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, 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
------- -------
<TABLE>
<S> <C>
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 September 30, 2000
---------------------------------------------------------------------------- ---------------------------------
Circuit City Stores, Inc. - Circuit City Group Common Stock, par value $0.50 205,450,497
Circuit City Stores, Inc. - CarMax Group Common Stock, par value $0.50 25,641,432
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 36.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
---------------------
Consolidated Financial Statements:
----------------------------------
Consolidated Balance Sheets -
August 31, 2000, and February 29, 2000 4
Consolidated Statements of Operations -
Three Months and Six Months Ended August 31, 2000, and 1999 5
Consolidated Statements of Cash Flows -
Six Months Ended August 31, 2000, and 1999 6
Notes to Consolidated Financial Statements 7
Circuit City Group Financial Statements:
----------------------------------------
Circuit City Group Balance Sheets -
August 31, 2000, and February 29, 2000 17
Circuit City Group Statements of Operations -
Three Months and Six Months Ended August 31, 2000, and 1999 18
Circuit City Group Statements of Cash Flows -
Six Months Ended August 31, 2000, and 1999 19
Notes to Circuit City Group Financial Statements 20
CarMax Group Financial Statements:
----------------------------------
CarMax Group Balance Sheets -
August 31, 2000, and February 29, 2000 28
CarMax Group Statements of Earnings -
Three Months and Six Months Ended August 31, 2000, and 1999 29
CarMax Group Statements of Cash Flows -
Six Months Ended August 31, 2000, and 1999 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 23
CarMax Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 33
Page 2 of 37
Item 3. Quantitative and Qualitative Disclosures about Market Risk:
-----------------------------------------------------------
Circuit City Stores, Inc. Quantitative and Qualitative Disclosures 16
About Market Risk
Circuit City Group Quantitative and Qualitative Disclosures 27
About Market Risk
CarMax Group Quantitative and Qualitative Disclosures 35
About Market Risk
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 36
</TABLE>
Page 3 of 37
<TABLE>
<S> <C>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
Aug. 31, 2000 Feb. 29, 2000
------------- -------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 432,700 $ 643,933
Net accounts receivable 614,540 593,276
Inventory 1,846,749 1,689,209
Prepaid expenses and other current assets 38,144 16,197
-------------- -------------
Total current assets 2,932,133 2,942,615
Property and equipment, net 954,960 965,181
Other assets 46,359 47,552
-------------- -------------
TOTAL ASSETS $ 3,933,452 $ 3,955,348
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of long-term debt $ 132,318 $ 177,344
Accounts payable 1,017,295 960,131
Short-term debt 2,470 3,005
Accrued expenses and other current liabilities 164,252 204,561
Deferred income taxes 63,791 61,118
-------------- -------------
Total current liabilities 1,380,126 1,406,159
Long-term debt, excluding current installments 118,393 249,241
Deferred revenue and other liabilities 110,202 130,020
Deferred income taxes 18,689 27,754
-------------- -------------
TOTAL LIABILITIES 1,627,410 1,813,174
-------------- -------------
Stockholders' equity:
Circuit City Group common stock, $0.50 par value;
350,000,000 shares authorized; 205,402,000 shares
issued and outstanding as of August 31, 2000 102,701 101,934
CarMax Group common stock, $0.50 par value;
175,000,000 shares authorized; 25,630,000 shares
issued and outstanding as of August 31, 2000 12,815 12,807
Capital in excess of par value 626,698 576,574
Retained earnings 1,563,828 1,450,859
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,306,042 2,142,174
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,933,452 $ 3,955,348
============== =============
See accompanying notes to consolidated financial statements.
</TABLE>
Page 4 of 37
<PAGE>
<TABLE>
<S> <C>
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,
2000 1999 2000 1999
-------------- -------------- ------------- --------------
Net sales and operating revenues $ 3,179,781 $ 2,958,394 $ 6,254,632 $ 5,649,376
Cost of sales, buying and warehousing 2,477,990 2,290,111 4,869,579 4,378,366
Appliance exit costs 28,326 - 28,326 -
-------------- -------------- ------------- --------------
Gross profit 673,465 668,283 1,356,727 1,271,010
-------------- -------------- ------------- --------------
Selling, general and administrative expenses 572,298 542,913 1,151,504 1,072,494
Appliance exit costs 1,670 - 1,670 -
Interest expense 3,583 5,262 9,804 10,594
-------------- -------------- ------------- --------------
Total expenses 577,551 548,175 1,162,978 1,083,088
-------------- -------------- ------------- --------------
Earnings from continuing operations
before income taxes 95,914 120,108 193,749 187,922
Provision for income taxes 36,447 45,641 73,624 71,411
-------------- -------------- ------------- --------------
Earnings from continuing operations 59,467 74,467 120,125 116,511
-------------- -------------- ------------- --------------
Discontinued operations:
Loss from discontinued operations of
Divx, less income tax benefit - - - (16,215)
Loss on disposal of Divx, less
income tax benefit - - - (114,025)
-------------- -------------- ------------- --------------
Loss from discontinued operations - - - (130,240)
-------------- -------------- ------------- --------------
Net earnings (loss) $ 59,467 $ 74,467 $ 120,125 $ (13,729)
============== ============== ============= ==============
Net earnings (loss) attributed to:
Circuit City Group common stock:
Continuing operations $ 55,341 $ 73,692 $ 112,464 $ 115,090
Discontinued operations - - - (130,240)
CarMax Group common stock 4,126 775 7,661 1,421
-------------- -------------- ------------- --------------
$ 59,467 $ 74,467 $ 120,125 $ (13,729)
============== ============== ============= ==============
Weighted average common shares:
Circuit City Group basic 203,770 201,315 203,318 200,890
============== ============== ============= ==============
Circuit City Group diluted 205,494 204,551 205,686 204,011
============== ============== ============= ==============
CarMax Group basic 25,550 23,522 25,534 23,336
============== ============== ============= ==============
CarMax Group diluted 26,956 25,673 26,937 25,571
============== ============== ============= ==============
Net earnings (loss) per share:
Circuit City Group basic:
Continuing operations $ 0.27 $ 0.37 $ 0.55 $ 0.57
============== ============== ============= ==============
Discontinued operations $ - $ - $ - $ (0.65)
============== ============== ============= ==============
Net earnings (loss) $ 0.27 $ 0.37 $ 0.55 $ (0.08)
============== ============== ============= ==============
Circuit City Group diluted:
Continuing operations $ 0.27 $ 0.36 $ 0.55 $ 0.56
============== ============== ============= ==============
Discontinued operations $ - $ - $ - $ (0.64)
============== ============== ============= ==============
Net earnings (loss) $ 0.27 $ 0.36 $ 0.55 $ (0.08)
============== ============== ============= ==============
CarMax Group basic $ 0.16 $ 0.03 $ 0.30 $ 0.06
============== ============== ============= ==============
CarMax Group diluted $ 0.15 $ 0.03 $ 0.28 $ 0.06
============== ============== ============= ==============
Dividends paid per common share:
Circuit City Group common stock $ 0.0175 $ 0.0175 $ 0.0350 $ 0.0350
============== ============== ============= ==============
CarMax Group common stock $ - $ - $ - $ -
============== ============== ============= ==============
See accompanying notes to consolidated financial statements.
</TABLE>
Page 5 of 37
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
<TABLE>
<S> <C>
Six Months Ended
August 31,
2000 1999
-------------- -------------
Operating Activities:
---------------------
Net earnings (loss) $ 120,125 $ (13,729)
Adjustments to reconcile net earnings (loss) to net cash (used in)
provided by operating activities of continuing operations:
Loss from discontinued operations - 16,215
Loss on disposal of discontinued operations - 114,025
Depreciation and amortization 66,957 67,706
Loss on sales of property and equipment 898 621
Provision for deferred income taxes (6,389) 3,321
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Decrease in deferred revenue and other liabilities (3,818) (20,241)
(Increase) decrease in net accounts receivable (21,250) 18,225
Increase in inventory (156,740) (289,394)
(Increase) decrease in prepaid expenses and other current assets (21,944) 18,014
Decrease (increase) in other assets 346 (282)
Increase in accounts payable, accrued expenses and
other current liabilities 15,643 213,796
-------------- -------------
Net cash (used in) provided by operating activities of
continuing operations (6,172) 128,277
-------------- -------------
Investing Activities:
---------------------
Cash used in business acquisitions (1,325) (34,849)
Purchases of property and equipment (97,475) (128,997)
Proceeds from sales of property and equipment 41,068 44,344
-------------- -------------
Net cash used in investing activities of continuing operations (57,732) (119,502)
-------------- -------------
Financing Activities:
---------------------
Payments on short-term debt, net (535) (2,529)
Principal payments on long-term debt (175,874) (947)
Issuances of Circuit City Group common stock, net 49,731 34,020
Issuances of CarMax Group common stock, net 1,168 2,580
Dividends paid on Circuit City Group common stock (7,156) (7,088)
-------------- -------------
Net cash (used in) provided by financing activities of
continuing operations (132,666) 26,036
-------------- -------------
Cash used in discontinued operations (14,663) (59,199)
-------------- -------------
Decrease in cash and cash equivalents (211,233) (24,388)
Cash and cash equivalents at beginning of year 643,933 265,880
-------------- -------------
Cash and cash equivalents at end of period $ 432,700 $ 241,492
============== =============
See accompanying notes to consolidated financial statements.
</TABLE>
Page 6 of 37
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 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 Circuit City Group's
retained interest in the CarMax Group and the Company's investment in
Digital Video Express, which has been discontinued (see Note 8). The CarMax
Group Common Stock is intended to track the performance of the CarMax
Group's operations. The Circuit City Group held a 74.6 percent interest in
the CarMax Group at August 31, 2000, a 74.7 percent interest at February
29, 2000, and a 76.0 percent interest at August 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 each
Group's financial statements, holders of Circuit City Group Common Stock
and holders of CarMax Group Common 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 the
Company's SEC filings, including its annual report on Form 10-K and its
registration statement on Form 8-A.
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 37
3. Earnings per Share
------------------
Reconciliations of the numerator and denominator of basic and diluted
earnings per share are presented below:
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
(Amounts in thousands August 31, August 31,
except per share data) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
Weighted average common shares............................. 203,770 201,315 203,318 200,890
Dilutive potential common shares:
Options................................................. 1,033 2,366 1,618 2,278
Restricted stock........................................ 691 870 750 843
--------------------------- ---------------------------
Weighted average common shares and
dilutive potential common shares........................ 205,494 204,551 205,686 204,011
=========================== ===========================
Earnings from continuing operations available
to common shareholders.................................. $ 55,341 $ 73,692 $ 112,464 $ 115,090
Basic earnings per share from continuing
operations.............................................. $ 0.27 $ 0.37 $ 0.55 $ 0.57
Diluted earnings per share from continuing
operations.............................................. $ 0.27 $ 0.36 $ 0.55 $ 0.56
CarMax Group:
Weighted average common shares............................. 25,550 23,522 25,534 23,336
Dilutive potential common shares:
Options................................................. 1,344 1,997 1,278 2,063
Restricted stock........................................ 62 154 125 172
--------------------------- ---------------------------
Weighted average common shares and
dilutive potential common shares........................ 26,956 25,673 26,937 25,571
=========================== ===========================
Net earnings available to common shareholders.............. $ 4,126 $ 775 $ 7,661 $ 1,421
Basic net earnings per share............................... $ 0.16 $ 0.03 $ 0.30 $ 0.06
Diluted net earnings per share............................. $ 0.15 $ 0.03 $ 0.28 $ 0.06
</TABLE>
Certain options were not included in the computation of diluted 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
August 31, 2000, options to purchase 5,614,789 shares of Circuit City Group
Common Stock at prices ranging from $34.84 to $47.53 per share were
outstanding and not included in the calculation. For the three-month period
ended August 31, 1999, options to purchase 2,000,000 shares of Circuit City
Group Common Stock at $29.50 per share were outstanding and not included in
the calculation.
For the three-month period ended August 31, 2000, options to purchase
1,458,326 shares of CarMax Group Common 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 August 31, 1999, options to purchase
1,655,871 shares of CarMax Group Common Stock at prices ranging from $6.06
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. For the
three-month period ended August 31, 2000, the change in Circuit City
Group's retained interests of credit card securitizations consisted of
originated interests of $11.6 million, less amortization of $12.1 million.
For the same period last fiscal year, the change in the retained interests
consisted of originated interests of $9.1 million, less amortization of
$9.3 million. For the six-month period
Page 8 of 37
ended August 31, 2000, the change in the retained interests consisted of
originated interests of $23.1 million, less amortization of $25.3 million.
For the same period last fiscal year, the change in retained interests
consisted of originated interests of $17.8 million, less amortization of
$19.7 million.
For the second quarter of this fiscal year, the change in retained
interests of automobile loan securitizations for the CarMax Group
consisted of originated interests of $7.5 million, less amortization of
$4.0 million. For the same period last fiscal year, the change in the
retained interests consisted of originated interests of $4.1 million, less
amortization of $3.1 million. For the six-month period ended August 31,
2000, the change in retained interests consisted of originated interests of
$13.0 million, less amortization of $7.4 million. For the same period last
fiscal year, the change consisted of originated interests of $8.8 million,
less amortization of $6.0 million.
5. Interest Rate Swaps
-------------------
On behalf of the CarMax Group, during the quarter the Company entered into
three 40-month amortizing swaps with a total notional amount of
approximately $209 million related to automobile loan receivable
securitizations. The total notional amount of the CarMax swaps was $649
million at August 31, 2000, and $327 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. Appliance Exit Costs
--------------------
On July 25, 2000, the Company announced plans to exit the major appliance
category in all stores. This decision reflects management's sales and
earnings expectations for its new store design and significant sales
weakness and increased competition in the major appliance category. To exit
the appliance business, the Company will close six distribution centers by
December 31, 2000, and two more by July 31, 2001. The Company also will
consolidate certain home delivery and service operations by the end of the
fiscal year. The majority of these properties are leased. The Company is in
the process of marketing these properties to be subleased. Circuit City
will maintain control over its in-home major appliance repair business,
although repairs will be subcontracted to an unrelated third party. In the
second quarter of fiscal 2001, the Company recorded appliance exit costs of
$30 million. The majority of these expenses are included in cost of sales,
buying and warehousing on the statements of operations.
Of the total exit costs, $4.4 million relates to employee termination
benefits. The Company will terminate approximately 1,000 employees. These
reductions will take place mainly in the service, distribution and
merchandising functions. The exit costs also include $17.8 million for
lease termination costs and $5.0 million, net of salvage value, for the
write-down of fixed assets.
<TABLE>
<S> <C>
Expenses Liability at
Original Adjustments Paid or Assets August 31,
(Amounts in millions) Estimate to Estimate Written Off 2000
-------------------------------------------------------------------------------------------------------------------------
Lease Termination Costs................... $ 17.8 $ - $ - $ 17.8
Fixed Asset Write-Downs................... 5.0 - 5.0 -
Employee Termination Benefits............. 4.4 - - 4.4
Other..................................... 2.8 - 2.8 -
----------------------------------------------------------------------------
Appliance Exit Costs...................... $ 30.0 $ - $ 7.8 $ 22.2
============================================================================
</TABLE>
7. 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
Page 9 of 37
CarMax Group's finance operation. Financial information for these segments
for the three- and six-month periods ended August 31, 2000 and 1999, is
presented below:
<TABLE>
<S> <C>
Three Months Ended August 31, 2000
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
---------------------------------------------------------------------------------------------------------------
Revenues from external customers.......................... $ 2,506,220 $ 673,561 $ 3,179,781
Interest expense.......................................... 625 2,958 3,583
Depreciation and amortization............................ 27,819 4,570 32,389
Earnings from continuing operations
before income taxes.................................. 69,671 26,243 95,914
Provision for income taxes................................ 26,475 9,972 36,447
Earnings from continuing operations....................... 43,196 16,271 59,467
Total assets.............................................. $ 3,289,201 $ 643,793 $ 3,932,994
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
Six Months Ended August 31, 2000
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
------------------------------------------------------------------------------------------------------------------
Revenues from external customers.......................... $ 4,955,330 $1,299,302 $ 6,254,632
Interest expense.......................................... 3,318 6,486 9,804
Depreciation and amortization............................ 57,811 9,146 66,957
Earnings from continuing operations
before income taxes.................................. 145,016 48,733 193,749
Provision for income taxes................................ 55,106 18,518 73,624
Earnings from continuing operations....................... 89,910 30,215 120,125
Total assets.............................................. $ 3,289,201 $ 643,793 $ 3,932,994
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
</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 8.
Page 10 of 37
8. 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 and six-month periods ended August 31, 2000, and for the
quarter ended August 31, 1999, the discontinued Divx operations had no
impact on the earnings of Circuit City Stores, Inc. 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. 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 period.
The net liabilities of the discontinued Divx operations, reflected in the
accompanying consolidated balance sheets as of August 31, 2000, and
February 29, 2000, are comprised of the following:
<TABLE>
<S> <C>
(Amounts in thousands) Aug. 31, 2000 Feb. 29, 2000
-----------------------------------------------------------------------------------------------------------------
Current assets................................................................ $ 90 $ 612
Property and equipment, net................................................... - 513
Other assets.................................................................. 368 -
Current liabilities.......................................................... (33,862) (32,650)
Noncurrent liabilities....................................................... (19,288) (35,291)
--------------------------------
Net liabilities of discontinued operations.................................... $ (52,692) $ (66,816)
================================
</TABLE>
Page 11 of 37
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 2001 were $3.18 billion, an increase of 7
percent from $2.96 billion for the same period last year. For the six months
ended August 31, 2000, total sales were $6.25 billion, an 11 percent increase
from $5.65 billion for the same period last year. Throughout the second quarter,
sales growth for the Circuit City business continued to be led by new
technologies and better-featured products such as big-screen televisions,
digital cameras, DVD players, DVD software and wireless communications. In
addition to the strong product demand, the Circuit City Group's total sales
growth includes continued expansion of its Superstores in new and existing
markets since the second quarter of fiscal 2000. CarMax continued to produce
higher-than-expected comparable store sales growth, especially in used vehicles.
These sales increases reflect a focus on the improved execution of the CarMax
consumer offer throughout the past year and increased customer traffic driven in
part by rapid growth in the number of consumers using the CarMax Web site.
During the first quarter of fiscal 2001, Circuit City removed the major
appliance category from 31 stores in central and south Florida in advance of a
full remodel of those stores to focus solely on the consumer electronics and
home office categories. In late July, the Company announced plans to
strategically reposition itself exclusively as a retailer of consumer
electronics and home office products. Under the three-year plan, virtually all
Superstores will undergo a major remodel. As an interim step to these major
remodels, the Company is discontinuing the sale of major appliances in all
stores and has begun partial remodels that will expand the selection of
peripherals, accessories, software, digital imaging and video games. The partial
remodels are expected to be completed prior to the holiday selling season. This
decision reflects management's sales and earnings expectations for its new store
design and significant sales weakness and increased competition in the major
appliance category.
Comparable store sales changes for the second quarter and first six months of
fiscal years 2001 and 2000 were as follows:
<TABLE>
<S> <C>
========================== ===================================== ======================================
2nd Quarter Six Months
------------------------------------- --------------------------------------
FY 01 FY 00 FY 01 FY 00
-------------------------- ------------------ ------------------ ------------------- ------------------
Circuit City Group 0% 10% 4% 9%
-------------------------- ------------------ ------------------ ------------------- ------------------
CarMax Group 18% (6%) 16% (5%)
========================== ================== ================== =================== ==================
</TABLE>
The comparable store sales performance shown above for the Circuit City Group
includes all comparable stores for all merchandise sales categories. Excluding
the store remodels in central and south Florida during the remodeling period,
comparable store sales increased 1 percent in the second quarter of fiscal 2001
and 4 percent for the six-month period ended August 31, 2000. Comparable store
sales in the major appliance category declined 23 percent for the second quarter
of this year and 15 percent for the six-month period ended August 31, 2000.
Excluding appliances, comparable store sales increased 6 percent in the second
quarter of this year and 7 percent for the six months ended August 31, 2000.
During the quarter, the Circuit City Group opened, in Jacksonville, Fla., the
first new store that reflects its new design, including a more contemporary
look, expanded merchandise selections and more flexible ways for the consumer to
shop. Circuit City expects to complete its remodels in central and south Florida
and to grand open 17 stores with this design before the holiday selling season.
The exit from the appliance business continues to proceed as planned. The
appliance category has been eliminated from approximately 383 stores and partial
remodels of approximately 330 stores have been completed as of October 6, 2000.
Page 12 of 37
CarMax has curtailed its geographic expansion to focus on building sales and
profitability in existing markets. In CarMax's multi-store markets, management
is concentrating on the hub-and-satellite operating strategy for its used-car
superstores. Management also is seeking new-car franchises to integrate or
co-locate with used-car superstores. During the quarter, CarMax was granted a
Suzuki new-car franchise point, which is being operated from the CarMax Auto
Superstore in Garland, Texas, and acquired the Mitsubishi franchise rights held
by Sonic Automotive of Nashville, LLC, and relocated the franchise to the CarMax
Auto Superstore in Nashville, Tenn.
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.2 percent of sales in the second quarter of fiscal 2001 and 5.6
percent of sales in the second quarter of fiscal 2000. Third-party warranty
revenue was 4.1 percent of sales in this year's second quarter and 4.3 percent
in the same period last year. The total extended warranty revenue that is
reported in total sales was 4.3 percent of sales in this year's second quarter
versus 4.5 percent in the second 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.
For the CarMax Group, gross dollar sales from all extended warranty programs
were 3.9 percent of sales in the second quarter of fiscal 2001, compared with
3.7 percent in the same period last year. Third-party warranty revenue increased
to 1.7 percent of sales in this year's second quarter from 1.6 percent in the
same period last year. The total extended warranty revenue that is reported in
total sales was 1.7 percent of sales in this year's second quarter versus 1.6
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.
Cost of Sales, Buying and Warehousing
-------------------------------------
The gross profit margin was 21.2 percent of sales in the second quarter of
fiscal 2001, compared with 22.6 percent in the same period last year. For the
six months ended August 31, 2000, the gross profit margin was 21.7 percent,
compared with 22.5 percent in the same period last year.
For the Circuit City Group, the gross profit margin was 23.3 percent of sales in
the second quarter, compared with 25.0 percent in the same period last year.
Excluding the appliance category, gross profit margins for the quarter were 26.1
percent this year, compared with 25.8 percent in the same period last year. Weak
sales and competitive pricing in the appliance category early in the quarter,
$28.3 million in one-time costs related to the exit from the appliance business
and a $7 million impact from additional appliance markdowns associated with the
exit from that business significantly reduced the gross profit margin. The
one-time costs include lease terminations and related fixed asset write-downs,
employee severance and other related costs. The gross margin for the major
appliance category, excluding the $28.3 million in one-time exit costs, was 13.3
percent in this year's second quarter, compared with 20.9 percent in the same
period last year. For the six months ended August 31, 2000, the gross profit
margin was 23.8 percent compared with 24.7 percent for the same period last
year.
For the CarMax Group, the gross profit margin increased to 13.4 percent of sales
in the second quarter of fiscal 2001 from 11.9 percent for the same period last
year. For the six months ended August 31, 2000, the gross profit margin was 13.5
percent compared with 12.3 percent for the same period last year. Increased
sales from the used-car business and continued improvements in inventory
management produced the margin increase.
Page 13 of 37
Selling, General and Administrative Expenses
--------------------------------------------
The Company's selling, general and administrative expense ratio was 18.1 percent
in the second quarter of fiscal 2001, compared with 18.4 percent for the same
period last year. For the six-month period ended August 31, 2000, the Company's
selling, general, and administrative expense ratio was 18.4 percent compared
with 19.0 percent for the same period last year.
For the Circuit City Group, the selling, general and administrative expense
ratio was 20.5 percent of sales in the second quarter of fiscal 2001, compared
with 20.1 percent for the same period last year. This year's second quarter
expense ratio includes $8.3 million in remodeling costs for the Florida stores
and $1.7 million of one-time appliance exit costs. Excluding these costs, the
second quarter expense ratio would have been even with last year's ratio of 20.1
percent. This strong expense management was achieved despite a lack of
comparable store sales growth caused by the significant weakness in the
appliance business. For the six-month periods ended August 31, 2000 and 1999,
the expense ratio was 20.8 percent.
The CarMax Group's selling, general and administrative expense ratio was 9.1
percent of sales in the second quarter of fiscal 2001, compared with 10.4
percent of sales for the same period last year. For the six-month period ended
August 31, 2000, the expense ratio was 9.3 percent compared with 10.9 percent
for the same period last year. Leverage from the sales growth, more efficient
advertising expenditures and the continued success of the hub-and-satellite
operating strategy led to the better expense ratio.
Interest Expense
----------------
Interest expense was 0.1 percent of sales in the second quarter of fiscal 2001,
compared with 0.2 percent of sales for the same period last year. For the
six-month periods ended August 31, 2000 and 1999, interest expense was 0.2
percent of sales.
Earnings from Continuing Operations
-----------------------------------
Earnings from continuing operations for the Company were $59.5 million in this
year's second quarter, compared with $74.5 million in last year's second
quarter. For the six-month period ended August 31, 2000, earnings from
continuing operations for the Company increased to $120.1 million from $116.5
million for the same period last year.
For the Circuit City Group, excluding the inter-group interest in the CarMax
Group, earnings from continuing operations for the quarter ended August 31,
2000, were $43.2 million compared with $71.2 million in the same period last
year. Earnings from continuing operations for the Circuit City business for the
six months ended August 31, 2000, were $89.9 million compared with $110.5
million in the same period last year. Excluding the appliance merchandise
markdowns associated with the exit from that category, the one-time appliance
exit costs, the Florida remodeling costs and the retained interest in CarMax,
earnings from continuing operations for the Circuit City Group were $71.3
million in this year's second quarter, compared with $71.2 million in last
year's second quarter. Excluding the second quarter's appliance merchandise
markdowns associated with the exit from that category, exit costs and remodel
expenses and excluding the retained interest in CarMax for the six-month period
ended August 31, 2000, earnings from continuing operations for the Circuit City
store business were $118.0 million in the first six months of this year,
compared with $110.5 million in the same period last year.
For the second quarter, the CarMax Group reported net earnings of $16.3 million
this year, compared with $3.2 million for the same period last year. The net
earnings for the six-month period ended August 31, 2000, were $30.2 million
compared with $6.0 million for the same period last year.
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
Page 14 of 37
been segregated from continuing operations and reported as separate line items,
after taxes, on the consolidated and the Circuit City Group statements of
operations for the periods presented.
For the quarter and six-month period ended August 31, 2000, and for the quarter
ended August 31, 1999, the discontinued Divx operations had no impact on the
earnings of the Company. 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. 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 period.
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 were $59.5 million in this year's second quarter,
compared with $74.5 million in last year's second quarter. For the six-month
period ended August 31, 2000, net earnings for Circuit City Stores, Inc. were
$120.1 million, compared with a net loss of $13.7 million for the same period
last year.
Liquidity and Capital Resources
-------------------------------
At August 31, 2000, total assets were $3.9 billion. The inventory increase of
$157.5 million reflects the buildup of inventory for category expansion
associated with the partial remodels. As a result of store construction and the
purchase of inventory, accounts payable have increased $57.2 million from the
end of fiscal 2000. In June 2000, a term loan totaling $130 million was
classified as a current liability because 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 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, 2000, the master trust program had a total program capacity of
$1.22 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, 2000, the bankcard master trust
program had a total program capacity of $1.65 billion.
The Company also has an asset securitization program through a special purpose
subsidiary on behalf of the CarMax Group. During the quarter, the Company added
a second automobile loan securitization conduit increasing capacity to $700
million as of August 31, 2000. The Company, on behalf of the CarMax Group, also
has a public program with a capacity of $434 million as of August 31, 2000. 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 and operating leases.
Securitization transactions will be used to finance growth in credit card and
automobile loan receivables, and the Company anticipates that it will be able to
expand its securitization programs to meet future needs.
At August 31, 2000, the Company maintained $401 million in seasonal lines that
are renewed annually with various banks, as well as a $150 million revolving
credit facility.
Page 15 of 37
ITEM 3.
CIRCUIT CITY STORES, INC. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company centrally 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, 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 automobile installment loan portfolio has
increased.
Total principal outstanding for fixed-rate automobile loans at August 31 and
February 29, 2000, was as follows:
(Amounts in millions) August 31 February 29
----------------------------------------------------------------------------
Fixed APR............................ $ 1,118 $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 August 31 and February 29, 2000,
were as follows:
<PAGE>
(Amounts in millions) August 31 February 29
-------------------------------------------------------------------------------
Fixed-rate securitizations.................. $ 434 $559
Floating-rate securitizations
synthetically altered to fixed........... 649 327
Floating-rate securitizations............... 11 1
Held by the Company:
For investment*.......................... 19 22
For sale................................. 5 23
------------------------------
Total ...................................... $1,118 $932
==============================
* Held by a bankruptcy remote special purpose company.
Because programs are 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.
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 16 of 37
<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, 2000 Feb. 29, 2000
------------- -------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 425,810 $ 633,952
Net accounts receivable 503,807 464,023
Merchandise inventory 1,559,146 1,405,617
Prepaid expenses and other current assets 35,125 13,353
-------------- -------------
Total current assets 2,523,888 2,516,945
Property and equipment, net 756,166 753,325
Inter-Group Interest in the CarMax Group 280,924 257,535
Other assets 9,605 9,583
-------------- -------------
TOTAL ASSETS $ 3,570,583 $ 3,537,388
============== =============
LIABILITIES AND GROUP EQUITY
----------------------------
Current liabilities:
Current installments of long-term debt $ 51,429 $ 85,735
Accounts payable 940,308 884,172
Short-term debt 957 1,453
Accrued expenses and other current liabilities 143,931 184,705
Deferred income taxes 53,059 53,971
-------------- -------------
Total current liabilities 1,189,684 1,210,036
Long-term debt, excluding current installments 54,632 127,984
Deferred revenue and other liabilities 103,105 122,771
Deferred income taxes 12,568 21,877
-------------- -------------
TOTAL LIABILITIES 1,359,989 1,482,668
GROUP EQUITY 2,210,594 2,054,720
-------------- -------------
TOTAL LIABILITIES AND GROUP EQUITY $ 3,570,583 $ 3,537,388
============== =============
See accompanying notes to group financial statements.
</TABLE>
Page 17 of 37
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
August 31, August 31,
2000 1999 2000 1999
-------------- -------------- ------------- --------------
Net sales and operating revenues $ 2,506,220 $ 2,422,667 $ 4,955,330 $ 4,627,586
Cost of sales, buying and warehousing 1,894,978 1,818,164 3,746,288 3,482,352
Appliance exit costs 28,326 - 28,326 -
-------------- -------------- ------------- --------------
Gross profit 582,916 604,503 1,180,716 1,145,234
-------------- -------------- ------------- --------------
Selling, general and administrative expenses 510,950 486,995 1,030,712 960,672
Appliance exit costs 1,670 - 1,670 -
Interest expense 625 2,615 3,318 6,264
-------------- -------------- ------------- --------------
Total expenses 513,245 489,610 1,035,700 966,936
-------------- -------------- ------------- --------------
Earnings from continuing operations before
income taxes and Inter-Group Interest in
the CarMax Group 69,671 114,893 145,016 178,298
Provision for income taxes 26,475 43,659 55,106 67,753
-------------- -------------- ------------- --------------
Earnings from continuing operations
before Inter-Group Interest in the
CarMax Group 43,196 71,234 89,910 110,545
Net earnings related to Inter-Group
Interest in the CarMax Group 12,145 2,458 22,554 4,545
-------------- -------------- ------------- --------------
Earnings from continuing operations 55,341 73,692 112,464 115,090
-------------- -------------- ------------- --------------
Discontinued operations:
Loss from discontinued operations of
Divx, less income tax benefit - - - (16,215)
Loss on disposal of Divx, less income
tax benefit - - - (114,025)
-------------- -------------- ------------- --------------
Loss from discontinued operations - - - (130,240)
-------------- -------------- ------------- --------------
Net earnings (loss) $ 55,341 $ 73,692 $ 112,464 $ (15,150)
============== ============== ============== ==============
Weighted average common shares:
Basic 203,770 201,315 203,318 200,890
============== ============== ============= ==============
Diluted 205,494 204,551 205,686 204,011
============== ============== ============= ==============
Net earnings (loss) per share:
Basic:
Continuing operations $ 0.27 $ 0.37 $ 0.55 $ 0.57
============== ============== ============= ==============
Discontinued operations $ - $ - $ - $ (0.65)
============== ============== ============= ==============
Net earnings (loss) $ 0.27 $ 0.37 $ 0.55 $ (0.08)
============== ============== ============= ==============
Diluted:
Continuing operations $ 0.27 $ 0.36 $ 0.55 $ 0.56
============== ============== ============= ==============
Discontinued operations $ - $ - $ - $ (0.64)
============== ============== ============= ==============
Net earnings (loss) $ 0.27 $ 0.36 $ 0.55 $ (0.08)
============== ============== ============= ==============
Dividends paid per common share $ 0.0175 $ 0.0175 $ 0.0350 $ 0.0350
============== ============== ============= ==============
</TABLE>
See accompanying notes to group financial statements.
Page 18 of 37
<PAGE>
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
<TABLE>
<S> <C>
Six Months Ended
August 31,
2000 1999
-------------- -------------
Operating Activities:
---------------------
Net earnings (loss) $ 112,464 $ (15,150)
Adjustments to reconcile net earnings (loss) to net cash (used in)
provided by 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 (22,554) (4,545)
Depreciation and amortization 57,811 60,899
Loss on sales of property and equipment 725 621
Provision for deferred income taxes (10,218) 1,641
Decrease in deferred revenue and other liabilities (3,666) (21,283)
(Increase) decrease in net accounts receivable (39,770) 64,420
Increase in merchandise inventory (153,529) (247,055)
(Increase) decrease in prepaid expenses and other current assets (21,769) 18,421
Decrease (increase) in other assets 346 (703)
Increase in accounts payable, accrued expenses
and other current liabilities 14,150 167,173
-------------- -------------
Net cash (used in) provided by operating activities of
continuing operations (66,010) 154,679
-------------- -------------
Investing Activities:
---------------------
Purchases of property and equipment (90,922) (100,738)
Proceeds from sales of property and equipment 29,032 42,704
-------------- -------------
Net cash used in investing activities of continuing operations (61,890) (58,034)
-------------- -------------
Financing Activities:
---------------------
Decrease in allocated short-term debt, net (496) (2,376)
Decrease in allocated long-term debt, net (107,658) (104,421)
Equity issuances, net 49,731 34,020
Dividends paid (7,156) (7,088)
-------------- -------------
Net cash used in financing activities of continuing operations (65,579) (79,865)
-------------- -------------
Cash used in discontinued operations (14,663) (59,199)
-------------- -------------
Decrease in cash and cash equivalents (208,142) (42,419)
Cash and cash equivalents at beginning of year 633,952 248,201
-------------- -------------
Cash and cash equivalents at end of period $ 425,810 $ 205,782
============== =============
</TABLE>
See accompanying notes to group financial statements.
Page 19 of 37
<PAGE>
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 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 Circuit City Group's
retained interest in the CarMax Group and the Company's investment in
Digital Video Express, which has been discontinued (see note 6). The CarMax
Group Common Stock is intended to track the performance of the CarMax
Group's operations. The Circuit City Group held a 74.6 percent interest in
the CarMax Group at August 31, 2000, a 74.7 percent interest at February
29, 2000, and a 76.0 percent interest at August 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 each
Group's financial statements, holders of Circuit City Group Common Stock
and holders of CarMax Group Common 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 the
Company's SEC filings, including its annual report on Form 10-K and its
registration statement on Form 8-A.
2. Accounting Policies
-------------------
The Circuit City Group has accounted for the 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 consolidated
financial statements have been included. The fiscal year-end balance sheet
data was derived from audited financial statements.
Page 20 of 37
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 Six Months Ended
(Amounts in thousands August 31, August 31,
except per share data) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Weighted average common shares............................. 203,770 201,315 203,318 200,890
Dilutive potential common shares:
Options................................................. 1,033 2,366 1,618 2,278
Restricted stock........................................ 691 870 750 843
--------------------------- ----------------------------
Weighted average common shares and
dilutive potential common shares........................ 205,494 204,551 205,686 204,011
=========================== ============================
Earnings from continuing operations available
to common shareholders.................................. $ 55,341 $ 73,692 $ 112,464 $ 115,090
Basic earnings per share from continuing
operations.............................................. $ 0.27 $ 0.37 $ 0.55 $ 0.57
Diluted earnings per share from continuing
operations.............................................. $ 0.27 $ 0.36 $ 0.55 $ 0.56
</TABLE>
Certain options were not included in the computation of diluted earnings
per share from continuing operations because the options' exercise prices
were greater than the average market price of the common shares. For the
three-month period ended August 31, 2000, options to purchase 5,614,789
shares of Circuit City Group Common Stock at prices ranging from $34.84 to
$47.53 per share were outstanding and not included in the calculation. For
the three-month period ended August 31, 1999, options to purchase 2,000,000
shares of Circuit City Group Common Stock at $29.50 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. For the
three-month period ended August 31, 2000, the change in the Circuit City
Group's retained interests of credit card securitizations consisted of
originated interests of $11.6 million, less amortization of $12.1 million.
For the same period last fiscal year, the change in retained interests
consisted of originated interests of $9.1 million, less amortization of
$9.3 million. For the six-month period ended August 31, 2000, the change
consisted of originated interests of $23.1 million less amortization of
$25.3 million. For the same period last fiscal year, the change consisted
of originated interests of $17.8 million, less amortization of $19.7
million.
5. Appliance Exit Costs
--------------------
On July 25, 2000, the Company announced plans to exit the major appliance
category in all stores. This decision reflects management's sales and
earnings expectations for its new store design and significant sales
weakness and increased competition in the major appliance category. To exit
the appliance business, the Company will close six distribution centers by
December 31, 2000, and two more by July 31, 2001. The Company also will
consolidate certain home delivery and service operations by the end of the
fiscal year. The majority of these properties are leased. The Company is in
the process of marketing these properties to be subleased. Circuit City
will maintain control over its in-home major appliance repair business,
although repairs will be subcontracted to an unrelated third party. In the
second quarter of fiscal 2001, the Company recorded appliance exit costs of
$30 million. The majority of these expenses are included in cost of sales,
buying and warehousing on the statements of operations.
Page 21 of 37
Of the total exit costs, $4.4 million relates to employee termination
benefits. The Company will terminate approximately 1,000 employees. These
reductions will take place mainly in the service, distribution and
merchandising functions. The exit costs also include $17.8 million for
lease termination costs and $5.0 million, net of salvage value, for the
write-down of fixed assets.
<TABLE>
<S> <C>
Expenses Liability at
Original Adjustments Paid or Assets August 31,
(Amounts in millions) Estimate to Estimate Written Off 2000
-----------------------------------------------------------------------------------------------------------
Lease Termination Costs................... $ 17.8 $ - $ - $ 17.8
Fixed Asset Write-Downs................... 5.0 - 5.0 -
Employee Termination Benefits............. 4.4 - - 4.4
Other..................................... 2.8 - 2.8 -
--------------------------------------------------------------
Appliance Exit Costs...................... $ 30.0 $ - $ 7.8 $ 22.2
==============================================================
</TABLE>
6. 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,
the write-down of assets to net realizable value, lease termination costs,
employee severance and benefit costs and other contractual commitments.
For the quarter and six-month periods ended August 31, 2000, and for the
quarter ended August 31,1999, the discontinued Divx operations had no
impact on the net earnings of the Circuit City Group. 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. 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 period.
The net liabilities of the discontinued Divx operations, reflected in the
accompanying Circuit City Group balance sheet as of August 31, 2000, and
February 29, 2000, are comprised of the following:
<PAGE>
<TABLE>
<S> <C>
(Amounts in thousands) Aug. 31, 2000 Feb. 29, 2000
-----------------------------------------------------------------------------------
Current assets................................... $ 90 $ 612
Property and equipment, net...................... - 513
Other assets..................................... 368 -
Current liabilities.............................. (33,862) (32,650)
Noncurrent liabilities........................... (19,288) (35,291)
-------------------------------
Net liabilities of discontinued operations....... $ (52,692) $ (66,816)
===============================
</TABLE>
Page 22 of 37
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 2001 were $2.51 billion, an increase of 4
percent from $2.42 billion for the same period last year. For the six months
ended August 31, 2000, total sales were $4.96 billion, an increase of 7 percent
from $4.63 billion in the same period last year. Throughout the second quarter,
sales growth for the Circuit City business continued to be led by new
technologies and better-featured products such as big-screen televisions,
digital cameras, DVD players, DVD software and wireless communications. In
addition to the strong product demand, Circuit City's total sales growth
includes continued expansion of its Superstores in new and existing markets
since the second quarter of fiscal 2000.
During the first quarter of fiscal 2001, Circuit City removed the major
appliance category from 31 stores in central and south Florida in advance of a
full remodel of those stores to focus solely on the consumer electronics and
home office categories. In late July, the Company announced plans to
strategically reposition itself exclusively as a retailer of consumer
electronics and home office products. Under the three-year plan, virtually all
Superstores will undergo a major remodel. As an interim step to these major
remodels, the Company is discontinuing the sale of major appliances in all
stores and has begun partial remodels that will expand the selection of
peripherals, accessories, software, digital imaging and video games. The partial
remodels are expected to be completed prior to the holiday selling season. This
decision reflects management's sales and earnings expectations for its new store
design and significant sales weakness and increased competition in the major
appliance category.
Circuit City's comparable store sales changes for the second quarter and first
six months of fiscal years 2001 and 2000 were as follows:
============================= ======================= ====================
2nd Quarter Six Months
--------------------------------------------
FY 01 FY 00 FY 01 FY 00
----------------------------- ----------- ----------- ---------- ---------
Circuit City Group 0% 10% 4% 9%
============================= =========== =========== ========== =========
The comparable store sales performance shown above for the Circuit City Group
includes all comparable stores for all merchandise sales categories. Excluding
the store remodels in central and south Florida during the remodeling period,
comparable store sales increased 1 percent in the second quarter of fiscal 2001
and 4 percent for the six-month period ended August 31, 2000. Comparable store
sales in the major appliance category declined 23 percent for the second quarter
of this year and 15 percent for the six-month period ended August 31, 2000.
Excluding appliances, comparable store sales increased 6 percent in the second
quarter of this year and 7 percent for the six months ended August 31, 2000.
During the quarter, the Circuit City Group opened, in Jacksonville, Fla., the
first new store that reflects its new design, including a more contemporary
look, expanded merchandise selections and more flexible ways for the consumer to
shop. Circuit City expects to complete its remodels in central and south Florida
and to grand open 17 stores with this design before the holiday selling season.
The exit from the appliance business continues to proceed as planned. The
appliance category has been eliminated from approximately 383 stores and partial
remodels of approximately 330 stores have been completed as of October 6, 2000.
<TABLE>
<S> <C>
Page 23 of 37
<PAGE>
The table below details Circuit City retail units:
===================================================================================================
Stores Open At End of Quarter Estimate
-----------------------------------------
Aug. 31, 2000 Aug. 31, 1999 Feb. 28, 2001 Feb. 29, 2000
---------------------------------------------------------------------------------------------------
Superstore
---------------------------------------------------------------------------------------------------
"D" Superstore 118 118 118 118
---------------------------------------------------------------------------------------------------
"C" Superstore 296 293 315 295
---------------------------------------------------------------------------------------------------
"B" Superstore 104 88 107 102
---------------------------------------------------------------------------------------------------
"A" Superstore 56 52 56 56
---------------------------------------------------------------------------------------------------
Electronics-Only - 2 - -
---------------------------------------------------------------------------------------------------
Circuit City Express 41 46 40 45
---------------------------------------------------------------------------------------------------
TOTAL 615 599 636 616
===================================================================================================
</TABLE>
For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.2 percent of sales in the second quarter of fiscal 2001 and 5.6
percent of sales in the second quarter of fiscal 2000. Third-party warranty
revenue was 4.1 percent of sales in this year's second quarter compared with 4.3
percent in the same period last year. The total extended warranty revenue that
is reported in total sales was 4.3 percent of sales in this year's second
quarter versus 4.5 percent in the second 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:
<TABLE>
<S> <C>
=================== ================================== ==================================
2nd Quarter Six Months
---------------------------------- ----------------------------------
Fiscal 2001 Fiscal 2000 Fiscal 2001 Fiscal 2000
------------------- ----------------- ---------------- ---------------- -----------------
TV 17% 17% 17% 18%
------------------- ----------------- ---------------- ---------------- -----------------
VCR/Camcorders 12 12 12 12
------------------- ----------------- ---------------- ---------------- -----------------
Audio 15 14 15 15
------------------- ----------------- ---------------- ---------------- -----------------
Home Office 31 28 31 27
------------------- ----------------- ---------------- ---------------- -----------------
Appliances 14 18 14 17
------------------- ----------------- ---------------- ---------------- -----------------
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, 2000, the gross profit margin was 23.3 percent
of sales versus 25.0 percent in the same period last year. Excluding the
appliance category, gross profit margins for the quarter were 26.1 percent this
year, compared with 25.8 percent in the same period last year. Weak sales and
competitive pricing in the appliance category early in the quarter, $28.3
million in one-time costs related to the exit from the appliance business and a
$7 million impact from additional appliance markdowns associated with the exit
from
Page 24 of 37
that business significantly reduced the gross profit margin. The one-time costs
include lease terminations and related fixed asset write-downs, employee
severance and other related costs. The gross margin for the major appliance
category, excluding the $28.3 million in one-time exit costs, was 13.3 percent
in this year's second quarter, compared with 20.9 percent in the same period
last year. The gross profit margin was 23.8 percent of sales for the first six
months of fiscal 2001, compared with 24.7 percent for the same period last year.
Selling, General and Administrative Expenses
--------------------------------------------
The Group's selling, general and administrative expense ratio was 20.5 percent
of sales in the second quarter of fiscal 2001, compared with 20.1 percent in the
second quarter of fiscal 2000. This year's second quarter expense ratio includes
$8.3 million in remodeling costs for the Florida stores and $1.7 million of
one-time appliance exit costs. Excluding these costs, the second quarter expense
ratio would have been even with last year's ratio of 20.1 percent. This strong
expense management was achieved despite a lack of comparable store sales growth
caused by the significant weakness in the appliance business. For the first six
months of fiscal 2001 and 2000, the expense ratio was 20.8 percent.
Interest Expense
----------------
Interest expense was 0.0 percent of sales in the second quarter of fiscal 2001,
compared with 0.2 percent of sales for the same period last year. For the six
months ended August 31, 2000 and 1999, interest expense was 0.1 percent of
sales. 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 were $43.2 million
compared with $71.2 million for the same period last year. For the six-month
period ended August 31, 2000, earnings before the Inter-Group Interest in the
CarMax Group were $89.9 million compared with $110.5 million for the same period
last year.
Excluding the appliance merchandise markdowns associated with the exit from that
category, the one-time appliance exit costs, the Florida remodeling costs and
the retained interest in CarMax, earnings from continuing operations for the
Circuit City Group were $71.3 million in this year's second quarter, compared
with $71.2 million in last year's second quarter. Excluding the second quarter's
appliance merchandise markdowns associated with the exit from that category,
appliance exit costs and the Florida remodel expenses and excluding the retained
interest in CarMax for the six-month period, earnings from continuing operations
for the Circuit City store business were $118.0 million in the first six months
of this year, compared with $110.5 million in the same period last year.
Excluding the retained interest in the CarMax Group, earnings per share from
continuing operations were 21 cents for the second quarter of fiscal 2001,
compared with 35 cents for the same period last year. Appliance merchandise
markdowns associated with the exit from that category, and one-time appliance
exit costs reduced earnings per share for the Circuit City store business by 11
cents. The costs associated with fully remodeling the central and south Florida
stores reduced earnings per share by another 3 cents. Excluding the markdowns,
the one-time costs, the Florida remodeling costs and the interest in CarMax,
earnings per share for the Circuit City Group were 35 cents for the second
quarter of fiscal 2001.
Excluding the retained interest in CarMax, earnings per share from continuing
operations for the six months ended August 31, 2000, were 44 cents compared with
54 cents in the prior year. Excluding the second quarter's appliance merchandise
markdowns, exit costs and remodel expenses and excluding the retained interest
in CarMax for the six-month period ended August 31, 2000, earnings per share for
the Circuit City store business were 58 cents in the first six months of this
year.
Page 25 of 37
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 $12.1 million, or 6 cents
per share, compared with $2.5 million, or 1 cent per share, for the same period
last year. For the first six months of fiscal 2001, net earnings attributed to
the Circuit City Group's Inter-Group Interest in the CarMax Group were $22.6
million, or 11 cents per share, compared with $4.5 million, or 2 cents per
share, for the same period last year.
Earnings from Continuing Operations
-----------------------------------
Earnings from continuing operations for the Circuit City Group were $55.3
million in this year's second quarter, compared with $73.7 million in the same
period last year, and earnings per share from continuing operations were 27
cents compared with 36 cents. Earnings from continuing operations for the
Circuit City Group were $112.5 million in the first six months of this fiscal
year, compared with $115.1 million in the same period last year, and earnings
per share from continuing operations were 55 cents compared with 56 cents.
<PAGE>
Reconciliation of earnings per share from continuing operations is presented
below:
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
August 31, August 31,
2000 1999 2000 1999
--------------------------------------------------------
Circuit City Store Business........................ $ 0.35 $ 0.35 $ 0.58 $ 0.54
Impact of Merchandise Markdowns*................... (0.02) - (0.02) -
Impact of Appliance Exit........................... (0.09) - (0.09) -
Impact of Florida Remodeling Costs**............... (0.03) - (0.03) -
Inter-Group Interest in CarMax..................... 0.06 0.01 0.11 0.02
----------------------------------------------------------
Circuit City Group................................. $ 0.27 $ 0.36 $ 0.55 $ 0.56
==========================================================
* Reflected as a reduction in gross profit margins.
** Reflected as an increase in selling, general and administrative expenses.
</TABLE>
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 and six-month period ended August 31, 2000, and for the quarter
ended August 31, 1999, the discontinued Divx operations had no impact on the
earnings of the Circuit City Group. 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. 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 period. 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 Circuit City Group were $55.3 million in this year's second
quarter, compared with $73.7 million in last year's second quarter. For the
six-month period ended August 31, 2000, the net earnings for the Circuit City
Group were $112.5 million compared with a net loss of $15.2 million for the same
period last year.
Page 26 of 37
Liquidity and Capital Resources
-------------------------------
Total assets at August 31, 2000, were $3.6 billion. The merchandise inventory
increase of $153.5 million reflects the buildup of inventory for category
expansion associated with the partial remodels. As a result of store
construction and the purchase of inventory, accounts payable have increased
$56.1 million from the end of fiscal 2000.
In June 2000, a term loan totaling $130 million was classified as a current
liability because it becomes due in June 2001. While 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 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, 2000, the master trust program had a total program capacity of
$1.22 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, 2000, the bankcard master trust
program had a total program capacity of $1.65 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, 2000, the Company also maintained $401 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 centrally 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 August 31, 2000, the Circuit City Group's private-label and bankcard
portfolios 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 27 of 37
<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, 2000 Feb. 29, 2000
------------- -------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 6,890 $ 9,981
Net accounts receivable 110,733 129,253
Inventory 287,603 283,592
Prepaid expenses and other current assets 3,019 2,844
------------ -----------
Total current assets 408,245 425,670
Property and equipment, net 198,794 211,856
Other assets 36,754 37,969
------------ -----------
TOTAL ASSETS $ 643,793 $ 675,495
============ ===========
LIABILITIES AND GROUP EQUITY
----------------------------
Current liabilities:
Current installments of long-term debt $ 80,889 $ 91,609
Accounts payable 76,987 75,959
Short-term debt 1,513 1,552
Accrued expenses and other current liabilities 20,321 19,856
Deferred income taxes 10,732 7,147
------------ -----------
Total current liabilities 190,442 196,123
Long-term debt, excluding current installments 63,761 121,257
Deferred revenue and other liabilities 7,097 7,249
Deferred income taxes 6,121 5,877
------------ -----------
TOTAL LIABILITIES 267,421 330,506
GROUP EQUITY 376,372 344,989
------------ -----------
TOTAL LIABILITIES AND GROUP EQUITY $ 643,793 $ 675,495
============ ===========
</TABLE>
See accompanying notes to group financial statements.
Page 28 of 37
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Earnings (Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
August 31, August 31,
2000 1999 2000 1999
------------ ----------- ------------- -------------
Net sales and operating revenues $ 673,561 $ 535,727 $ 1,299,302 $ 1,021,790
Cost of sales 583,012 471,947 1,123,291 896,014
------------ ----------- ------------- -------------
Gross profit 90,549 63,780 176,011 125,776
------------ ----------- ------------- -------------
Selling, general and administrative expenses 61,348 55,918 120,792 111,822
Interest expense 2,958 2,647 6,486 4,330
------------ ----------- ------------- -------------
Total expenses 64,306 58,565 127,278 116,152
------------ ----------- ------------- -------------
Earnings before income taxes 26,243 5,215 48,733 9,624
Provision for income taxes 9,972 1,982 18,518 3,658
------------ ----------- ------------- -------------
Net earnings $ 16,271 $ 3,233 $ 30,215 $ 5,966
============ =========== ============= =============
Net earnings attributed to:
Circuit City Group common stock $ 12,145 $ 2,458 $ 22,554 $ 4,545
CarMax Group common stock 4,126 775 7,661 1,421
------------ ----------- ------------- -------------
$ 16,271 $ 3,233 $ 30,215 $ 5,966
============ =========== ============= =============
Weighted average common shares:
Basic 25,550 23,522 25,534 23,336
============ =========== ============= =============
Diluted 26,956 25,673 26,937 25,571
============ =========== ============= =============
Net earnings per share:
Basic $ 0.16 $ 0.03 $ 0.30 $ 0.06
============ =========== ============= =============
Diluted $ 0.15 $ 0.03 $ 0.28 $ 0.06
============ =========== ============= =============
Dividends paid per common share $ - $ - $ - $ -
============ =========== ============= =============
</TABLE>
See accompanying notes to group financial statements.
Page 29 of 37
<PAGE>
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
<TABLE>
<S> <C>
Six Months Ended
August 31,
2000 1999
------------ -----------
Operating Activities:
---------------------
Net earnings $ 30,215 $ 5,966
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,146 6,807
Loss on sales of property and equipment 173 -
Provision for deferred income taxes 3,829 1,680
Changes in operating assets and liabilities, net of effects
from business acquisitions:
(Decrease) increase in deferred revenue and other liabilities (152) 1,042
Decrease (increase) in net accounts receivable 18,520 (46,195)
Increase in inventory (3,211) (42,339)
Increase in prepaid expenses and other current assets (175) (407)
Decrease in other assets - 421
Increase in accounts payable, accrued expenses and other
current liabilities 1,493 46,623
------------ -----------
Net cash provided by (used in) operating activities 59,838 (26,402)
------------ -----------
Investing Activities:
---------------------
Cash used in business acquisitions (1,325) (34,849)
Purchases of property and equipment (6,553) (28,259)
Proceeds from sales of property and equipment 12,036 1,640
------------ -----------
Net cash provided by (used in) investing activities 4,158 (61,468)
------------ -----------
Financing Activities:
---------------------
Decrease in allocated short-term debt, net (39) (153)
(Decrease) increase in allocated long-term debt, net (68,216) 103,474
Equity issuances, net 1,168 2,580
------------ -----------
Net cash (used in) provided by financing activities (67,087) 105,901
------------ -----------
(Decrease) increase in cash and cash equivalents (3,091) 18,031
Cash and cash equivalents at beginning of year 9,981 17,679
------------ -----------
Cash and cash equivalents at end of period $ 6,890 $ 35,710
============ ===========
</TABLE>
See accompanying notes to group financial statements.
Page 30 of 37
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 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 Circuit City Group's
retained interest in the CarMax Group and the Company's investment in
Digital Video Express, which has been discontinued. The CarMax Group Common
Stock is intended to track the performance of the CarMax Group's
operations. The Circuit City Group held a 74.6 percent interest in the
CarMax Group at August 31, 2000, a 74.7 percent interest at February 29,
2000, and a 76.0 percent interest at August 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 each
Group's financial statements, holders of CarMax Group Common Stock and
holders of Circuit City Group Common 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 the
Company's SEC filings, including its annual report on Form 10-K and its
registration statement on Form 8-A.
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.
Page 31 of 37
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 Six Months Ended
(Amounts in thousands August 31, August 31,
except per share data) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------
Weighted average common shares.................. 25,550 23,522 25,534 23,336
Dilutive potential common shares:
Options...................................... 1,344 1,997 1,278 2,063
Restricted stock............................. 62 154 125 172
------------------------ ------------------------
Weighted average common shares and
dilutive potential common shares............. 26,956 25,673 26,937 25,571
======================== ========================
Net earnings available to common shareholders... $ 4,126 $ 775 $ 7,661 $ 1,421
Basic net earnings per share.................... $ 0.16 $ 0.03 $ 0.30 $ 0.06
Diluted net earnings per share.................. $ 0.15 $ 0.03 $ 0.28 $ 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 period
ended August 31, 2000, options to purchase 1,458,326 shares of CarMax Group
Common 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 August 31, 1999, options to purchase 1,655,871 shares of CarMax Group
Common Stock at prices ranging from $6.06 to $16.31 per share were
outstanding and not included in the calculation.
4. 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. For the second quarter of
this fiscal year, the change in retained interests of automobile loan
securitizations for the CarMax Group consisted of originated interests of
$7.5 million, less amortization of $4.0 million. For the same period last
fiscal year, the change in the retained interests consisted of originated
interests of $4.1 million, less amortization of $3.1 million.
For the six-month period ended August 31, 2000, the change in retained
interests consisted of originated interests of $13.0 million, less
amortization of $7.4 million. For the same period last fiscal year, the
change consisted of originated interests of $8.8 million, less amortization
of $6.0 million.
5. Interest Rate Swaps
-------------------
On behalf of the CarMax Group, during the quarter the Company entered into
three 40-month amortizing swaps with a total notional amount of
approximately $209 million related to automobile loan receivable
securitizations. The total notional amount of the CarMax swaps was $649
million at August 31, 2000, and $327 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 32 of 37
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 26 percent for the quarter ended August
31, 2000, to $673.6 million from $535.7 million in last year's second quarter.
For the six months ended August 31, 2000, total sales were $1.30 billion, an
increase of 27 percent from $1.02 billion in the same period last year. CarMax
continued to produce higher-than-expected comparable store sales growth,
especially in used vehicles. These sales increases reflect a focus on the
improved execution of the CarMax consumer offer throughout the past year and
increased customer traffic driven in part by rapid growth in the number of
consumers using the CarMax Web site.
CarMax's comparable store sales changes for the second quarter and first six
months of fiscal years 2001 and 2000 were as follows:
============================= ===========================
2nd Quarter Six Months
----------------------------- ---------------------------
FY 01 FY 00 FY 01 FY 00
------------- --------------- ------------- -------------
18% (6%) 16% (5%)
============= =============== ============= =============
CarMax has curtailed its geographic expansion to focus on building sales and
profitability in existing markets. In CarMax's multi-store markets, management
is concentrating on the hub-and-satellite operating strategy for its used-car
superstores. Management also is seeking new-car franchises to integrate or
co-locate with used-car superstores. During the quarter, CarMax was granted a
Suzuki new-car franchise point, which is being operated from the CarMax Auto
Superstore in Garland, Texas, and acquired the Mitsubishi franchise rights held
by Sonic Automotive of Nashville, LLC, and relocated the franchise to the CarMax
Auto Superstore in Nashville, Tenn.
<TABLE>
<S> <C>
The table below details CarMax retail units:
============================================================================================================
Retail Units At End of Quarter Estimate
-----------------------------------
Aug. 31, 2000 Aug. 31, 1999 Feb. 28, 2001 Feb. 29, 2000
------------------------------------------------------------------------------------------------------------
"C" and "B" Stores 14 13 14 14
------------------------------------------------------------------------------------------------------------
"A" Store 17 17 17 17
------------------------------------------------------------------------------------------------------------
Satellite Prototype Store 4 2 4 4
------------------------------------------------------------------------------------------------------------
Stand-Alone New-Car Store 5 4 5 5
============================================================================================================
TOTAL 40 36 40 40
============================================================================================================
</TABLE>
The table below details CarMax franchises:
<TABLE>
<S> <C>
==========================================================================================================================
Franchises Open At End of Quarter Estimate
-------------------------------------
Aug. 31, 2000 Aug. 31, 1999 Feb. 28, 2001 Feb. 29, 2000
--------------------------------------------------------------------------------------------------------------------------
Integrated/Co-Located New-Car Franchises 17 17 17 15
--------------------------------------------------------------------------------------------------------------------------
Stand-Alone New-Car Franchises 5 4 5 5
--------------------------------------------------------------------------------------------------------------------------
TOTAL 22 21 22 20
==========================================================================================================================
</TABLE>
Page 33 of 37
For the CarMax Group, gross dollar sales from all extended warranty programs
were 3.9 percent of sales in the second quarter of fiscal 2001, compared with
3.7 percent in the same period last year. Third-party warranty revenue increased
to 1.7 percent of sales in this year's second quarter from 1.6 percent in the
same period last year. The total extended warranty revenue that is reported in
total sales was 1.7 percent of sales in this year's second quarter versus 1.6
percent in last year's second quarter.
<PAGE>
The percentage of vehicle sales represented by each category for the quarters
and the six-month periods is as follows:
=========================================================================
Three Months Ended Six Months Ended
August 31 August 31
------------------- -------------------
2000 1999 2000 1999
-------------------------------------------------------------------------
Vehicle Dollars:
-------------------------------------------------------------------------
Used Vehicles 79% 78% 80% 80%
-------------------------------------------------------------------------
New Vehicles 21% 22% 20% 20%
-------------------------------------------------------------------------
Vehicle Units:
-------------------------------------------------------------------------
Used Vehicles 86% 85% 86% 87%
-------------------------------------------------------------------------
New Vehicles 14% 15% 14% 13%
=========================================================================
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 13.4 percent of sales in the
second quarter of fiscal 2001 from 11.9 percent for the same period last year.
For the six months ended August 31, 2000, the gross profit margin increased to
13.5 percent from 12.3 percent for the same period last year. Increased sales
from the used-car business and continued improvements in inventory management
produced the margin increase.
Selling, General and Administrative Expenses
--------------------------------------------
The CarMax Group's selling, general and administrative expense ratio was 9.1
percent of sales in the second quarter of fiscal 2001, compared with 10.4
percent of sales for the same period last year. For the six-month period ended
August 31, 2000, the expense ratio was 9.3 percent of sales compared with 10.9
percent in the same period last year. Leverage from the sales growth, more
efficient advertising expenditures and the continued success of the
hub-and-satellite operating strategy led to the better expense ratio.
Interest Expense
----------------
Interest expense was 0.4 percent of sales in the second quarter of fiscal 2001,
compared with 0.5 percent of sales for the same period last year. For the
six-month period ended August 31, 2000, interest expense increased to 0.5
percent from 0.4 percent for the same period last year. The change reflects
CarMax's allocation of pooled debt.
Net Earnings
------------
For the second quarter, the CarMax Group reported net earnings of $16.3 million
this year versus $3.2 million for the same period last year. For the second
quarter, the net earnings attributed to the CarMax Group Common Stock were $4.1
million this year, compared with $775,000 for the same period last year. The net
earnings per share attributed to the CarMax Group Common Stock rose 400 percent
to 15 cents per share in this year's second quarter from 3 cents per share in
last year's second quarter.
Page 34 of 37
The net earnings for the six-month period ended August 31, 2000, were $30.2
million compared with $6.0 million for the same period last year. For the
six-month period ended August 31, 2000, the net earnings attributed to the
CarMax Group Common Stock were $7.7 million compared with $1.4 million for the
same period last year. The net earnings per share attributed to the CarMax Group
Common Stock increased 367 percent to 28 cents per share this year from 6 cents
per share in the first six months of last year.
Liquidity and Capital Resources
-------------------------------
Total assets at August 31, 2000, were $643.8 million. Net accounts receivable
decreased by $18.5 million due to a change in the timing of securitizations as a
result of adding a second conduit.
In June 2000, a term loan totaling $130 million was classified as a current
liability because it becomes due in June 2001. While 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 result in a reduction of
CarMax Group allocated debt.
The Company has an asset securitization program operated through a special
purpose subsidiary on behalf of the CarMax Group. During the quarter, the
Company added a second automobile loan securitization conduit increasing
capacity to $700 million as of August 31, 2000. The Company, on behalf of the
CarMax Group, also has a public program with a capacity of $434 million as of
August 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 August 31,
2000, the Company also maintained $401 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.
ITEM 3.
CARMAX GROUP QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company centrally 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 29, 2000, was as follows:
(Amounts in millions) August 31 February 29
-----------------------------------------------------------------
Fixed APR....................... $1,118 $932
Page 35 of 37
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 August 31 and February 29, 2000,
were as follows:
(Amounts in millions) August 31 February 29
-----------------------------------------------------------------------------
Fixed-rate securitizations.................. $ 434 $ 559
Floating-rate securitizations
synthetically altered to fixed........... 649 327
Floating-rate securitizations............... 11 1
Held by the Company:
For investment*.......................... 19 22
For sale................................. 5 23
---------------------------
Total $ 1,118 $ 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.
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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) The Company's Non-Employee Director's Deferred
Compensation Plan, as filed herewith.
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated July
26, 2000, in which it reported, under Item 5, its plan to
remodel all superstores nationwide and to exit the major
appliance category.
Page 36 of 37
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
October 16, 2000
Page 37 of 37
