UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Quarterly
Period Ended May 31, 2000
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
-------
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Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2000
----------------------------------------------------------------------------- ----------------------------
Circuit City Stores, Inc. - Circuit City Group Common Stock, par value $0.50 205,292,247
Circuit City Stores, Inc. - CarMax Group Common Stock, par value $0.50 25,621,254
</TABLE>
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 35.
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CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets -
May 31, 2000 and February 29, 2000 4
Consolidated Statements of Operations -
Three Months Ended May 31, 2000 and 1999 5
Consolidated Statements of Cash Flows -
Three Months Ended May 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Circuit City Group Financial Statements:
Circuit City Group Balance Sheets -
May 31, 2000 and February 29, 2000 15
Circuit City Group Statements of Operations -
Three Months Ended May 31, 2000 and 1999 16
Circuit City Group Statements of Cash Flows -
Three Months Ended May 31, 2000 and 1999 17
Notes to Circuit City Group Financial Statements 18
CarMax Group Financial Statements:
CarMax Group Balance Sheets -
May 31, 2000 and February 29, 2000 25
CarMax Group Statements of Earnings -
Three Months Ended May 31, 2000 and 1999 26
CarMax Group Statements of Cash Flows -
Three Months Ended May 31, 2000 and 1999 27
Notes to CarMax Group Financial Statements 28
Item 2. Management's Discussion and Analysis:
-------------------------------------
Circuit City Stores, Inc. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
Circuit City Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 21
CarMax Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 30
Page 2 of 36
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
-----------------------------------------------------------
Circuit City Stores, Inc. Quantitative and Qualitative Disclosures 14
About Market Risk
Circuit City Group Quantitative and Qualitative Disclosures 24
About Market Risk
CarMax Group Quantitative and Qualitative Disclosures 33
About Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 6. Exhibits and Reports on Form 8-K 35
Page 3 of 36
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
May 31, 2000 Feb. 29, 2000
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 368,046 $ 643,933
Net accounts receivable 589,554 593,276
Inventory 1,848,910 1,689,209
Prepaid expenses and other current assets 32,433 16,197
-------------- -------------
Total current assets 2,838,943 2,942,615
Property and equipment, net 946,989 965,181
Other assets 48,712 47,552
-------------- -------------
TOTAL ASSETS $ 3,834,644 $ 3,955,348
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 2,379 $ 177,344
Accounts payable 1,000,728 960,131
Short-term debt 1,419 3,005
Accrued expenses and other current liabilities 128,767 204,561
Deferred income taxes 61,576 61,118
-------------- -------------
Total current liabilities 1,194,869 1,406,159
Long-term debt, excluding current installments 248,941 249,241
Deferred revenue and other liabilities 123,045 130,020
Deferred income taxes 25,875 27,754
-------------- -------------
TOTAL LIABILITIES 1,592,730 1,813,174
-------------- -------------
Stockholders' equity:
Circuit City Group common stock, $0.50 par value;
350,000,000 shares authorized; 204,876,000 shares
issued and outstanding as of May 31, 2000 102,438 101,934
CarMax Group common stock, $0.50 par value;
175,000,000 shares authorized; 25,620,000 shares
issued and outstanding as of May 31, 2000 12,810 12,807
Capital in excess of par value 618,719 576,574
Retained earnings 1,507,947 1,450,859
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,241,914 2,142,174
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,834,644 $ 3,955,348
============== =============
See accompanying notes to consolidated financial statements.
Page 4 of 36
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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
May 31,
2000 1999
-------------- -------------
Net sales and operating revenues $ 3,074,851 $ 2,690,982
Cost of sales, buying and warehousing 2,391,589 2,088,255
-------------- -------------
Gross profit 683,262 602,727
-------------- -------------
Selling, general and administrative expenses 579,206 529,581
Interest expense 6,221 5,332
-------------- -------------
Total expenses 585,427 534,913
-------------- -------------
Earnings from continuing operations before income taxes 97,835 67,814
Provision for income taxes 37,177 25,770
-------------- -------------
Earnings from continuing operations 60,658 42,044
-------------- -------------
Discontinued operations:
Loss from discontinued operations of Divx,
less income tax benefit - (16,215)
Loss on disposal of Divx, including provision for
losses during phase-out period, less income tax benefit - (114,025)
-------------- -------------
Loss from discontinued operations - (130,240)
-------------- -------------
Net earnings (loss) $ 60,658 $ (88,196)
============== =============
Net earnings (loss) attributed to:
Circuit City Group common stock:
Continuing operations $ 57,123 $ 41,398
Discontinued operations - (130,240)
CarMax Group common stock 3,535 646
-------------- -------------
$ 60,658 $ (88,196)
============== =============
Weighted average common shares:
Circuit City Group:
Basic 202,865 200,466
============== =============
Diluted 205,877 203,470
============== =============
CarMax Group:
Basic 25,519 23,150
============== =============
Diluted 26,918 25,470
============== =============
Net earnings (loss) per share:
Circuit City Group:
Basic:
Continuing operations $ 0.28 $ 0.21
============== =============
Discontinued operations $ - $ (0.65)
============== =============
Net earnings (loss) $ 0.28 $ (0.44)
============== =============
Diluted:
Continuing operations $ 0.28 $ 0.20
============== =============
Discontinued operations $ - $ (0.64)
============== =============
Net earnings (loss) $ 0.28 $ (0.44)
============== =============
CarMax Group:
Basic $ 0.14 $ 0.03
============== =============
Diluted $ 0.13 $ 0.03
============== =============
Dividends paid per common share:
Circuit City Group common stock $ 0.0175 $ 0.0175
============== =============
CarMax Group common stock $ - $ -
============== =============
See accompanying notes to consolidated financial statements.
Page 5 of 36
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CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31,
2000 1999
-------------- -------------
Operating Activities:
Net earnings (loss) $ 60,658 $ (88,196)
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities of continuing operations:
Loss from discontinued operations - 16,215
Loss on disposal of discontinued operations - 114,025
Depreciation and amortization 34,568 34,090
Loss on sales of property and equipment 545 541
Provision for deferred income taxes (1,418) (695)
Changes in operating assets and liabilities,
net of effects from business acquisitions:
Decrease in deferred revenue and other liabilities (1,475) (10,965)
Decrease (increase) in net accounts receivable 3,726 (12,389)
Increase in inventory (159,699) (103,062)
Increase in prepaid expenses and other current assets (16,233) (19,968)
Increase in other assets (2,030) (1,067)
Decrease in accounts payable, accrued expenses and
other current liabilities (35,465) (30,036)
-------------- -------------
Net cash used in operating activities of continuing operations (116,823) (101,507)
-------------- -------------
Investing Activities:
Cash used in business acquisitions - (31,278)
Purchases of property and equipment (33,807) (57,349)
Proceeds from sales of property and equipment 17,471 17,087
-------------- -------------
Net cash used in investing activities of continuing operations (16,336) (71,540)
-------------- -------------
Financing Activities:
(Payments on) proceeds from issuance of short-term debt, net (1,586) 3,939
Principal payments on long-term debt (175,265) (704)
Issuances of Circuit City Group common stock, net 41,506 16,448
Issuances of CarMax Group common stock, net 1,146 1,080
Dividends paid on Circuit City Group common stock (3,570) (3,538)
-------------- -------------
Net cash (used in) provided by financing activities
of continuing operations (137,769) 17,225
-------------- -------------
Cash used in discontinued operations (4,959) (32,945)
-------------- -------------
Decrease in cash and cash equivalents (275,887) (188,767)
Cash and cash equivalents at beginning of year 643,933 265,880
-------------- -------------
Cash and cash equivalents at end of period $ 368,046 $ 77,113
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6 of 36
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The common stock of Circuit City Stores, Inc. consists of two common stock
series, which are intended to reflect the performance of the Company's two
businesses. 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 has been discontinued (see Note 7). The CarMax
Group Common Stock is intended to track the performance of the CarMax
Group's operations. The Circuit City Group held a 74.7 percent interest in
the CarMax Group at May 31, 2000, a 74.7 percent interest at February 29,
2000, and a 76.3 percent interest at May 31, 1999.
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 Group Stock and holders of
CarMax Group 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 2000 annual
report to shareholders.
On June 15, 1999, the board of directors declared a two-for-one split of
the outstanding Circuit City Group Stock in the form of a 100 percent stock
dividend. Circuit City Group share, earnings per share and dividends per
share calculations included in the accompanying financial statements
reflect this stock split.
2. Accounting Policies
The consolidated financial statements of the Company conform to generally
accepted accounting principles. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments
(consisting only of normal, recurring adjustments) necessary for a fair
presentation of the interim consolidated financial statements have been
included. The fiscal year-end balance sheet data was derived from audited
financial statements.
Page 7 of 36
3. Net Earnings per Share
Reconciliations of the numerator and denominator of basic and diluted net
earnings per share are presented below:
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Three Months Ended
(Amounts in thousands May 31,
except per share data) 2000 1999
--------------------------------------------------------------------------------------------------
Circuit City Group:
Weighted average common shares.................................. 202,865 200,466
Dilutive potential common shares:
Options...................................................... 2,202 2,188
Restricted stock............................................. 810 816
-----------------------------
Weighted average common shares and
dilutive potential common shares............................. 205,877 203,470
=============================
Earnings from continuing operations available
to common shareholders....................................... $ 57,123 $ 41,398
=============================
Basic earnings per share from continuing
operations................................................... $ 0.28 $ 0.21
=============================
Diluted earnings per share from continuing
operations................................................... $ 0.28 $ 0.20
=============================
CarMax Group:
Weighted average common shares.................................. 25,519 23,150
Dilutive potential common shares:
Options...................................................... 1,212 2,130
Restricted stock............................................. 187 190
-----------------------------
Weighted average common shares and
dilutive potential common shares............................. 26,918 25,470
=============================
Net earnings available to common shareholders................... $ 3,535 $ 646
=============================
Basic net earnings per share.................................... $ 0.14 $ 0.03
=============================
Diluted net earnings per share.................................. $ 0.13 $ 0.03
=============================
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Certain options were not included in the computation of diluted net
earnings per share because the options' exercise prices were greater than
the average market price of the common shares. For the three-month period
ended May 31, 2000, options to purchase 100,000 shares of Circuit City
Group Stock at $56.28 per share were outstanding and not included in the
calculation. For the three-month period ended May 31, 1999, options to
purchase 4,800 shares of Circuit City Group Stock at $34.63 per share were
outstanding and not included in the calculation.
For the three-month period ended May 31, 2000, options to purchase
1,512,376 shares of CarMax Group Stock at prices ranging from $3.91 to
$16.31 per share were outstanding and not included in the calculation. For
the three-month period ended May 31, 1999, options to purchase 646,173
shares of CarMax Group Stock at prices ranging from $6.25 to $16.31 per
share were outstanding and not included in the calculation.
4. Gain or Loss on Securitizations
For transfers of receivables that qualify as sales, the Company recognizes
gains or losses as a component of the Company's finance operations. The
change in Circuit City Group's retained interests of credit card
securitizations consisted of originated interests of $11.5 million for the
three-month period ended May 31, 2000, less amortization of $13.2 million.
For the same period last fiscal year, the change in the retained interests
consisted of originated retained interests of $8.7 million, less
amortization of $10.4 million.
Page 8 of 36
The change in retained interests of auto loan securitizations for the
CarMax Group consisted of originated interests of $5.5 million for the
first quarter of this fiscal year, less amortization of $3.4 million. For
the same period last fiscal year, the change in the retained interests
consisted of originated retained interests of $4.7 million, less
amortization of $2.9 million.
5. Interest Rate Swaps
On behalf of the CarMax Group, the Company, in the first quarter of fiscal
2001, entered into two 40-month amortizing swaps related to auto loan
receivable securitizations. These swaps had an initial notional amount of
approximately $164 million. The total notional amount of CarMax swaps was
$472.7 million at May 31, 2000, and $327.0 million at February 29, 2000.
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.
6. 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 its finance operation. Divx is not
included as an operating segment because it was discontinued on June 16,
1999. Financial information for these segments for the first quarters of
fiscal 2001 and fiscal 2000 is presented below.
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Quarter Ended May 31, 2000
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
--------------------------------------------------------------------------------------------------------------------------
Revenues from external customers.......................... $ 2,449,110 $ 625,741 $ 3,074,851
Interest expense.......................................... 2,693 3,528 6,221
Depreciation and amortization............................ 29,992 4,576 34,568
Earnings from continuing operations
before income taxes.................................. 75,345 22,490 97,835
Provision for income taxes................................ 28,631 8,546 37,177
Earnings from continuing operations....................... 46,714 13,944 60,658
Total assets.............................................. $ 3,115,292 $ 719,086 $ 3,834,378
Quarter Ended May 31, 1999
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
--------------------------------------------------------------------------------------------------------------------------
Revenues from external customers.......................... $ 2,204,919 $ 486,063 $ 2,690,982
Interest expense.......................................... 3,649 1,683 5,332
Depreciation and amortization............................ 31,455 2,635 34,090
Earnings from continuing operations
before income taxes.................................. 63,405 4,409 67,814
Provision for income taxes................................ 24,094 1,676 25,770
Earnings from continuing operations....................... 39,311 2,733 42,044
Total assets.............................................. $ 2,710,736 $ 658,886 $ 3,369,622
</TABLE>
Earnings from continuing operations and total assets for Circuit City
exclude the Inter-Group Interest in the CarMax Group and the discontinued
Divx operations as discussed in Note 7.
Page 9 of 36
7. 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 that
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 taxes, on both the
consolidated and the Circuit City Group statements of operations.
Discontinued operations also have been segregated on the consolidated and
Circuit City Group statements of cash flows. However, Divx is not
segregated on the consolidated and Circuit City Group balance sheets.
The loss on the disposal includes a provision 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 costs,
employee severance and benefit costs and other contractual commitments.
For the quarter ended May 31, 2000, the discontinued Divx operations had no
impact on the earnings of Circuit City Stores, Inc. For the quarter ended
May 31, 1999, the loss from the discontinued Divx operations totaled $16.2
million after an income tax benefit of $9.9 million. The loss on the
disposal of the Divx business totaled $114.0 million after an income tax
benefit of $69.9 million in that same quarter.
The net liabilities of the discontinued Divx operations, reflected in the
accompanying consolidated balance sheets as of May 31, 2000, and February
29, 2000, are comprised of the following:
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(Amounts in thousands) May 31, 2000 Feb. 29, 2000
-----------------------------------------------------------------------------------------------
Current assets.......................................... $ 38 $ 612
Property and equipment, net............................. 228 513
Current liabilities..................................... (32,918) (32,650)
Non-current liabilities................................. (29,788) (35,291)
---------------------------------
Net liabilities of discontinued operations.............. $ (62,440) $ (66,816)
=================================
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Page 10 of 36
ITEM 2.
CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Operating Revenues and General Comments
Sales for the first quarter of fiscal 2001 were $3.07 billion, an increase of 14
percent from $2.69 billion for the same period last year. The Circuit City Group
sales growth was driven by strong sales of personal computers, entertainment
software, big-screen televisions and new technologies, including DVD players and
digital cameras. The Circuit City Group's total sales growth also reflects
continued Superstore expansion, including additions to existing markets and
entries into new markets since the first quarter of last fiscal year. For the
CarMax Group, the first quarter sales growth reflects a more consistent
execution of the CarMax consumer offer at a number of locations; continued
customer awareness of the CarMax web site; and the exit of a significant
competitor late last calendar year.
Comparable store sales changes for the first quarters of fiscal years 2001 and
2000 were as follows:
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============================= ============================================= ==============================
FY 01 1st Quarter
--------------------------------------------- ------------------------------
MAR APR MAY FY01 FY00
----------------------------- -------------- --------------- -------------- -------------- ---------------
Circuit City Group 9% 14% 0% 7% 9%
----------------------------- -------------- --------------- -------------- -------------- ---------------
CarMax Group 18% 17% 10% 14% (3%)
============================= ============== =============== ============== ============== ===============
</TABLE>
The May 2000 and first quarter fiscal 2001 comparable store sales changes for
the Circuit City Group exclude 31 stores where the Company began significant
remodeling in May. The stores will be excluded from the comparable store base
until remodeling is complete. In addition, the Company will no longer disclose
monthly comparable store sales changes because these disclosures focus attention
on short-term sales variations rather than overall business trends that are
critical to management decisions and to quarterly and longer term earnings
results. Therefore, going forward, the Company will only present quarterly
comparable store sales changes.
During the quarter, the Circuit City Group opened two stores. The Group opened
its 32nd store in the New York metropolitan market and its 5th store in the
Kansas City, Kan. market. During the remainder of the fiscal year, the Circuit
City Group plans to open approximately 23 Superstores. During the first quarter
of fiscal 2001, the Circuit City Group began the roll out of a number of new
technology displays that are designed to help consumers learn about the latest
capabilities available in consumer electronics, including digital memory
devices, wireless communications, Internet access and new digital video and
digital audio products. In addition, Circuit City is in the process of
redesigning its store format to add more space for consumer electronics and
personal computer products and expand its selection of self-service items.
CarMax has limited its geographic expansion to focus on building sales and
profitability in existing markets. Management is concentrating on the
hub-and-satellite operating strategy for its used-car superstores and seeking
new-car franchises to integrate or co-locate with used-car superstores.
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.4 percent of sales in the first quarter of fiscal 2001 and 5.5
percent of sales in the first quarter of fiscal 2000. Third-party warranty
revenue was 4.2 percent of sales in this year's first quarter and 4.4 percent in
the same period last year. The total extended warranty revenue that is reported
in total sales was 4.4 percent of sales in this year's first quarter versus 4.8
percent in the first quarter of last fiscal year. The decline reflects the
impact of lower average retail prices on consumer demand for the related
warranties in many categories, increased sales of some products that carry lower
warranty penetration rates and the shift in extended warranty sales from Circuit
City extended warranties to third-party extended warranties over the past five
years. The gross profit margins on products sold with extended warranties are
higher than the gross profit margins on products sold without extended
warranties.
Page 11 of 36
For the CarMax Group, gross dollar sales from all extended warranty programs
were 4.0 percent of sales in the first quarter of fiscal 2001 compared with 3.9
percent in the same period last year. Third-party warranty revenue increased to
1.8 percent of sales in this year's first quarter from 1.7 percent in the same
period last year. The total extended warranty revenue that is reported in total
sales was 1.8 percent of sales in the first quarter of both fiscal 2001 and
2000.
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.
Cost of Sales, Buying and Warehousing
The gross profit margin was 22.2 percent of sales in the first quarter of fiscal
2001 compared with 22.4 percent in the same period last year.
For the Circuit City Group, the gross profit margin was 24.4 percent of sales in
the first quarter compared with 24.5 percent in the same period last year. The
lower margin reflects changes in the merchandise sales mix.
For the CarMax Group, the gross profit margin increased to 13.7 percent of sales
in the first quarter of fiscal 2001 from 12.8 percent for the same period last
year. Better inventory management drove the margin improvement.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expense ratio was 18.8 percent
in the first quarter of fiscal 2001 compared with 19.7 percent for the same
period last year.
For the Circuit City Group, the selling, general and administrative expense
ratio was 21.2 percent of sales in the first quarter of fiscal 2001 compared
with 21.5 percent for the same period last year. The improvement in the expense
ratio reflects the increase in comparable store sales.
The CarMax Group's selling, general and administrative expense ratio improved to
9.5 percent of sales in the first quarter of fiscal 2001 compared with 11.5
percent of sales for the same period last year. Leverage from sales growth and
productivity improvements, including more effective advertising expenditures and
the implementation of the hub-and-satellite operating strategy in a number of
markets, produced this significant expense ratio improvement.
Interest Expense
Interest expense was 0.2 percent of sales in the first quarter of fiscal 2001
and fiscal 2000.
For the Circuit City Group, interest expense decreased to 0.1 percent of sales
in the first quarter of fiscal 2001 compared with 0.2 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.
For the CarMax Group, interest expense increased to 0.6 percent of sales in the
first quarter of fiscal 2001 compared with 0.4 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. increased 44
percent to $60.7 million from $42.0 million in last year's first quarter. The
increase reflects a 19 percent earnings increase achieved by the Circuit City
store business and a 410 percent earnings increase from the CarMax Group.
Page 12 of 36
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 that 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 taxes, on both the consolidated and the Circuit City
Group statements of operations. Discontinued operations also have been
segregated on the consolidated and Circuit City Group statements of cash flows.
However, Divx is not segregated on the consolidated and Circuit City Group
balance sheets.
For the quarter ended May 31, 2000, the discontinued Divx operations had no
impact on the earnings of Circuit City Stores, Inc. For the quarter ended May
31, 1999, the loss from the discontinued Divx operations totaled $16.2 million
after an income tax benefit of $9.9 million.
The loss on the disposal of the Divx business totaled $114.0 million after an
income tax benefit of $69.9 million in that same quarter. The loss on the
disposal includes a provision 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 costs, employee severance and benefit costs
and other contractual commitments.
Net Earnings (Loss)
Net earnings for the Company increased to $60.7 million for the first quarter of
fiscal 2001 from a net loss of $88.2 million in last year's first quarter.
Liquidity and Capital Resources
At May 31, 2000, total assets were $3.8 billion. The inventory increase of
$159.7 million reflects seasonal inventory increases, lower-than-anticipated
sales in the last month of the quarter and better in-stock positions in key
products such as personal computers and digital televisions. To support the
purchase of inventory, accounts payable increased $40.6 million from the end of
fiscal 2000. As scheduled, the Company used existing working capital to repay a
term loan totaling $175 million in May 2000. In June 2000, a term loan totaling
$130 million will be classified as a current liability since it becomes due in
June 2001. Although the Company has the ability to refinance this loan, it
intends to repay the debt using existing working capital.
The Circuit City Group's finance operation has a master trust securitization
facility which allows the transfer of its private-label card receivables through
private placement and the public market. As of May 31, 2000, the master trust
program had a total program capacity of $1.44 billion. The Circuit City Group's
finance operation also has a master trust securitization facility related to its
bankcard program. As of May 31, 2000, the bankcard master trust program had a
total program capacity of $1.63 billion. These master trust vehicles permit
further expansion of the securitization programs in both the public and private
markets.
The Company also has an asset securitization program, operated through a special
purpose subsidiary on behalf of the CarMax Group. This program had a capacity of
$500 million as of May 31, 2000. The Company, on behalf of the CarMax Group,
also has a public program of $495 million as of May 31, 2000.
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 and operating leases. The Company
anticipates that it will be able to expand its securitization programs to meet
future needs. Securitization transactions will be used to finance growth in
credit card and auto loan receivables.
At May 31, 2000, the Company maintained $370 million in seasonal lines that are
renewed annually with various banks, as well as a $150 million revolving credit
facility.
Page 13 of 36
<PAGE>
ITEM 3.
CIRCUIT CITY STORES, INC. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT 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 May 31, 2000, the private-label and bankcard portfolios of the Circuit
City Group had not changed significantly since February 29, 2000. However, as a
result of CarMax's growth, the auto installment loan portfolio has increased.
Total principal outstanding for fixed-rate automobile loans at May 31 and
February 29, 2000, was as follows:
(Amounts in millions) May 31 February 29
--------------------------------------------------------------------------------
Fixed APR................................ $1,023 $932
Financing for these receivables is achieved through asset securitization
programs which, in turn, issue both fixed- and floating-rate securities.
Interest rate exposure is hedged through the use of interest rate swaps matched
to projected payoffs. Receivables held by the Company for investment or sale are
financed with working capital. Financings at May 31 and February 29, 2000, were
as follows:
(Amounts in millions) May 31 February 29
--------------------------------------------------------------------------------
Fixed-rate securitizations............... $495 $559
Floating-rate securitizations
synthetically altered to fixed........ 473 327
Floating-rate securitizations............ 1 1
Held by the Company:
For investment*....................... 31 22
For sale.............................. 23 23
-------------------------------
Total ................................... $1,023 $932
===============================
* Held by a bankruptcy remote special purpose company.
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.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, which are subject
to risks and uncertainties. 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 SEC filings, including
the Company's report on Form 10-K for the year ended February 29, 2000.
Page 14 of 36
<PAGE>
<TABLE>
<S><C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Balance Sheets
(Amounts in thousands)
May 31, 2000 Feb. 29, 2000
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 356,676 $ 633,952
Net accounts receivable 447,620 464,023
Merchandise inventory 1,535,435 1,405,617
Prepaid expenses and other current assets 29,308 13,353
-------------- -------------
Total current assets 2,369,039 2,516,945
Property and equipment, net 734,906 753,325
Inter-Group Interest in the CarMax Group 268,799 257,535
Other assets 11,613 9,583
-------------- -------------
TOTAL ASSETS $ 3,384,357 $ 3,537,388
============== =============
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long-term debt $ 1,174 $ 85,735
Accounts payable 907,713 884,172
Short-term debt - 1,453
Accrued expenses and other current liabilities 111,516 184,705
Deferred income taxes 53,896 53,971
-------------- -------------
Total current liabilities 1,074,299 1,210,036
Long-term debt, excluding current installments 23,808 127,984
Deferred revenue and other liabilities 115,862 122,771
Deferred income taxes 19,754 21,877
-------------- -------------
TOTAL LIABILITIES 1,233,723 1,482,668
GROUP EQUITY 2,150,634 2,054,720
-------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY $ 3,384,357 $ 3,537,388
============== =============
See accompanying notes to group financial statements.
Page 15 of 36
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended
May 31,
2000 1999
-------------- -------------
Net sales and operating revenues $ 2,449,110 $ 2,204,919
Cost of sales, buying and warehousing 1,851,310 1,664,188
-------------- -------------
Gross profit 597,800 540,731
-------------- -------------
Selling, general and administrative expenses 519,762 473,677
Interest expense 2,693 3,649
-------------- -------------
Total expenses 522,455 477,326
-------------- -------------
Earnings from continuing operations before income taxes
and Inter-Group Interest in the CarMax Group 75,345 63,405
Provision for income taxes 28,631 24,094
-------------- -------------
Earnings from continuing operations before Inter-Group
Interest in the CarMax Group 46,714 39,311
Net earnings related to the Inter-Group Interest
in the CarMax Group 10,409 2,087
-------------- -------------
Earnings from continuing operations 57,123 41,398
-------------- -------------
Discontinued operations:
Loss from discontinued operations of Divx,
less income tax benefit - (16,215)
Loss on disposal of Divx, including provision for
losses during phase-out period, less income tax benefit - (114,025)
-------------- -------------
Loss from discontinued operations - (130,240)
-------------- -------------
Net earnings (loss) $ 57,123 $ (88,842)
============== =============
Weighted average common shares:
Basic 202,865 200,466
============== =============
Diluted 205,877 203,470
============== =============
Net earnings (loss) per share:
Basic:
Continuing operations $ 0.28 $ 0.21
============== =============
Discontinued operations $ - $ (0.65)
============== =============
Net earnings (loss) $ 0.28 $ (0.44)
============== =============
Diluted:
Continuing operations $ 0.28 $ 0.20
============== =============
Discontinued operations $ - $ (0.64)
============== =============
Net earnings (loss) $ 0.28 $ (0.44)
============== =============
Dividends paid per common share $ 0.0175 $ 0.0175
============== =============
See accompanying notes to group financial statements.
Page 16 of 36
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31,
2000 1999
------------ -----------
Operating Activities:
Net earnings (loss) $ 57,123 $ (88,842)
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities of continuing operations:
Loss from discontinued operations - 16,215
Loss on disposal of discontinued operations - 114,025
Net earnings related to Inter-Group Interest
in the CarMax Group (10,409) (2,087)
Depreciation and amortization 29,992 31,455
Loss on sales of property and equipment 545 541
Provision for deferred income taxes (2,195) (1,938)
Decrease in deferred revenue and other liabilities (1,409) (11,470)
Decrease in net accounts receivable 16,407 17,938
Increase in merchandise inventory (129,816) (83,151)
Increase in prepaid expenses and other current assets (15,952) (19,649)
Increase in other assets (2,030) (1,515)
Decrease in accounts payable, accrued expenses
and other current liabilities (49,916) (56,102)
------------ -----------
Net cash used in operating activities of continuing operations (107,660) (84,580)
------------ -----------
Investing Activities:
Purchases of property and equipment (29,874) (43,317)
Proceeds from sales of property and equipment 17,471 15,446
------------ -----------
Net cash used in investing activities of continuing operations (12,403) (27,871)
------------ -----------
Financing Activities:
(Decrease) increase in allocated short-term debt, net (1,453) 1,395
Decrease in allocated long-term debt, net (188,737) (54,221)
Equity issuances, net 41,506 16,448
Dividends paid (3,570) (3,538)
------------ -----------
Net cash used in financing activities of continuing operations (152,254) (39,916)
------------ -----------
Cash used in discontinued operations (4,959) (32,945)
------------ -----------
Decrease in cash and cash equivalents (277,276) (185,312)
Cash and cash equivalents at beginning of year 633,952 248,201
------------ -----------
Cash and cash equivalents at end of period $ 356,676 $ 62,889
============ ===========
</TABLE>
See accompanying notes to group financial statements.
Page 17 of 36
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Notes to Group Financial Statements
(Unaudited)
1. Basis of Presentation
The common stock of Circuit City Stores, Inc. consists of two common stock
series, which are intended to reflect the performance of the Company's two
businesses. 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 has been discontinued (see Note 5). The CarMax
Group Common Stock is intended to track the performance of the CarMax
Group's operations. The Circuit City Group held a 74.7 percent interest in
the CarMax Group at May 31, 2000, a 74.7 percent interest at February 29,
2000, and a 76.3 percent interest at May 31, 1999.
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 Group Stock and holders of
CarMax Group 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 2000 annual
report to shareholders.
On June 15, 1999, the board of directors declared a two-for-one split of
the outstanding Circuit City Group Stock in the form of a 100 percent stock
dividend. Circuit City Group share, earnings per share and dividends per
share calculations included in the accompanying financial statements
reflect this stock split.
2. Accounting Policies
The Circuit City Group has accounted for its interest in the CarMax Group
in a manner similar to the equity method of accounting. Generally accepted
accounting principles require that the CarMax Group be consolidated with
the Circuit City Group. Except for the effects of not consolidating the
CarMax Group with the Circuit City Group, the financial statements of the
Circuit City Group conform to generally accepted accounting principles. The
interim period financial statements are unaudited; however, in the opinion
of management, all adjustments, consisting only of normal, recurring
adjustments, necessary for a fair presentation of the interim financial
statements have been included. The fiscal year-end balance sheet data was
derived from audited financial statements.
Page 18 of 36
3. Earnings per Share
Reconciliations of the numerator and denominator of basic and diluted
earnings per share from continuing operations are presented below:
<TABLE>
<S><C>
Three Months Ended
(Amounts in thousands May 31,
except per share data) 2000 1999
--------------------------------------------------------------------------------------------------
Weighted average common shares.................................. 202,865 200,466
Dilutive potential common shares:
Options...................................................... 2,202 2,188
Restricted stock............................................. 810 816
-----------------------------
Weighted average common shares and
dilutive potential common shares............................. 205,877 203,470
=============================
Earnings from continuing operations
available to common shareholders............................. $ 57,123 $ 41,398
=============================
Basic earnings per share from continuing
operations................................................... $ 0.28 $ 0.21
=============================
Diluted earnings per share from continuing
operations................................................... $ 0.28 $ 0.20
=============================
</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 period
ended May 31, 2000, options to purchase 100,000 shares of Circuit City
Group Stock at $56.28 per share were outstanding and not included in the
calculation. For the three-month period ended May 31, 1999, options to
purchase 4,800 shares of Circuit City Group Stock at $34.63 per share were
outstanding and not included in the calculation.
4. Gain or Loss on Securitizations
For transfers of receivables that qualify as sales, the Group recognizes
gains or losses as a component of the Group's finance operations. The
change in Circuit City Group's retained interests of credit card
securitizations consisted of originated retained interests of $11.5 million
for the three-month period ended May 31, 2000, less amortization of $13.2
million. For the same period last fiscal year, the change in the retained
interests consisted of originated retained interests of $8.7 million, less
amortization of $10.4 million.
5. 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 that
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 taxes, on both the
consolidated and the Circuit City Group statements of operations.
Discontinued operations also have been segregated on the consolidated and
Circuit City Group statements of cash flows. However, Divx is not
segregated on the consolidated and Circuit City Group balance sheets.
The loss on the disposal includes a provision for operating losses to be
incurred during the phase-out period and also includes provisions for
commitments under licensing agreements with motion picture distributors,
Page 19 of 36
the write-down of assets to net realizable value, lease termination costs,
employee severance and benefit costs and other contractual commitments.
For the quarter ended May 31, 2000, the discontinued Divx operations had no
impact on the earnings of the Circuit City Group. For the quarter ended May
31, 1999, the loss from the discontinued Divx operations totaled $16.2
million after an income tax benefit of $9.9 million. The loss on the
disposal of the Divx business totaled $114.0 million after an income tax
benefit of $69.9 million in that same quarter.
The net liabilities of the discontinued Divx operations, reflected in the
accompanying Group balance sheets as of May 31, 2000, and February 29,
2000, are comprised of the following:
<TABLE>
<S><C>
(Amounts in thousands) May 31, 2000 Feb. 29, 2000
---------------------------------------------------------------------------------------------
Current assets............................................ $ 38 $ 612
Property and equipment, net............................... 228 513
Current liabilities....................................... (32,918) (32,650)
Non-current liabilities................................... (29,788) (35,291)
---------------------------------
Net liabilities of discontinued operations................ $ (62,440) $ (66,816)
=================================
</TABLE>
Page 20 of 36
ITEM 2.
CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales and Operating Revenues and General Comments
Sales for the first quarter of fiscal 2001 were $2.45 billion, an increase of 11
percent from $2.20 billion for the same period last year. The Group's sales
growth was driven by strong sales of personal computers, entertainment software,
big-screen televisions and new technologies, including DVD players and digital
cameras. The Circuit City Group's total sales growth also reflects continued
Superstore expansion, including additions to existing markets and entries into
new markets since the first quarter of last fiscal year.
The Circuit City Group's comparable store sales changes for the first quarter of
fiscal years 2001 and 2000 were as follows:
========================================= =========================
FY 01 1st Quarter
----------------------------------------- -------------------------
MAR APR MAY FY01 FY00
-------------- ------------ ------------- ------------ ------------
9% 14% 0% 7% 9%
============== ============ ============= ============ ============
The May 2000 and first quarter fiscal 2001 comparable store sales changes for
the Circuit City Group exclude 31 stores where the Company began significant
remodeling in May. The stores will be excluded from the comparable store base
until remodeling is complete. In addition, the Company will no longer disclose
monthly comparable store sales changes because these disclosures focus attention
on short-term sales variations rather than overall business trends that are
critical to management decisions and to quarterly and longer term earnings
results. Therefore, going forward, the Company will only present quarterly
comparable store sales changes.
During the quarter, the Circuit City Group opened two stores. The Group opened
its 32nd store in the New York metropolitan market and its 5th store in the
Kansas City, Kan. market. During the remainder of the fiscal year, the Circuit
City Group plans to open approximately 23 Superstores. During the first quarter
of fiscal 2001, the Circuit City Group began the roll out of a number of new
technology displays that are designed to help consumers learn about the latest
capabilities available in consumer electronics, including digital memory
devices, wireless communications, Internet access and new digital video and
digital audio products. In addition, Circuit City is in the process of
redesigning its store format to add more space for consumer electronics and
personal computer products and expand its selection of self-service items.
The table below details Circuit City retail units:
<TABLE>
<S><C>
=============================================================================================================
Stores Open At End of Quarter Estimate
------------------------------------------
May 31, 2000 May 31, 1999 Feb. 28, 2001 Feb. 29, 2000
=============================================================================================================
Superstore
-------------------------------------------------------------------------------------------------------------
"D" Superstore 118 118 118 118
-------------------------------------------------------------------------------------------------------------
"C" Superstore 295 294 319 295
-------------------------------------------------------------------------------------------------------------
"B" Superstore 104 84 103 102
-------------------------------------------------------------------------------------------------------------
"A" Superstore 56 50 56 56
-------------------------------------------------------------------------------------------------------------
Electronics-Only --- 2 --- ---
-------------------------------------------------------------------------------------------------------------
Appliance-Only --- --- 3 ---
-------------------------------------------------------------------------------------------------------------
Circuit City Express 43 46 40 45
-------------------------------------------------------------------------------------------------------------
TOTAL 616 594 639 616
=============================================================================================================
</TABLE>
Page 21 of 36
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.4 percent of sales in the first quarter of fiscal 2001 and 5.5
percent of sales in the first quarter of fiscal 2000. Third-party warranty
revenue was 4.2 percent of sales in this year's first quarter and 4.4 percent in
the same period last year. The total extended warranty revenue that is reported
in total sales was 4.4 percent of sales in this year's first quarter versus 4.8
percent in the first quarter of last fiscal year. The decline reflects the
impact of lower average retail prices on consumer demand for the related
warranties in many categories, increased sales of some products that carry lower
warranty penetration rates and the shift in extended warranty sales from Circuit
City extended warranties to third-party extended warranties over the past five
years. The gross profit margins on products sold with extended warranties are
higher than the gross profit margins on products sold without extended
warranties.
The percentage of merchandise sales represented by each category is listed
below:
==============================================================
1st Quarter
------------------------------------
Fiscal 2001 Fiscal 2000
--------------------------------------------------------------
TV 18% 19%
--------------------------------------------------------------
VCR/Camcorders 12% 13%
--------------------------------------------------------------
Audio 14% 15%
--------------------------------------------------------------
Home Office 31% 26%
--------------------------------------------------------------
Appliances 14% 16%
--------------------------------------------------------------
Other 11% 11%
--------------------------------------------------------------
TOTAL 100% 100%
==============================================================
Circuit City Group'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 May 31, 2000, the gross profit margin decreased to 24.4
percent of sales from 24.5 percent in the same period last year. The lower
margin reflects changes in the merchandise sales mix.
Selling, General and Administrative Expenses
The Group's selling, general and administrative expense ratio was 21.2 percent
of sales in the first quarter of fiscal 2001, down from 21.5 percent in the
first quarter of fiscal 2000. The improvement in the expense ratio reflects the
increase in comparable store sales.
Interest Expense
Interest expense decreased to 0.1 percent of sales in the first quarter of
fiscal 2001 compared with 0.2 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.
Earnings From Continuing Operations 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 first quarter increased 19 percent
to $46.7 million from $39.3 million for the same period last year. The earnings
per share from continuing operations of the Circuit City store business rose 21
percent to 23 cents in the first quarter this year compared with 19 cents for
the same period last year.
Page 22 of 36
Net Earnings Related to Inter-Group Interest in the CarMax Group
During the first quarter of fiscal 2001, the net earnings attributed to the
Circuit City Group's Inter-Group Interest in the CarMax Group were $10.4 million
compared with $2.1 million for the same period last year.
Earnings from Continuing Operations
Earnings from continuing operations for the quarter ended May 31, 2000,
increased 38 percent to $57.1 million from $41.4 million in the same period last
year. Earnings per share from continuing operations increased 40 percent to 28
cents from 20 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 that 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 the disposal of the Divx
business have been segregated from continuing operations and reported as
separate line items, after taxes, on both the consolidated and the Circuit City
Group statements of operations. Discontinued operations also have been
segregated on the consolidated and Circuit City Group statements of cash flows.
However, Divx is not segregated on the consolidated and Circuit City Group
balance sheets.
For the quarter ended May 31, 2000, the discontinued Divx operations had no
impact on the earnings of the Circuit City Group. For the quarter ended May 31,
1999, the loss from the discontinued Divx operations totaled $16.2 million after
an income tax benefit of $9.9 million. The loss on the disposal of the Divx
business totaled $114.0 million after an income tax benefit of $69.9 million in
that same quarter.
The loss on the disposal includes a provision 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 costs, employee
severance and benefit costs and other contractual commitments.
Net Earnings (Loss)
Net earnings for Circuit City Group for the quarter ended May 31, 2000, were
$57.1 million compared with a net loss of $88.8 million in the same period last
year.
Liquidity and Capital Resources
Total assets at May 31, 2000, were $3.4 billion. The merchandise inventory
increase of $129.8 million reflects seasonal inventory increases,
lower-than-anticipated sales in the last month of the quarter and better
in-stock positions in key products such as personal computers and digital
televisions. To support the purchase of inventory, accounts payable increased
$23.5 million from the end of fiscal 2000. As scheduled, the Company used
existing working capital to repay a term loan totaling $175 million in May 2000.
In June 2000, a term loan totaling $130 million will be classified as a current
liability since it becomes due in June 2001. Although the company has the
ability to refinance this loan, it intends to repay the debt using existing
working capital. Payment of corporate debt will not necessarily reduce Circuit
City Group allocated debt.
The Circuit City Group's finance operation has a master trust securitization
facility which allows the transfer of its private-label card receivables through
private placement and the public market. As of May 31, 2000, the master trust
program had a total program capacity of $1.44 billion. The Circuit City Group's
finance operation also has a master trust securitization facility related to its
bankcard program. As of May 31, 2000, the bankcard master trust program had a
total program capacity of $1.63 billion. These master trust vehicles permit
further expansion of the securitization programs in both the public and private
markets. 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
Page 23 of 36
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 May 31, 2000, the Company also maintained $370 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 and cash generated by operations will be sufficient to fund the
Circuit City Group's capital expenditures and operations.
ITEM 3.
CIRCUIT CITY GROUP QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT 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.
As of May 31, 2000, the private-label and bankcard portfolios of the Circuit
City Group had not changed significantly since February 29, 2000.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, which are subject
to risks and uncertainties. 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 SEC filings, including
the Company's report on Form 10-K for the year ended February 29, 2000.
Page 24 of 36
<PAGE>
<TABLE>
<S><C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Balance Sheets
(Amounts in thousands)
May 31, 2000 Feb. 29, 2000
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,370 $ 9,981
Net accounts receivable 141,934 129,253
Inventory 313,475 283,592
Prepaid expenses and other current assets 3,125 2,844
------------ ----------
Total current assets 469,904 425,670
Property and equipment, net 212,083 211,856
Other assets 37,099 37,969
------------ ----------
TOTAL ASSETS $ 719,086 $ 675,495
============ ==========
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long-term debt $ 1,205 $ 91,609
Accounts payable 93,015 75,959
Short-term debt 1,419 1,552
Accrued expenses and other current liabilities 17,251 19,856
Deferred income taxes 7,680 7,147
------------ ----------
Total current liabilities 120,570 196,123
Long-term debt, excluding current installments 225,133 121,257
Deferred revenue and other liabilities 7,183 7,249
Deferred income taxes 6,121 5,877
------------ ----------
TOTAL LIABILITIES 359,007 330,506
GROUP EQUITY 360,079 344,989
------------ -----------
TOTAL LIABILITIES AND GROUP EQUITY $ 719,086 $ 675,495
============ ===========
See accompanying notes to group financial statements.
Page 25 of 36
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended
May 31,
2000 1999
------------ -----------
Net sales and operating revenues $ 625,741 $ 486,063
Cost of sales 540,279 424,067
------------ -----------
Gross profit 85,462 61,996
------------ -----------
Selling, general and administrative expenses 59,444 55,904
Interest expense 3,528 1,683
------------ -----------
Total expenses 62,972 57,587
------------ -----------
Earnings before income taxes 22,490 4,409
Provision for income taxes 8,546 1,676
------------ -----------
Net earnings $ 13,944 $ 2,733
============ ===========
Net earnings attributed to:
Circuit City Group common stock $ 10,409 $ 2,087
CarMax Group common stock 3,535 646
------------ -----------
$ 13,944 $ 2,733
============ ===========
Weighted average common shares:
Basic 25,519 23,150
============ ===========
Diluted 26,918 25,470
============ ===========
Net earnings per share:
Basic $ 0.14 $ 0.03
============ ===========
Diluted $ 0.13 $ 0.03
============ ===========
Dividends paid per common share $ - $ -
============ ===========
See accompanying notes to group financial statements.
Page 26 of 36
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31,
2000 1999
------------- -----------
Operating Activities
Net earnings $ 13,944 $ 2,733
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 4,576 2,635
Provision for deferred income taxes 777 1,243
Changes in operating assets and liabilities, net of effects
from business acquisitions:
(Decrease) increase in deferred revenue and other liabilities (66) 505
Increase in net accounts receivable (12,681) (30,327)
Increase in inventory (29,883) (19,911)
Increase in prepaid expenses and other current assets (281) (319)
Decrease in other assets - 448
Increase in accounts payable, accrued expenses and other
current liabilities 14,451 26,066
------------- -----------
Net cash used in operating activities (9,163) (16,927)
------------- -----------
Investing Activities:
Cash used in business acquisitions - (31,278)
Purchases of property and equipment (3,933) (14,032)
Proceeds from sales of property and equipment - 1,641
------------- -----------
Net cash used in investing activities (3,933) (43,669)
------------- -----------
Financing Activities:
(Decrease) increase in allocated short-term debt, net (133) 2,544
Increase in allocated long-term debt, net 13,472 53,517
Equity issuances, net 1,146 1,080
------------- -----------
Net cash provided by financing activities 14,485 57,141
------------- -----------
Increase (decrease) in cash and cash equivalents 1,389 (3,455)
Cash and cash equivalents at beginning of year 9,981 17,679
------------- -----------
Cash and cash equivalents at end of period $ 11,370 $ 14,224
============= ===========
</TABLE>
See accompanying notes to group financial statements.
Page 27 of 36
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Notes to Group Financial Statements
(Unaudited)
1. Basis of Presentation
The Common stock of Circuit City Stores, Inc. consists of two common stock
series, which are intended to reflect the performance of the Company's two
businesses. The CarMax Group Common Stock is intended to track the
performance of the CarMax Group's operations. 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 has been
discontinued. The Circuit City Group held a 74.7 percent interest in the
CarMax Group at May 31, 2000, a 74.7 percent interest at February 29, 2000,
and a 76.3 percent interest at May 31, 1999.
Notwithstanding the attribution of the Company's assets and liabilities,
including contingent liabilities, and stockholders' equity between the
CarMax Group and the Circuit City Group for the purposes of preparing their
financial statements, holders of CarMax Group Stock and holders of Circuit
City Group 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 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 2000 annual report to
shareholders.
2. Accounting Policies
The financial statements of the CarMax Group conform to generally accepted
accounting principles. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments,
consisting only of normal, recurring adjustments, necessary for a fair
presentation of the interim group financial statements have been included.
The fiscal year-end balance sheet data was derived from audited financial
statements.
3. Net Earnings per Share
Reconciliations of the numerator and denominator of basic and diluted net
earnings per share are presented below:
<TABLE>
<S><C>
Three Months Ended
(Amounts in thousands May 31,
except per share data) 2000 1999
--------------------------------------------------------------------------------------------------
Weighted average common shares.................................... 25,519 23,150
Dilutive potential common shares:
Options......................................................... 1,212 2,130
Restricted stock................................................ 187 190
----------------------------
Weighted average common shares and
dilutive potential common shares................................ 26,918 25,470
============================
Net earnings available to common shareholders..................... $ 3,535 $ 646
============================
Basic net earnings per share...................................... $ 0.14 $ 0.03
============================
Diluted net earnings per share.................................... $ 0.13 $ 0.03
============================
</TABLE>
Page 28 of 36
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 period
ended May 31, 2000, options to purchase 1,512,376 shares of CarMax Group
Stock at prices ranging from $3.91 to $16.31 per share were outstanding and
not included in the calculation. For the three-month period ended May 31,
1999, options to purchase 646,173 shares of CarMax Group Stock at prices
ranging from $6.25 to $16.31 per share were outstanding and not included in
the calculation.
4. Gain or Loss on Securitizations
For transfers of receivables that qualify as sales, the Group recognizes
gains or losses as a component of the Group's finance operations. The
change in retained interests of auto loan securitizations for the CarMax
Group consisted of originated retained interests for auto loan
securitizations of $5.5 million for the first quarter of this fiscal year,
less amortization of $3.4 million. For the same period last fiscal year,
the change in the retained interests consisted of originated retained
interests of $4.7 million, less amortization of $2.9 million.
5. Interest Rate Swaps
On behalf of the CarMax Group, the Company, in the first quarter of fiscal
2001, entered into two 40-month amortizing swaps related to auto loan
receivable securitizations. These swaps had an initial notional amount of
approximately $164 million. The total notional amount of CarMax swaps was
$472.7 million at May 31, 2000, and $327.0 million at February 29, 2000.
These swaps were entered into as part of the sales of receivables and are,
therefore, included in the gain or loss on sales of receivables.
Page 29 of 36
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 29 percent for the quarter ended May 31,
2000, to $625.7 million from $486.1 million in last year's first quarter.
CarMax's first quarter sales growth reflects a more consistent execution of the
CarMax consumer offer at a number of locations; continued consumer awareness and
use of the CarMax web site; and the exit of a significant competitor late last
calendar year.
CarMax's comparable store sales changes for the first quarter of fiscal years
2001 and 2000 were as follows:
========================================== ==========================
FY 01 1st Quarter
------------------------------------------ --------------------------
MAR APR MAY FY01 FY00
--------------- ------------ ------------- ------------- ------------
18% 17% 10% 14% (3%)
=============== ============ ============= ============= ============
The Company will no longer disclose monthly comparable store sales changes
because these disclosures focus attention on short-term sales variations rather
than overall business trends that are critical to management decisions and to
quarterly and longer term earnings results. Therefore, going forward, the
Company will only present quarterly comparable store sales changes.
CarMax has limited its geographic expansion to focus on building sales and
profitability in existing markets. Management is concentrating on the
hub-and-satellite operating strategy for its used-car superstores and seeking
new-car franchises to integrate or co-locate with used-car superstores.
<TABLE>
<S><C>
The table below details CarMax retail units:
========================================================================================================================
Stores Open At End of Quarter Estimate
----------------------------------------
May 31, 2000 May 31, 1999 Feb. 28, 2001 Feb. 29, 2000
========================================================================================================================
"C" and "B" Stores 14 13 14 14
------------------------------------------------------------------------------------------------------------------------
"A" Store 17 16 17 17
------------------------------------------------------------------------------------------------------------------------
Prototype Satellite Store 4 2 4 4
------------------------------------------------------------------------------------------------------------------------
Stand-alone New-car Store 5 4 5 5
========================================================================================================================
TOTAL 40 35 40 40
========================================================================================================================
</TABLE>
For the CarMax Group, gross dollar sales from all extended warranty programs
were 4.0 percent of sales in the first quarter of fiscal 2001 compared with 3.9
percent in the same period last year. Third-party warranty revenue increased to
1.8 percent of sales in this year's first quarter from 1.7 percent in the same
period last year. The total extended warranty revenue that is reported in total
sales was 1.8 percent of sales in the first quarter of both fiscal 2001 and
2000.
Page 30 of 36
The percentage of sales dollars and sales units represented by used and new
vehicles for the first quarter is listed below:
================================================================================
Fiscal Years 2001 2000
================================================================================
Vehicle Dollars:
--------------------------------------------------------------------------------
Used Vehicles 80% 82%
--------------------------------------------------------------------------------
New Vehicles 20% 18%
--------------------------------------------------------------------------------
Vehicle Units:
--------------------------------------------------------------------------------
Used Vehicles 86% 88%
--------------------------------------------------------------------------------
New Vehicles 14% 12%
================================================================================
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
For the CarMax Group, the gross profit margin increased to 13.7 percent of sales
in the first quarter of fiscal 2001 from 12.8 percent for the same period last
year. Better inventory management drove the margin improvement.
Selling, General and Administrative Expenses
The CarMax Group's selling, general and administrative expense ratio was 9.5
percent of sales in the first quarter of fiscal 2001 compared with 11.5 percent
of sales for the same period last year. Leverage from sales growth and
productivity improvements, including more effective advertising expenditures and
the implementation of the hub-and-satellite operating strategy in a number of
markets, produced this significant expense ratio improvement.
Interest Expense
Interest expense increased to 0.6 percent of sales in the first quarter of
fiscal 2001 compared with 0.4 percent of sales for the same period last year.
The increase is a result of the rise in CarMax's allocation of pooled debt.
Net Earnings
During the first quarter, the CarMax Group reported net earnings of $13.9
million versus $2.7 million for the same period last year. The net earnings
attributed to the CarMax Group Common Stock were 13 cents per share for the
first quarter of fiscal 2001 compared with 3 cents per share for the same period
last year.
Liquidity and Capital Resources
Total assets at May 31, 2000, were $719.1 million, an increase of $43.6 million,
or 6 percent, from $675.5 million at February 29, 2000. Inventory increased
$29.9 million because of seasonal sales trends. Net accounts receivable
increased by $12.7 million, reflecting an increase in auto loans. As scheduled,
the Company used existing working capital to repay a term loan totaling $175
million in May 2000. In June 2000, a term loan totaling $130 million will be
classified as a current liability since it becomes due in June 2001. Although
the Company has the ability to refinance this loan, it intends to repay the debt
using existing working capital. Payment of corporate debt will not necessarily
reduce CarMax Group allocated debt.
Page 31 of 36
The Company has an asset securitization program, operated through a special
purpose subsidiary on behalf of the CarMax Group. This program had a capacity of
$500 million as of May 31, 2000. The Company, on behalf of the CarMax Group,
also has a public program of $495 million as of May 31, 2000. The Company
anticipates that it will be able to expand its securitization programs to meet
future needs.
The Group relies on the Company's external debt allocated to the CarMax Group to
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 May 31,
2000, the Company also maintained $370 million in seasonal lines that are
renewed annually with various banks, as well as a $150 million revolving credit
facility.
Management believes that proceeds from the sales of property and equipment and
receivables, future increases in the Company's debt allocated to the CarMax
Group and cash generated by operations will be sufficient to fund the CarMax
Group's capital expenditures and operations.
Page 32 of 36
ITEM 3.
CARMAX GROUP QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT 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 May 31 and
February 29, 2000, was as follows:
(Amounts in millions) May 31 February 29
--------------------------------------------------------------------------------
Fixed APR...................................... $1,023 $932
Financing for these receivables is achieved through asset securitizations which,
in turn, issue both fixed- and floating-rate securities. Interest rate exposure
is hedged through the use of interest rate swaps matched to projected payoffs.
<PAGE>
Receivables held by the Company for investment or sale are financed with working
capital. Financings at May 31 and February 29, 2000, were as follows:
(Amounts in millions) May 31 February 29
--------------------------------------------------------------------------------
Fixed-rate securitizations..................... $ 495 $ 559
Floating-rate securitizations
synthetically altered to fixed............. 473 327
Floating-rate securitizations.................. 1 1
Held by the Company:
For investment*............................ 31 22
For sale................................... 23 23
------ ------
Total.......................................... $1,023 $ 932
====== ======
* Held by a bankruptcy remote special purpose company.
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.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, which are subject
to risks and uncertainties. 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 SEC filings, including
the Company's report on Form 10-K for the year ended February 29, 2000.
Page 33 of 36
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the Company's shareholders was held
June 13, 2000.
(c) (i) At the annual meeting, the shareholders of the
Company elected Barbara S. Feigin and W. Alan
McCollough as directors for three-year terms and
Michael T. Chalifoux to a two-year term. The
elections were approved by the following votes:
<TABLE>
<S><C>
=======================================================================================================
Directors For Withheld
=======================================================================================================
Barbara S. Feigin 175,199,783 1,027,321
-------------------------------------------------------------------------------------------------------
W. Alan McCollough 175,203,105 1,023,999
-------------------------------------------------------------------------------------------------------
Michael T. Chalifoux 175,185,963 1,041,141
=======================================================================================================
(ii) At the annual meeting, the shareholders of the
Company approved the 2000 Non-Employee Directors
Stock Incentive Plan. This proposal was approved
by the following votes:
=======================================================================================================
2000 Broker
Non-Employee Directors For Against Abstain Non-Votes
Stock Incentive Plan
============================================================================
126,009,289 29,801,545 557,350 19,858,920
=======================================================================================================
(iii) At the annual meeting, the shareholders of the
Company approved amendments to the 1994 Stock
Incentive Plan. This proposal was approved by the
following votes:
=======================================================================================================
Amendments to
1994 Stock Broker
Incentive Plan For Against Abstain Non-Votes
============================================================================
128,928,061 26,874,926 565,197 19,858,920
=======================================================================================================
Page 34 of 36
<PAGE>
(iv) At the annual meeting, the shareholders of the
Company voted against a shareholder proposal
regarding a report on employment practices. This
proposal was defeated by the following votes:
=======================================================================================================
Shareholder Broker
Proposal For Against Abstain Non-Votes
============================================================================
31,754,359 116,537,052 8,076,773 19,858,920
=======================================================================================================
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(ii) Bylaws of the Company, as amended and restated
April 11, 2000, are filed herewith.
(10) Material Contracts*
(a) The Company's Non-Employee Directors Stock
Incentive Plan, filed as Appendix A to the
Company's Definitive Proxy Statement dated May
10, 2000, for the Annual Meeting of Shareholders
held on June 13, 2000, (File No. 1-5767) is
expressly incorporated herein by this reference.
(b) Amendments effective June 13, 2000, to the
Company's 1994 Stock Incentive Plan, as amended,
are filed herewith.
* All contracts listed under Exhibit 10 are management
contracts or compensatory plans, contracts or arrangements
of the Company required to be filed as an exhibit.
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
Page 35 of 36
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/ W. Alan McCollough
W. Alan McCollough
President 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
July 12, 2000
Page 36 of 36
