid royalties are charged to operations as
revenues are earned. Execution fees are one-time payments made to licensors at
the time the related licensing agreements are executed and are amortized over
the shorter of the initial terms of the licensing agreements or five years. Both
the prepaid royalties and execution fees are stated at the lower of amortized
cost or estimated net realizable value on a license-agreement basis.
(F) PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the assets' estimated useful
lives.
54
Property held under capital lease is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or market
value and is amortized on a straight-line basis over the lease term or the
estimated useful life of the asset, whichever is shorter.
(G) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the Company adopted the
American Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." 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 capitalized.
Amounts capitalized are amortized on a straight-line basis over a period of
three to five years.
(H) PRE-OPENING EXPENSES: Expenses associated with the opening of new stores are
deferred and amortized ratably over the period from the date of the store
opening to the end of the fiscal year.
(I) INCOME TAXES: Income taxes are accounted for in accordance with SFAS No.
109, "Accounting for Income Taxes." Deferred income taxes reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and the amounts recognized for income tax
purposes, measured by applying currently enacted tax laws. A deferred tax asset
is recognized if it is more likely than not that a benefit will be realized.
(J) DEFERRED REVENUE: The Circuit City Group sells its own extended warranty
contracts and extended warranty contracts on behalf of unrelated third parties.
The contracts extend beyond the normal manufacturer's warranty period, usually
with terms (including the manufacturer's warranty period) between 12 and 60
months. All revenue from the sale of the Circuit City Group's own extended
warranty contracts is deferred and amortized on a straight-line basis over the
life of the contracts. Incremental direct costs related to the sale of contracts
are deferred and charged to expense in proportion to the revenue recognized.
Commission revenue for the unrelated third-party extended warranty plans is
recognized at the time of sale.
(K) INTER-GROUP INTEREST: Prior to the offering, the Circuit City Group held a
100 percent Inter-Group Interest in the CarMax Group. The Circuit City Group
held a 76.6 percent Inter-Group Interest in the CarMax Group at February 28,
1999, a 77.3 percent Inter-Group Interest at February 28, 1998, and a 77.5
percent Inter-Group Interest at February 28, 1997. For purposes of these group
financial statements, the Circuit City Group accounts for the Inter-Group
Interest in a manner similar to the equity method of accounting. Accordingly,
the Circuit City Group's Inter-Group Interest in the Company's equity value that
is attributed to the CarMax Group is reflected as "Inter-Group Interest in the
CarMax Group" on the Circuit City Group balance sheets. Similarly, the net
losses of the CarMax Group attributed to the Circuit City Group's Inter-Group
Interest are reflected as "Net loss related to Inter-Group Interest in the
CarMax Group" on the Circuit City Group statements of earnings. All amounts
corresponding to the Circuit City Group's Inter-Group Interest in the CarMax
Group in these group financial statements represent the Circuit City Group's
proportional interest in the businesses, assets and liabilities and income and
expenses of the CarMax Group.
The carrying value of the Circuit City Group's Inter-Group Interest in the
CarMax Group has been decreased proportionally for the net loss of the CarMax
Group. In addition, in the event of any dividend or other distribution on CarMax
Stock, an amount that is proportionate to the aggregate amount paid in respect
to shares of CarMax Stock would be transferred to the Circuit City Group from
the CarMax Group with respect to its Inter-Group Interest and would reduce the
related book value.
(L) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating profits generated by
the finance operation are recorded as a reduction to selling, general and
administrative expenses.
(M) ADVERTISING EXPENSES: All advertising costs are expensed as incurred.
(N) NET EARNINGS PER SHARE: On December 15, 1997, the Company adopted SFAS No.
128, "Earnings per Share." All prior period earnings per share data presented
has been restated to conform with the provisions of SFAS No. 128.
Basic net earnings per share is computed by dividing net earnings
attributed to Circuit City Stock, including the Circuit City Group's 100 percent
interest in the losses of the CarMax Group for periods prior to the offering and
the Circuit City Group's retained interest in the CarMax Group subsequent to the
offering, by the weighted average number of common shares outstanding. Diluted
net earnings per share is computed by dividing net earnings attributed to
Circuit City Stock, which includes the Circuit City Group's retained interest in
CarMax, by the weighted average number of common shares outstanding and dilutive
potential common shares.
(O) STOCK-BASED COMPENSATION: On March 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue applying the provisions of the Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and to provide the pro forma
disclosures of SFAS No. 123.
(P) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into interest rate swap
agreements to manage exposure to interest rates and to more closely match
funding costs to the use of funding. Interest rate swaps relating to long-term
debt are classified as held for purposes other than trading and are accounted
for on a settlement basis. To qualify for this accounting treatment, the swap
must synthetically alter the nature of a designated underlying financial
instrument. Under this method, payments or receipts due or owed under the swap
agreement are accrued through each settlement date and recorded as a component
of interest expense. If a swap designated as a synthetic alteration were to be
terminated, any gain or loss on the termination would be deferred and recognized
over the shorter of the original contractual life of the swap or the related
life of the designated long-term debt.
The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller as part of a sale
of financial assets are considered proceeds at fair value in the determination
of the gain or loss on the sale. If
55
such a swap were terminated, the impact on the fair value of the financial asset
created by the sale of the related receivables would be estimated and included
in earnings.
(Q) RISKS AND UNCERTAINTIES: Circuit City is a leading national retailer of
brand-name consumer electronics, personal computers, major appliances and
entertainment software. The diversity of Circuit City's products, customers,
suppliers and geographic operations significantly reduces the risk that a severe
impact will occur in the near term as a result of changes in its customer base,
competition, sources of supply or markets. It is unlikely that any one event
would have a severe impact on Circuit City's operating results.
Because of the Company's investment in Divx, the Circuit City Group is
subject to additional risks and uncertainties. Divx was formed to develop and
launch an enhancement for DVD players that provides significant copyright
protection for movies released on Divx digital discs and sets a new standard for
home video convenience. While management believes this product will gain
widespread acceptance, there is no assurance that Divx ever will achieve
significant sales of such product. Other risks include limited operating
history, no assurance of successful operations, early state of market
development, acquiring and maintaining licensing and manufacturing agreements,
minimum compensation requirements under studio license agreements, competition
from substitute products and services, rapid technological change, dependence on
key personnel and vendors, development or assertions by or against Divx relating
to intellectual property rights, and the uncertainty of availability of
additional financing.
Because of the Inter-Group Interest, the Circuit City Group also is subject
to risks and uncertainties related to the CarMax Group. The diversity of the
CarMax Group's customers and suppliers reduces the risk that a severe impact
will occur in the near term as a result of changes in its customer base or
sources of supply. However, due to the CarMax Group's limited overall size,
management cannot assure that unanticipated events will not have a negative
impact on the Circuit City Group.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
(R) RECLASSIFICATIONS: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 1999.
3. CORPORATE ACTIVITIES
The Circuit City Group's financial statements reflect the application of the
management and allocation policies adopted by the board of directors to various
corporate activities, as described below:
(A) FINANCIAL ACTIVITIES: Most financial activities are managed by the Company
on a centralized basis. Such financial activities include the investment of
surplus cash and the issuance and repayment of short-term and long-term debt.
Allocated invested surplus cash of the Circuit City Group consists of (i)
Company cash equivalents, if any, that have been allocated in their entirety to
the Circuit City Group and (ii) a portion of the Company's cash equivalents that
are allocated between the Groups. Allocated debt of the Circuit City Group
consists of (i) Company debt, if any, that has been allocated in its entirety to
the Circuit City Group and (ii) a portion of the Company's pooled debt, which is
debt allocated between the Groups. The pooled debt bears interest at a rate
based on the average pooled debt balance. Expenses related to increases in
pooled debt are reflected in the weighted average interest rate of such pooled
debt as a whole.
(B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporate general and
administrative costs and other shared services generally have been allocated to
the Circuit City Group based upon utilization of such services by the Group.
Where determinations based on utilization alone have been impractical, other
methods and criteria were used that management believes are equitable and
provide a reasonable estimate of the costs attributable to the Group.
(C) INCOME TAXES: The Circuit City Group is included in the consolidated federal
income tax return and certain state tax returns filed by the Company.
Accordingly, the provision for federal income taxes and related payments of tax
are determined on a consolidated basis. The financial statement provision and
the related tax payments or refunds are reflected in each Group's financial
statements in accordance with the Company's tax allocation policy for such
Groups. In general, this policy provides that the consolidated tax provision and
related tax payments or refunds will be allocated between the Groups based
principally upon the financial income, taxable income, credits and other amounts
directly related to the respective Group. Tax benefits that cannot be used by
the Group generating such attributes, but can be utilized on a consolidated
basis, are allocated to the Group that generated such benefits. As a result, the
allocated Group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the Groups had filed separate
tax returns.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 28 is summarized as follows:
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------
Land and buildings (20 to 25 years).. $59,823 $109,115
Construction in progress............. 103,309 97,980
Furniture, fixtures and equipment
(3 to 8 years).................... 654,156 584,110
Leasehold improvements
(10 to 15 years).................. 534,015 478,679
Capital leases, primarily buildings
(20 years)........................ 12,471 12,471
---------------------
1,363,774 1,282,355
Less accumulated depreciation and
amortization...................... 561,947 448,008
---------------------
Property and equipment, net.......... $801,827 $834,347
---------------------
56
<PAGE>
5. DEBT
Long-term debt of the Company at February 28 is summarized as follows:
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------
Term loans............................... $405,000 $405,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest ranging
from 5.0% to 7.0%..................... 6,564 7,665
Obligations under capital leases [NOTE 10] 12,728 12,928
Note payable............................. 5,000 -
------------------
Total long-term debt..................... 429,292 425,593
Less current installments................ 2,707 1,301
------------------
Long-term debt, excluding
current installments.................. $426,585 $424,292
------------------
Portion of long-term debt allocated
to the Circuit City Group............. $288,322 $398,207
------------------
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. The loan was restructured in August 1996 as a
$100,000,000, six-year unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 1999, the interest rate on the term loan was 5.76 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1999, the interest rate
on the term loan was 5.67 percent.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1999, the interest rate
on the term loan was 5.29 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving
credit agreement with four banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.13 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2002. No amounts were outstanding under the revolving credit
agreement at February 28, 1999 or 1998.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$10,740,000 at February 28, 1999, and $10,879,000 at February 28, 1998.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 1999 and 1998.
Short-term debt of the Company is funded through committed lines of credit
and informal credit arrangements, as well as the revolving credit agreement.
Amounts outstanding and committed lines of credit available are as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998
- ----------------------------------------------------------------
Average short-term debt outstanding...... $54,505 $48,254
------------------
Maximum short-term debt outstanding...... $463,000 $414,000
------------------
Aggregate committed lines of credit...... $370,000 $410,000
------------------
The weighted average interest rate on the outstanding short-term debt was
5.1 percent during fiscal 1999, 5.7 percent during fiscal 1998 and 5.4 percent
during fiscal 1997.
Interest expense allocated by the Company to the Circuit City Group,
excluding interest capitalized, was $21,926,000 in fiscal 1999, $25,072,000 in
fiscal 1998 and $23,503,000 in fiscal 1997. The Circuit City Group capitalizes
interest in connection with the construction of certain facilities and software
developed or obtained for internal use. In fiscal 1999, interest capitalized
amounted to $2,749,000 ($4,759,000 in fiscal 1998 and $6,072,000 in fiscal
1997).
<PAGE>
6. INCOME TAXES
The components of the provision for income taxes on earnings before income taxes
and Inter-Group Interest in the CarMax Group are as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- -------------------------------------------------------------
Current:
Federal....................... $82,907 $63,576 $62,649
State......................... 10,379 5,319 8,265
--------------------------
93,286 68,895 70,914
--------------------------
Deferred:
Federal....................... 9,068 14,060 18,150
State......................... 280 2,859 1,157
--------------------------
9,348 16,919 19,307
--------------------------
Provision for income taxes....... $102,634 $85,814 $90,221
--------------------------
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
Years Ended February 28
1999 1998 1997
-----------------------
Federal statutory income
tax rate...................... 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit........ 3.1 3.3 3.2
----------------------
Effective income tax rate........ 38.1% 38.3% 38.2%
----------------------
57
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 28, 1999 and 1998 are as follows:
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------
Deferred tax assets:
Deferred revenue........................ $8,202 $1,129
Inventory capitalization................ 7,198 7,783
Accrued expenses........................ 24,110 36,448
Other................................... 5,246 3,638
----------------
Total gross deferred tax assets...... 44,756 48,998
----------------
Deferred tax liabilities:
Depreciation and amortization........... 43,600 43,630
Gain on sales of receivables............ 10,337 9,489
Other prepaid expenses.................. 12,062 10,569
Other................................... 14,383 11,588
----------------
Total gross deferred tax liabilities. 80,382 75,276
----------------
Net deferred tax liability................. $35,626 $26,278
----------------
Based on the Company's historical and current pretax earnings, management
believes the amount of gross deferred tax assets will be realized through future
taxable income; therefore, no valuation allowance is necessary.
7. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) PREFERRED STOCK: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of Circuit City Stock. The
rights are exercisable only upon the attainment of, or the commencement of a
tender offer to attain, a specified ownership interest in the Company by a
person or group. When exercisable, each Circuit City Group right would entitle
shareholders to buy one four-hundredth of a share of Cumulative Participating
Preferred Stock, Series E, $20 par value, at an exercise price of $250 per share
subject to adjustment. A total of 500,000 shares of such preferred stock, which
have preferential dividend and liquidation rights, have been designated. No such
shares are outstanding. In the event that an acquiring person or group acquires
the specified ownership percentage of the Company's common stock (except
pursuant to a cash tender offer for all outstanding shares determined to be fair
by the board of directors) or engages in certain transactions with the Company
after the rights become exercisable, each right will be converted into a right
to purchase, for half the current market price at that time, shares of the
related Group stock valued at two times the exercise price.
<PAGE>
The Company also has 1,000,000 shares of undesignated preferred stock
authorized of which no shares are outstanding and an additional 500,000 shares
of preferred stock designated as Series F which are related to similar rights
held by CarMax Group shareholders.
(B) VOTING RIGHTS: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters on which
common shareholders generally are entitled to vote other than a matter on which
the common stock or either series thereof or any series of preferred stock would
be entitled to vote as a separate voting group. On all matters on which both
series of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes based on the
weighted average ratio of the market value of a share of CarMax Stock to a share
of Circuit City Stock. If shares of only one series of common stock are
outstanding, each share of that series shall be entitled to one vote. If either
series of common stock is entitled to vote as a separate voting group with
respect to any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
(C) RESTRICTED STOCK: The Company has issued restricted stock under the
provisions of the 1994 Stock Incentive Plan whereby management and key employees
are granted restricted shares of Circuit City Stock. Shares are awarded in the
name of the employee, who has all the rights of a stockholder, subject to
certain restrictions or forfeitures. Restrictions on the awards generally expire
three to seven years from the date of grant. In fiscal 1999, certain members of
management of the Circuit City Group were granted 131,350 restricted shares of
Circuit City Stock that vest seven years from the date of grant. These awards
provide accelerated vesting if certain performance factors are met. Total
restricted stock awards of 360,346 shares of Circuit City Stock were granted to
eligible employees in fiscal 1999. The market value at the date of grant of
these shares has been recorded as unearned compensation and is a component of
group equity. Unearned compensation is expensed over the restriction periods. In
fiscal 1999, a total of $8,741,100 was charged to operations ($4,995,400 in
fiscal 1998 and $3,790,200 in fiscal 1997). As of February 28, 1999, 966,053
restricted shares of Circuit City Stock were outstanding.
(D) EMPLOYEE STOCK PURCHASE PLAN: The Company has Employee Stock Purchase Plans
for all employees meeting certain eligibility criteria. Under the Circuit City
Plan, eligible employees may purchase shares of Circuit City Stock, subject to
certain limitations, at 85 percent of market value. Purchases are limited to 10
percent of an employee's eligible compensation, up to a maximum of $7,500 per
year. At February 28, 1999, a total of 683,015 shares remained available under
the Circuit City Plan. During fiscal 1999, 429,355 shares were issued to or
purchased on the open market for employees (450,698 shares in fiscal 1998 and
499,338 in fiscal 1997). The average price per share was $43.38 in fiscal 1999,
$36.78 in fiscal 1998 and $32.68 in fiscal 1997. The purchase price discount is
charged to Circuit City Group operations and totaled $2,716,400 in fiscal 1999,
$2,509,500 in fiscal 1998 and $2,433,600 in fiscal 1997.
(E) STOCK INCENTIVE PLANS: Under the Company's stock incentive plans, incentive
and nonqualified stock options may be granted to management, key employees and
outside directors to purchase shares of Circuit City Stock. The exercise price
for incentive stock options for employees and nonqualified options for outside
directors is equal to, or greater than, the market value at the date of grant;
for nonqualified options granted under the
58
1988 Plan for employees, it is at least 85 percent of the market value at the
date of grant (100 percent under the 1994 Plan). Options generally are
exercisable over a period of from one to 10 years from the date of grant.
<TABLE>
<S> <C>
TABLE 1 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year........ 4,994 $32.00 4,828 $29.76 3,563 $18.63
Granted................................. 540 42.33 726 35.21 2,159 43.38
Exercised............................... (1,004) 17.53 (483) 15.00 (786) 17.67
Cancelled............................... (83) 33.59 (77) 29.42 (108) 21.90
------ ----- -----
Outstanding at end of year.............. 4,447 $36.49 4,994 $32.00 4,828 $29.76
------ ----- -----
Options exercisable at end of year...... 1,483 $24.03 1,754 $19.68 1,629 $17.24
------ ----- -----
- -------------------------------------------------------------------------------------------------------------------------------
<PAGE>
TABLE 2 Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
$15.69 to 20.13.............................. 474 2.0 $18.34 474 $18.34
22.50 to 29.13.............................. 701 2.1 23.49 617 23.63
29.50 to 38.00.............................. 1,748 5.2 31.97 392 31.55
38.38 to 48.56.............................. 524 7.1 42.40 - -
59.00....................................... 1,000 3.1 59.00 - -
----- -----
Total........................................ 4,447 4.1 $36.49 1,483 $24.03
----- -----
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of the status of the Circuit City Group's stock options and
changes during the years ended February 28, 1999, 1998 and 1997 are shown in
Table 1. Table 2 summarizes information about stock options outstanding as of
February 28, 1999.
The Circuit City Group applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized. Had compensation cost been determined
based on the fair value at the grant date consistent with the methods of SFAS
No. 123, the Circuit City Group's net earnings and net earnings per share would
have been reduced to the pro forma amounts indicated in the next column. In
accordance with the transition provisions of SFAS No. 123, the pro forma amounts
reflect options with grant dates subsequent to March 1, 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net earnings amounts presented because
compensation cost is reflected over the options' vesting periods and
compensation cost of options granted prior to March 1, 1995, is not considered.
The pro forma effect on fiscal year 1999 may not be representative of the pro
forma effects on net earnings for future years.
(Amounts in thousands Years Ended February 28
except per share data) 1999 1998 1997
- -------------------------------------------------------------
Net earnings-as reported.... $148,381 $112,074 $136,680
Net earnings-pro forma...... 142,479 107,399 133,326
Basic net earnings per
share-as reported........ $1.50 $1.14 $1.40
Basic net earnings per
share-pro forma.......... 1.44 1.10 1.37
Diluted net earnings per
share-as reported........ $1.48 $1.13 $1.39
Diluted net earnings per
share-pro forma.......... 1.42 1.08 1.35
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model. The weighted average assumptions used in the
model are as follows:
1999 1998 1997
- ------------------------------------------------------------
Expected dividend yield........... 0.4% 0.4% 0.4%
Expected stock volatility......... 33% 33% 33%
Risk-free interest rates.......... 6% 6% 6%
Expected lives (in years)......... 5 4 4
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted for the Circuit City Group is $15 in fiscal 1999,
$13 in fiscal 1998 and $8 in fiscal 1997.
59
<PAGE>
8. NET EARNINGS PER SHARE
Reconciliations of the numerator and denominator of basic and diluted net
earnings per share are presented below:
(Amounts in thousands Years Ended February 28
except per share data) 1999 1998 1997
- -------------------------------------------------------------
Weighted average common
shares...................... 99,152 98,027 97,311
Dilutive potential common shares:
Options..................... 850 842 889
Restricted stock............ 404 335 272
----------------------------
Weighted average common shares
and dilutive potential
common shares............... 100,406 99,204 98,472
----------------------------
Income available to common
shareholders................ $148,381 $112,074 $136,680
----------------------------
Basic net earnings per share... $1.50 $1.14 $1.40
----------------------------
Diluted net earnings per share. $1.48 $1.13 $1.39
----------------------------
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 Stock at $59.00 per share were outstanding and not included in
the calculation at the end of fiscal 1999; 1,510,000 shares ranging from $35.47
to $59.00 per share at the end of fiscal 1998; and 1,076,000 shares ranging from
$32.25 to $59.00 per share at the end of fiscal 1997.
9. PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of
Circuit City Stock at February 28, 1999 and 1998.
Eligible employees of the Circuit City Group participate in the Company's
plan. Pension costs for these employees have been allocated to the Circuit City
Group based on its proportionate share of the projected benefit obligation. The
following tables set forth the Circuit City Group's share of the Plan's
financial status and amounts recognized in the balance sheets as of February 28:
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year........ $88,166 $70,055
Service cost................................... 10,479 8,365
Interest cost.................................. 6,135 5,221
Actuarial loss................................. 8,511 7,603
Benefits paid.................................. (3,290) (3,078)
------------------
Benefit obligation at end of year.............. $110,001 $88,166
------------------
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year.. $83,009 $62,033
Actual return on plan assets.................... 4,342 12,574
Employer contributions.......................... 10,064 11,480
Benefits paid................................... (3,290) (3,078)
-----------------
Fair value of plan assets at end of year........ $94,125 $83,009
-----------------
Reconciliation of funded status:
Funded status................................... $(15,876) $(5,157)
Unrecognized actuarial loss (gain).............. 8,657 (3,187)
Unrecognized transition asset................... (598) (797)
Unrecognized prior service benefit.............. (552) (656)
-----------------
Net amount recognized........................... $ (8,369) $(9,797)
------------------
<PAGE>
The components of net pension expense are as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------
Service cost.................................... $10,479 $8,365 $9,227
Interest cost................................... 6,135 5,221 4,667
Expected return on plan assets.................. (7,675) (5,060) (3,874)
Amortization of prior service cost.............. (104) (104) (104)
Amortization of transitional asset.............. (199) (199) (199)
Recognized actuarial loss....................... - - 1,223
--------------------------
Net pension expense............................. $ 8,636 $8,223 $10,940
--------------------------
Assumptions used in the accounting for the pension plan were:
Years Ended February 28
1999 1998 1997
- -------------------------------------------------------------------
Weighted average discount rate.............. 6.8% 7.0% 7.5%
Rate of increase in compensation levels..... 5.0% 5.0% 5.5%
Expected rate of return on plan assets...... 9.0% 9.0% 9.0%
-------------------
10. LEASE COMMITMENTS
The Circuit City Group conducts a substantial portion of its business in leased
premises. The Circuit City Group's lease obligations are based upon contractual
minimum rates. For certain locations, amounts in excess of these minimum rates
are payable based upon specified percentages of sales. Rental expense and
sublease income for all operating leases are summarized as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- ------------------------------------------------------------------
Minimum rentals..................... $273,185 $236,962 $178,599
Rentals based on sales volume....... 1,247 730 2,322
Sublease income..................... (14,857) (12,879) (11,121)
----------------------------
Net................................. $259,575 $224,813 $169,800
----------------------------
The Circuit City Group computes rent based on a percentage of sales volumes
in excess of defined amounts in certain store locations. Most of the Circuit
City Group's other leases are fixed-dollar rental commitments, with many
containing rent escalations based on the Consumer Price Index. Most provide that
the Circuit City Group pay taxes, maintenance, insurance and certain other
operating expenses applicable to the premises.
60
The initial term of most real property leases will expire within the next
25 years; however, most of the leases have options providing for additional
lease terms of five years to 25 years at terms similar to the initial terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Circuit City Group, as of February 28, 1999,
were:
Operating Operating
(Amounts in thousands) Capital Lease Sublease
Fiscal Leases Commitments Income
- -------------------------------------------------------------
2000......................... $1,662 $265,709 $(14,684)
2001......................... 1,681 263,649 (12,817)
2002......................... 1,725 260,494 (11,605)
2003......................... 1,726 256,873 (10,624)
2004......................... 1,768 254,586 (9,123)
After 2004................... 16,464 2,837,569 (55,144)
-----------------------------
Total minimum lease
payments.................. 25,026 $4,138,880 $(113,997)
---------------------
Less amounts representing
interest.................. 12,298
-------
Present value of net
minimum capital lease
payments [NOTE 5]......... $12,728
-------
In fiscal 1999, the Company entered into sale-leaseback transactions on
behalf of the Circuit City Group with unrelated parties at an aggregate selling
price of $103,750,000 ($120,670,000 in fiscal 1998 and $185,244,000 in fiscal
1997). Neither the Company nor the Circuit City Group has continuing involvement
under the sale-leaseback transactions.
<PAGE>
11. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Advertising expense, which is included in selling, general and administrative
expenses in the accompanying statements of earnings, amounted to $417,619,000
(4.5 percent of net sales and operating revenues) in fiscal 1999, $370,725,000
(4.6 percent of net sales and operating revenues) in fiscal 1998 and
$342,777,000 (4.8 percent of net sales and operating revenues) in fiscal 1997.
12. SECURITIZATIONS
On behalf of the Circuit City Group, the Company enters into securitization
transactions, which allow for the sale of credit card receivables to unrelated
entities, to finance the consumer revolving credit receivables generated by its
wholly owned finance operation. Proceeds from securitization transactions were
$224.6 million for fiscal 1999, $331.4 million for fiscal 1998 and $551.1
million for fiscal 1997.
Receivables relating to the securitization facilities consist of the
following at February 28:
(Amounts in thousands) 1999 1998
- ------------------------------------------------------------
Managed receivables.............. $2,957,132 $2,749,793
Receivables/residual interests held
by the Circuit City Group:
For sale...................... (39,948) (44,622)
For investment................ (161,996) (203,921)
-------------------------
Net receivables sold............. $2,755,188 $2,501,250
-------------------------
Net receivables sold
with recourse................. $322,000 $726,000
-------------------------
Program capacity................. $3,127,000 $3,075,000
-------------------------
Private-label credit card receivables are financed through securitization
programs employing a master trust structure. As of February 28, 1999, this
securitization program had a capacity of $1.38 billion. The agreement has no
recourse provisions.
During fiscal 1998, a bank card master trust securitization facility was
established and issued two series from the trust. Provisions under the master
trust agreement provide recourse to the Company for any cash flow deficiencies
on $322 million of the receivables sold. The finance charges from the
transferred receivables are used to fund interest costs, charge-offs, servicing
fees and other related costs. The Company believes that as of February 28, 1999,
no liability existed under these recourse provisions. The bank card
securitization program has a total program capacity of $1.75 billion.
The net gain on sales of receivables totaled $2.3 million for fiscal 1999,
$21.8 million for fiscal 1998 and $3.2 million for fiscal 1997. The finance
operation's servicing revenue, including gains on sales of receivables, totaled
$200.6 million for fiscal 1999, $195.7 million for fiscal 1998 and $197.0
million for fiscal 1997. Rights recorded for future interest income from
serviced assets that exceed the contractually specified servicing fees are
carried at fair value and amounted to $27.3 million at February 28, 1999, $25.0
million at February 28, 1998, and $3.2 million at February 28, 1997, and are
included in net accounts receivable. The servicing fees specified in the credit
card securitization agreements adequately compensate the finance operation for
servicing the accounts. Accordingly, no servicing asset or liability has been
recorded.
In determining the fair value of retained interests, the Company estimates
future cash flows from finance charge collections, reduced by net defaults,
servicing cost, and interest cost. The Company employs a risk-based pricing
strategy that increases the stated annual percentage rate for accounts that have
a higher predicted risk of default. Accounts with a lower risk profile also may
qualify for promotional financing.
The private-label card programs, excluding promotional balances, range from
21 percent to 24 percent APR, with default rates varying based on portfolio
composition, but generally aggregating from 6 percent to 10 percent. Principal
payment rates vary widely both seasonally and by credit terms but are in the
range of 9 percent to 12 percent.
61
The bank card APRs are based on the prime rate and generally range from 7
percent to 22 percent, with default rates varying by portfolio composition, but
generally aggregating from 8 percent to 12 percent. Principal payment rates vary
widely both seasonally and by credit terms but are in the range of 5 percent to
8 percent.
Interest cost paid by the master trusts varies between series and ranges
from 5.0 percent to 6.3 percent.
13. OPERATING SEGMENT INFORMATION
The Circuit City Group conducts business in two operating segments: Circuit City
and Divx. These segments are identified and managed by the Group based on the
different products and services offered by each. Circuit City refers to the
retail operations bearing the Circuit City name and to all related operations
such as its finance operation. This segment is engaged in the business of
selling brand-name consumer electronics, personal computers, major appliances
and entertainment software. Divx primarily is engaged in the business of selling
specially encrypted DVD at wholesale. Financial information for these segments
for fiscal 1999, 1998 and 1997 are shown in Table 3.
14. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year interest rate swap
agreements with notional amounts totaling $300 million relating to a public
issuance of securities by the master trust. As part of this issuance, $344
million of five-year, fixed-rate certificates were issued to fund consumer
credit receivables. The finance operation is servicer for the accounts, and as
such, receives its monthly cash portfolio yield after deducting interest,
charge-offs and other related costs. The underlying receivables are based on a
floating rate. The swaps were put in place to better match funding costs to the
receivables being securitized. As a result, the master trust pays fixed-rate
interest, and the Company utilizes the swaps to convert the fixed-rate
obligation to a floating-rate, LIBOR-based obligation. These swaps were entered
into as part of the sales of receivables and are included in the gain on sales
of receivables.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year interest rate swaps with notional
amounts aggregating $175 million. These swaps effectively converted the
variable-rate obligation into a fixed-rate obligation. The fair value of the
swaps is the amount at which they could be settled. This value is based on
estimates obtained from the counterparties, which are two banks highly rated by
several financial rating agencies. The swaps are held for hedging purposes and
are not recorded at fair value. Recording the swaps at fair value at February
28, 1999, would result in a loss of $2.2 million and at February 28, 1998, would
result in a loss of $1.9 million.
<TABLE>
<S> <C>
TABLE 3
- -------------------------------------------------------------------------------------------------------------------------------
1999
Total
(Amounts in thousands) Circuit City Divx Elimination Segments
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers........................................ $9,335,298 $2,851 $- $9,338,149
Intersegment revenues................................................... 8,872 6,830 (15,702) -
Interest expense........................................................ 21,926 - - 21,926
Depreciation and amortization........................................... 119,724 10,566 - 130,290
Earnings (loss) before income taxes..................................... 379,630 (110,558) - 269,072
Provision for income taxes (income tax benefit)......................... 144,646 (42,012) - 102,634
Net earnings (loss)..................................................... 234,984 (68,546) - 166,438
Total assets............................................................ $2,813,635 $60,433 $- $2,874,068
1998
Total
(Amounts in thousands) Circuit City Divx Elimination Segments
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers........................................ $7,996,591 $ - $- $7,996,591
Interest expense........................................................ 25,072 - - 25,072
Depreciation and amortization........................................... 110,282 1,467 - 111,749
Earnings (loss) before income taxes..................................... 257,632 (33,284) - 224,348
Provision for income taxes (income tax benefit)......................... 98,462 (12,648) - 85,814
Net earnings (loss)..................................................... 159,170 (20,636) - 138,534
Total assets............................................................ $2,752,402 $30,977 $- $2,783,379
1997
Total
(Amounts in thousands) Circuit City Divx Elimination Segments
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers........................................ $7,153,562 $ - $- $7,153,562
Interest expense........................................................ 23,503 - - 23,503
Depreciation and amortization........................................... 97,006 307 - 97,313
Earnings (loss) before income taxes..................................... 248,567 (12,614) - 235,953
Provision for income taxes (income tax benefit)......................... 95,014 (4,793) - 90,221
Net earnings (loss)..................................................... 153,553 (7,821) - 145,732
Total assets............................................................ $2,699,907 $4,692 $- $2,704,599
</TABLE>
Net earnings (loss) and total assets for Circuit City exclude the Inter-Group
Interest in the CarMax Group.
62
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Company does not anticipate significant market risk from swaps, since their
use is to more closely match funding costs to the use of the funding. Credit
risk is the exposure to nonperformance of another party to an agreement. Credit
risk is mitigated by dealing with highly rated counterparties.
15. COMMITMENTS AND CONTINGENT LIABILITIES
(A) INVESTMENT IN DIVX: In May 1995, the Company agreed to invest $30.0 million
in Divx, a partnership that has developed and is marketing a new home digital
video system. That commitment was increased to $130.0 million in September 1997.
Although that commitment was fulfilled during fiscal 1999, the Company continues
to fund the operations of Divx as management continues to explore various
financing options. As of February 28, 1999, the Company owned approximately 75
percent of the partnership. The Company has been allocated 100 percent of the
losses since inception. The Company allocates its investment in Divx to the
Circuit City Group. As of February 28, 1999, the Company had funded
approximately $207 million for the operations of Divx.
(B) LICENSING AGREEMENTS: Divx has entered into licensing agreements with motion
picture distributors for use of their feature-length films for the Divx system.
The Company guarantees Divx's performance under these commitments. The licensing
fees are based on varying percentages of consumer viewing and wholesale receipts
and require minimum distributor compensation commencing from the operational
date of each agreement through the following one to five years. As of February
28, 1999, the minimum compensation due from Divx to the distributors is $101.0
million ($26.0 million in fiscal 2000, $32.0 million in fiscal 2001, $20.5
million in fiscal 2002, $14.5 million in fiscal 2003 and $8.0 million in fiscal
2004).
(C) LEGAL PROCEEDINGS: In the normal course of business, the Company is involved
in various legal proceedings. Based upon the Circuit City Group's evaluation of
the information presently available, management believes that the ultimate
resolution of any such proceedings will not have a material adverse effect on
the Circuit City Group's financial position, liquidity or results of operations.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<S> <C>
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales and operating
revenues..........$1,924,727 $1,679,350 $2,117,123 $1,814,139 $2,266,956 $1,917,133 $3,029,343 $2,585,969 $9,338,149 $7,996,591
-------------------------------------------------------------------------------------------------------------
Gross profit......... $464,618 $401,649 $525,470 $453,559 $552,345 $466,396 $730,320 $648,553 $2,272,753 $1,970,157
-------------------------------------------------------------------------------------------------------------
Earnings before Inter-Group
Interest in the CarMax
Group............. $15,748 $13,697 $34,427 $29,226 $21,575 $21,078 $94,688 $74,533 $166,438 $138,534
-------------------------------------------------------------------------------------------------------------
Net earnings......... $13,269 $12,749 $32,147 $27,879 $15,945 $14,012 $87,020 $57,434 $148,381 $112,074
-------------------------------------------------------------------------------------------------------------
Net earnings per share:
Basic............. $0.13 $0.13 $0.32 $0.28 $0.16 $0.14 $0.87 $0.58 $1.50 $1.14
-------------------------------------------------------------------------------------------------------------
Diluted........... $0.13 $0.13 $0.32 $0.28 $0.16 $0.14 $0.86 $0.58 $1.48 $1.13
-------------------------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the Circuit City Group (as
defined in Note 1) as of February 28, 1999 and 1998 and the related statements
of earnings, group equity and cash flows for each of the fiscal years in the
three-year period ended February 28, 1999. These financial statements are the
responsibility of Circuit City Stores, Inc.'s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully discussed in Note 1, the financial statements of the Circuit
City Group should be read in conjunction with the consolidated financial
statements of Circuit City Stores, Inc. and subsidiaries and the financial
statements of the CarMax Group.
The Circuit City Group has accounted for its interest in the CarMax Group
in a manner similar to the equity method of accounting. Generally accepted
accounting principles require that the CarMax Group be consolidated with the
Circuit City Group.
In our opinion, except for the effects of not consolidating the Circuit
City Group and the CarMax Group as discussed in the preceding paragraph, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Circuit City Group as of February 28, 1999 and
1998 and the results of its operations and its cash flows for each of the fiscal
years in the three-year period ended February 28, 1999 in conformity with
generally accepted accounting principles.
/s/KPMG LLP
Richmond, Virginia
April 2, 1999
63
<PAGE>
CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On January 24, 1997, shareholders of Circuit City Stores, Inc. approved the
creation of two common stock series. The Company's existing common stock was
subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common
Stock. In an initial public offering, which was completed February 7, 1997, the
Company sold 21.86 million shares of Circuit City Stores, Inc.-CarMax Group
Common Stock.
The Circuit City Group Common Stock is intended to track the performance of
the Circuit City store-related operations, the Company's investment in Digital
Video Express and the Group's retained interest in the CarMax Group. The effects
of this retained interest on the Circuit City Group's financial statements are
identified by the term "Inter-Group."
The CarMax Group Common Stock is intended to track the performance of the
CarMax operations. The Inter-Group Interest is not considered outstanding CarMax
Group stock. Therefore, any net earnings or loss attributed to the Inter-Group
Interest is not included in the CarMax Group's per share calculations.
The following discussion and analysis relates to the CarMax Group. Reported
losses attributed to the CarMax Group Common Stock reflect the Circuit City
Group's 100 percent interest prior to the consummation of the offering on
February 7, 1997, and the lower Inter-Group Interest since that time. For
additional information, refer to the "Management's Discussion and Analysis of
Results of Operations and Financial Condition" for Circuit City Stores, Inc. and
for the Circuit City Group.
RESULTS OF OPERATIONS
Sales Growth
Total sales for the CarMax Group increased 68 percent in fiscal 1999 to $1.47
billion. In fiscal 1998, total sales increased 71 percent to $874.2 million from
$510.3 million in fiscal 1997. The fiscal 1999 total sales growth reflects the
addition of 12 locations, three of which opened in the last week of the fiscal
year, and a 2 percent decrease in comparable store sales.
CarMax opened 10 used-car superstores in fiscal 1999. The Group
grand-opened the Chicago, Ill., market with three stores that opened early in
fiscal 1999 and one that opened late in fiscal 1998. The Group also entered San
Antonio, Texas; and Greenville, S.C.; and added stores in the Washington,
D.C./Baltimore, Md.; Tampa, Fla.; and Dallas/Ft. Worth, Texas, markets. The
Group also acquired franchise rights or was awarded new franchise points for six
new-car stores, including the nine-franchise Mauro Auto Mall in Kenosha, Wisc.
In November 1998, CarMax acquired the Toyota franchise rights and related assets
held by Laurel Automotive, Inc. in Laurel, Md. That franchise is being operated
from its existing location until a new location is completed next to the Laurel,
Md., superstore. In November, Mitsubishi Motor Sales of America granted CarMax
two new-car franchise points. These franchise points were integrated into the
Laurel, Md., and the Dulles, Va., locations. CarMax acquired the franchise
rights and related assets of Mauro Auto Mall, Inc. in early December 1998 and
renamed it the CarMax Auto Mall. In February 1999, CarMax acquired the franchise
rights and related assets held by Nissan of Greenville, Inc. The franchise was
integrated into the Greenville superstore which opened late that month. In
February 1999, CarMax also acquired the Mitsubishi franchise rights and related
assets of Boomershine Automotive, Inc. CarMax relocated this franchise to its
Town Center superstore in the Atlanta, Ga., market.
CarMax's fiscal 1999 comparable store sales reflect used-car sales that
were below expectations and continued strength in CarMax's new-car comparable
store sales. The disappointing used-car sales resulted from an intensely price
competitive new-car industry, with which CarMax must compete, and insufficient
customer traffic in a number of multi-store metropolitan markets. CarMax is
producing strong store-level returns in single-store markets and in the
multi-store Atlanta, Ga., and Washington, D.C./Baltimore, Md., markets.
In larger, metropolitan markets, CarMax has begun testing a hub/satellite
operating process. Under the hub/satellite process, a satellite store shares
reconditioning, purchasing and business office operations with a nearby hub
store. The consumer offer is identical in both the hub and satellite stores.
This process significantly reduced overhead and operating costs for existing
stores that were designated as satellite stores in fiscal 1999. Management
believes this operating concept will allow it to efficiently open more but
smaller stores in metropolitan markets. Prototypical satellite stores are
expected to be approximately 12,000 square feet on four- to six-acre sites.
CarMax opened one prototypical satellite store late in fiscal 1999. All other
fiscal 1999 satellite stores are larger stores and are therefore classified by
size, with "C" stores representing the largest store format, in the "Store Mix"
table below. Going forward, management expects primarily to open smaller format
"A" stores and satellite stores.
<PAGE>
STORE MIX
Retail Units at Year-End
------------------------
Fiscal 1999 1998 1997 1996 1995
- -------------------------------------------------------------
"C" and "B" Stores............ 12 10 4 1 -
"A" Store..................... 15 8 3 3 2
Prototype Satellite Store..... 1 - - - -
Stand-Alone New-Car Store..... 2 - - - -
-----------------------------
Total......................... 30 18 7 4 2
In fiscal 1999, two locations were reclassed from "B" stores to "A" stores.
FRANCHISES
New-Car Franchises
-------------------------------
Fiscal 1999 1998 1997 1996 1995
- -------------------------------------------------------------
Integrated New-Car Franchise.. 6 2 1 - -
Stand-Alone New-Car Franchise. 10 - - - -
-----------------------------
Total......................... 16 2 1 - -
-----------------------------
CarMax's fiscal 1998 sales growth reflects the addition of 11 locations,
two of which opened in the last week of the fiscal year, and a 6 percent
comparable store sales increase. The Group's used-car sales began to fall below
management's expectations during the second half of fiscal 1998. New-car sales
remained strong
64
throughout that fiscal year. In June 1997, CarMax acquired its second
Chrysler-Plymouth-Jeep franchise, which was relocated and opened in conjunction
with the opening of the CarMax superstore in Stockbridge, Ga.
The fiscal 1997 sales growth includes the addition of three stores and a 23
percent comparable store sales increase for the two locations classified as
comparable stores throughout the year and the two locations classified as
comparable stores for a portion of the year.
Extended warranty sales prior to July 1997 include third-party contracts
and CarMax's own extended warranty contracts. In most states, CarMax sells
warranties on behalf of an unrelated third party and has no contractual
liability to the customer under the warranty programs. In states where
third-party warranty sales are not permitted, CarMax has sold its own extended
warranty. CarMax expects to continue selling this warranty where state law
restricts third-party warranty sales. Gross dollar sales from all extended
warranty programs were 4.3 percent of the Group's total sales in fiscal 1999,
3.8 percent in fiscal 1998 and 3.5 percent in fiscal 1997. The fiscal 1999
increase reflects pricing adjustments and a higher penetration rate achieved by
extending warranty coverage to more vehicles. Total extended warranty revenue,
which is reported in the Group's total sales, was 2.0 percent of total sales in
fiscal 1999, 1.5 percent in fiscal 1998 and 1.2 percent in fiscal 1997.
Third-party extended warranty revenue was 1.9 percent of total sales in fiscal
1999, 1.4 percent in fiscal 1998 and 1.1 percent in fiscal 1997.
IMPACT OF INFLATION. Inflation has not been a significant contributor to the
Group's results. The Group's profitability is based on achieving specific gross
profit dollars per unit rather than on average retail prices. Because the
wholesale market generally adjusts to reflect retail price trends, management
believes that if the stores meet inventory turn objectives then changes in
average retail prices will have only a short-term impact on the Group's gross
margin and thus profitability.
Cost of Sales
The CarMax marketing concept includes a strong commitment to providing a high
level of consumer value. CarMax generally prices its used vehicles below retail
book value. New vehicles are priced to be competitive with the lowest available
price in the market. As a result, CarMax operates with lower gross profit
margins than industry averages. The gross profit margin was 11.7 percent in
fiscal 1999, 8.4 percent in fiscal 1998 and 8.5 percent in fiscal 1997. The
fiscal 1999 gross profit margin increase reflects the impact of a profit
improvement plan that was initiated at the end of fiscal 1998 and better
used-car inventory management. The profit improvement plan included the
elimination of centralized reconditioning, a variety of pricing adjustments and
the introduction of electronic accessory sales. Cost of sales includes vehicle
costs, reconditioning costs, transportation and related purchasing costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 13.9 percent of sales in
fiscal 1999, 14.6 percent of sales in fiscal 1998 and 10.4 percent of sales in
fiscal 1997. The fiscal 1999 selling, general and administrative expense ratio
reflects the costs associated with the expansion of CarMax superstores and the
below-plan sales in a number of multi-store metropolitan markets. Management
believes that sales generated by the addition of satellite stores and new-car
franchises to these underperforming markets and the lower operating cost of the
satellite stores will help improve the expense ratio.
The fiscal 1998 selling, general and administrative expense ratio primarily
reflects the costs associated with the CarMax expansion, the
lower-than-anticipated sales during the second half of that year and an $11.5
million write-down of assets associated with the closure and disposal of the
Group's centralized reconditioning facilities and excess property at some
locations. Excluding the write-down of assets, the selling, general and
administrative expense ratio would have been 13.3 percent of sales in fiscal
1998.
Profits generated by CarMax's finance operation and fees received for
arranging financing through third parties are recorded as a reduction to
selling, general and administrative expenses.
Interest Expense
Interest expense was 0.4 percent of sales in fiscal 1999, 0.2 percent of sales
in fiscal 1998 and 1.2 percent of sales in fiscal 1997. In fiscal 1999 and
fiscal 1997, interest expense primarily was incurred on allocated debt to fund
store expansion and working capital. In fiscal 1998, interest expense primarily
was incurred on an inter-group note used to finance inventory for much of the
year. The significant decrease in interest from fiscal 1997 to fiscal 1998
reflects the reduction in the Group's average debt, using funds raised through
the CarMax equity offering, which was completed late in fiscal 1997.
Pretax Losses
The CarMax Group produced a pretax loss of $38.5 million in fiscal 1999. The
fiscal 1999 loss exceeded management's expectations and reflects the
underperformance of stores, especially in several multi-store metropolitan
markets. The fiscal 1998 pretax loss, which includes the $11.5 million
write-down of assets, was $56.1 million. Excluding the write-down, the fiscal
1998 pretax loss was $44.6 million. The fiscal 1997 pretax loss was $15.9
million.
Income Taxes
The Group's effective income tax rate was 39.0 percent in fiscal years 1999 and
1998 compared with 41.5 percent in fiscal 1997. The CarMax Group generated
losses in all reported periods and as a result has recorded related income tax
benefits.
Net Losses
The fiscal 1999 net loss was $23.5 million. Including the write-down of assets,
the fiscal 1998 net loss was $34.2 million. Excluding the impact of the
write-down of assets, the net loss was $27.2 million. The fiscal 1997 net loss
was $9.3 million.
The net loss attributed to the CarMax Group Common Stock was $5.5 million,
or 24 cents per share, in fiscal 1999, compared with $7.8 million, or 35 cents
per share, in fiscal 1998. In fiscal 1997, for the period from the public
offering date to the end of the fiscal year, the net loss attributed to the
CarMax Group Common Stock was $266,000, or 1 cent per share.
65
Operations Outlook
Late in fiscal 1999, management announced that it would delay CarMax's entry
into the Los Angeles market until fiscal 2001 and focus on improving
profitability in existing markets. The single-store Nashville, Tenn., market
will likely be the Group's only new market in fiscal 2000. Instead, the company
expects to add satellite stores and new-car franchises into existing markets.
CarMax also continues to refine its marketing programs to increase consumer
awareness and build customer traffic for all locations, but especially those in
the underperforming markets. Management believes the fiscal 2000 growth plan
will allow CarMax to produce a modest loss or reach break-even in fiscal 2000.
In the following year, CarMax expects to enter the Los Angeles market with a
combination of its current "A" format stores and satellite stores.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the "Circuit City Stores, Inc. Management's Discussion and Analysis of
Results of Operations and Financial Condition" for a review of recent accounting
pronouncements.
FINANCIAL CONDITION
Net cash used in operating activities was $82.0 million in fiscal 1999, $86.1
million in fiscal 1998 and $25.4 million in fiscal 1997. The net cash used in
operations primarily reflects inventory to support store openings and additional
new-car franchises, net losses for all periods and an increase in net accounts
receivable, partly offset by an increase in accounts payable.
Most financial activities, including the investment of surplus cash and the
issuance and repayment of short-term and long-term debt, are managed by the
Company on a centralized basis. Investment of surplus cash from the equity
offering has been allocated to the CarMax Group. Allocated debt of the CarMax
Group consists of (1) Company debt, if any, that has been allocated in its
entirety to the CarMax Group and (2) a portion of the Company's debt that is
allocated between the Circuit City Group and the CarMax Group. This pooled debt
bears interest at a rate based on the average pooled debt balance. Expenses
related to increases in pooled debt are reflected in the weighted average
interest rate of the pooled debt.
In addition to the allocation of cash and debt, interest-bearing loans,
with terms determined by the board of directors, are used to manage cash between
the Groups. These loans are reflected as inter-group receivables or payables on
the financial statements of each Group. During fiscal 1998, an inter-group note
was issued by the Circuit City Group on behalf of the CarMax Group as a
temporary financing vehicle for the CarMax inventory. At fiscal year-end 1999
and 1998, the CarMax Group maintained no inter-group notes, payables or
receivables with the Circuit City Group. At February 28, 1997, the CarMax Group
had an inter-group receivable totaling $48.1 million with the Circuit City
Group.
The CarMax Group's capital expenditures were $138.3 million in fiscal 1999,
$234.3 million in fiscal 1998 and $90.4 million in fiscal 1997. CarMax's capital
expenditures through fiscal 1999 were related to store expansion. Capital
expenditures have been funded through sale-leaseback transactions, landlord
reimbursements, proceeds from the CarMax Group equity offering and allocated
short- and long-term debt. Sale-leaseback and landlord reimbursement
transactions totaled $139.3 million in fiscal 1999, $98.1 million in fiscal 1998
and $16.5 million in fiscal 1997.
During fiscal 1999, the CarMax Group acquired the Toyota franchise rights
and the related assets of Laurel Automotive Group, Inc.; the franchise rights
and the related assets of Mauro Auto Mall, Inc.; the franchise rights and the
related assets of Nissan of Greenville, Inc.; and the Mitsubishi franchise
rights and the related assets of Boomershine Automotive, Inc. for a total of
$49.6 million. The acquisitions were financed through cash payments totaling
$41.6 million and the issuance of two promissory notes totaling $8.0 million.
Costs in excess of the acquired net tangible assets, which are primarily
inventory, have been recorded as goodwill and covenants not to compete.
In fiscal 1996, Circuit City Stores, Inc. initiated an asset securitization
program on behalf of the CarMax Group. At the end of fiscal 1999, that program
allowed the transfer of up to $575.0 million in auto loan receivables. At
February 28, 1999, securitized receivables totaled $539.0 million. The
receivables are sold to an unaffiliated third party with the servicing retained.
Management expects that securitization programs that allow for the transfer of
receivables through both private placement and the public market, can be used to
fund increases in receivables resulting from CarMax's continued growth.
In fiscal 1999, CarMax entered into a $200.0 million one-year, renewable
inventory financing arrangement with an asset-backed commercial paper conduit.
The arrangement provides funding for the acquisition of vehicle inventory
through the use of a non-affiliated special purpose company. As of February 28,
1999, CarMax had not yet used the financing facility; however, management
expects the facility to be phased in during fiscal 2000 as various state
regulatory requirements are met.
Late in fiscal 1997, Circuit City Stores, Inc. raised a net of $412.3
million through the initial public offering of 21.86 million shares of newly
created CarMax Group Common Stock. In fiscal 1997, the Group used approximately
$187 million of the net proceeds to repay its allocated portion of Circuit City
Stores, Inc. indebtedness. Management has used the remainder of the net proceeds
to help finance the CarMax expansion.
Management believes that the proceeds from sales of property and equipment
and receivables, equity issuances, the use of the renewable inventory financing
facility, future increases in Circuit City Stores, Inc. debt allocated to the
CarMax Group and cash generated by operations will be sufficient to fund the
CarMax Group's capital expenditures and operations. In fiscal 2000, the Group
anticipates capital expenditures of approximately $50.0 million.
66
MARKET RISK
The Company manages the auto installment portfolio of the Group's finance
operation. A portion of this portfolio is securitized and, therefore, is not
presented on the Group's balance sheet. Interest rate exposure relating to these
receivables represents a market risk exposure that the Company has managed with
matched funding and interest rate swaps. Total principal outstanding for
fixed-rate automobile loans at February 28 was as follows:
(Amounts in millions) 1999 1998
- -------------------------------------------------------------
Fixed APR................................. $592 $297
-----------------
Financing for these receivables is achieved through bank conduit
securitizations that, in turn, issue floating-rate securities. Interest rate
exposure is hedged through the use of interest rate swaps matched to projected
payoffs. Receivables held by the Company for investment or sale are financed
with working capital. Financings at February 28 and related interest rates were
as follows:
(Amounts in millions) 1999 1998
- -------------------------------------------------------------
Floating-rate securitizations
synthetically altered to fixed......... $500 $224
Floating-rate securitizations............. 39 44
Held by the Company:
For investment......................... 38 23
For sale............................... 15 6
-----------------
Total..................................... $592 $297
-----------------
The Company has analyzed its interest rate exposure and has concluded that
it did not represent a material market risk at February 28, 1999 or 1998.
Because it has a program in place to manage interest rate exposure relating to
its installment loan portfolio, the Company expects to experience relatively
little impact as interest rates fluctuate in the future.
YEAR 2000 CONVERSION
Refer to the "Circuit City Stores, Inc. Management's Discussion and Analysis of
Results of Operations and Financial Condition" for a discussion of the Year 2000
issue and its impact on the Group's financial statements.
FORWARD-LOOKING STATEMENTS
Company statements that are not historical facts, including statements about
management's expectations for fiscal year 2000 and beyond, are forward-looking
statements and involve various risks and uncertainties. Refer to the "Circuit
City Stores, Inc. Management's Discussion and Analysis of Results of Operations
and Financial Condition" for a review of possible risks and uncertainties.
67
CARMAX GROUP STATEMENTS OF OPERATIONS
<TABLE>
<S> <C>
Years Ended February 28
(Amounts in thousands except per share data) 1999 % 1998 % 1997 %
- ------------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES.................................$1,466,298 100.0 $874,206 100.0 $510,249 100.0
Cost of sales.................................................... 1,294,032 88.3 800,699 91.6 466,788 91.5
-------------------------------------------------------------
GROSS PROFIT..................................................... 172,266 11.7 73,507 8.4 43,461 8.5
-------------------------------------------------------------
Selling, general and administrative expenses
[including $11.5 million expense related to owned
and leased real estate in fiscal 1998. NOTES 3 AND 13]........ 204,422 13.9 127,822 14.6 53,111 10.4
Interest expense [NOTES 3 AND 7]................................. 6,393 0.4 1,789 0.2 6,279 1.2
-------------------------------------------------------------
TOTAL EXPENSES................................................... 210,815 14.3 129,611 14.8 59,390 11.6
-------------------------------------------------------------
Loss before income tax benefit................................... 38,549 2.6 56,104 6.4 15,929 3.1
Income tax benefit [NOTES 3 AND 8]............................... 15,035 1.0 21,881 2.5 6,611 1.3
-------------------------------------------------------------
NET LOSS......................................................... $23,514 1.6 $34,223 3.9 $9,318 1.8
-------------------------------------------------------------
Net loss attributed to [NOTE 1]:
Circuit City Group common stock............................... $18,057 $26,460 $9,052
CarMax Group common stock..................................... 5,457 7,763 266
---------- ------- ------
$23,514 $34,223 $9,318
---------- ------- ------
Weighted average common shares [NOTES 2 AND 10].................. 22,604 22,001 21,860
---------- ------- ------
NET LOSS PER SHARE [NOTES 2 AND 10].............................. $0.24 $0.35 $0.01
---------- ------- ------
See accompanying notes to group financial statements.
68
<PAGE>
CARMAX GROUP BALANCE SHEETS
At February 28
(Amounts in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................................. $17,679 $26,412
Net accounts receivable [NOTE 5]........................................................... 97,364 60,866
Inventory.................................................................................. 225,460 143,970
Prepaid expenses and other current assets.................................................. 620 1,359
-------------------------------
TOTAL CURRENT ASSETS....................................................................... 341,123 232,607
Property and equipment, net [NOTES 6 AND 7]................................................ 203,946 214,087
Other assets............................................................................... 26,129 1,628
-------------------------------
TOTAL ASSETS............................................................................... $571,198 $448,322
-------------------------------
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTE 7]............................................ $1,250 $-
Accounts payable........................................................................... 59,838 51,220
Short-term debt [NOTE 7]................................................................... 4,605 385
Accrued expenses and other current liabilities............................................. 8,556 3,604
Deferred income taxes [NOTE 8]............................................................. 7,674 370
-------------------------------
TOTAL CURRENT LIABILITIES.................................................................. 81,923 55,579
Long-term debt, excluding current installments [NOTE 7].................................... 139,720 27,386
Deferred revenue and other liabilities..................................................... 5,015 5,266
Deferred income taxes [NOTE 8]............................................................. 4,125 145
-------------------------------
TOTAL LIABILITIES.......................................................................... 230,783 88,376
GROUP EQUITY............................................................................... 340,415 359,946
-------------------------------
Commitments and contingent liabilities [NOTES 1, 5, 11, 12, 14 AND 15]
TOTAL LIABILITIES AND GROUP EQUITY......................................................... $571,198 $448,322
-------------------------------
See accompanying notes to group financial statements.
69
<PAGE>
CARMAX GROUP STATEMENTS OF CASH FLOWS
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss................................................................ $(23,514) $(34,223) $(9,318)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................ 10,003 4,577 1,664
Expense related to owned and leased real estate [NOTE 13]............ - 11,500 -
Provision for deferred income taxes.................................. 11,284 (1,867) 1,666
Changes in operating assets and liabilities, net of effects
from business acquisitions:
(Decrease) increase in deferred revenue and other liabilities..... (251) 835 1,157
Increase in net accounts receivable............................... (36,498) (32,516) (11,788)
Increase in inventory, prepaid expenses and other current assets.. (55,776) (58,967) (23,918)
(Increase) decrease in other assets............................... (809) 63 (1,691)
Increase in accounts payable, accrued expenses and
other current liabilities...................................... 13,570 24,472 16,789
-----------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES................................... (81,991) (86,126) (25,439)
-----------------------------------------------
INVESTING ACTIVITIES:
Cash used in business acquisitions [NOTE 4]............................. (41,562) - -
Purchases of property and equipment..................................... (138,299) (234,252) (90,428)
Proceeds from sales of property and equipment........................... 139,332 98,098 16,450
Decrease (increase) in inter-group receivable, net...................... - 48,147 (48,147)
-----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES................................... (40,529) (88,007) (122,125)
-----------------------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in allocated short-term debt, net................... 1,220 385 (18,050)
Increase (decrease) in allocated long-term debt, net.................... 108,584 27,386 (78,519)
Equity issuances, net................................................... 3,983 2,353 412,335
-----------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................... 113,787 30,124 315,766
-----------------------------------------------
(Decrease) increase in cash and cash equivalents........................... (8,733) (144,009) 168,202
Cash and cash equivalents at beginning of year............................. 26,412 170,421 2,219
-----------------------------------------------
Cash and cash equivalents at end of year................................... $17,679 $26,412 $170,421
-----------------------------------------------
See accompanying notes to group financial statements.
70
CARMAX GROUP STATEMENTS OF GROUP EQUITY (DEFICIT)
(Amounts in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1996............................................................................................ $(11,201)
--------
Net loss......................................................................................................... (9,318)
Equity issuances, net............................................................................................ 412,335
--------
BALANCE AT FEBRUARY 28, 1997........................................................................................ 391,816
--------
Net loss......................................................................................................... (34,223)
Equity issuances, net............................................................................................ 2,353
--------
BALANCE AT FEBRUARY 28, 1998........................................................................................ 359,946
--------
Net loss......................................................................................................... (23,514)
Equity issuances, net............................................................................................ 3,983
--------
BALANCE AT FEBRUARY 28, 1999........................................................................................ $340,415
--------
See accompanying notes to group financial statements.
</TABLE>
71
<PAGE>
NOTES TO CARMAX GROUP FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On January 24, 1997, shareholders of Circuit City Stores, Inc. and its
subsidiaries approved the creation of two common stock series. The Company's
existing common stock was subsequently redesignated as Circuit City Stores,
Inc.-Circuit City Group Common Stock. In an initial public offering, which was
completed February 7, 1997, the Company sold 21.86 million shares of Circuit
City Stores, Inc.-CarMax Group Common Stock.
The Circuit City Group Common Stock is intended to track the performance of
the Circuit City store-related operations, the Company's investment in Digital
Video Express and the Group's retained interest in the CarMax Group. The effects
of this retained interest on the Circuit City Group's financial statements are
identified by the term "Inter-Group." The CarMax Group Common Stock is intended
to track the performance of the CarMax operations. The Inter-Group Interest is
not considered outstanding CarMax Stock. Therefore, any net earnings or loss
attributed to the Inter-Group Interest is not included in the CarMax Group's per
share calculations. The Circuit City Group held a 76.6 percent interest in the
CarMax Group at February 28, 1999, 77.3 percent interest at February 28, 1998,
and a 77.5 percent interest at February 28, 1997.
The CarMax Group financial statements give effect to the management and
allocation policies adopted by the board of directors as described under
"Corporate Activities." The CarMax Group financial statements have been prepared
on a basis that management believes to be reasonable and appropriate and include
(i) the historical financial position, results of operations and cash flows of
the CarMax Group, (ii) an allocated portion of the Company's cash equivalents
and debt, including the related effects upon results of operations and cash
flows, and (iii) an allocated portion of the Company's corporate general and
administrative costs.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the CarMax
Group and the Circuit City Group for the purposes of preparing their respective
financial statements, holders of CarMax Stock and holders of Circuit City Stock
are shareholders of the Company and continue to be subject to all of the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. Such attribution and the change in the equity structure of the
Company does not affect title to the assets or responsibility for the
liabilities of the Company or any of its subsidiaries. The results of operations
or financial condition of one Group could affect the results of operations or
financial condition of the other Group. Accordingly, the CarMax Group financial
statements included herein should be read in conjunction with the Company's
consolidated financial statements and the Circuit City Group financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS: Allocated cash equivalents of $14,750,000 at
February 28, 1999, and $16,535,000 at February 28, 1998, consist of highly
liquid debt securities with original maturities of three months or less.
(B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: The Company adopted Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," effective
January 1, 1997. For transfers that qualify as sales, the Company recognizes
gains or losses as a component of the Company's finance operations. For
transfers of financial assets to qualify for sale accounting, control over the
assets must be surrendered at the time of sale. Multiple estimates are used to
calculate the gain or loss on sales of receivables under SFAS No. 125. Finance
charge income, default rates and payment rates are estimated using projections
developed from the prior 12 months of operating history. These estimates are
adjusted for any industry or portfolio trends that have been observed. The
resulting cash flow projections are present valued at a discount rate
appropriate for the type of asset and risk. Retained interests (such as residual
interests in a securitization trust, cash reserve accounts and rights to future
interest from serviced assets that exceed contractually specified servicing
fees) are included in net accounts receivable and are carried at fair value with
changes in fair value reflected in earnings. Loan receivables held for sale are
carried at the lower of cost or market, whereas loan receivables held for
investment are carried at cost less an allowance for losses. At February 28,
1999 and 1998, cost approximates fair value.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company enters into financial
instruments on behalf of the CarMax Group. The carrying value of the CarMax
Group's financial instruments approximates fair value. Credit risk is the
exposure to the potential nonperformance of another material party to an
agreement due to changes in economic, industry or geographic factors and is
mitigated by dealing only with counterparties that are highly rated by several
financial rating agencies. Accordingly, the CarMax Group does not anticipate
material loss for nonperformance. All financial instruments are broadly
diversified along industry, product and geographic areas.
(D) INVENTORY: Inventory is stated at the lower of cost or market. Vehicle
inventory cost is determined by specific identification. Parts and labor used to
recondition vehicles, as well as transportation and other incremental expenses
associated with acquiring vehicles, are included in inventory.
(E) PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less
accumulated depreciation. Depreciation is calculated using the straight-line
method over the assets' estimated useful lives.
<PAGE>
(F) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the Company adopted the
American Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." 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 capitalized.
Amounts capitalized are amortized on a straight-line basis over a period of
three to five years.
72
(G) INTANGIBLE ASSETS: Amounts paid for acquired businesses in excess of the
fair value of the net tangible assets acquired are recorded as goodwill, which
is amortized on a straight-line basis over 15 years, and covenants not to
compete, which are amortized on a straight-line basis over the life of the
covenant not to exceed five years. Both goodwill and covenants not to compete
are included in other assets on the accompanying CarMax Group balance sheets.
The carrying value of intangible assets is periodically reviewed by the Company
and impairments are recognized when the expected future undiscounted operating
cash flows derived from such intangible assets are less than the carrying value.
(H) PRE-OPENING EXPENSES: Expenses associated with the opening of new stores are
deferred and amortized ratably over the period from the date of the store
opening to the end of the fiscal year.
(I) INCOME TAXES: Income taxes are accounted for in accordance with SFAS No.
109, "Accounting for Income Taxes." Deferred income taxes reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and the amounts recognized for income tax
purposes, measured by applying currently enacted tax laws. A deferred tax asset
is recognized if it is more likely than not that a benefit will be realized.
(J) DEFERRED REVENUE: The CarMax Group sells service contracts on behalf of
unrelated third parties and, prior to July 1997, sold its own contracts at one
location where third-party warranty sales were not permitted. Contracts usually
have terms of coverage between 12 and 72 months. All revenue from the sale of
the CarMax Group's own service contracts is deferred and amortized over the life
of the contracts consistent with the pattern of repair experience of the
industry. Incremental direct costs related to the sale of contracts are deferred
and charged to expense in proportion to the revenue recognized. Commission
revenue for the unrelated third-party service contracts is recognized at the
time of sale.
(K) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating profits generated by
the finance operation are recorded as a reduction to selling, general and
administrative expenses.
(L) ADVERTISING EXPENSES: All advertising costs are expensed as incurred.
(M) NET LOSS PER SHARE: On December 15, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." All prior period loss per share data presented has been
restated to conform with the provisions of SFAS No. 128.
Net loss per share is computed by dividing the net loss attributed to
CarMax Stock by the weighted average number of common shares outstanding.
Diluted net loss per share is not calculated since CarMax has a net loss for the
periods presented.
(N) STOCK-BASED COMPENSATION: On March 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue applying the provisions of the Accounting Principles Board Opinion No.
25, "Accounting For Stock Issued to Employees," and to provide the pro forma
disclosures of SFAS No. 123.
(O) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into interest rate swap
agreements to manage exposure to interest rates and to more closely match
funding costs to the use of funding. Interest rate swaps relating to long-term
debt are classified as held for purposes other than trading and are accounted
for on a settlement basis. To qualify for this accounting treatment, the swap
must synthetically alter the nature of a designated underlying financial
instrument. Under this method, payments or receipts due or owed under the swap
agreement are accrued through each settlement date and recorded as a component
of interest expense. If a swap designated as a synthetic alteration were to be
terminated, any gain or loss on the termination would be deferred and recognized
over the shorter of the original contractual life of the swap or the related
life of the designated long-term debt.
The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller as part of a sale
of financial assets are considered proceeds at fair value in the determination
of the gain or loss on the sale. If such a swap were terminated, the impact on
the fair value of the financial asset created by the sale of the related
receivables would be estimated and included in earnings.
(P) RISKS AND UNCERTAINTIES: The CarMax Group is a used- and new-car retail
business. The diversity of the CarMax Group's customers and suppliers reduces
the risk that a severe impact will occur in the near term as a result of changes
in its customer base or sources of supply. However, due to the CarMax Group's
limited overall size, management cannot assure that unanticipated events will
not have a negative impact on the Group.
<PAGE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
(Q) RECLASSIFICATIONS: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 1999.
3. CORPORATE ACTIVITIES
The CarMax Group's financial statements reflect the application of the
management and allocation policies adopted by the board of directors to various
corporate activities, as described below:
(A) FINANCIAL ACTIVITIES: Most financial activities are managed by the Company
on a centralized basis. Such financial activities include the investment of
surplus cash and the issuance and repayment of short-term and long-term debt.
Allocated invested surplus cash of the CarMax Group consists of (i) Company cash
equivalents, if any, that have been allocated in their entirety to the CarMax
Group and (ii) a portion of the Company's cash equivalents that are allocated
between the Groups. Investment of surplus cash from the offering has been
allocated to the CarMax Group. Allocated debt of the CarMax Group consists of
(i) Company debt, if any, that has been allocated in its entirety to the CarMax
Group and (ii) a portion of the Company's pooled debt, which is debt allocated
between the Groups. The pooled debt bears interest at a rate based on the
average pooled debt balance.
73
Expenses related to increases in pooled debt are reflected in the weighted
average interest rate of such pooled debt as a whole.
(B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporate general and
administrative costs and other shared services generally have been allocated to
the CarMax Group based upon utilization of such services by the Group. Where
determinations based on utilization alone have been impractical, other methods
and criteria were used that management believes are equitable and provide a
reasonable estimate of the costs attributable to the Group. Costs allocated to
the CarMax Group totaled approximately $7.5 million for fiscal 1999, $6.2
million for fiscal 1998 and $1.3 million for fiscal 1997.
(C) INCOME TAXES: The CarMax Group is included in the consolidated federal
income tax return and in certain state tax returns filed by the Company.
Accordingly, the provision for federal income taxes and related payments of tax
are determined on a consolidated basis. The financial statement provision and
the related tax payments or refunds are reflected in each Group's financial
statements in accordance with the Company's tax allocation policy for such
Groups. In general, this policy provides that the consolidated tax provision and
related tax payments or refunds will be allocated between the Groups based
principally upon the financial income, taxable income, credits and other amounts
directly related to the respective Group. Tax benefits that cannot be used by
the Group generating such attributes, but can be utilized on a consolidated
basis, are allocated to the Group that generated such benefits. As a result, the
allocated Group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the Groups had filed separate
tax returns.
4. BUSINESS ACQUISITIONS
During fiscal 1999, CarMax acquired the franchise rights and the related assets
of four new-car dealerships for an aggregate cost of $49.6 million. The
acquisitions were financed through available cash resources and the issuance of
two promissory notes aggregating $8.0 million. Costs in excess of the fair value
of the net tangible assets acquired (primarily inventory) have been recorded as
goodwill and covenants not to compete. These acquisitions were accounted for
under the purchase method and the results of the operations of the acquired
franchises have been included in the accompanying CarMax Group financial
statements since the date of acquisition. Unaudited pro forma information
related to these acquisitions is not included as the impact of these
acquisitions on the accompanying CarMax Group financial statements is not deemed
to be material.
5. ACCOUNTS RECEIVABLE AND SECURITIZATION TRANSACTIONS
Accounts receivable consist of the following at February 28:
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------
Trade receivables......................... $23,649 $23,085
Installment receivables:
Held for sale.......................... 14,690 5,816
Held for investment.................... 38,093 22,986
Retained interests..................... 26,145 12,762
----------------
Total accounts receivable................. 102,577 64,649
Less allowance for doubtful accounts...... 5,213 3,783
----------------
Net accounts receivable................... $97,364 $60,866
----------------
<PAGE>
In fiscal 1996, the Company entered into a securitization transaction on
behalf of the CarMax Group to finance the installment receivables generated by
the Group's finance operation. Proceeds from the auto loan securitization
transaction were $271 million during fiscal 1999 and $123 million during fiscal
1998.
Receivables relating to the securitization facility consist of the
following at February 28:
(Amounts in thousands) 1999 1998
- ------------------------------------------------------------
Managed receivables..................... $589,032 $291,294
Receivables held by the CarMax Group:
For sale............................. (14,690) (5,816)
For investment*...................... (35,342) (17,478)
------------------
Net receivables sold.................... $539,000 $268,000
------------------
Program capacity........................ $575,000 $300,000
------------------
*Held by a bankruptcy remote special purpose company
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. A restructuring of the facility
during fiscal 1997 resulted in the recourse provisions being eliminated.
The net gain on sales of receivables totaled $7.9 million for fiscal 1999,
$3.7 million for fiscal 1998 and $3.1 million for fiscal 1997. Rights recorded
for future interest income from serviced assets that exceed the contractually
specified servicing fees are carried at fair value and amounted to $14.7 million
at February 28, 1999, $6.8 million at February 28, 1998, and $3.1 million at
February 28, 1997, and are included in net accounts receivable. The finance
operation's servicing revenue, including gains on sales of receivables, totaled
$28.2 million for fiscal 1999, $11.2 million for fiscal 1998 and $8.7 million
for fiscal 1997. The servicing fee specified in the auto loan securitization
agreement adequately compensates the finance operation for servicing the
accounts. Accordingly, no servicing asset or liability has been recorded.
In determining the fair value of retained interests, the Company estimates
future cash flows from finance charge collections, reduced by net defaults,
servicing cost, and interest cost. The Company employs a risk-based pricing
strategy that increases the stated annual percentage rate for accounts that have
74
a higher predicted risk of default. Accounts with a lower risk profile also may
qualify for promotional financing.
The APRs range from 6 percent to 12 percent fixed, with default rates
varying based on credit quality, but generally aggregating 0.75 percent to 1.25
percent. Weighted average life of the receivables is expected to be in the 18
month to 20 month range.
Interest cost depends on the time at which accounts were originated, but is
in the range of 5 percent to 7 percent.
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 28 is summarized as follows:
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------
Land and buildings (20 to 25 years)...... $47,487 $34,790
Land held for development................ 28,781 11,601
Construction in progress................. 76,355 139,225
Furniture, fixtures and equipment
(3 to 8 years)........................ 51,504 31,454
Leasehold improvements (10 to 15 years).. 15,658 4,390
------------------
219,785 221,460
Less accumulated depreciation............ 15,839 7,373
------------------
Property and equipment, net.............. $203,946 $214,087
------------------
Land held for development is land owned for future sites that are scheduled
to open more than one year beyond the fiscal year reported.
<PAGE>
7. DEBT
Long-term debt of the Company at February 28 is summarized as follows:
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------
Term loans............................... $405,000 $405,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest
ranging from 5.0% to 7.0%............. 6,564 7,665
Obligations under capital leases......... 12,728 12,928
Note payable............................. 5,000 -
------------------
Total long-term debt..................... 429,292 425,593
Less current installments................ 2,707 1,301
------------------
Long-term debt, excluding
current installments.................. $426,585 $424,292
------------------
Portion of long-term debt allocated
to the CarMax Group................... $140,970 $27,386
------------------
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. The loan was restructured in August 1996 as a
$100,000,000, six-year unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 1999, the interest rate on the term loan was 5.76 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1999, the interest rate
on the term loan was 5.67 percent.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1999, the interest rate
on the term loan was 5.29 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving
credit agreement with four banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.13 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2002. No amounts were outstanding under the revolving credit
agreement at February 28, 1999 or 1998.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 1999 and 1998.
In November 1998, CarMax entered into a four-year, unsecured $5,000,000
promissory note. Principal is due annually with interest payable periodically at
8.25 percent.
In fiscal 1999, CarMax entered into a $200,000,000 one-year, renewable
inventory financing arrangement with an asset-backed commercial paper conduit.
The arrangement will provide funding for the acquisition of vehicle inventory
through the use of a non-affiliated special purpose company. During fiscal 1999,
no inventory was financed by CarMax under this arrangement.
Short-term debt of the Company is funded through committed lines of credit
and informal credit arrangements, as well as the revolving credit agreement.
Amounts outstanding and committed lines of credit available are as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998
- ----------------------------------------------------------------
Average short-term debt outstanding...... $54,505 $48,254
------------------
Maximum short-term debt outstanding...... $463,000 $414,000
------------------
Aggregate committed lines of credit...... $370,000 $410,000
------------------
The weighted average interest rate on the outstanding short-term debt was
5.1 percent during fiscal 1999, 5.7 percent during fiscal 1998 and 5.4 percent
during fiscal 1997.
Interest expense allocated by the Company to the CarMax Group, excluding
interest capitalized, was $6,393,000 in fiscal 1999, $1,789,000 in fiscal 1998
and $6,279,000 in fiscal 1997. The CarMax Group capitalizes interest in
connection with the construction of certain facilities. In fiscal 1999, interest
capitalized amounted to $2,674,000 ($4,879,000 in fiscal 1998 and $898,000 in
fiscal 1997).
75
<PAGE>
8. INCOME TAXES
The components of the income tax benefit on loss before income tax benefit are
as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- ------------------------------------------------------------
Current:
Federal................... $(23,773) $(17,101) $(6,976)
State..................... (2,546) (2,913) (1,301)
-----------------------------
(26,319) (20,014) (8,277)
-----------------------------
Deferred:
Federal................... 10,945 (1,259) 1,689
State..................... 339 (608) (23)
-----------------------------
11,284 (1,867) 1,666
-----------------------------
Income tax benefit........... $(15,035) $(21,881) $(6,611)
-----------------------------
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
Years Ended February 28
1999 1998 1997
- ---------------------------------------------------------------
Federal statutory income
tax rate.................... 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit...... 4.0 4.0 6.5
--------------------------
Effective income tax rate...... 39.0% 39.0% 41.5%
--------------------------
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 28, 1999 and 1998 are as follows:
(Amounts in thousands) 1999 1998
- ------------------------------------------------------------
Deferred tax assets:
Deferred revenue..................... $130 $231
Accrued expenses..................... 2,970 6,106
Other................................ 184 -
-----------------
Total gross deferred tax assets... 3,284 6,337
-----------------
Deferred tax liabilities:
Depreciation......................... 4,435 1,488
Inventory capitalization............. 4,620 2,807
Gain on sales of receivables......... 4,653 1,950
Other................................ 1,375 607
-----------------
Total gross deferred tax liabilities 15,083 6,852
-----------------
Net deferred tax liability.............. $11,799 $515
-----------------
In assessing the realizability of deferred tax assets, management considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies. Based on these considerations, management
believes that it is more likely than not that the gross deferred tax assets at
February 28, 1999 and 1998, will be realized by the CarMax Group; therefore, no
valuation allowance is necessary.
9. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) PREFERRED STOCK: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of CarMax Stock. The rights are
exercisable only upon the attainment of, or the commencement of a tender offer
to attain, a specified ownership interest in the Company by a person or group.
When exercisable, each CarMax Group right would entitle shareholders to buy one
four-hundredth of a share of Cumulative Participating Preferred Stock, Series F,
$20 par value, at an exercise price of $100 per share subject to adjustment. A
total of 500,000 shares of such preferred stock, which have preferential
dividend and liquidation rights, have been designated and reserved. No such
shares are outstanding. In the event that an acquiring person or group acquires
the specified ownership percentage of the Company's common stock (except
pursuant to a cash tender offer for all outstanding shares determined to be fair
by the board of directors) or engages in certain transactions with the Company
after the rights become exercisable, each right will be converted into a right
to purchase, for half the current market price at that time, shares of the
related Group stock valued at two times the exercise price.
The Company also has 1,000,000 shares of undesignated preferred stock
authorized of which no shares are outstanding and an additional 500,000 shares
of preferred stock designated as Series E which are related to similar rights
held by Circuit City Group shareholders.
(B) VOTING RIGHTS: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters on which
common shareholders generally are entitled to vote other than a matter on which
the common stock or either series thereof or any series of preferred stock would
be entitled to vote as a separate voting group. On all matters on which both
series of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes based on the
weighted average ratio of the market value of a share of CarMax Stock to a share
of Circuit City Stock. If shares of only one series of common stock are
outstanding, each share of that series shall be entitled to one vote. If either
series of common stock is entitled to vote as a separate voting group with
respect to any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
(C) RESTRICTED STOCK: The Company has issued restricted stock under the
provisions of the 1994 Stock Incentive Plan whereby management and key employees
are granted restricted shares of CarMax Stock. Shares are awarded in the name of
the employee, who has all the rights of a stockholder, subject to certain
restrictions or forfeitures. Restrictions on the awards generally expire five
years from the date of grant. In fiscal 1999, restricted stock awards for
100,000 shares were granted to eligible employees. The market value at the date
of grant of these shares has been recorded as unearned compensation and is a
component of Group equity. Unearned compensation is expensed over the
76
restriction periods. In fiscal 1999, a total of $426,600 was charged to CarMax
Group operations ($77,700 in fiscal 1998). As of February 28, 1999, 120,000
restricted shares were outstanding.
<TABLE>
<S> <C>
TABLE 1 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year........ 4,822 $1.49 4,769 $0.51 4,278 $0.22
Granted................................. 205 8.63 413 13.04 961 1.68
Exercised............................... (543) 0.22 (273) 0.22 - -
Cancelled............................... (104) 10.54 (87) 6.36 (470) 0.27
----- ----- -----
Outstanding at end of year.............. 4,380 $1.77 4,822 $1.49 4,769 $0.51
----- ----- -----
Options exercisable at end of year...... 1,566 $0.96 762 $0.37 - $ -
----- ----- -----
- --------------------------------------------------------------------------------------------------------------------------------
TABLE 2 Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
$ 0.22....................................... 3,692 3.0 $0.22 1,476 $0.22
4.00 to 9.19.............................. 448 5.0 7.84 23 9.17
12.94 to 16.31.............................. 240 5.2 14.34 67 14.39
----- -----
Total........................................ 4,380 3.3 $1.77 1,566 $0.96
----- -----
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(D) EMPLOYEE STOCK PURCHASE PLAN: The Company has Employee Stock Purchase Plans
for all employees meeting certain eligibility criteria. The CarMax Plan was
started in April 1997 and allows eligible employees to purchase shares of CarMax
Stock, subject to certain limitations, at 85 percent of market value. Purchases
are limited to 10 percent of an employee's eligible compensation, up to a
maximum of $7,500 per year. At February 28, 1999, a total of 138,693 shares
remained available under the CarMax Plan. During fiscal 1999, 268,532 shares
were issued to or purchased on the open market on behalf of the employees
(92,775 in fiscal 1998). The average price per share was $7.56 in fiscal 1999
and $12.73 in fiscal 1998. The purchase price discount is charged to CarMax
Group operations and totaled $268,100 in fiscal 1999 and $160,900 in fiscal
1998.
(E) STOCK INCENTIVE PLANS: In fiscal 1998, options that were outstanding as of
February 28, 1997, to purchase shares of stock of the corporate entity
comprising the CarMax Group were converted into options to purchase CarMax
Stock. Under the Company's stock incentive plans, incentive and nonqualified
stock options may be granted to management, key employees, and outside directors
to purchase shares of CarMax Stock. The exercise price for nonqualified options
granted under the 1994 plan is equal to, or greater than, the market value at
the date of grant. Options generally are exercisable over various periods
ranging from one to seven years from the date of grant.
A summary of the status of the CarMax Group's stock options and changes
during the years ended February 28, 1999, 1998 and 1997 are shown in Table 1.
Table 2 summarizes information about stock options outstanding as of February
28, 1999.
The CarMax Group applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the CarMax
Group's net loss and net loss per share would have been increased to the pro
forma amounts indicated below. In accordance with the transition provisions of
SFAS No. 123, the pro forma amounts reflect options with grant dates subsequent
to March 1, 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
earnings amounts presented below because compensation cost is reflected over the
options' vesting periods and compensation cost of options granted prior to March
1, 1995, is not considered. The pro forma effect on fiscal year 1999 may not be
representative of the pro forma effects on net earnings for future years.
(Amounts in thousands Years Ended February 28
except per share data) 1999 1998 1997
- -------------------------------------------------------------
Net loss-as reported............. $5,457 $7,763 $266
Net loss-pro forma............... 5,537 7,824 268
Net loss per share-as reported... $0.24 $0.35 $0.01
Net loss per share-pro forma..... 0.24 0.36 0.01
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model. The weighted average assumptions used in the
model are as follows:
1999 1998 1997
- -------------------------------------------------------------
Expected dividend yield........... - - -
Expected stock volatility......... 50% 50% 40%
Risk-free interest rates.......... 6% 6% 6%
Expected lives (in years)......... 3 3 4
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted for the CarMax Group is $3 in fiscal 1999, $6 in
fiscal 1998 and $0.70 in fiscal 1997.
77
10. NET LOSS PER SHARE
The calculation of net loss per share is presented below:
(Amounts in thousands Years Ended February 28
except per share data) 1999 1998 1997
- -------------------------------------------------------------
Weighted average common
shares...................... 22,604 22,001 21,860
---------------------------
Loss available to common
shareholders................ $5,457 $7,763 $266
---------------------------
Net loss per share............. $0.24 $0.35 $0.01
---------------------------
The CarMax Group had no diluted net loss per share because the Group had
net losses for the periods presented.
11. PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of
Circuit City Stock at February 28, 1999 and 1998.
<PAGE>
Eligible employees of the CarMax Group participate in the Company's plan.
Pension costs for these employees have been allocated to the CarMax Group based
on its proportionate share of the projected benefit obligation. The following
tables set forth the CarMax Group's share of the Plan's financial status and
amounts recognized in the balance sheets as of February 28:
(Amounts in thousands) 1999 1998
- ----------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year.... $958 $521
Service cost............................... 525 219
Interest cost.............................. 67 39
Actuarial loss............................. 1,015 179
----------------
Benefit obligation at end of year.......... $2,565 $958
----------------
Change in plan assets:
Fair value of plan assets at beginning of year $1,242 $895
Actual return on plan assets............... 69 185
Employer contributions..................... 242 162
----------------
Fair value of plan assets at end of year... $1,553 $1,242
----------------
Reconciliation of funded status:
Funded status.............................. $(1,012) $284
Unrecognized actuarial loss (gain)......... 1,063 (2)
Unrecognized transition asset.............. (8) (11)
Unrecognized prior service benefit......... (8) (9)
-----------------
Net amount recognized...................... $35 $262
-----------------
The components of net pension expense are as follows:
Years Ended February 28
(Amounts in thousands) 1999 1998 1997
- ----------------------------------------------------------------
Service cost............................ $525 $219 $162
Interest cost........................... 67 39 34
Expected return on plan assets.......... (119) (73) (55)
Amortization of prior service cost...... (1) (1) (1)
Amortization of transitional asset...... (3) (3) (3)
Recognized actuarial loss............... - 17 17
--------------------
Net pension expense..................... $469 $198 $154
--------------------
Assumptions used in the accounting for the pension plan were:
Years Ended February 28
1999 1998 1997
- --------------------------------------------------------------
Weighted average discount rate......... 6.8% 7.0% 7.5%
Rate of increase in compensation levels 5.0% 5.0% 5.5%
Expected rate of return on plan assets. 9.0% 9.0% 9.0%
--------------------
12. LEASE COMMITMENTS
The CarMax Group conducts substantially all of its business in leased premises.
The CarMax Group's lease obligations are based upon contractual minimum rates.
Rental expenses for all operating leases were $23,521,000 in fiscal 1999,
$11,421,000 in fiscal 1998 and $6,019,000 in fiscal 1997. Most leases provide
that the CarMax Group pay taxes, maintenance, insurance and certain other
operating expenses applicable to the premises.
The initial term of most real property leases will expire within the next
22 years; however, most of the leases have options providing for additional
lease terms of 10 years to 20 years at terms similar to the initial terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the CarMax Group, as of February 28, 1999, were:
Operating
(Amounts in thousands) Lease
Fiscal Commitments
- --------------------------------------------------------------
2000.............................................. $30,965
2001.............................................. 30,312
2002.............................................. 29,059
2003.............................................. 28,837
2004.............................................. 28,836
After 2004........................................ 451,538
--------
Total minimum lease payments...................... $599,547
--------
<PAGE>
In fiscal 1999, the Company entered into sale-leaseback transactions on
behalf of the CarMax Group with unrelated parties at an aggregate selling price
of $131,750,000 ($98,098,000 in fiscal 1998 and $16,450,000 in fiscal 1997).
Neither the Company nor the CarMax Group has continuing involvement under the
sale-leaseback transactions.
78
13. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
(A) ADVERTISING EXPENSE: Advertising expense, which is included in selling,
general and administrative expenses in the accompanying statements of
operations, amounted to $50,042,000 (3.4 percent of net sales and operating
revenues) in fiscal 1999, $29,621,000 (3.4 percent of net sales and operating
revenues) in fiscal 1998 and $11,493,000 (2.3 percent of net sales and operating
revenues) in fiscal 1997.
(B) IMPAIRMENT LOSS: In the fourth quarter of fiscal 1998, CarMax recorded an
impairment loss of $11.5 million related to the closure and eventual disposal of
its centralized reconditioning facilities and costs associated with excess
property at some locations. The centralized reconditioning facilities were
closed in fiscal 1998 when experience proved that in-store reconditioning was
more efficient. The excess property was purchased as part of retail sites. Both
the reconditioning facilities and portions of the excess property were disposed
of in fiscal year 1999, and the remaining excess property is expected to be
disposed of within the next fiscal year.
Of the total impairment loss, the CarMax Group recorded a $9.7 million loss
for impairment of long-lived assets as required by SFAS No. 121. The charge
represents the difference between the carrying value and the estimated fair
value of the assets less any disposal costs. The estimated fair value is based
on sales prices for comparable assets or expected future cash flows. In
addition, CarMax recorded a $1.8 million long-term liability for an operating
lease where events indicated that the lease value was impaired. This loss is
calculated as the difference between the present value of the required rental
payments on the original lease obligations and the present value of the future
rental receipts that are expected from subleasing the property. This liability
was relieved during fiscal year 1999 as part of the disposition of the related
property.
14. INTEREST RATE SWAPS
The Company enters into amortizing swaps relating to the auto loan receivable
securitization to convert variable-rate financing costs to fixed-rate
obligations to better match funding costs to the receivables being securitized.
In November 1995, the Company entered into a 50-month amortizing swap with a
notional amount of $75 million and, in October 1996, entered into a 40-month
amortizing swap with a notional amount of $64 million. The Company entered into
four 40-month amortizing swaps with notional amounts totaling approximately $162
million in fiscal 1998 and four 40-month amortizing swaps with notional amounts
totaling approximately $387 million in fiscal 1999. These swaps were entered
into as part of sales of receivables and are included in the gain on sales of
receivables. The remaining total notional amount of all swaps related to the
auto loan receivable securitization was approximately $499 million at February
28, 1999, $224 million at February 28, 1998, and $114 million at February 28,
1997.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year interest rate swaps with notional
amounts aggregating $175 million. These swaps effectively converted the
variable-rate obligation into a fixed-rate obligation. The fair value of the
swaps is the amount at which they could be settled. This value is based on
estimates obtained from the counterparties, which are two banks highly rated by
several financial rating agencies. The swaps are held for hedging purposes and
are not recorded at fair value. Recording the swaps at fair value at February
28, 1999, would result in a loss of $2.2 million and at February 28, 1998, would
result in a loss of $1.9 million.
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Company does not anticipate significant market risk from swaps, since their
use is to more closely match funding costs to the use of the funding. Credit
risk is the exposure to nonperformance of another party to an agreement. Credit
risk is mitigated by dealing with highly rated counterparties.
15. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the CarMax Group's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the CarMax Group's
financial position, liquidity or results of operations.
79
<PAGE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<S> <C>
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Net sales and operating
revenues......... $346,363 $177,554 $400,031 $206,433 $345,940 $227,086 $373,964 $263,133 $1,466,298 $874,206
--------------------------------------------------------------------------------------------------------
Gross profit........ $39,896 $16,629 $46,202 $18,870 $39,760 $15,357 $46,408 $22,651 $172,266 $73,507
--------------------------------------------------------------------------------------------------------
Net loss............ $ 3,215 $ 1,223 $ 2,965 $ 1,740 $ 7,331 $ 9,141 $ 10,003 $ 22,119 $ 23,514 $ 34,223
--------------------------------------------------------------------------------------------------------
Net loss attributed to
CarMax Stock..... $ 736 $ 275 $ 685 $ 393 $ 1,701 $ 2,075 $ 2,335 $ 5,020 $ 5,457 $ 7,763
--------------------------------------------------------------------------------------------------------
Net loss per share. $ 0.03 $ 0.01 $ 0.03 $ 0.02 $ 0.07 $ 0.09 $ 0.10 $ 0.23 $ 0.24 $ 0.35
--------------------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the CarMax Group (as defined
in Note 1) as of February 28, 1999 and 1998 and the related statements of
operations, group equity (deficit) and cash flows for each of the fiscal years
in the three-year period ended February 28, 1999. These financial statements are
the responsibility of Circuit City Stores, Inc.'s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully discussed in Note 1, the financial statements of the CarMax
Group should be read in conjunction with the consolidated financial statements
of Circuit City Stores, Inc. and subsidiaries and the financial statements of
the Circuit City Group.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the CarMax Group as of
February 28, 1999 and 1998 and the results of its operations and its cash flows
for each of the fiscal years in the three-year period ended February 28, 1999 in
conformity with generally accepted accounting principles.
/s/KPMG LLP
Richmond, Virginia
April 2, 1999
80
<PAGE>
MANAGEMENT'S REPORT
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
The consolidated financial statements of Circuit City Stores, Inc. and
subsidiaries, as well as the financial statements of the Circuit City Group and
the CarMax Group, have been prepared under the direction of management, which is
responsible for their integrity and objectivity. These financial statements have
been prepared in conformity with generally accepted accounting principles,
except for the Circuit City Group which has accounted for its interest in the
CarMax Group in a manner similar to the equity method of accounting. Generally
accepted accounting principles require that the CarMax Group be consolidated
with the Circuit City Group. However, management feels the manner in which the
Circuit City Group is presented more clearly indicates the performance of the
Circuit City business and the Company's investment in Digital Video Express. The
financial statements include amounts that are the best estimates and judgments
of management with consideration given to materiality.
Management is responsible for maintaining an internal control structure
designed to provide reasonable assurance that the books and records reflect the
transactions of the Company and that the Company's established policies and
procedures are carefully followed. Because of inherent limitations in any
system, there can be no absolute assurance that errors or irregularities will
not occur. Nevertheless, management believes that the internal control structure
provides reasonable assurance that assets are safeguarded and that financial
information is objective and reliable.
The Company's and the Groups' financial statements have been audited by
KPMG LLP, independent auditors. Their Independent Auditors' Reports, which are
based on audits made in accordance with generally accepted auditing standards,
express opinions as to the fair presentation in conformity with generally
accepted accounting principles of the financial statements. In performing their
audits, KPMG LLP considers the Company's internal control structure to the
extent it deems necessary in order to issue its opinions on the Company's and
the Groups' financial statements.
The audit committee of the board of directors is composed solely of outside
directors. The committee meets periodically with management, the internal
auditors and the independent auditors to assure each is properly discharging its
responsibilities. KPMG LLP and the internal auditors have full and free access
to meet privately with the audit committee to discuss accounting controls, audit
findings and financial reporting matters.
/s/Richard L. Sharp
Richard L. Sharp
Chairman and Chief Executive Officer
/s/Michael T. Chalifoux
Michael T. Chalifoux
Executive Vice President, Chief Financial Officer and
Corporate Secretary
April 5, 1999
COMMON STOCK
The common stock of Circuit City Stores, Inc. includes two series: Circuit City
Stores, Inc.-Circuit City Group Common Stock and Circuit City Stores,
Inc.-CarMax Group Common Stock. Both Group stocks are traded on the New York
Stock Exchange. The quarterly dividend data shown below applies to the Circuit
City Group Common Stock for the applicable periods. No dividend data is shown
for the CarMax Group Common Stock since it pays no dividends at this time.
<TABLE>
<S> <C>
Circuit City Group CarMax Group
--------------------------------------------------------------- ----------------------------------------
Market Price of Common Stock Dividends Market Price of Common Stock
Fiscal 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ------------------------------------------------------------------------------------------------------------------------------
1st.......... $49.63 $37.56 $40.88 $30.88 $.035 $.035 $13.50 $8.63 $20.13 $13.50
2nd.......... $54.50 $29.94 $39.88 $33.13 $.035 $.035 $11.00 $5.56 $15.38 $12.63
3rd.......... $39.56 $28.81 $45.50 $31.00 $.035 $.035 $8.00 $3.63 $18.50 $11.38
4th.......... $64.13 $35.38 $39.56 $31.38 $.035 $.035 $5.75 $3.94 $12.06 $6.50
---------------------------------------------------------------------------------------------------------------
Total $.140 $.140
---------------
</TABLE>
81
Exhibit 21
CIRCUIT CITY STORES, INC.
Subsidiaries of the Company
Jurisdiction of
Incorporation
Subsidiary or Organization
CC Distribution Company of Virginia, Inc. Virginia
Circuit City Stores West Coast, Inc. California
First North American National Bank National Bank
Located in Georgia
Northern National Insurance Ltd. Bermuda
Patapsco Designs, Inc. Maryland
CarMax, Inc. Virginia
CarMax Auto Superstores, Inc. Virginia
CarMax Auto Superstores West Coast, Inc. California
DIVX Entertainment, Inc. California
DIVX Management, Inc. Virginia
DIVX Direct, Inc. Virginia
DIVX Services, Inc. Virginia
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Circuit City Stores, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 33-56697, 33-36650, 33-64757, 333-02971, 333-20303, 333-22759,
333-25451, 333-27933, 333-34539 and 333-52935) on Form S-8 of Circuit
City Stores, Inc. of our reports dated April 2, 1999, relating to the
consolidated balance sheets of Circuit City Stores, Inc. and
subsidiaries (the Company) as of February 28, 1999 and 1998, and the
related consolidated statements of earnings, stockholders' equity and
cash flows for each of the fiscal years in the three-year period ended
February 28, 1999, and the related financial statement schedule, which
reports are included, or incorporated by reference from the annual
report to stockholders, in the February 28, 1999 annual report on Form
10-K of Circuit City Stores, Inc.
We also consent to incorporation by reference in the foregoing
registration statements of our reports dated April 2, 1999, relating to
the balance sheets of the Circuit City Group as of February 28, 1999
and 1998, and the related statements of earnings, group equity and cash
flows for each of the fiscal years in the three-year period ended
February 28, 1999, and the related financial statement schedule, which
reports are included, or incorporated by reference from the annual
report to stockholders, in the February 28, 1999 annual report on Form
10-K of Circuit City Stores, Inc. Our reports on the Circuit City Group
dated April 2, 1999, include a qualification related to the effects of
not consolidating the CarMax Group with the Circuit City Group as
required by generally accepted accounting principles.
We also consent to incorporation by reference in the foregoing
registration statements of our reports dated April 2, 1999, relating to
the balance sheets of the CarMax Group as of February 28, 1999 and
1998, and the related statements of operations, group equity (deficit)
and cash flows for each of the fiscal years in the three-year period
ended February 28, 1999, and the related financial statement schedule,
which reports are included, or incorporated by reference from the
annual report to stockholders, in the February 28, 1999 annual report
on Form 10-K of Circuit City Stores, Inc.
s/KPMG LLP
Richmond, Virginia
May 24, 1999
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Richard L. Sharp my true and lawful attorney-in-fact
to sign on my behalf, as an individual and in the capacity stated below, the
Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year
ended February 28, 1999 and any amendment with such attorney-in-fact may deem
appropriate or necessary.
Signature: /s/Michael T. Chalifoux
Print Name: Michael T. Chalifoux
Title: Executive Vice President,
Chief Financial Officer
And Corporate Secretary
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1999 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Richard N. Cooper
Print Name: Richard N. Cooper
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1999 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Barbara S. Feigin
Print Name: Barbara S. Feigin
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1999 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/James F. Hardymon
Print Name: James F. Hardymon
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1999 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Robert S. Jepson Jr.
Print Name: Robert S. Jepson Jr.
Title: Director
<
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1999 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Hugh G. Robinson
Print Name: Hugh G. Robinson
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1999 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Walter J. Salmon
Print Name: Walter J. Salmon
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1999 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Mikael Salovaara
Print Name: Mikael Salovaara
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1999 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/John W. Snow
Print Name: John W. Snow
Title: Director
<PAGE>
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1999 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Edward Villanueva
Print Name: Edward Villanueva
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1999 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Alan Wurtzel
Print Name: Alan Wurtzel
Title: Vice-Chairman
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Column 1 = CONSOLIDATED
Column 2 = CIRCUIT CITY GROUP
Column 3 = CARMAX GROUP
Changes Caption = Allocation of Inter-Group Interest in CarMax losses
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> Feb-28-1999 Feb-28-1999 Feb-28-1999
<PERIOD-END> Feb-28-1999 Feb-28-1999 Feb-28-1999
<CASH> 265,880 248,201 17,679
<SECURITIES> 0 0 0
<RECEIVABLES> 574,316 476,952 97,364
<ALLOWANCES> 0 0 0
<INVENTORY> 1,517,675 1,292,215 225,460
<CURRENT-ASSETS> 2,394,515 2,053,392 341,123
<PP&E> 1,583,559 1,363,774 219,785
<DEPRECIATION> 577,786 561,947 15,839
<TOTAL-ASSETS> 3,445,266 3,134,826 571,198
<CURRENT-LIABILITIES> 963,805 881,882 81,923
<BONDS> 426,585 286,865 139,720
0 0 0
0 0 0
<COMMON> 61,968 50,410 11,558
<OTHER-SE> 1,843,162 1,775,063 328,857
<TOTAL-LIABILITY-AND-EQUITY> 3,445,266 3,134,826 571,198
<SALES> 10,804,447 9,338,149 1,466,298
<TOTAL-REVENUES> 10,804,447 9,338,149 1,466,298
<CGS> 8,359,428 7,065,396 1,294,032
<TOTAL-COSTS> 8,359,428 7,065,396 1,294,032
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 28,319 21,926 6,393
<INCOME-PRETAX> 230,523 269,072 (38,549)
<INCOME-TAX> 87,599 102,634 (15,035)
<INCOME-CONTINUING> 142,924 166,438 (23,514)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 (18,057) 18,057
<NET-INCOME> 142,924 148,381 (5,457)
<EPS-BASIC> 0 1.50 (0.24)
<EPS-DILUTED> 0 1.48 (0.24)
</TABLE>
