UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1999
Commission File Number 1-5767
CIRCUIT CITY STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-0493875
(State of Incorporation) (I.R.S. Employer
Identification No.)
9950 MAYLAND DRIVE, RICHMOND, VIRGINIA 23233
(Address of Principal Executive Offices and Zip Code)
(804) 527-4000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
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Class Outstanding at September 30, 1999
Circuit City Stores, Inc. - Circuit City Group Common Stock, par value $0.50 203,346,662
Circuit City Stores, Inc. - CarMax Group Common Stock, par value $0.50 23,960,463
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 37.
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<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
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INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets -
August 31, 1999, and February 28, 1999 4
Consolidated Statements of Operations -
Three Months and Six Months Ended August 31, 1999, and 1998 5
Consolidated Statements of Cash Flows -
Six Months Ended August 31, 1999, and 1998 6
Notes to Consolidated Financial Statements 7
Circuit City Group Financial Statements:
Circuit City Group Balance Sheets -
August 31, 1999, and February 28, 1999 18
Circuit City Group Statements of Operations -
Three Months and Six Months Ended August 31, 1999, and 1998 19
Circuit City Group Statements of Cash Flows -
Six Months Ended August 31, 1999, and 1998 20
Notes to Circuit City Group Financial Statements 21
CarMax Group Financial Statements:
CarMax Group Balance Sheets -
August 31, 1999, and February 28, 1999 28
CarMax Group Statements of Operations -
Three Months and Six Months Ended August 31, 1999, and 1998 29
CarMax Group Statements of Cash Flows -
Six Months Ended August 31, 1999, and 1998 30
Notes to CarMax Group Financial Statements 31
Item 2. Management's Discussion and Analysis:
Circuit City Stores, Inc. Management's Discussion and
Analysis of Financial Condition and Results of Operations 12
Circuit City Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 24
CarMax Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 33
Page 2 of 38
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 37
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3 of 38
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
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Aug. 31, 1999 Feb. 28, 1999
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 241,492 $ 265,880
Net accounts receivable 556,168 574,316
Inventory 1,791,767 1,517,675
Prepaid expenses and other current assets 71,912 36,644
-------------- -------------
Total current assets 2,661,339 2,394,515
Property and equipment, net 1,005,894 1,005,773
Other assets 49,509 44,978
-------------- -------------
TOTAL ASSETS $ 3,716,742 $ 3,445,266
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 177,760 $ 2,707
Accounts payable 1,041,555 799,733
Short-term debt 5,487 8,016
Accrued expenses and other current liabilities 141,093 143,585
Deferred income taxes 13,242 9,764
-------------- -------------
Total current liabilities 1,379,137 963,805
Long-term debt, excluding current installments 250,585 426,585
Deferred revenue and other liabilities 137,844 112,085
Deferred income taxes 28,263 37,661
-------------- -------------
TOTAL LIABILITIES 1,795,829 1,540,136
-------------- -------------
Stockholders' equity:
Circuit City Group common stock, $0.50 par value;
350,000,000 shares authorized; 203,272,000 shares
issued and outstanding as of August 31, 1999 101,636 50,410
CarMax Group common stock, $0.50 par value;
175,000,000 shares authorized; 23,848,000 shares
issued and outstanding as of August 31, 1999 11,924 11,558
Capital in excess of par value 560,694 575,686
Retained earnings 1,246,659 1,267,476
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,920,913 1,905,130
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,716,742 $ 3,445,266
============== =============
See accompanying notes to consolidated financial statements.
Page 4 of 38
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CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Six Months Ended
August 31, August 31,
1999 1998 1999 1998
-------------- -------------- ------------- --------------
Net sales and operating revenues $ 2,958,394 $ 2,517,827 $ 5,649,376 $ 4,788,888
Cost of sales, buying and warehousing 2,290,111 1,945,003 4,378,366 3,711,156
-------------- -------------- ------------- --------------
Gross profit 668,283 572,824 1,271,010 1,077,732
-------------- -------------- ------------- --------------
Selling, general and administrative expenses 542,913 497,012 1,072,494 961,358
Interest expense 5,262 6,314 10,594 13,645
-------------- -------------- ------------- --------------
Total expenses 548,175 503,326 1,083,088 975,003
-------------- -------------- ------------- --------------
Earnings from continuing operations
before income taxes 120,108 69,498 187,922 102,729
Provision for income taxes 45,641 26,410 71,411 39,038
-------------- -------------- ------------- --------------
Earnings from continuing operations 74,467 43,088 116,511 63,691
-------------- -------------- ------------- --------------
Discontinued operations:
Loss from discontinued operations of Divx,
less income tax benefit -- (11,626) (16,215) (19,696)
Loss on disposal of Divx, including
provision for losses during phase-out
period, less income tax benefit -- -- (114,025) --
-------------- -------------- ------------- --------------
Loss from discontinued operations -- (11,626) (130,240) (19,696)
-------------- -------------- ------------- --------------
Net earnings (loss) $ 74,467 $ 31,462 $ (13,729) $ 43,995
============== ============== ============= ==============
Net earnings (loss) attributed to:
Circuit City Group common stock:
Continuing operations $ 73,692 $ 43,773 $ 115,090 $ 65,112
Discontinued operations -- (11,626) (130,240) (19,696)
CarMax Group common stock 775 (685) 1,421 (1,421)
-------------- -------------- ------------- --------------
$ 74,467 $ 31,462 $ (13,729) $ 43,995
============== ============== ============= ==============
Weighted average common shares:
Circuit City Group:
Basic 201,315 198,190 200,890 197,786
============== ============== ============= ==============
Diluted 204,551 200,847 204,011 200,370
============== ============== ============= ==============
CarMax Group:
Basic 23,522 22,580 23,336 22,461
============== ============== ============= ==============
Diluted 25,673 22,580 25,571 22,461
============== ============== ============= ==============
Net earnings (loss) per share:
Circuit City Group:
Basic:
Continuing operations $ 0.37 $ 0.22 $ 0.57 $ 0.33
============== ============== ============= ==============
Discontinued operations $ -- $ (0.06) $ (0.65) $ (0.10)
============== ============== ============= ==============
Net earnings (loss) $ 0.37 $ 0.16 $ (0.08) $ 0.23
============== ============== ============= ==============
Diluted:
Continuing operations $ 0.36 $ 0.22 $ 0.56 $ 0.33
============== ============== ============= ==============
Discontinued operations $ -- $ (0.06) $ (0.64) $ = (0.10)
============== ============== ============= ==============
Net earnings (loss) $ 0.36 $ 0.16 $ (0.08) $ 0.23
============== ============== ============= ==============
CarMax Group:
Basic $ 0.03 $ (0.03) $ 0.06 $ (0.06)
============== ============== ============= ==============
Diluted $ 0.03 $ (0.03) $ 0.06 $ (0.06)
============== ============== ============= ==============
Dividends paid per common share:
Circuit City Group common stock $ 0.0175 $ 0.0175 $ 0.035 $ 0.035
============== ============== ============= ==============
CarMax Group common stock $ -- $ -- $ -- $ --
============== ============== ============= ==============
See accompanying notes to consolidated financial statements.
Page 5 of 38
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CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Six Months Ended
August 31,
1999 1998
-------------- -------------
Operating Activities:
Net (loss) earnings $ (13,729) $ 43,995
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities of continuing operations:
Loss from discontinued operations 16,215 19,696
Loss on disposal of discontinued operations 114,025 --
Depreciation and amortization 67,706 67,181
Loss on sales of property and equipment 621 1,126
Provision for deferred income taxes 3,321 (10,220)
Decrease in deferred revenue and other liabilities (20,241) (12,737)
Decrease (increase) in net accounts receivable 18,225 (7,605)
Increase in inventory (289,394) (139,982)
Decrease (increase) in prepaid expenses and other current assets 18,014 (8,447)
(Increase) decrease in other assets (282) 2,309
Increase in accounts payable, accrued expenses and
other current liabilities 213,796 85,839
-------------- -------------
Net cash provided by operating activities of continuing operations 128,277 41,155
-------------- -------------
Investing Activities:
Cash used in business acquisitions (34,849) --
Purchases of property and equipment (128,997) (197,929)
Proceeds from sales of property and equipment 44,344 134,972
-------------- -------------
Net cash used in investing activities of continuing operations (119,502) (62,957)
-------------- -------------
Financing Activities:
(Payments on) proceeds from issuance of short-term debt, net (2,529) 15,956
Principal payments on long-term debt (947) (857)
Issuances of Circuit City Group common stock, net 34,020 25,425
Issuances of CarMax Group common stock, net 2,580 1,675
Dividends paid on Circuit City Group common stock (7,088) (6,963)
-------------- -------------
Net cash provided by financing activities of continuing operations 26,036 35,236
-------------- -------------
Cash used in discontinued operations (59,199) (36,476)
-------------- -------------
Decrease in cash and cash equivalents (24,388) (23,042)
Cash and cash equivalents at beginning of year 265,880 116,612
-------------- -------------
Cash and cash equivalents at end of period $ 241,492 $ 93,570
============== =============
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See accompanying notes to consolidated financial statements.
Page 6 of 38
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The Company, which is comprised of Circuit City Stores, Inc. and its
subsidiaries, has two series of common stock - the Circuit City Group Stock
and the CarMax Group Stock. The Circuit City Group Common Stock is intended
to track the performance of the Circuit City store-related operations, the
Group's retained interest in the CarMax Group and the Company's investment
in Digital Video Express, which is discontinued (see Note 10). The CarMax
Group Common Stock is intended to track the performance of the CarMax
operations. The Circuit City Group held a 76.0 percent interest in the
CarMax Group at August 31, 1999, a 76.6 percent interest at February 28,
1999, and a 76.8 percent interest at August 31, 1998.
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
financial statements, holders of Circuit City Stock and holders of CarMax
Stock are shareholders of the Company and are subject to all of the risks
associated with an investment in the Company and all of its businesses,
assets and liabilities. Such attribution does not affect title to the
assets or responsibility for the liabilities of the Company or any of its
subsidiaries. The results of operations or financial condition of one Group
could affect the results of operations or financial condition of the other
Group. Accordingly, the Company's consolidated financial statements
included herein should be read in conjunction with the financial statements
of each Group and with the notes to the consolidated and Group financial
statements included herein and in the Company's 1999 annual report to
shareholders.
2. Accounting Policies
The consolidated financial statements of the Company conform to generally
accepted accounting principles. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments necessary
for a fair presentation of the interim consolidated financial statements
have been included. The fiscal year-end balance sheet data was derived from
audited financial statements.
3. Accounting for the Costs of Start-Up Activities
Effective March 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities." SOP 98-5 requires costs of start-up
activities, including organization and pre-opening costs, to be expensed as
incurred. Prior to fiscal 2000, Circuit City capitalized pre-opening costs
for new store locations. Beginning in the month after the store opened for
business, the pre-opening costs were amortized over the remainder of that
fiscal year. Management has determined that SOP 98-5 does not have a
material impact on the Company's financial position, annual results of
operations or cash flows.
4. Prepaid Expenses and Other Current Assets
Income taxes receivable, which are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets, were
$47,090,000 at August 31, 1999, and $7,143,000 at February 28, 1999.
Page 7 of 38
5. Net Earnings (Loss) per Share
Reconciliations of the numerator and denominator of basic and diluted net
earnings (loss) per share are presented below:
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Three Months Ended Six Months Ended
(Amounts in thousands August 31, August 31,
except per share data) 1999 1998 1999 1998
--------------------------------------------------------------------------------------------------------------------
Circuit City Group:
Weighted average common shares....................... 201,315 198,190 200,890 197,786
Dilutive potential common shares:
Options........................................... 2,366 1,986 2,278 1,950
Restricted stock.................................. 870 671 843 634
--------------------------- ---------------------------
Weighted average common shares and
dilutive potential common shares.................. 204,551 200,847 204,011 200,370
=========================== ===========================
Income from continuing operations.................... $ 73,692 $ 43,773 $ 115,090 $ 65,112
Loss from discontinued operations.................... -- (11,626) (130,240) (19,696)
--------------------------- ---------------------------
Income (loss) available to common shareholders....... $ 73,692 $ 32,147 $ (15,150) $ 45,416
=========================== ===========================
Basic net earnings (loss) per share:
Continuing operations............................. $ 0.37 $ 0.22 $ 0.57 $ 0.33
Discontinued operations........................... -- (0.06) (0.65) (0.10)
--------------------------- --------------------------
Net earnings (loss) per share..................... $ 0.37 $ 0.16 $ (0.08) $ 0.23
=========================== ===========================
Diluted net earnings (loss) per share:
Continuing operations............................. $ 0.36 $ 0.22 $ 0.56 $ 0.33
Discontinued operations........................... -- (0.06) (0.64) (0.10)
--------------------------- ---------------------------
Net earnings (loss) per share..................... $ 0.36 $ 0.16 $ (0.08) $ 0.23
=========================== ===========================
CarMax Group:
Weighted average common shares....................... 23,522 22,580 23,336 22,461
Dilutive potential common shares:
Options........................................... 1,997 -- 2,063 --
Restricted stock.................................. 154 -- 172 --
--------------------------- ---------------------------
Weighted average common shares and
dilutive potential common shares.................. 25,673 22,580 25,571 22,461
=========================== ===========================
Income (loss) available to common shareholders....... $ 775 $ (685) $ 1,421 $ (1,421)
Basic net earnings (loss) per share.................. $ 0.03 $ (0.03) $ 0.06 $ (0.06)
Diluted net earnings (loss) per share................ $ 0.03 $ (0.03) $ 0.06 $ (0.06)
</TABLE>
Certain options were not included in the computation of diluted net
earnings per share because the options' exercise prices were greater than
the average market price of the common shares. For the three-month and
six-month periods ended August 31, 1998, options to purchase 2,000,000
shares of Circuit City Group Stock at $29.50 per share were outstanding and
not included in the calculation.
For the three-month and six-month periods ended August 31, 1999, options to
purchase 1,655,871 shares of CarMax Group Stock at prices ranging from
$6.06 to $16.31 per share were outstanding and not included in the
calculation.
Page 8 of 38
6. Gain or Loss on Securitizations
For transfers that qualify as sales, the Company recognizes gains or losses
as a component of the Company's finance operations. Amortization of
prior-period gains on securitizations for the Circuit City Group's finance
operation exceeded current-period gains by $200,000 compared with a net
gain of $500,000 for the same period last fiscal year. Amortization of
prior-period gains on securitizations for the Circuit City Group's finance
operation exceeded current-period gains by $1.9 million for the six-month
period ended August 31, 1999, compared with $500,000 for the six-month
period ended August 31, 1998. The net gain on sales of receivables for the
CarMax Group's finance operation was $931,000 for the second quarter of
this fiscal year compared with $2.2 million for the same period last fiscal
year. The net gain on sales of receivables for the CarMax Group's finance
operation totaled $2.7 million for the six-month period ended August 31,
1999, compared with $4.8 million for the six-month period ended August 31,
1998.
7. 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. These swaps were entered into
as part of the sales of receivables and are included in the gain or loss on
sales of receivables.
Concurrent with the funding of the $175 million term loan in May 1995, the
Company entered into five-year interest rate swaps with notional amounts
aggregating $175 million. Recording the swaps at fair value would result in
a loss of $1.04 million at August 31, 1999, compared with a loss of $2.20
million at February 28, 1999.
On behalf of the CarMax Group, during the quarter the Company entered into
a 40-month amortizing swap with a notional amount of approximately $150
million related to the auto loan receivable securitization. The total
notional amount of the CarMax swaps was $553 million at August 31, 1999,
and $500 million at February 28, 1999. These swaps were entered into as
part of the sales of receivables and are, therefore, included in the gain
or loss on sales of receivables.
8. Business Acquisitions
During the second quarter, CarMax acquired the Nissan franchise rights and
related assets of one new-car dealership for an aggregate cost of $3.6
million. The acquisition was financed through available cash resources.
Costs in excess of the fair value of the acquired net tangible assets,
primarily inventory, have been recorded as goodwill and covenants not to
compete. The acquisition was accounted for under the purchase method, and
the results of the operations of the acquired franchise have been included
in the accompanying consolidated financial statements since the date of
acquisition. Pro-forma information related to the acquisition is not
included since the impact of the acquisition on the accompanying
consolidated financial statements is not deemed to be material.
9. Operating Segment Information
The Company conducts business in two operating segments: Circuit City 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 the Circuit City Group's finance operation. This segment
is engaged in the business of selling brand-name consumer electronics,
personal computers, major appliances and entertainment software. CarMax
refers to the used- and new-car retail locations bearing the CarMax name
and to all related operations such as the CarMax Group's finance operation.
Divx is no longer included as an operating segment because it was
discontinued on June 16, 1999. Prior-year financial information has been
adjusted to reflect this change. Financial information for these segments
for the three- and six-month periods ended August 31, 1999, and 1998, is
presented on the following page.
Page 9 of 38
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Three Months Ended August 31, 1999
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
- ---------------------------------------------------------------------------------------------------------------
Revenues from external customers................. $ 2,422,667 $ 535,727 $ 2,958,394
Interest expense................................. 2,615 2,647 5,262
Depreciation and amortization.................... 29,444 4,172 33,616
Earnings from continuing operations
before income taxes......................... 114,893 5,215 120,108
Provision for income taxes....................... 43,659 1,982 45,641
Earnings from continuing operations.............. 71,234 3,233 74,467
Total assets..................................... $ 2,974,900 $ 732,410 $ 3,707,310
Three Months Ended August 31, 1998
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
- ---------------------------------------------------------------------------------------------------------------
Revenues from external customers................. $ 2,117,796 $ 400,031 $ 2,517,827
Interest expense................................. 4,998 1,316 6,314
Depreciation and amortization.................... 32,833 2,251 35,084
Earnings (loss) from continuing operations
before income taxes......................... 74,358 (4,860) 69,498
Provision (benefit) for income taxes............. 28,305 (1,895) 26,410
Earnings (loss) from continuing operations....... 46,053 (2,965) 43,088
Total assets..................................... $ 2,801,217 $ 536,836 $ 3,338,053
Six Months Ended August 31, 1999
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
- ---------------------------------------------------------------------------------------------------------------
Revenues from external customers................. $ 4,627,586 $ 1,021,790 $ 5,649,376
Interest expense................................. 6,264 4,330 10,594
Depreciation and amortization.................... 60,899 6,807 67,706
Earnings from continuing operations
before income taxes......................... 178,298 9,624 187,922
Provision for income taxes....................... 67,753 3,658 71,411
Earnings from continuing operations.............. 110,545 5,966 116,511
Total assets..................................... $ 2,974,900 $ 732,410 $ 3,707,310
Six Months Ended August 31, 1998
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
- ---------------------------------------------------------------------------------------------------------------
Revenues from external customers................. $ 4,042,494 $ 746,394 $ 4,788,888
Interest expense................................. 12,080 1,565 13,645
Depreciation and amortization.................... 62,860 4,321 67,181
Earnings (loss) from continuing operations
before income taxes......................... 112,860 (10,131) 102,729
Provision (benefit) for income taxes............. 42,989 (3,951) 39,038
Earnings (loss) from continuing operations....... 69,871 (6,180) 63,691
Total assets..................................... $ 2,801,217 $ 536,836 $ 3,338,053
</TABLE>
Earnings from continuing operations and total assets for Circuit City
exclude: (1) the Inter-Group Interest in the CarMax Group and (2) the
discontinued Divx operations discussed in Note 10.
Page 10 of 38
10. Loss from Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations, but
existing, registered customers would be able to view discs during a
two-year phase-out period. The operating results of Divx and the loss on
disposal of the Divx business have been segregated from continuing
operations and reported as separate line items, after tax, on the
consolidated and the Circuit City Group statements of operations for the
periods presented.
For the quarter ended August 31, 1999, the discontinued Divx operations had
no impact on the earnings of Circuit City Stores, Inc. Results for the
second quarter of last year include a loss of $11.6 million after an income
tax benefit of $7.1 million related to the Divx operations. For the six
months ended August 31, 1999, the loss from the discontinued Divx
operations totaled $16.2 million after an income tax benefit of $9.9
million, compared with $19.7 million after an income tax benefit of $12.0
million in the prior year. The loss on the disposal of the Divx business
totaled $114.0 million after an income tax benefit of $69.9 million in the
six-month period ended August 31, 1999. The loss on the disposal includes a
provision of $3.0 million, after tax, for operating losses to be incurred
during the phase-out period. It also includes provisions for commitments
under licensing agreements with motion picture distributors, the write-down
of assets to net realizable value, lease termination cost, employee
severance and benefit costs and other contractual commitments.
<PAGE>
The net liabilities or assets of the discontinued Divx operations reflected
in the accompanying consolidated balance sheet as of August 31, 1999, and
February 28, 1999, are comprised of the following:
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(Amounts in thousands) Aug. 31, 1999 Feb. 28, 1999
-----------------------------------------------------------------------------------------------------
Other current assets......................................... $ 338 $ 25,630
Property and equipment, net.................................. 3,250 23,589
Noncurrent deferred tax asset................................ 5,844 --
Other assets................................................. -- 7,895
Current liabilities.......................................... (48,660) (23,126)
Noncurrent deferred tax liability............................ -- (3,397)
Other liabilities............................................ (46,000) --
---------------------------------------
Net (liabilities) assets of discontinued operations.......... $ (85,228) $ 30,591
=======================================
</TABLE>
11. Stock Split
On June 15, 1999, following the approval by the Company's shareholders of
an increase in the authorized Circuit City Group Common Stock, the board of
directors declared a two-for-one split of the outstanding Circuit City
Group Common Stock. Stockholders of record at the close of business on June
30, 1999, were entitled to participate in the stock split, which was
payable in the form of a 100 percent stock dividend. The distribution date
was July 15, 1999. The split was effected by transferring the par value for
the additional shares issued from the capital in excess of par value
account to the common stock accounts at May 31, 1999. The share, earnings
per share and dividends per share calculations included in the accompanying
consolidated financial statements reflect the Circuit City Group
two-for-one stock split.
12. Reclassifications
The Company has reclassified its prior-year financial statements to present
the operating results of Divx as a discontinued operation.
Page 11 of 38
<PAGE>
ITEM 2.
CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Operating Revenues and General Comments
Sales for the second quarter of fiscal 2000 were $2.96 billion, an increase of
17 percent from $2.52 billion for the same period last year. For the six months
ended August 31, 1999, total sales were $5.65 billion, an 18 percent increase
from $4.79 billion for the same period last year. Throughout the second quarter,
the Circuit City Group continued to see strong consumer demand across virtually
all major product categories. In addition to the strong product demand, the
Circuit City Group's total sales growth includes continued expansion of its
Superstore in new and existing markets. For the CarMax Group, used-car sales
trends were consistent with the first quarter results. New-car sales remained
strong. The addition of 13 store locations since the second quarter of last
fiscal year and additional new-car franchises produced the CarMax Group total
sales increase.
Comparable store sales changes for the second quarter and first six months of
fiscal years 2000 and 1999 were as follows:
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============================================================================================
FY 00 2nd Quarter Six Months
-------------------------- --------------------- ---------------------
JUN JUL AUG FY 00 FY 99 FY 00 FY 99
- ----------------------------------------------- ---------- ---------- --------- ----------
Circuit City Group 8% 15% 6% 10% 6% 9% 5%
- ----------------------------------------------- ---------- ---------- --------- ----------
CarMax Group (13%) (3%) (2%) (6%) 0% (5%) 0%
============================================================================================
</TABLE>
During the quarter, the Circuit City Group opened a total of five stores. The
second quarter expansion included Superstores in Johnstown, Pa.; Atlanta, Ga.;
Panama City, Fla.; Indianapolis, Ind.; and New York, N.Y. During the remainder
of the fiscal year, the Circuit City Group plans to add approximately 22
Superstores.
During the quarter, CarMax opened one used-car superstore, located in Nashville,
Tenn. Early in the quarter, the company purchased the Nissan franchise rights
held by Town & Country Pontiac Nissan, Inc. in Perryhall, Md., and added the
franchise to its White Marsh, Md., superstore. On September 1, 1999, CarMax
opened a used-car superstore in Duarte, Calif. The CarMax Group anticipates
opening two used-car satellite locations and a new facility for its Laurel
Toyota franchise adjacent to the Laurel, Md., superstore during the remainder of
the fiscal year.
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.6 percent of sales in the second quarter of fiscal 2000 and 5.7
percent of sales in the second quarter of fiscal 1999. Third-party warranty
revenue declined to 4.3 percent of sales in this year's second quarter from 4.5
percent in the same period last year. The declines in gross dollar sales and
third-party warranty revenue 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. The total
extended warranty revenue that is reported in total sales was 4.5 percent of
sales in this year's second quarter versus 5.1 percent in the second quarter of
last fiscal year.
For the CarMax Group, gross dollar sales from all extended warranty programs
were 3.7 percent of sales in the second quarter of fiscal 2000 compared with 4.4
percent in the same period last year. The increase in sales of new vehicles,
which already include manufacturer-provided warranties and thus carry lower
warranty penetration rates, contributed to the decline. Third-party warranty
revenue decreased to 1.6 percent of sales in this year's second quarter from 2.0
percent in the same period last year. The total extended warranty revenue that
Page 12 of 38
is reported in total sales was 1.6 percent of sales in this year's second
quarter versus 2.0 percent in last year's second quarter.
The Company's operations, in common with other retailers in general, are subject
to seasonal influences. Historically, the Circuit City Group has realized more
of its net sales and net earnings in the final fiscal quarter, which includes
the December holiday selling season, than in any other fiscal quarter. CarMax
stores, however, have experienced more of their net sales in the first two
quarters of the fiscal year. The net earnings of any interim quarter are
seasonally disproportionate to net sales since administrative and certain
operating expenses remain relatively constant during the year. Therefore,
interim results should not be relied upon as necessarily indicative of results
for the entire fiscal year.
<PAGE>
Cost of Sales, Buying and Warehousing
The gross profit margin was 22.6 percent of sales in the second quarter of
fiscal 2000 compared with 22.8 percent in the same period last year. For the six
months ended August 31, 1999, the gross profit margin was 22.5 percent,
unchanged from the same period last year.
For the Circuit City Group, the gross profit margin increased to 25.0 percent of
sales in the second quarter from 24.9 percent in the same period last year. For
the six months ended August 31, 1999, the gross profit margin was 24.7 percent
compared with 24.5 percent for the same period last year. The margin reflects
the combined impact of the merchandise sales mix, improvements in inventory
management and a competitive pricing and promotional environment.
For the CarMax Group, the gross profit margin increased to 11.9 percent of sales
in the second quarter of fiscal 2000 from 11.5 percent for the same period last
year. For the six months ended August 31, 1999, the gross profit margin was 12.3
percent compared with 11.5 percent for the same period last year. CarMax's
profit improvement plan, which includes better inventory management, increased
retail service sales, pricing adjustments and the addition of consumer
electronics accessory sales produced the margin increase.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expense ratio was 18.4 percent
in the second quarter of fiscal 2000 compared with 19.7 percent for the same
period last year. For the six-month period ended August 31, 1999, the Company's
selling, general, and administrative expense ratio was 19.0 percent compared
with 20.1 percent for the same period last year.
For the Circuit City Group, the selling, general and administrative expense
ratio was 20.1 percent of sales in the second quarter of fiscal 2000 compared
with 21.1 percent for the same period last year. For the six-month period ended
August 31, 1999, the expense ratio was 20.8 percent compared with 21.4 percent
for the same period last year. The comparable store sales growth was a primary
contributor to the improved expense ratio.
The CarMax Group's selling, general and administrative expense ratio improved to
10.4 percent of sales in the second quarter of fiscal 2000 compared with 12.4
percent of sales for the same period last year. For the six-month period ended
August 31, 1999, the expense ratio was 10.9 percent compared with 12.7 percent
for the same period last year. The expense leverage generated by the total sales
increase and effective cost controls that include more efficient advertising
programs, improved store staffing ratios and tightly managed corporate overhead
reduced the expense ratio.
Interest Expense
Interest expense was 0.2 percent of sales in the second quarter of fiscal 2000,
unchanged from the same period last year. For the six-month period ended August
31, 1999, interest expense decreased to 0.2 percent of sales compared with 0.3
percent of sales for the same period last year.
For the Circuit City Group, interest expense decreased to 0.2 percent of sales
in the second quarter of fiscal 2000 compared with 0.3 percent of sales for the
same period last year. For the six-month period ended August 31, 1999, interest
expense decreased to 0.1 percent of sales compared with 0.3 percent of sales for
the same period last year. The decrease is a result of the reduction in the
Circuit City Group's allocation of pooled debt.
Page 13 of 38
For the CarMax Group, interest expense increased to 0.5 percent of sales in the
second quarter of fiscal 2000 compared with 0.3 percent of sales for the same
period last year. For the six-month period ended August 31, 1999, interest
expense increased to 0.4 percent of sales compared with 0.2 percent of sales for
the same period last year. The increase is a result of the rise in CarMax's
allocation of pooled debt.
Earnings from Continuing Operations
Earnings from continuing operations for Circuit City Stores, Inc. were $74.5
million in this year's second quarter compared with $43.1 million in last year's
second quarter. For the six-month period ended August 31, 1999, earnings from
continuing operations for Circuit City Stores, Inc. were $116.5 million compared
with $63.7 million for the same period last year.
For the Circuit City Group, earnings from continuing operations for the quarter
ended August 31, 1999, increased 68 percent to $73.7 million from $43.8 million
in the same period last year. Earnings from continuing operations for the six
months ended August 31, 1999, increased 77 percent to $115.1 million from $65.1
million in the same period last year. Management expects full-year earnings
growth for the Circuit City business of at least 30 percent.
For the second quarter, the CarMax Group reported earnings from continuing
operations of $3.2 million versus a loss from continuing operations of $3.0
million for the same period last year. The net earnings for the six-month period
ended August 31, 1999, were $6.0 million compared with a loss of $6.2 million
for the same period last year. For the second quarter, the earnings attributed
to the CarMax Group stock were $775,000, compared with a loss attributed to the
CarMax Group stock of $685,000 for the same period last year. For the six-month
period ended August 31, 1999, the earnings attributed to the CarMax Group stock
were $1.4 million, compared with a loss attributed to the CarMax Group stock of
$1.4 million for the same period last year. CarMax's first-half performance
reinforces management's expectation for an improved full-year performance in the
modest loss to break-even range. Rather than expand in the Los Angeles market,
CarMax will for the foreseeable future continue to focus on improving
profitability in existing markets, especially the multi-store markets in
Florida, Texas and Illinois. The Group expects to open additional satellite
stores and new-car franchises integrated with used-car superstores, but plans
limited, if any, expansion into new markets.
Loss from Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease marketing
the Divx home video system and discontinue operations, but existing, registered
customers would be able to view discs during a two-year phase-out period. The
operating results of Divx and the loss on disposal of the Divx business have
been segregated from continuing operations and reported as separate line items,
after tax, on the consolidated and the Circuit City Group statements of
operations for the periods presented.
For the quarter ended August 31, 1999, the discontinued Divx operations had no
impact on the earnings of Circuit City Stores, Inc. Results for the second
quarter of last year include a loss of $11.6 million after an income tax benefit
of $7.1 million related to the Divx operations. For the six months ended August
31, 1999, the loss from the discontinued Divx operations totaled $16.2 million
after an income tax benefit of $9.9 million, compared with $19.7 million after
an income tax benefit of $12.0 million in the prior year. The loss on the
disposal of the Divx business totaled $114.0 million after an income tax benefit
of $69.9 million in the six-month period ended August 31, 1999. The loss on the
disposal includes a provision of $3.0 million, after tax, for operating losses
to be incurred during the phase-out period. It also includes provisions for
commitments under licensing agreements with motion picture distributors, the
write-down of assets to net realizable value, lease termination cost, employee
severance and benefit costs and other contractual commitments.
Page 14 of 38
Net Earnings (Loss)
Net earnings for Circuit City Stores, Inc. were $74.5 million in this year's
second quarter compared with $31.5 million in last year's second quarter. For
the six-month period ended August 31, 1999, the net loss for Circuit City
Stores, Inc. was $13.7 million compared with net earnings of $44.0 million for
the same period last year.
Liquidity and Capital Resources
At August 31, 1999, total assets were $3.7 billion. Inventory increased $274.1
million to support anticipated sales growth and new and future store openings
for both the Circuit City Group and the CarMax Group. To support store
construction and the purchase of inventory, accounts payable have increased
$241.8 million from the end of fiscal 1999.
During the first half of the fiscal year, $175.0 million of long-term debt due
in May 2000 was reclassified to short-term debt. While the Company has the
ability to refinance this amount, the current intention is to pay the debt using
existing working capital.
The Circuit City Group's finance operation has a master trust securitization
facility for its private-label card that allows the transfer of receivables
through private placement and the public market. The master trust vehicle
permits further expansion of the securitization program to meet future needs. As
of August 31, 1999, the master trust program had a total program capacity of
$1.60 billion. The Circuit City Group's finance operation also has a master
trust securitization facility related to its bankcard program. This master trust
vehicle permits further expansion of the securitization program in both the
public and private markets. As of August 31, 1999, the bankcard master trust
program had a total program capacity of $1.75 billion. As of August 31, 1999,
the Company's asset securitization program, operated through a special purpose
subsidiary on behalf of the CarMax Group, allowed for the transfer of up to $700
million in auto loan receivables. The Company anticipates that it will be able
to expand its securitization programs to meet future needs through private
placement and the public market.
The Company generally expects to continue its existing long-term capitalization
strategy for the balance of the current fiscal year. Management anticipates that
capital expenditures will be funded through a combination of internally
generated funds, sale-leaseback transactions, operating leases and proceeds of
equity issuances. Securitization transactions will be used to finance growth in
credit card and auto loan receivables. In late fiscal 1999, management
established a CarMax inventory financing program that is renewable annually;
however, as of August 31, 1999, CarMax had not yet used this program.
At August 31, 1999, the Company maintained $365 million in seasonal lines that
are renewed annually with various banks, as well as a $150 million revolving
credit facility.
Market Risk
The Company manages the private-label and bankcard revolving loan portfolios of
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.
As of August 31, 1999, the Circuit City Group's private-label and bankcard
portfolios had not changed significantly since February 28, 1999. However, as a
result of CarMax's growth, that Group's auto installment loan portfolio has
increased.
Total principal outstanding for fixed-rate automobile loans at August 31 and
February 28, 1999, was as follows:
(Amounts in millions) August 31 February 28
- --------------------------------------------------------------
Fixed APR...................... $ 779 $ 592
Page 15 of 38
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 August 31 and February 28, 1999, were as follows:
(Amounts in millions) August 31 February 28
- -----------------------------------------------------------------------------
Floating-rate securitizations
synthetically altered to fixed..... $ 553 $ 500
Floating-rate securitizations......... 142 39
Held by the Company:
For investment..................... 48 38
For sale........................... 36 15
---------------------------------
Total ................................ $ 779 $ 592
=================================
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.
Year 2000
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 on or after January 1, 2000, could result
in a system failure or miscalculations that cause disruption of operations
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. In addition to
computer systems, any equipment with embedded systems that involve
date-sensitive functions is 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 believes it has identified all critical
areas. Critical is defined as any business process or application failure that
would result in a material financial, legal or operational impact. 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 of its
internally developed and externally purchased systems. Replacement work and
enterprise-level testing for all systems and equipment is complete. However, the
Company will continue to re-test its systems and equipment through the end of
calendar 1999.
With regard to embedded systems, the Company has identified 204 distinct makes
and models used for environmental controls, fire detection and monitoring,
burglar detection and monitoring, elevators, office equipment and
uninterruptable power supplies. All of these embedded systems have been vendor
certified as capable of appropriate function in Year 2000 or are no longer in
use by the Company.
The Company also has identified its key third-party operational 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 to the operation of
Circuit City's business if such an entity is not Year 2000 functional. Responses
have been received from approximately 98 percent of these partners with no major
potential problems identified. Risks and business impacts also have been
assigned to the vendor products and services believed to be significant to the
Company's operations. Current action statements and contingency plans have been
developed by the business areas for products and services believed to be at high
or medium Year 2000 risk.
Since the project began, the Company has expensed $15.4 million in project
costs, including $2.2 million in fiscal 2000. The remaining cost of the Year
2000 project is estimated at $800,000. These costs are in addition to the normal
budget for information systems and are being funded through operating cash
flows. The CarMax computer systems were developed in recent years, and have not
required significant remediation.
Page 16 of 38
Therefore, the Company does not expect the CarMax Group to incur any material
costs related to the Year 2000 issue.
The Company expects that no significant business disruption will occur as a
result of Year 2000 issues; however possible consequences if the Company's
remediation efforts or the remediation efforts of third parties fail include,
but are not limited to, loss of communications links with certain store
locations, delays in receipt of inventory, loss of electric power, inability to
process transactions, send purchase orders or engage in similar normal business
activities. 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. Several areas within the Company have adopted
mandatory attendance policies for certain managers and staff for the days
surrounding the millennium change in order to assure adequate and appropriate
managerial and other response to address any Year 2000 related problem that may
arise and can be handled by manual intervention. These plans are intended to
enable the Company to continue to operate even if a degree of business
interruption occurs at Year 2000. However, the Company believes that due to 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 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.
Regarding products sold by the Circuit City stores, the Company believes that
the vendors who supply products to Circuit City for resale are solely
responsible for the Year 2000 functionality of those products. Circuit City has
encouraged its merchandise vendors to disclose any potential effect that the
Year 2000 change might have on their products. Circuit City also encourages its
customers by way of in-store notices and its Y2K discussion on its Internet site
to contact the manufacturers directly for specific, up-to-date information on
individual products. To the extent that the Company becomes involved in any
consumer initiated Y2K-related litigation, it may benefit from the "Y2K Act"
signed into law by the President of the United States in July 1999. The Act
contains several provisions that should reduce the potential exposure of
retailers to costs associated with involvement in any such litigation.
Forward-Looking Statements
This report contains forward-looking statements, which are subject to risks and
uncertainties, including, but not limited to, risks associated with the
development of new businesses and risks associated with Year 2000 issues.
Additional discussion of factors that could cause actual results to differ
materially from management's projections, forecasts, estimates and expectations
is contained in the Company's 1999 SEC filings, including the Company's report
on Form 10-K for the year ended February 28, 1999.
Page 17 of 38
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Balance Sheets
(Amounts in thousands)
<TABLE>
<S> <C>
Aug. 31, 1999 Feb. 28, 1999
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 205,782 $ 248,201
Net accounts receivable 412,609 476,952
Merchandise inventory 1,505,745 1,292,215
Prepaid expenses and other current assets 70,885 36,024
-------------- -------------
Total current assets 2,195,021 2,053,392
Property and equipment, net 780,367 801,827
Inter-Group Interest in the CarMax Group 265,141 260,758
Other assets 8,944 18,849
-------------- -------------
TOTAL ASSETS $ 3,249,473 $ 3,134,826
============== =============
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long-term debt $ 73,047 $ 1,457
Accounts payable 941,137 739,895
Short-term debt 1,035 3,411
Accrued expenses and other current liabilities 126,494 135,029
Deferred income taxes 4,983 2,090
-------------- -------------
Total current liabilities 1,146,696 881,882
Long-term debt, excluding current installments 110,854 286,865
Deferred revenue and other liabilities 131,787 107,070
Deferred income taxes 23,043 33,536
-------------- -------------
TOTAL LIABILITIES 1,412,380 1,309,353
GROUP EQUITY 1,837,093 1,825,473
-------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY $ 3,249,473 $ 3,134,826
============== =============
See accompanying notes to group financial statements.
Page 18 of 38
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Six Months Ended
August 31, August 31,
1999 1998 1999 1998
-------------- -------------- ------------- --------------
Net sales and operating revenues $ 2,422,667 $ 2,117,796 $ 4,627,586 $ 4,042,494
Cost of sales, buying and warehousing 1,818,164 1,591,174 3,482,352 3,050,860
-------------- -------------- ------------- --------------
Gross profit 604,503 526,622 1,145,234 991,634
-------------- -------------- ------------- --------------
Selling, general and administrative expenses 486,995 447,266 960,672 866,694
Interest expense 2,615 4,998 6,264 12,080
-------------- -------------- ------------- --------------
Total expenses 489,610 452,264 966,936 878,774
-------------- -------------- ------------- --------------
Earnings from continuing operations before
income taxes and the Inter-Group
Interest in the CarMax Group 114,893 74,358 178,298 112,860
Provision for income taxes 43,659 28,305 67,753 42,989
-------------- -------------- ------------- --------------
Earnings from continuing operations
before Inter-Group Interest in the
CarMax Group 71,234 46,053 110,545 69,871
Net earnings (loss) related to the Inter-
Group Interest in the CarMax Group 2,458 (2,280) 4,545 (4,759)
-------------- -------------- ------------- --------------
Earnings from continuing operations 73,692 43,773 115,090 65,112
-------------- -------------- ------------- --------------
Discontinued operations:
Loss from discontinued operations of Divx,
less income tax benefit -- (11,626) (16,215) (19,696)
Loss on disposal of Divx, including
provision for losses during phase-out
period, less income tax benefit -- -- (114,025) --
-------------- -------------- ------------- --------------
Loss from discontinued operations -- (11,626) (130,240) (19,696)
-------------- -------------- ------------- --------------
Net earnings (loss) $ 73,692 $ 32,147 $ (15,150) $ 45,416
============== ============== ============= ==============
Weighted average common shares:
Basic: 201,315 198,190 200,890 197,786
============== ============== ============= ==============
Diluted: 204,551 200,847 204,011 200,370
============== ============== ============= ==============
Net earnings (loss) per share:
Basic:
Continuing operations $ 0.37 $ 0.22 $ 0.57 $ 0.33
============= ============== ============= =============
Discontinued operations $ -- $ (0.06) $ (0.65) $ (0.10)
============= ============== ============= =============
Net earnings (loss) $ 0.37 $ 0.16 $ (0.08) $ 0.23
============= ============== ============= =============
Diluted:
Continuing operations $ 0.36 $ 0.22 $ 0.56 $ 0.33
============= ============== ============= =============
Discontinued operations $ -- $ (0.06) $ (0.64) $ (0.10)
============= ============== ============= =============
Net earnings (loss) $ 0.36 $ 0.16 $ (0.08) $ 0.23
============= ============== ============= =============
Dividends paid per common share $ 0.0175 $ 0.0175 $ 0.035 $ 0.035
============= ============== ============= =============
See accompanying notes to group financial statements.
Page 19 of 38
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Six Months Ended
August 31,
1999 1998
-------------- -------------
Operating Activities:
Net (loss) earnings $ (15,150) $ 45,416
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities of continuing operations:
Loss from discontinued operations 16,215 19,696
Loss on disposal of discontinued operations 114,025 --
Net (earnings) loss related to Inter-Group Interest
in the CarMax Group (4,545) 4,759
Depreciation and amortization 60,899 62,860
Loss on sales of property and equipment 621 1,126
Provision for deferred income taxes 1,641 (10,219)
Decrease in deferred revenue and other liabilities (21,283) (13,567)
Decrease in net accounts receivable 64,420 20,913
Increase in merchandise inventory (247,055) (103,118)
Decrease (increase) in prepaid expenses and other current assets 18,421 (6,571)
(Increase) decrease in other assets (703) 3,759
Increase in accounts payable, accrued expenses
and other current liabilities 167,173 80,298
-------------- -------------
Net cash provided by operating activities of continuing operations 154,679 105,352
-------------- -------------
Investing Activities:
Purchases of property and equipment (100,738) (104,061)
Proceeds from sales of property and equipment 42,704 71,650
-------------- -------------
Net cash used in investing activities of continuing operations (58,034) (32,411)
-------------- -------------
Financing Activities:
(Decrease) increase in allocated short-term debt, net (2,376) 10,524
Decrease in allocated long-term debt, net (104,421) (80,889)
Equity issuances, net 34,020 25,425
Dividends paid (7,088) (6,963)
-------------- -------------
Net cash used in financing activities of continuing operations (79,865) (51,903)
-------------- -------------
Cash used in discontinued operations (59,199) (36,476)
-------------- --------------
Decrease in cash and cash equivalents (42,419) (15,438)
Cash and cash equivalents at beginning of year 248,201 90,200
-------------- -------------
Cash and cash equivalents at end of period $ 205,782 $ 74,762
============== =============
See accompanying notes to group financial statements.
</TABLE>
Page 20 of 38
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Notes to Group Financial Statements
1. Basis of Presentation
The Company, which is comprised of Circuit City Stores, Inc. and its
subsidiaries, has two series of common stock - the Circuit City Group Stock
and the CarMax Group Stock. The Circuit City Group Common Stock is intended
to track the performance of the Circuit City store-related operations, the
Group's retained interest in the CarMax Group, and the Company's investment
in Digital Video Express, which is discontinued (see Note 8). The CarMax
Group Common Stock is intended to track the performance of the CarMax
operations. The Circuit City Group held a 76.0 percent interest in the
CarMax Group at August 31, 1999, a 76.6 percent interest at February 28,
1999, and a 76.8 percent interest at August 31, 1998.
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
financial statements, holders of Circuit City Stock and holders of CarMax
Stock are shareholders of the Company and are subject to all of the risks
associated with an investment in the Company and all of its businesses,
assets and liabilities. Such attribution does not affect title to the
assets or responsibility for the liabilities of the Company or any of its
subsidiaries. The results of operations or financial condition of one Group
could affect the results of operations or financial condition of the other
Group. Accordingly, the Company's consolidated financial statements
included herein should be read in conjunction with the financial statements
of each Group and with the notes to the consolidated and Group financial
statements included herein and in the Company's 1999 annual report to
shareholders.
2. Accounting Policies
The financial statements of the Circuit City Group conform to generally
accepted accounting principles. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments necessary
for a fair presentation of the interim consolidated financial statements
have been included. The fiscal year-end balance sheet data was derived from
audited financial statements.
3. Accounting for the Costs of Start-Up Activities
Effective March 1, 1999, the Circuit City Group adopted the American
Institute of Certified Public Accountants Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires costs of
start-up activities, including organization and pre-opening costs, to be
expensed as incurred. Prior to fiscal 2000, Circuit City capitalized
pre-opening costs for new store locations. Beginning in the month after the
store opened for business, the pre-opening costs were amortized over the
remainder of that fiscal year. Management has determined that SOP 98-5 does
not have a material impact on the Group's financial position, annual
results of operations or cash flows.
4. Prepaid Expenses and Other Current Assets
Income taxes receivable, which are included in prepaid expenses and other
current assets in the accompanying Group balance sheets, were $47,090,000
at August 31, 1999, and $7,143,000 at February 28, 1999.
Page 21 of 38
5. Net Earnings (Loss) per Share
Reconciliations of the numerator and denominator of basic and diluted net
earnings per share are presented below:
<PAGE>
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
(Amounts in thousands August 31, August 31,
except per share data) 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------
Weighted average common shares.................... 201,315 198,190 200,890 197,786
Dilutive potential common shares:
Options........................................ 2,366 1,986 2,278 1,950
Restricted stock............................... 870 671 843 634
--------------------------- ---------------------------
Weighted average common shares and
dilutive potential common shares............... 204,551 200,847 204,011 200,370
=========================== ===========================
Income from continuing operations................. $ 73,692 $ 43,773 $ 115,090 $ 65,112
Loss from discontinued operations................. -- (11,626) (130,240) (19,696)
--------------------------- ---------------------------
Income (loss) available to common shareholders.... $ 73,692 $ 32,147 $ (15,150) $ 45,416
=========================== ===========================
Basic net earnings (loss) per share:
Continuing operations.......................... $ 0.37 $ 0.22 $ 0.57 $ 0.33
Discontinued operations........................ -- (0.06) (0.65) (0.10)
--------------------------- ---------------------------
Net earnings (loss) per share.................. $ 0.37 $ 0.16 $ (0.08) $ 0.23
=========================== ===========================
Diluted net earnings (loss) per share:
Continuing operations.......................... $ 0.36 $ 0.22 $ 0.56 $ 0.33
Discontinued operations........................ -- (0.06) (0.64) (0.10)
--------------------------- ---------------------------
Net earnings (loss) per share.................. $ 0.36 $ 0.16 $ (0.08) $ 0.23
=========================== ===========================
</TABLE>
Certain options were not included in the computation of diluted net
earnings per share because the options' exercise prices were greater than
the average market price of the common shares. For the three-month and
six-month periods ended August 31, 1998, options to purchase 2,000,000
shares of Circuit City Group Stock at $29.50 per share were outstanding and
not included in the calculation.
6. Gain or Loss on Securitizations
For transfers that qualify as sales, the Group recognizes gains or losses
as a component of the Group's finance operations. Amortization of
prior-period gains on securitizations for the Circuit City Group's finance
operation exceeded current-period gains by $200,000 compared with a net
gain of $500,000 for the same period last fiscal year. Amortization of
prior-period gains on securitizations for the Circuit City Group's finance
operation exceeded current-period gains by $1.9 million for the six-month
period ended August 31, 1999, compared with $500,000 for the six-month
period ended August 31, 1998.
7. Interest Rate Swaps
On behalf of the Circuit City Group, the Company entered into five-year
interest rate swaps in October 1994, with notional amounts totaling $300
million related to the Circuit City Group's finance operation. These swaps
were entered into as part of the sales of receivables and are, therefore,
included in the gain or loss on sales of receivables.
Concurrent with the funding of the $175 million term loan in May 1995, the
Company entered into five-year interest rate swaps with notional amounts
aggregating $175 million. Recording the swaps at fair value would result in
a loss of $1.04 million at August 31, 1999, compared with a loss of $2.20
million at February 28, 1999.
Page 22 of 38
8. Loss from Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations, but
existing, registered customers would be able to view discs during a
two-year phase-out period. The operating results of Divx and the loss on
disposal of the Divx business have been segregated from continuing
operations and reported as separate line items, after tax, on the
consolidated and the Circuit City Group statements of operations for the
periods presented.
For the quarter ended August 31, 1999, the discontinued Divx operations had
no impact on the earnings of the Circuit City Group. Results for the second
quarter of last year include a loss of $11.6 million after an income tax
benefit of $7.1 million related to the Divx operations. For the six months
ended August 31, 1999, the loss from the discontinued Divx operations
totaled $16.2 million after an income tax benefit of $9.9 million, compared
with $19.7 million after an income tax benefit of $12.0 million in the
prior year. The loss on the disposal of the Divx business totaled $114.0
million after an income tax benefit of $69.9 million in the six-month
period ended August 31, 1999. The loss on the disposal includes a provision
of $3.0 million, after tax, for operating losses to be incurred during the
phase-out period. It also includes provisions for commitments under
licensing agreements with motion picture distributors, the write-down of
assets to net realizable value, lease termination cost, employee severance
and benefit costs and other contractual commitments.
The net liabilities or assets of the discontinued Divx operations reflected
in the accompanying Group balance sheet as of August 31, 1999, and February
28, 1999, are comprised of the following:
<TABLE>
<S> <C>
(Amounts in thousands) Aug. 31, 1999 Feb. 28, 1999
--------------------------------------------------------------------------------------------
Other current assets...................................... $ 338 $ 25,630
Property and equipment, net............................... 3,250 23,589
Noncurrent deferred tax asset............................. 5,844 --
Other assets.............................................. -- 7,895
Current liabilities...................................... (48,660) (23,126)
Noncurrent deferred tax liability........................ -- (3,397)
Other liabilities........................................ (46,000) --
------------------------------
Net (liabilities) assets of discontinued operations....... $ (85,228) $ 30,591
==============================
</TABLE>
9. Stock Split
On June 15, 1999, following the approval by the Company's shareholders of
an increase in the authorized Circuit City Group Common Stock, the board of
directors declared a two-for-one split of the outstanding Circuit City
Group Common Stock. Stockholders of record at the close of business on June
30, 1999, were entitled to participate in the stock split, which was
payable in the form of a 100 percent stock dividend. The distribution date
was July 15, 1999. The split was effected by transferring the par value for
the additional shares issued from the capital in excess of par value
account to the common stock accounts at May 31, 1999. The share, earnings
per share and dividends per share calculations included in the accompanying
consolidated financial statements reflect the Circuit City Group
two-for-one stock split.
10. Reclassifications
The Company has reclassified its prior year financial statements to present
the operating results of Divx as a discontinued operation.
Page 23 of 38
<PAGE>
ITEM 2.
CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Operating Revenues and General Comments
Sales for the second quarter of fiscal 2000 were $2.42 billion, an increase of
14 percent from $2.12 billion for the same period last year. For the six months
ended August 31, 1999, total sales were $4.63 billion, an increase of 15 percent
from $4.04 billion in the same period last year. The total and comparable store
sales increases reflect strong consumer demand across virtually all major
product categories. In addition to the strong product demand, Circuit City's
total sales growth includes continued expansion of its Superstore in new and
existing markets.
Circuit City's comparable store sales changes for the second quarter and first
six months of fiscal years 2000 and 1999 were as follows:
=============================================================================
FY 00 2nd Quarter Six Months
---------------------------- ---------------------- ======================
JUN JUL AUG FY 00 FY 99 FY 00 FY 99
---------------------------- ---------- ----------- ---------- ----------
8% 15% 6% 10% 6% 9% 5%
---------------------------- ---------- ----------- ---------- ----------
During the quarter, the Circuit City Group opened a total of five stores. The
second quarter expansion included Superstores in Johnstown, Pa.; Atlanta, Ga.;
Panama City, Fla.; Indianapolis, Ind.; and New York, N.Y. During the remainder
of the fiscal year, the Circuit City Group plans to add approximately 22
Superstores.
<TABLE>
<S> <C>
The table below details Circuit City retail units:
===============================================================================================================
Stores Open At End of Quarter Estimate
-----------------------------------
Aug. 31, 1999 Aug. 31, 1998 Feb. 29, 2000 Feb. 28, 1999
===============================================================================================================
Superstore
- ---------------------------------------------------------------------------------------------------------------
"D" Superstore 118 116 118 118
- ---------------------------------------------------------------------------------------------------------------
"C" Superstore 293 289 297 294
- ---------------------------------------------------------------------------------------------------------------
"B" Superstore 88 75 102 82
- ---------------------------------------------------------------------------------------------------------------
"A" Superstore 52 34 56 43
- ---------------------------------------------------------------------------------------------------------------
Electronics-Only 2 4 0 2
- ---------------------------------------------------------------------------------------------------------------
Circuit City Express 46 50 45 48
- ---------------------------------------------------------------------------------------------------------------
TOTAL 599 568 618 587
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.6 percent of sales in the second quarter of fiscal 2000 and 5.7
percent of sales in the second quarter of fiscal 1999. Third-party warranty
revenue declined to 4.3 percent of sales in this year's second quarter from 4.5
percent in the same period last year. The declines in gross dollar sales and
third-party warranty revenue 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. The total
extended warranty revenue that is reported in total sales was 4.5 percent of
sales in this year's second quarter versus 5.1 percent in the second quarter of
last fiscal year.
Page 24 of 38
<PAGE>
The percentage of merchandise sales represented by each category is listed
below:
<TABLE>
<S> <C>
============================================================================================
2nd Quarter Six Months
---------------------------------------------------------------------
Fiscal 2000 Fiscal 1999 Fiscal 2000 Fiscal 1999
- --------------------------------------------------------------------------------------------
TV 17 % 16 % 18 % 17 %
- --------------------------------------------------------------------------------------------
VCR/Camcorders 12 13 12 13
- --------------------------------------------------------------------------------------------
Audio 14 15 15 15
- --------------------------------------------------------------------------------------------
Home Office 28 26 27 26
- --------------------------------------------------------------------------------------------
Appliances 18 19 17 18
- --------------------------------------------------------------------------------------------
Other 11 11 11 11
- --------------------------------------------------------------------------------------------
TOTAL 100 % 100 % 100 % 100 %
- --------------------------------------------------------------------------------------------
</TABLE>
Circuit City's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, the Group has realized more of its
net sales and net earnings in the final fiscal quarter, which includes the
December holiday selling season, than in any other fiscal quarter. The net
earnings of any interim quarter are seasonally disproportionate to net sales
since administrative and certain operating expenses remain relatively constant
during the year. Therefore, interim results should not be relied upon as
necessarily indicative of results for the entire fiscal year.
Cost of Sales, Buying and Warehousing
For the quarter ended August 31, 1999, the gross profit margin increased to 25.0
percent of sales from 24.9 percent in the same period last year. The gross
profit margin was 24.7 percent of sales for the first six months of fiscal 2000
compared with 24.5 percent for the same period last year. The margin reflects
the combined impact of the merchandise sales mix, improvements in inventory
management and a competitive pricing and promotional environment.
Selling, General and Administrative Expenses
The Group's selling, general and administrative expense ratio was 20.1 percent
of sales in the second quarter of fiscal 2000, down from 21.1 percent in the
second quarter of fiscal 1999. For the first six months of fiscal 2000, the
expense ratio was 20.8 percent compared with 21.4 percent for the same period
last year. The comparable store sales growth was a primary contributor to the
improved expense ratio.
Interest Expense
Interest expense decreased to 0.2 percent of sales in the second quarter of
fiscal 2000 compared with 0.3 percent of sales for the same period last year.
For the six months ended August 31, 1999, interest expense decreased to 0.1
percent of sales compared with 0.3 percent for the same period last year. The
decrease is a result of the reduction in the Circuit City Group's allocation of
pooled debt.
Earnings Before Inter-Group Interest in the CarMax Group
Excluding the retained interest in the CarMax Group, earnings from continuing
operations for the Circuit City Group for the second quarter increased 54
percent to $71.2 million from $46.1 million for the same period last year. For
the six-month period, earnings before the Inter-Group Interest in the CarMax
Group were $110.5 million, an increase of 58 percent from $69.9 million for the
same period last year. Excluding CarMax, the earnings per share from continuing
operations of the Circuit City Group rose 52 percent to 35 cents in the second
quarter this year compared with 23 cents for the same period last year. For the
six-month period ended August 31, 1999, the earnings per share from continuing
operations of the Circuit City Group before the
Page 25 of 38
Inter-Group Interest in the CarMax Group rose 54 percent to 54 cents compared
with 35 cents for the same period last year. Management expects full-year
earnings growth for the Circuit City business of at least 30 percent.
Net Earnings Related to Inter-Group Interest in the CarMax Group
During the second quarter, the net earnings attributed to the Circuit City
Group's Inter-Group Interest in the CarMax Group were $2.5 million compared with
a net loss of $2.3 million for the same period last year. For the first six
months of fiscal 2000, net earnings attributed to the Circuit City Group's
Inter-Group Interest in the CarMax Group were $4.5 million compared with a net
loss of $4.8 million for the same period last year.
Earnings from Continuing Operations
Earnings from continuing operations for the quarter ended August 31, 1999,
increased 68 percent to $73.7 million from $43.8 million in the same period last
year. Earnings from continuing operations for the six months ended August 31,
1999, increased 77 percent to $115.1 million from $65.1 million in the same
period last year. Earnings per share from continuing operations in the second
quarter of fiscal 2000 increased 64 percent to 36 cents from 22 cents for the
same period last year. Earnings per share from continuing operations in the
first six months of fiscal 2000 increased 70 percent to 56 cents from 33 cents
for the same period last year.
Loss from Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease marketing
the Divx home video system and discontinue operations, but existing, registered
customers would be able to view discs during a two-year phase-out period. The
operating results of Divx and the loss on disposal of the Divx business have
been segregated from continuing operations and reported as separate line items,
after tax, on the consolidated and the Circuit City Group statements of
operations for the periods presented.
For the quarter ended August 31, 1999, the discontinued Divx operations had no
impact on the earnings of the Circuit City Group. Results for the second quarter
of last year include a loss of $11.6 million after an income tax benefit of $7.1
million related to the Divx operations. For the six months ended August 31,
1999, the loss from the discontinued Divx operations totaled $16.2 million after
an income tax benefit of $9.9 million, compared with $19.7 million after an
income tax benefit of $12.0 million in the prior year. The loss on the disposal
of the Divx business totaled $114.0 million after an income tax benefit of $69.9
million in the six-month period ended August 31, 1999. The loss on the disposal
includes a provision of $3.0 million, after tax, for operating losses to be
incurred during the phase-out period. It also includes provisions for
commitments under licensing agreements with motion picture distributors, the
write-down of assets to net realizable value, lease termination cost, employee
severance and benefit costs and other contractual commitments.
Net Earnings (Loss)
Net earnings for the Circuit City Group were $73.7 million in this year's second
quarter compared with $32.1 million in last year's second quarter. For the
six-month period ended August 31, 1999, the net loss for the Circuit City Group
was $15.2 million compared with net earnings of $45.4 million for the same
period last year.
Liquidity and Capital Resources
Total assets at August 31, 1999, were $3.2 billion. Merchandise inventory
increased $213.5 million to support anticipated sales and new and future store
openings. Accounts payable have increased $201.2 million since the end of fiscal
1999.
During the first half of the fiscal year, $175.0 million of long-term debt due
in May 2000 was reclassified to short-term debt. While the Company has the
ability to refinance this amount, the current intention is to pay the debt using
existing working capital. At August 31, 1999, $71.5 million of the debt was
allocated to the Circuit City Group.
Page 26 of 38
The Circuit City Group's finance operation has a master trust securitization
facility for its private-label card that allows the transfer of receivables
through private placement and the public market. The master trust vehicle
permits further expansion of the securitization program to meet future needs. As
of August 31, 1999, the master trust program had a total program capacity of
$1.60 billion. The Circuit City Group's finance operation also has a master
trust securitization facility related to its bankcard program. This master trust
vehicle permits further expansion of the securitization program in both the
public and private markets. As of August 31, 1999, the bankcard master trust
program had a total program capacity of $1.75 billion. The Company anticipates
that it will be able to expand its securitization programs to meet future needs.
The Group relies on the Company's external debt allocated to the Circuit City
Group to provide working capital needed to fund net assets not otherwise
financed through sale-leasebacks or receivable securitizations. All significant
financial activities of the Group are managed on a centralized basis and are
dependent on the financial condition of the Company as a whole. Such financial
activities include the investment of surplus cash, issuance and repayment of
debt, securitization of receivables and sale-leasebacks of real estate. At
August 31, 1999, the Company also maintained $365 million in seasonal lines that
are renewed annually with various banks, as well as a $150 million revolving
credit facility.
Management believes that proceeds from sales of property and equipment and
receivables, future increases in the Company's debt allocated to the Circuit
City Group, proceeds of equity issuances and cash generated by operations will
be sufficient to fund the Circuit City Group's capital expenditures and
operations.
Market Risk
The Company manages the private-label and bankcard revolving loan portfolios of
the Circuit City Group's finance operation. Portions of these portfolios are
securitized and, therefore, are not presented on the Circuit City 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.
As of August 31, 1999, the Circuit City Group's private-label and bankcard
portfolios had not changed significantly since February 28, 1999.
Year 2000
Refer to the "Circuit City Stores, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the Year 2000
issue and its impact on the Circuit City Group's financial statements.
Forward-Looking Statements
This report contains forward-looking statements, which are subject to risks and
uncertainties, including, but not limited to, risks associated with the
development of new businesses and risks associated with Year 2000 issues.
Additional discussion of factors that could cause actual results to differ
materially from management's projections, forecasts, estimates and expectations
is contained in the Company's 1999 SEC filings, including the Company's report
on Form 10-K for the year ended February 28, 1999.
Page 27 of 38
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Balance Sheets
(Amounts in thousands)
<TABLE>
<S> <C>
Aug. 31, 1999 Feb. 28, 1999
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 35,710 $ 17,679
Net accounts receivable 143,559 97,364
Inventory 286,022 225,460
Prepaid expenses and other current assets 1,027 620
------------ -----------
Total current assets 466,318 341,123
Property and equipment, net 225,527 203,946
Other assets 40,565 26,129
------------ -----------
TOTAL ASSETS $ 732,410 $ 571,198
============ ===========
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long term debt $ 104,713 $ 1,250
Accounts payable 100,418 59,838
Short-term debt 4,452 4,605
Accrued expenses and other current liabilities 14,599 8,556
Deferred income taxes 8,259 7,674
------------ -----------
Total current liabilities 232,441 81,923
Long-term debt, excluding current installments 139,731 139,720
Deferred revenue and other liabilities 6,057 5,015
Deferred income taxes 5,220 4,125
------------ -----------
TOTAL LIABILITIES 383,449 230,783
GROUP EQUITY 348,961 340,415
------------ -----------
TOTAL LIABILITIES AND GROUP EQUITY $ 732,410 $ 571,198
============ ===========
See accompanying notes to group financial statements.
Page 28 of 38
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Six Months Ended
August 31, August 31,
1999 1998 1999 1998
------------ ----------- ----------- ------------
Net sales and operating revenues $ 535,727 $ 400,031 $ 1,021,790 $ 746,394
Cost of sales 471,947 353,829 896,014 660,296
------------ ----------- ----------- ------------
Gross profit 63,780 46,202 125,776 86,098
------------ ----------- ----------- ------------
Selling, general and administrative expenses 55,918 49,746 111,822 94,664
Interest expense 2,647 1,316 4,330 1,565
------------ ----------- ----------- ------------
Total expenses 58,565 51,062 116,152 96,229
------------ ----------- ----------- ------------
Earnings (loss) before income taxes 5,215 (4,860) 9,624 (10,131)
Income tax provision (benefit) 1,982 (1,895) 3,658 (3,951)
------------ ----------- ----------- ------------
Net earnings (loss) $ 3,233 $ (2,965) $ 5,966 $ (6,180)
============ =========== =========== ============
Net earnings (loss) attributed to:
Circuit City Group common stock $ 2,458 $ (2,280) $ 4,545 $ (4,759)
CarMax Group common stock 775 (685) 1,421 (1,421)
------------ ----------- ----------- ------------
$ 3,233 $ (2,965) $ 5,966 $ (6,180)
============ =========== =========== ============
Weighted average common shares:
Basic 23,522 22,580 23,336 22,461
============ =========== =========== ============
Diluted 25,673 22,580 25,571 22,461
============ =========== =========== ============
Net earnings (loss) per share:
Basic $ 0.03 $ (0.03) $ 0.06 $ (0.06)
============ =========== =========== ============
Diluted $ 0.03 $ (0.03) $ 0.06 $ (0.06)
============ =========== ============ ============
Dividends paid per common share $ -- $ -- $ -- $ --
============ =========== =========== ============
See accompanying notes to group financial statements.
Page 29 of 38
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Six Months Ended
August 31,
1999 1998
-------------- -------------
Operating Activities:
Net earnings (loss) $ 5,966 $ (6,180)
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities:
Depreciation and amortization 6,807 4,321
Provision for deferred income taxes 1,680 (1)
Changes in operating assets and liabilities, net of effects from business
acquisitions:
Increase in deferred revenue and other liabilities 1,042 830
Increase in net accounts receivable (46,195) (28,518)
Increase in inventory (42,339) (36,864)
Increase in prepaid expenses and other current assets (407) (1,876)
Decrease (increase) in other assets 421 (1,450)
Increase in accounts payable, accrued expenses and other
current liabilities 46,623 5,541
-------------- -------------
Net cash used in operating activities (26,402) (64,197)
-------------- --------------
Investing Activities:
Cash used in business acquisitions (34,849) --
Purchases of property and equipment (28,259) (93,868)
Proceeds from sales of property and equipment 1,640 63,322
-------------- -------------
Net cash used in investing activities (61,468) (30,546)
-------------- -------------
Financing Activities:
(Decrease) increase in allocated short-term debt, net (153) 5,432
Increase in allocated long-term debt, net 103,474 80,032
Equity issuances, net 2,580 1,675
-------------- -------------
Net cash provided by financing activities 105,901 87,139
-------------- -------------
Increase (decrease) in cash and cash equivalents 18,031 (7,604)
Cash and cash equivalents at beginning of year 17,679 26,412
-------------- -------------
Cash and cash equivalents at end of period $ 35,710 $ 18,808
============== =============
See accompanying notes to group financial statements.
</TABLE>
Page 30 of 38
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Notes to Group Financial Statements
1. Basis of Presentation
The Company, which is comprised of Circuit City Stores, Inc. and its
subsidiaries, has two series of common stock - the Circuit City Group Stock
and the CarMax Group Stock. The Circuit City Group Common Stock is intended
to track the performance of the Circuit City store-related operations, the
Group's retained interest in the CarMax Group and the Company's investment
in Digital Video Express, which is discontinued. The CarMax Group Common
Stock is intended to track the performance of the CarMax operations. The
Circuit City Group held a 76.0 percent interest in the CarMax Group at
August 31, 1999, a 76.6 percent interest at February 28, 1999, and a 76.8
percent interest at August 31, 1998.
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
financial statements, holders of Circuit City Stock and holders of CarMax
Stock are shareholders of the Company and are subject to all of the risks
associated with an investment in the Company and all of its businesses,
assets and liabilities. Such attribution does not affect title to the
assets or responsibility for the liabilities of the Company or any of its
subsidiaries. The results of operations or financial condition of one Group
could affect the results of operations or financial condition of the other
Group. Accordingly, the Company's consolidated financial statements
included herein should be read in conjunction with the financial statements
of each Group and with the notes to the consolidated and Group financial
statements included herein and in the Company's 1999 annual report to
shareholders.
2. Accounting Policies
The financial statements of the CarMax Group conform to generally accepted
accounting principles. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments necessary
for a fair presentation of the interim group financial statements have been
included. The fiscal year-end balance sheet data was derived from audited
financial statements.
3. Accounting for the Costs of Start-Up Activities
Effective March 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities." SOP 98-5 requires costs of start-up
activities, including organization and pre-opening costs, to be expensed as
incurred. Prior to fiscal 2000, Circuit City capitalized pre-opening costs
for new store locations. Beginning in the month after the store opened for
business, the pre-opening costs were amortized over the remainder of that
fiscal year. Management has determined that SOP 98-5 does not have a
material impact on the Company's financial position, annual results of
operations or cash flows.
Page 31 of 38
4. Net Earnings (Loss) per Share
The calculation of net earnings (loss) per share is presented below:
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
(Amounts in thousands August 31, August 31,
except per share data) 1999 1998 1999 1998
--------------------------------------------------------------------------------------------------------------------
Weighted average common shares....................... 23,522 22,580 23,336 22,461
Dilutive potential common shares:
Options........................................... 1,997 -- 2,063 --
Restricted stock.................................. 154 -- 172 --
--------------------------- ---------------------------
Weighted average common shares and
dilutive potential common shares.................. 25,673 22,580 25,571 22,461
=========================== ===========================
Income (loss) available to common shareholders....... $ 775 $ (685) $ 1,421 $ (1,421)
Basic net earnings (loss) per share.................. $ 0.03 $ (0.03) $ 0.06 $ (0.06)
Diluted net earnings (loss) per share................ $ 0.03 $ (0.03) $ 0.06 $ (0.06)
</TABLE>
Certain options were not included in the computation of diluted net
earnings per share because the options' exercise prices were greater than
the average market price of the common shares. For the three-month and
six-month periods ended August 31, 1999, options to purchase 1,655,871
shares of CarMax Group Stock at prices ranging from $6.06 to $16.31 per
share were outstanding and not included in the calculation.
5. Gain or Loss on Securitizations
For transfers that qualify as sales, the Group recognizes gains or losses
as a component of the Group's finance operations. The net gain on sales of
receivables for the CarMax Group's finance operation was $931,000 for the
second quarter of this fiscal year compared with $2.2 million for the same
period last fiscal year. The net gain on sales of receivables for the
CarMax Group's finance operation totaled $2.7 million for the six-month
period ended August 31, 1999, compared with $4.8 million for the six-month
period ended August 31, 1998.
6. Interest Rate Swaps
Concurrent with the funding of the $175 million term loan in May 1995, the
Company entered into five-year interest rate swaps with notional amounts
aggregating $175 million. Recording the swaps at fair value would result in
a loss of $1.04 million at August 31, 1999, compared with a loss of $2.20
million at February 28, 1999.
On behalf of the CarMax Group, during the quarter the Company entered into
a 40-month amortizing swap with a notional amount of approximately $150
million related to the auto loan receivable securitization. The total
notional amount of the CarMax swaps was $553 million at August 31, 1999,
and $500 million at February 28, 1999. These swaps were entered into as
part of the sales of receivables and are, therefore, included in the gain
or loss on sales of receivables.
7. Business Acquisitions
During the second quarter, CarMax acquired the Nissan franchise rights and
related assets of one new-car dealership for an aggregate cost of $3.6
million. The acquisition was financed through available cash resources.
Costs in excess of the fair value of the acquired net tangible assets,
primarily inventory, have been recorded as goodwill and covenants not to
compete. The acquisition was accounted for under the purchase method and
the results of the operations of the acquired franchise have been included
in the accompanying Group financial statements since the date of
acquisition. Pro-forma information related to the acquisition is not
included as the impact of the acquisition on the accompanying Group
financial statements is not deemed to be material.
Page 32 of 38
<PAGE>
ITEM 2.
CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Operating Revenues and General Comments
Total sales for the CarMax Group rose 34 percent for the quarter ended August
31, 1999, to $535.7 million from $400.0 million in last year's second quarter.
For the six months ended August 31, 1999, total sales were $1.02 billion, an
increase of 37 percent from $746.4 million in the same period last year.
Used-car sales trends were consistent with the first quarter results. New-car
sales remained strong. The addition of 13 store locations since the second
quarter of last fiscal year and additional new-car franchises produced the
Group's total sales increase.
CarMax's comparable store sales changes for the second quarter and first six
months of fiscal years 2000 and 1999 were as follows:
================================================================================
FY 00 2nd Quarter Six Months
- ------------------------------ ------------------------ ------------------------
JUN JUL AUG FY 00 FY 99 FY 00 FY 99
- --------------------------------------------------------------------------------
(13%) (3%) (2%) (6%) 0% (5%) 0%
- --------------------------------------------------------------------------------
During the quarter, CarMax opened one used-car superstore, located in Nashville,
Tenn. Early in the quarter, the company purchased the Nissan franchise rights
held by Town & Country Pontiac Nissan, Inc. in Perryhall, Md., and added that
franchise to its White Marsh, Md., superstore. On September 1, 1999, CarMax
opened a used-car superstore in Duarte, Calif. The CarMax Group anticipates
opening two used-car satellite locations and a new facility for its Laurel
Toyota franchise adjacent to the Laurel, Md., superstore during the remainder of
the fiscal year.
The table below details CarMax retail units:
<TABLE>
<S> <C>
===============================================================================================================================
Stores Open At End of Quarter Estimate
-------------------------------------------
Aug. 31, 1999 Aug. 31, 1998 Feb. 29, 2000 Feb. 28, 1999
- -------------------------------------------------------------------------------------------------------------------------------
"C" and "B" Stores 12 14 13 12
- -------------------------------------------------------------------------------------------------------------------------------
"A" Stores 16 9 16 15
- -------------------------------------------------------------------------------------------------------------------------------
Prototype Satellite Stores 3 0 5 2
- -------------------------------------------------------------------------------------------------------------------------------
Stand-Alone New-Car Stores 5 0 6 2
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL 36 23 40 31
===============================================================================================================================
</TABLE>
The table below details CarMax franchises:
<TABLE>
<S> <C>
==========================================================================================================================
Franchises Open At End of
Quarter Estimate
----------------------------------
Aug. 31, 1999 Aug. 31, 1998 Feb. 29, 2000 Feb. 28, 1999
==========================================================================================================================
Integrated New-Car Franchises 8 2 8 6
- --------------------------------------------------------------------------------------------------------------------------
Stand-Alone New-Car Franchises 13 0 12 10
- --------------------------------------------------------------------------------------------------------------------------
TOTAL 21 2 20 16
==========================================================================================================================
</TABLE>
For the CarMax Group, gross dollar sales from all extended warranty programs
were 3.7 percent of sales in the second quarter of fiscal 2000 compared with 4.4
percent in the same period last year. The increase in sales of new vehicles,
which already include manufacturer-provided warranties and thus carry lower
warranty penetration rates, contributed to the decline. Third-party warranty
revenue decreased to 1.6 percent of sales in this year's second quarter from 2.0
percent in the same period last year. The total extended warranty revenue that
Page 33 of 38
is reported in total sales was 1.6 percent of sales in this year's second
quarter versus 2.0 percent in last year's second quarter.
CarMax's operations, in common with other retailers in general, are subject to
seasonal influences. Historically, CarMax stores have experienced more of their
net sales in the first two quarters of the fiscal year. The net earnings of any
interim quarter are seasonally disproportionate to net sales since
administrative and certain operating expenses remain relatively constant during
the year. Therefore, interim results should not be relied upon as necessarily
indicative of results for the entire fiscal year.
Cost of Sales
The CarMax Group's gross profit margin increased to 11.9 percent of sales in the
second quarter of fiscal 2000 from 11.5 percent for the same period last year.
For the six months ended August 31, 1998, the gross profit margin was 12.3
percent compared with 11.5 percent for the same period last year. CarMax's
profit improvement plan, which includes better inventory management, increased
retail service sales, pricing adjustments and the addition of consumer
electronics accessory sales produced the improved gross margin.
Selling, General and Administrative Expenses
The CarMax Group's selling, general and administrative expense ratio was 10.4
percent of sales in the second quarter of fiscal 2000 compared with 12.4 percent
of sales for the same period last year. For the six-month period ended August
31, 1999, the expense ratio was 10.9 percent of sales compared with 12.7 percent
in the same period last year. The expense leverage generated by the total sales
increase and effective cost controls that include more efficient advertising
programs, improved store staffing ratios and tightly managed corporate overhead
reduced the expense ratio.
Interest Expense
Interest expense increased to 0.5 percent of sales in the second quarter of
fiscal 2000 compared with 0.3 percent of sales for the same period last year.
For the six-month period ended August 31, 1999, interest expense was 0.4 percent
compared with 0.2 percent for the same period last year. The increase reflects a
rise in CarMax's allocation of pooled debt.
Net Earnings (Loss)
For the second quarter, the CarMax Group reported net earnings of $3.2 million
versus a net loss of $3.0 million for the same period last year. For the second
quarter, the net earnings attributed to the CarMax Group stock were $775,000,
compared with a net loss attributed to the CarMax Group stock of $685,000 for
the same period last year. The net earnings per share attributed to the CarMax
Group Common Stock were three cents for the second quarter of fiscal 2000
compared with a net loss per share of three cents for the same period last year.
The net earnings for the six-month period ended August 31, 1999, were $6.0
million compared with a net loss of $6.2 million for the same period last year.
For the six-month period ended August 31, 1999, the net earnings attributed to
the CarMax Group stock were $1.4 million, compared with a net loss attributed to
the CarMax Group stock of $1.4 million for the same period last year. The net
earnings per share attributed to the CarMax Group were six cents for the first
half of fiscal 2000 compared with a net loss per share of six cents for the same
period last year. CarMax's first-half performance reinforces management's
expectation for an improved full-year performance in the modest loss to
break-even range. Rather than expand in the Los Angeles market, CarMax will for
the foreseeable future continue to focus on improving profitability in existing
markets, especially the multi-store markets in Florida, Texas and Illinois. The
Group expects to open additional satellite stores and new-car franchises
integrated with used-car superstores, but plans limited, if any, expansion into
new markets.
Page 34 of 38
Liquidity and Capital Resources
Total assets at August 31, 1999, were $732.4 million, an increase of $161.2
million, or 28 percent, from $571.2 million at February 28, 1999. Inventory
increased $60.6 million to support new stores. Net accounts receivable increased
by $46.2 million, reflecting an increase in auto loans.
During the first half of the fiscal year, $175.0 million of long-term debt due
in May 2000 was reclassified to short-term debt. While the Company has the
ability to refinance this amount, the current intention is to pay the debt using
existing working capital. Payment of corporate debt will not necessarily result
in a reduction of CarMax Group allocated debt (see Note 1). At August 31, 1999,
$103.5 million of the debt was allocated to the CarMax Group.
As of August 31, 1999, the Company's asset securitization program, operated
through a special purpose subsidiary on behalf of the CarMax Group, allowed for
the transfer of up to $700 million in auto loan receivables. The Company
anticipates that it will be able to expand its securitization programs to meet
future needs through private placement and the public market.
The Group relies on the Company's external debt allocated to the CarMax Group to
fund operating deficits and to provide working capital needed to fund net assets
not otherwise financed through sale-leasebacks or receivable securitizations.
All significant financial activities of the Group are managed on a centralized
basis and are dependent on the financial condition of the Company as a whole.
Such financial activities include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables, proceeds of equity offerings
and sale-leasebacks of real estate. At August 31, 1999, the Company also
maintained $365 million in seasonal lines that are renewed annually with various
banks, as well as a $150 million revolving credit facility.
In late fiscal 1999, management established a CarMax inventory financing program
that is renewable annually; however, as of August 31, 1999, CarMax had not yet
used this program. Management believes that proceeds from the sales of property
and equipment and receivables, proceeds of equity offerings, other equity
issuances, future increases in the Company's debt allocated to the CarMax Group
and cash generated by operations will be sufficient to fund the CarMax Group's
capital expenditures and operations.
Market Risk
The Company manages the installment loan portfolio of the CarMax Group's finance
operation. Portions of this portfolio are securitized and, therefore, are not
presented on the Group's balance sheet. Interest rate exposure relating to these
receivables represents a market risk exposure that the Company has managed with
matched funding and interest rate swaps.
Total principal outstanding for fixed-rate automobile loans at August 31 and
February 28, 1999, was as follows:
(Amounts in millions) August 31 February 28
- -----------------------------------------------------------------------------
Fixed APR.............................. $ 779 $ 592
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 August 31 and February 28, 1999, were as follows:
Page 35 of 38
(Amounts in millions) August 31 February 28
- -----------------------------------------------------------------------------
Floating-rate securitizations
synthetically altered to fixed....... $ 553 $ 500
Floating-rate securitizations........... 142 39
Held by the Company:
For investment....................... 48 38
For sale............................. 36 15
---------------------------------
Total ................................. $ 779 $ 592
=================================
Because of the programs in place to manage interest rate exposure relating to
its installment loan portfolio, the Company expects to experience relatively
little impact as interest rates fluctuate in the future.
Year 2000
Refer to the "Circuit City Stores, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the Year 2000
issue and its impact on the CarMax Group's financial statements.
Forward-Looking Statements
This report contains forward-looking statements, which are subject to risks and
uncertainties, including, but not limited to, risks associated with the
development of new businesses and risks associated with Year 2000 issues.
Additional discussion of factors that could cause actual results to differ
materially from management's projections, forecasts, estimates and expectations
is contained in the Company's 1999 SEC filings, including the Company's report
on Form 10-K for the year ended February 28, 1999.
Page 36 of 38
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
Page 37 of 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRCUIT CITY STORES, INC.
By: s/Richard L. Sharp
Richard L. Sharp
Chairman of the Board and
Chief Executive Officer
By: s/Michael T. Chalifoux
Michael T. Chalifoux
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
By: s/Philip J. Dunn
Philip J. Dunn
Senior Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
October 15, 1999
Page 38 of 38
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 income
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> FEB-28-2000 FEB-28-2000 FEB-28-2000
<PERIOD-END> AUG-31-1999 AUG-31-1999 AUG-31-1999
<CASH> 241,492 205,782 35,710
<SECURITIES> 0 0 0
<RECEIVABLES> 556,168 412,609 143,559
<ALLOWANCES> 0 0 0
<INVENTORY> 1,791,767 1,505,745 286,022
<CURRENT-ASSETS> 2,661,339 2,195,021 466,318
<PP&E> 1,638,378 1,391,810 246,568
<DEPRECIATION> 632,484 611,443 21,041
<TOTAL-ASSETS> 3,716,742 3,249,473 732,410
<CURRENT-LIABILITIES> 1,379,137 1,146,696 232,441
<BONDS> 250,585 110,854 139,731
0 0 0
0 0 0
<COMMON> 113,560 101,636 11,924
<OTHER-SE> 1,807,353 1,735,457 337,037
<TOTAL-LIABILITY-AND-EQUITY> 3,716,742 3,249,473 732,410
<SALES> 5,649,376 4,627,586 1,021,790
<TOTAL-REVENUES> 5,649,376 4,627,586 1,021,790
<CGS> 4,378,366 3,482,352 896,014
<TOTAL-COSTS> 4,378,366 3,482,352 896,014
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 10,594 6,264 4,330
<INCOME-PRETAX> 187,922 178,298 9,624
<INCOME-TAX> 71,411 67,753 3,658
<INCOME-CONTINUING> 116,511 110,545 5,966
<DISCONTINUED> (130,240) (130,240) 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 4,545 (4,545)
<NET-INCOME> (13,729) (15,150) 1,421
<EPS-BASIC> 0 (0.08) 0.06
<EPS-DILUTED> 0 (0.08) 0.06
</TABLE>
