UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended February 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________ to _________
Commission File No.: 1-5767
CIRCUIT CITY STORES, INC.
(Exact name of Registrant as specified in its charter)
VIRGINIA 54-0493875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9950 Mayland Drive
Richmond, VA 23233
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (804) 527-4000
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on Which Registered
Circuit City Stores, Inc.-Circuit City Group Common Stock, Par Value $0.50 New York Stock Exchange
Circuit City Stores, Inc.-CarMax Group Common Stock, Par Value $0.50 New York Stock Exchange
Rights to Purchase Preferred Stock,
Series E, Par Value $20.00 New York Stock Exchange
Series F, Par Value $20.00 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [|X|].
On April 30, 2000, the Company had outstanding 204,793,432 Circuit
City Group common shares and 25,620,720 CarMax Group common shares. The
aggregate market value of the common shares held by non-affiliates (without
admitting that any person whose shares are not included in determining such
value is an affiliate) was $12,044,413,720 for the Circuit City Group and
$65,653,095 for the CarMax Group based upon the closing price of these shares as
reported by the New York Stock Exchange on April 28, 2000.
Page 1 OF 18
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
Parts I, II, III and IV of this Form 10-K Report: (1) Pages 23 through 80 of the
Company's Annual Report to Shareholders for the fiscal year ended February 29,
2000, (Parts I, II and IV) and (2) "Item One--Election of Directors,"
"Beneficial Ownership of Securities," "Executive Compensation," "Employment
Agreements and Change-in-Control Arrangements," "Compensation of Directors" and
"Section 16(a) Compliance" in the May 10, 2000, Proxy Statement, furnished to
shareholders of the Company in connection with the 2000 Annual Meeting of such
shareholders (Part III).
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TABLE OF CONTENTS
Item Page
PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 12
Executive Officers of the Company 12
PART II
5. Market for the Company's Common Equity and Related Stockholder Matters 14
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Results of Operations and Financial Condition 14
7a. Quantitative and Qualitative Disclosure about Market Risk 14
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14
PART III
10. Directors and Executive Officers of the Company 15
11. Executive Compensation 15
12. Security Ownership of Certain Beneficial Owners and Management 15
13. Certain Relationships and Related Transactions 15
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15
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Page 2 of 18
PART I
Item 1. Business.
Circuit City Stores, Inc. was incorporated under the laws of Virginia
in 1949. Its corporate headquarters is located at 9950 Mayland Drive, Richmond,
Va. Its retail operations consist of Circuit City Superstores and mall-based
Circuit City Express stores. Certain of Circuit City Stores, Inc. subsidiaries
operate CarMax Auto Superstores, a used- and new-car retail business. The
Company has wholly owned finance operations that provide consumer revolving
credit and automobile installment loans. In addition, the Company owns
approximately 75 percent of Digital Video Express, a business that has been
discontinued, and has been allocated 100 percent of the Divx losses since
inception. Divx was primarily engaged in the business of replicating and
distributing specially encrypted DVDs at wholesale.
Capital Structure.
The common stock of Circuit City Stores, Inc. consists of two common
stock series, which are intended to reflect the performance of the Company's two
businesses. The Circuit City Group Common Stock is intended to track the
performance of the Circuit City stores and related operations, the Group's
retained interest in the CarMax Group, and the Company's investment in Digital
Video Express, which has been discontinued. The CarMax Group Common Stock is
intended to track the performance of the CarMax operations.
Notwithstanding the attribution of the Company's assets and
liabilities, including contingent liabilities, and stockholders' equity between
the Circuit City Group and the CarMax Group for the purposes of preparing their
respective financial statements, holders of Circuit City Group Stock and holders
of CarMax Group Stock are shareholders of the Company and continue to be subject
to all of the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its subsidiaries.
The results of operations or financial condition of one Group could affect the
results of operations or financial condition of the other Group. Accordingly,
the Company's consolidated financial statements should be read in conjunction
with the financial statements of each Group.
In this document, the following terms and definitions are used:
The Company refers to Circuit City Stores, Inc. and subsidiaries,
which include Circuit City retail stores and related operations, the
CarMax retail stores and related operations, and the Company's
investment in Digital Video Express, which has been discontinued.
Circuit City refers to retail operations bearing the Circuit City
name and to all related operations such as the finance operation and
product service.
Circuit City Group refers to Circuit City, the retained interest in
the CarMax Group and the Company's investment in Digital Video
Express, which has been discontinued.
CarMax Group and CarMax refer to retail locations bearing the CarMax
name and to all related operations such as CarMax's finance
operation.
Circuit City Group:
This section describes the Circuit City business and the Company's
investment in Digital Video Express, which has been discontinued. It excludes
the retained interest in the CarMax business, which is discussed separately
beginning on page 7. Divx is discussed in more detail at the end of the Circuit
City Group section on page 6.
Page 3 of 18
General. Circuit City is a leading national retailer of brand-name
consumer electronics, personal computers, major appliances and entertainment
software. It sells video equipment, including televisions, digital satellite
systems, video cassette recorders, camcorders and digital video disc players;
audio equipment, including home stereo systems, compact disc players, tape
recorders and tape players; mobile electronics, including car stereo systems and
security systems; home office products, including personal computers, printers,
peripherals, software and facsimile machines; other consumer electronics
products, including cellular phones, telephones and portable audio and video
products; major appliances, including washers, dryers, refrigerators, microwave
ovens and ranges; and entertainment software.
Each Circuit City store location follows detailed operating
procedures and merchandising programs. Included are procedures for inventory
maintenance, advertising, customer relations, store administration, merchandise
display, store security and the demonstration and sale of products. Merchandise
lines vary from location to location based on store size and market
characteristics. Most merchandise is supplied directly to the stores by regional
warehouse distribution facilities.
Expansion. As of April 30, 2000, Circuit City operated 618 retail
locations throughout the United States. Circuit City has established its
presence in virtually all of the nation's top 100 markets and will continue
adding to the existing store base as attractive market opportunities arise. In
fiscal 2001, Circuit City expects to open approximately 25 additional
Superstores and remodel another 30 to 35 to include its most recent
merchandising innovations. These remodeled Superstores will allow management to
test a concept dedicated to consumer electronics and home office products. In
the remodel markets, Circuit City will test approximately six stand-alone major
appliance stores to create better selling space for the new technologies in the
appliance business and to increase consumer awareness of Circuit City's
appliance offering. Management believes that the Group has the opportunity to
operate approximately 800 Superstores within the United States. Circuit City's
goal is to maximize profitability in each market it serves by capturing large
market shares that produce high sales volumes across a broad merchandise mix.
Merchandising. Because management believes that local markets have
individual characteristics which vary greatly by the advertising, merchandising
and pricing strategies of competitors, Circuit City has organized its marketing
function to focus on markets with similar competitive conditions. Circuit City's
operating regions benefit from a centralized buying organization. The central
buying staff reduces costs by purchasing in large volumes, structures a sound
basic merchandising program and is supported by advanced management information
and distribution systems.
Circuit City's merchandising strategy emphasizes a broad selection of
products, including the industry's newest technologies, and a wide range of
prices. Merchandise mix and displays are controlled centrally to help ensure a
high level of consistency from store to store. Merchandise pricing and selling
strategies vary by market to reflect competitive conditions.
Although suggested retail prices are established by the corporate
merchandising department, each store manager is responsible for shopping the
local competition on a regular basis and is empowered to adjust retail prices to
meet in-market conditions. As part of its competitive strategy, Circuit City
advertises low prices and provides customers with a low-price guarantee. Circuit
City will beat any price from a local store stocking the same new item,
available for sale with a manufacturer's warranty and in a factory-sealed box.
In most cases, if a customer finds a lower price, including Circuit City's own
sale price, within 30 days, Circuit City will refund 110 percent of the
difference to the customer.
Suppliers. During fiscal 2000, Circuit City's 10 largest suppliers
accounted for approximately 60 percent of merchandise purchased. Circuit City's
major suppliers include Sony Electronics, Hewlett Packard, Compaq, Thomson,
Panasonic, JVC, Whirlpool, Maytag, eMachines and Toshiba. Brand-name advertised
products are sold by all of Circuit City's retail locations. Circuit City has no
significant long-term contracts for the purchase of merchandise.
In the past, Circuit City has not experienced any continued or
ongoing difficulty obtaining satisfactory sources of supply and believes that
adequate sources of supply exist for the types of merchandise sold in its
stores.
Advertising. Circuit City relies on considerable amounts of
advertising to maintain high levels of consumer awareness. Advertising
expenditures from continuing operations were 3.7 percent of sales in fiscal
2000, 4.0 percent of sales in fiscal 1999 and 4.6 percent of sales in fiscal
1998. Circuit City is generally one of the largest newspaper advertisers in the
markets that it serves. Circuit City primarily uses print advertising, including
multi-page vehicles and run-of-press newspaper ads, for Superstore advertising.
Circuit City emphasizes the use of multi-page vehicles to allow a more extensive
presentation of the broad selection of products and price ranges it carries.
These multi-page vehicles are generally distributed in newspapers. In addition,
Circuit City combines both spot TV for local advertising and network cable
advertising to communicate its consumer offer. Circuit City advertisements are
regularly seen in USA Today and on top-rated sports and entertainment programs.
Page 4 of 18
Competition. From mid-fiscal 1996 through fiscal 1998, a lack of
significant consumer electronics product introductions resulted in weak industry
sales. The industry began to emerge from this period of declining sales in
fiscal 1999, and that trend continued in fiscal 2000. Despite the improvement,
the consumer electronics industry remains highly competitive. Circuit City's
primary competitors are large specialty, discount or warehouse retailers with
generally lower levels of service.
Circuit City uses selection, service and pricing to differentiate
itself from the competition. As part of its competitive strategy, Circuit City's
Superstores offer a broad selection of top-quality merchandise that includes
3,200 to 4,000 brand-name items (excluding entertainment software), depending on
the selling square footage of the Superstore. Professionally trained sales
counselors, convenient credit options, factory-authorized product repair, home
delivery, installation centers for automotive electronics, exchange and no-lemon
policies, reflect a strong commitment to customer service. Circuit City strives
to maintain highly competitive prices and offers customers the low-price
guarantee previously described.
Customer Satisfaction. Circuit City conducts market research to
monitor store operations and help assure customer satisfaction. Market research
techniques used include telephone interviews, exit interviews and "mystery
shops," in which an Associate acts as a customer to evaluate customer service
performance. Quick feedback enables management to identify issues that need to
be addressed, ensuring that store and individual performance remain focused on
providing the highest possible level of customer service.
Training. Circuit City staffs its Superstores with commissioned sales
counselors, support personnel (cashiers and stockpersons), a store manager, one
or more sales managers and an operations manager. New sales counselors complete
an in-market training program focused on product knowledge, customer service and
store operations. In fiscal 2001, Circuit City will introduce interactive
Web-based training for store, service center and distribution Associates. Online
access will provide experienced Associates with ongoing training in new
technologies. Market training facilities are utilized for classroom sessions
taught by professional trainers, and a state-of-the-art, in-house video studio
produces video-based training materials. Formalized training for store, sales
and operations managers focuses on human resource management, sales management
and critical operating procedures. Individual development plans address personal
training needs, giving Associates advancement opportunity.
Consumer Credit. Because consumer electronics, personal computers and
major appliances represent relatively large purchases for the average consumer,
Circuit City's business is affected by consumer credit availability, which
varies with the state of the economy and the location of a particular store. In
fiscal 2000, approximately 14 percent of Circuit City's total sales were made
through its private-label credit card and 47 percent through third-party credit
sources.
In fiscal 1991, the Company established a credit card finance
operation to issue its private-label credit card. The credit card finance
operation is located in Kennesaw, Ga. This credit program enhances customer
service with increased credit availability, online links between the stores and
the credit operation and better control over customer interactions. Interfacing
the finance operation with Circuit City's point-of-sale (POS) system has
produced a rapid customer credit approval process. A customer's application can
be electronically scored, and qualified customers can generally receive approval
in under one minute. In addition to increased credit availability, the
private-label credit card program provides Circuit City with additional
marketing opportunities, including direct mail campaigns to credit card
customers and special financing programs for promotions. The finance operation's
credit extension, customer service and collection operations are fully automated
with state-of-the-art technology to maintain a high level of profitability and
customer service. This technology aids its collection philosophy of contacting
cardholders in the preliminary days of delinquency to resolve any past due
status.
The credit card finance operation also manages a bank card portfolio.
Receivables generated by both the private-label credit card and bank card
programs are sold to non-affiliated entities under asset securitization
programs.
Systems. Circuit City's in-store POS system maintains an online
record of all transactions and allows management to track performance by region,
store and individual sales counselor. The information gathered by the system
supports automatic replenishment of in-store inventory from the regional
distribution centers and is incorporated into product buying decisions. The POS
system is interfaced with the finance operation's credit approval system. In the
stores, electronic signature capture for all credit card purchases, automatic
printing of manufacturers' rebates, bar-code scanning for product returns and
repairs, automatic price tag printing for price changes and computerized home
delivery scheduling enhance Circuit City's customer service. These enhancements
eliminate time-consuming administrative tasks for store Associates and reduce
costs through smoother store-level execution. As part of an agreement with
America Online, Inc. announced in December 1999, the POS system is also
integrated with the registration systems of AOL and CompuServe, allowing
in-store registration with the interactive services to be completed in
approximately five minutes. At in-store kiosks, the POS system also allows
customers to special order custom-built computers from major PC vendors.
Page 5 of 18
Circuit City's Customer Service Information System maintains an
on-line history of customer purchases and enables sales counselors to better
assist customers with purchases by ensuring that new products can be integrated
with existing products in the home. This system also facilitates product returns
and product repair.
E-commerce. In July 1999, Circuit City launched its e-commerce Web
site. Circuit City provides in-depth product comparison information, broad
product selection and convenient purchase and delivery options. Internet
customers can check the inventory of up to three Circuit City Superstores in
their market, as well as the in-stock availability from the e-Superstore.
Beginning in April 2000, the Web site inventory also is accessible from any
store location through the POS system. Products can be shipped through the
e-Superstore for normal shipping charges or they can be picked up using the
Express Pickup service at a local Superstore. Products purchased through the
e-Superstore are shipped from an existing distribution center directly to the
customer. Products purchased through the Web site can be serviced, exchanged or
returned to any Circuit City Superstore location.
Distribution. At April 30, 2000, Circuit City operated seven
automated electronics distribution centers. These centers are designed to serve
stores within a 500-mile range. They use conveyor systems and laser bar-code
scanners to reduce labor requirements, prevent inventory damage and maintain
inventory control. Circuit City also operates smaller distribution centers
handling primarily appliances and larger electronics products. Management
believes that the use of the distribution centers enables it to efficiently
distribute a broad selection of merchandise to its stores, reduce inventory
requirements at individual stores, benefit from volume purchasing and maintain
accounting control. Circuit City also operates an automated, centralized
distribution center for entertainment software. Most of Circuit City's store
merchandise is distributed through its distribution centers.
Service. Circuit City offers service and repairs for nearly all the
products it sells. Customers also are able to purchase extended warranty plans
on most of the merchandise Circuit City sells.
At April 30, 2000, Circuit City had 34 regional, factory-authorized
repair facilities. To meet customer needs, merchandise that requires service or
repair usually is moved by truck from the stores to the nearest regional service
facility and is returned to the customer at the store after repair. Circuit City
also has in-home technicians who service large items not conveniently carried to
a store.
Extended warranty plans provide coverage beyond the normal
manufacturer's warranty period, usually with terms of coverage, including the
manufacturer's warranty period, between 12 and 60 months. Circuit City sells two
extended warranty programs on behalf of unrelated third parties who are the
primary obligors. These third parties issue these plans for merchandise sold by
other retailers as well as Circuit City. Under these third-party warranty
programs, the Company has no contractual liability to the customer. One of these
programs is sold in most major markets and features in-home service for personal
computer products. The second program covers consumer electronics and major
appliances and also is sold in most major markets. In states where third-party
warranty sales are not permitted, the Group sells a Circuit City extended
warranty for which the Company is the primary obligor.
Seasonality. Like many retail businesses, the Circuit City Group's
sales are greater in the fourth quarter of the fiscal year than in other periods
of the fiscal year because of holiday buying patterns. A corresponding
pre-seasonal inventory build-up is associated with this sales volume. This
increased sales volume results in a lower ratio of fixed costs to sales and a
higher ratio of operating income to sales in the fourth fiscal quarter. Circuit
City Group's sales from continuing operations for the fourth fiscal quarter,
which includes the Christmas season, were $3,476,171,000 in fiscal 2000,
$3,029,418,000 in fiscal 1999 and $2,585,969,000 in fiscal 1998. Fourth quarter
sales represented approximately 33 percent of total sales in fiscal 2000 and 32
percent in fiscal 1999 and fiscal 1998.
Divx. On June 16, 1999, Digital Video Express announced that it would
cease marketing of the Divx home video system and discontinue operations because
it did not obtain the studio support necessary for long-term success. Existing,
registered customers can view discs during a two-year phase-out period. The
operating results of Divx and the loss on the disposal of the Divx business have
been segregated from continuing operations and reported as separate line items,
after tax, on the Company's and Circuit City Group's statements of earnings. For
fiscal 2000, the loss from the discontinued operations of Divx totaled $16.2
million after an income tax benefit of $9.9 million. The loss from the
discontinued operations of Divx totaled $68.5 million after an income tax
benefit of $42.0 million in fiscal 1999 and $20.6 after an income tax benefit of
$12.6 million in fiscal 1998.
In fiscal 2000, the loss on the disposal of the Divx business totaled
$114.0 million after an income tax benefit of $69.9 million. 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 the
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.
Page 6 of 18
The Divx system included DVD players with the Divx feature and Divx
discs. Divx offered consumers a convenient no-return, rental-like system. Unlike
video rentals, the Divx viewing period began when customers first inserted a
disc into their player and pushed play. After that point, consumers had a
48-hour window in which they could watch the movie as many times as they wanted.
Subsequent two-day viewing periods could be purchased at a discounted rate, and
selected favorite movies could be converted to unlimited viewing for play on any
Divx-equipped player registered to the customer's account. On a regular basis,
Divx-equipped players used the telephone connection to automatically transfer
viewing information to the Divx billing system. Payment was made through a
customer's credit or debit card.
CarMax Group:
General. In 1993, CarMax pioneered the used-car superstore concept
when it opened its first location in Richmond, Va. CarMax purchases,
reconditions and sells used vehicles. In addition, CarMax sells new vehicles
under sales and service agreements with DaimlerChrysler, Nissan, Mitsubishi,
Toyota, Ford, General Motors and BMW. CarMax allows customers to purchase
vehicles the same way they can buy virtually every other retail product, with
friendly service and non-negotiated low prices.
Expansion. As of April 30, 2000, CarMax operated 40 store locations,
including 31 used-car superstores and co-located new-car stores, four prototype
satellite stores and five stand-alone new-car franchises. In total, CarMax
operates 20 new-car franchises. In fiscal 1999, CarMax began testing a hub and
satellite operating strategy. Under the hub and satellite strategy, a satellite
store uses the reconditioning, purchasing and business office operations of a
nearby hub store. The consumer offer is identical in both the hub and satellite
stores. A prototypical satellite store operates on a four- to six-acre site with
a 12,000- to 14,000-square-foot facility that houses offices, a showroom and
four to seven service bays for regular maintenance and warranty service. As of
April 30, 2000, CarMax operated four prototypical satellite stores and had
converted six superstores to satellite operations. In fiscal 2000, CarMax slowed
its geographic expansion to focus on improving sales and profitability in
existing multi-store markets through the addition of satellite stores and
new-car franchises. In fiscal 2001, CarMax's management expects to continue this
focus on revenue growth and operating margin enhancements in existing CarMax
markets. Management will concentrate on the hub and satellite operating strategy
for its used-car superstores and seek new-car franchises to integrate or
co-locate with used-car superstores. In addition, management is actively
pursuing opportunities to integrate or co-locate as many of the five stand-alone
new-car franchises with existing used-car superstores as possible. Management
anticipates that in fiscal 2001 and beyond any new stores will be smaller "A"
stores or satellite stores.
Merchandising. All used-car CarMax locations feature a broad
selection of top-quality domestic and import used cars and trucks, with a wide
range of prices appealing to a large range of potential customers. CarMax's
selection covers the most popular brands, such as Ford, General Motors,
Chrysler, Toyota, Honda, Nissan and Mitsubishi and specialty brands like Lexus
and BMW. To appeal to the vast array of consumer preferences and budgets, CarMax
offers its used vehicles under two programs - the CarMax program and the ValuMax
program. CarMax used cars are generally less than six years old with fewer than
60,000 miles and range in price from $6,500 to $30,000. Through the ValuMax
program, CarMax sells high-quality used vehicles that are either older than six
years or have greater than 60,000 miles and generally range in price from $4,000
to $19,000. To ensure that CarMax quality standards are maintained, vehicles
under both programs undergo a comprehensive, certified quality inspection by
CarMax service technicians. CarMax backs its commitment to quality with a
five-day or 250-mile, money-back guarantee and a limited warranty. At all
new-car locations, the full selection of the manufacturer's models is available.
CarMax new-car franchises include Chrysler, Plymouth, Dodge, Jeep, Mitsubishi,
Nissan, Toyota, BMW, Chevrolet and Ford.
CarMax used-car prices average $1,300 below Kelley Blue Book prices
and more than 80 percent of CarMax's new cars are priced below manufacturers'
invoice. All customers receive the same low price with no negotiating required.
CarMax has extended its "no-haggle" philosophy to every stage of the vehicle
transaction, including trade-ins, financing rates, electronic accessories,
extended warranty pricing and its low vehicle documentation fees. CarMax has
replaced the traditional "trade-in" transaction with a process in which trained
CarMax buyers appraise any vehicle and provide the vehicle's owner with a
written guaranteed cash offer that is good for seven days or 300 miles. The
appraisal process is available to everyone, whether or not the individual is
purchasing a vehicle from CarMax. In conjunction with Circuit City's in-store
Roadshops, CarMax sells electronic accessories at its store locations.
Suppliers. In stores open for more than one year, CarMax acquires the
majority of its used-vehicle inventory from consumers or from local and regional
auctions in the markets that it serves. This buying strategy provides an
inventory of makes and models that reflect the tastes of the market. CarMax
appraises and makes an offer to purchase any properly documented vehicle from an
individual. CarMax also acquires used vehicles directly from other sources,
including wholesalers, franchised and independent dealers and fleet owners, such
as leasing companies and rental companies. Based on consumer acceptance of the
appraisal process at existing CarMax stores and the experience and success of
CarMax to date in
Page 7 of 18
acquiring vehicles from auctions and other sources, management believes that its
sources of used vehicles will continue to be sufficient to meet current needs
and to support planned expansion.
New-car inventory for the franchise locations is governed by the
terms of the sales and service agreements with DaimlerChrysler, Nissan,
Mitsubishi, Toyota, Ford, General Motors and BMW.
Reconditioning. An integral part of CarMax's used-car consumer offer
is the reconditioning process. This process includes: (1) a comprehensive,
certified quality inspection by CarMax ASE-certified technicians, (2) completion
of all scheduled preventive maintenance and required mechanical repairs, (3) a
thorough cosmetic reconditioning that includes car detailing and minor repairs
of scratches, dents, etc. and (4) a standard, final quality-control check. In
fiscal 1998, management closed its centralized reconditioning facilities after
experience proved that in-market reconditioning is more efficient and produces a
higher quality vehicle for the consumer.
Advertising. Television and radio advertisements are designed to
enhance consumer awareness of the CarMax name and key components of the CarMax
offer. These advertisements are distinctly different from those placed by most
auto dealers. Newspaper ads promote CarMax's selection and price leadership,
targeting consumers with immediate purchase intentions. In fiscal 2000, CarMax
modified its advertising campaign to build greater awareness and focus on the
core equities of the CarMax offer. The CarMax Web site also helped build traffic
throughout fiscal 2000, and enhancements to the Web site at the end of fiscal
2000 continue to contribute to CarMax's overall awareness. Advertising
expenditures were 2.4 percent of sales in fiscal 2000 and 3.4 percent of sales
in fiscal 1999 and 1998. The fiscal 2000 advertising expense ratio reflects
leverage from the total and comparable store sales increases and changes in
media buying strategy designed to increase buying efficiency for both television
and newspaper. The advertising expense ratio was unchanged from fiscal 1998 to
fiscal 1999 as expenses associated with store openings offset the leverage from
increased store sales.
Franchises. CarMax operates new-car dealerships under separate
franchise or dealer agreements with DaimlerChrysler, Nissan, Mitsubishi, Toyota,
Ford, General Motors and BMW. The agreements generally grant CarMax the right to
sell the manufacturer's vehicle brands, perform warranty work on these vehicles
and sell related parts and services within a specified market area. The
designation of specified market areas generally does not guarantee exclusivity
within a specified territory. The agreements govern the relationship between the
dealership and the manufacturer and generally impose certain operational
requirements and restrictions. These requirements include inventory levels,
working capital, monthly financial reporting, signage and cooperation with
marketing strategies. A manufacturer may terminate a dealer agreement under
certain circumstances, including a change in ownership without prior
manufacturer approval, failure to maintain adequate customer satisfaction
ratings or a material breach or other provisions of the agreement. CarMax also
has entered into framework agreements with several major vehicle manufacturers.
These agreements generally contain provisions relating to the acquisition,
ownership structure, advertising and management of a dealership franchised by
such manufacturers.
Various federal and state laws governing the relationship between
automotive dealerships and vehicle manufacturers also might affect CarMax. These
laws include statutes prohibiting manufacturers from terminating or failing to
renew franchise agreements without proper cause and unreasonably withholding
approval for proposed ownership changes.
Competition. The $650 billion used- and new-car retail business is
highly competitive. In the used-vehicle market, CarMax competes with existing
franchised and independent dealers, rental companies and private parties. Many
franchised new-car dealerships also have increased their focus on the
used-vehicle market. Late in fiscal 2000, CarMax's primary competitor exited the
used-car superstore business. Management believes their exit from the
Dallas/Fort Worth, Houston, San Antonio, Tampa and Miami markets, where the two
companies competed, will help eliminate consumer confusion over the two offers
and increase customer flow for CarMax. Part of CarMax's business strategy is to
position itself as a low-price operator in the industry. In fiscal 1999,
CarMax's used-car sales were negatively impacted by an intensely competitive
new-car industry and insufficient customer traffic in a number of multi-store
metropolitan markets.
In the new-vehicle market, CarMax competes with other franchised
dealers offering vehicles produced by the same or other manufacturers and with
auto brokers and leasing companies. As is typical of such arrangements, CarMax's
existing franchise agreements do not guarantee exclusivity within a specified
territory. Aggressive discounting by manufacturers of new cars, which typically
occurs in the fall during the close-out of prior year models, may result in
lower retail prices and margins for used vehicles during such discounting. In
fiscal 2000 and 1999, CarMax's new-car sales were strong, resulting in part from
the highly promotional climate in the new-car industry.
Customer Satisfaction. The elements of the CarMax offer are designed
to create a customer-friendly experience. The "no-haggle" pricing allows the
sales consultant to focus solely on the customer's needs. CarMax sales personnel
play a significant role in ensuring a customer-friendly sales process. All sales
consultants, including both full- and part-time employees, are compensated on a
commission basis. The amount of the commission is a fixed dollar amount per
vehicle sold.
Page 8 of 18
The entire purchase process, including a test-drive and financing, can be
completed in less than one hour. Extensive market research is conducted to
measure CarMax's customer service record and to refine its consumer offer.
Training. CarMax is committed to providing exceptional initial and
ongoing training to its Associates. All new Associates are offered structured,
self-paced training programs that introduce them to company policies and their
specific job responsibilities. Associate participation and performance in each
training program is measured corporately by a unique, intranet-based testing and
tracking system. Most new Associates are assigned mentors who provide on-the-job
guidance and support. Many CarMax compensation programs reward Associates for
continuously improving their skills.
CarMax also offers comprehensive, facilitated classroom training
courses to sales consultants, buyers, automotive technicians and managers. All
sales consultants receive extensive customer service training and ongoing
training as new products become available. Each buyer undergoes a 12- to
24-month apprenticeship under the tutelage of an experienced buyer and appraises
thousands of cars before making his or her first independent purchase. Most
service technicians are ASE-certified - the industry standard for technician
training. At the end of fiscal 2000, the 38 general managers averaged more than
three years of CarMax experience and 12 years of prior management experience.
Consumer Credit. CarMax offers its customers an opportunity to obtain
prime financing for vehicle purchases through its finance operation or Bank of
America. In addition, Chrysler Financial, BMW Financial, Ford Motor Credit,
General Motors Acceptance, Mitsubishi Motors Credit, Nissan Motors Acceptance
and Toyota Motor Credit offer prime financing to customers purchasing new
vehicles at applicable CarMax locations. Non-prime financing is offered by
TransSouth Financial at all CarMax locations and Flagship Credit and AmeriCredit
on a regional basis, with no financial recourse to CarMax. Sales consultants use
CarMax's proprietary point-of-sale system to electronically submit financing
applications and receive responses from multiple lenders, generally in less than
eight minutes.
Systems. Using a touch screen, CarMax customers can electronically
search the inventory for cars that meet their specific needs. The CarMax
inventory information system displays a color picture of the car and generates a
vehicle information sheet for customer reference. After the selection process is
complete, financing applications are submitted electronically and purchase and
title forms are systematically generated, reducing customer wait time. The
inventory management system includes bar codes on each vehicle and each on-site
parking place. Daily scanning tracks movement of vehicles on the lot. An
electronic gate helps track test drives for vehicles and sales consultants. This
combination of systems allows inventory and sales performance to be closely
monitored, enabling management to quickly resolve any issues.
E-commerce. Since 1997, CarMax's Web site has offered complete
inventory and pricing search capabilities. In fiscal 2000, the site was updated
to include all the detailed vehicle information available at the store; this
information includes a picture of each vehicle, prices, features, specifications
and the store location. Inventory information on the more than 10,000 cars
available in CarMax's nationwide inventory is updated daily. In addition, The
Insta-Price Online New-Car Buying Service was launched in fiscal 2000 for 10
major cities. This service connects the customer with a dedicated CarMax
Internet sales consultant so that the sales consultant can answer all questions
regarding purchase details, including financing inquiries. The customer is then
able to pick up the new vehicle from the store location. Also in fiscal 2000,
CarMax began testing partnerships with most major online automotive sites to
further expand its online presence.
Service. During fiscal 1998, CarMax completed the roll out of retail
repair service to all locations. In fiscal 2000, CarMax expanded its retail
service operations as its customer base increased. In fiscal 2001, CarMax
intends to continue its retail service expansion through additional marketing
and growth in its customer base.
In most states, CarMax sells warranties on behalf of an unrelated
third party who is the primary obligor. Under this third-party warranty program,
the Company has no contractual liability to the customer. In states where
third-party warranty sales are not permitted, CarMax has sold its own extended
warranty for which the Company is the primary obligor. Contracts usually have
terms of coverage between 12 and 72 months.
Seasonality. The business of CarMax is seasonal, with each location
generally experiencing more of its net sales in the first half of the fiscal
year. During the fall quarter, new-model-year introductions and discounting on
close-out vehicles can cause rapid depreciation of used-car prices, especially
on late-model vehicles. CarMax anticipates that the seasonality of its business
may vary from region to region as its operations expand geographically.
Employees:
On April 30, 2000, the Company had 35,101 hourly and salaried
employees and 24,093 sales employees working on a commission basis. None of the
Company's employees are subject to a collective bargaining agreement. Additional
personnel are employed during peak selling seasons. The Circuit City Group
accounted for 30,902 of the Company's hourly
Page 9 of 18
and salaried employees and 22,382 of the Company's sales employees working on a
commission basis. The CarMax Group accounted for 4,199 of the Company's hourly
and salaried employees and 1,711 of the Company's sales employees working on a
commission basis.
Item 2. Properties.
At April 30, 2000, the Company's Circuit City retail operations were
conducted in 618 locations. The Company operates four Circuit City Superstore
formats with square footage and merchandise assortments tailored to population
and volume expectations for specific trade areas. The "D" format was developed
to serve the most populous trade areas. At the end of fiscal 2000, selling space
in the "D" format averaged approximately 23,000 square feet with total square
footage averaging 43,043. The "C" format constitutes the largest percent of the
store base. At the end of fiscal 2000, selling square footage in this format
averaged 15,000 square feet with total square footage for all "C" stores
averaging 34,006. The "B" format is often located in smaller markets or in trade
areas that are on the fringes of larger metropolitan markets. At the end of
fiscal 2000, selling space in these stores averaged approximately 13,000 square
feet with an average total square footage of 27,078. The "B" stores offer a
broad merchandise assortment that maximizes return on investment in these lower
volume areas. The "A" format serves the least populated trade areas. Selling
space in these stores averaged approximately 9,000 square feet at the end of
fiscal 2000, and total square footage averaged 19,098. The "A" stores feature a
layout, staffing levels and merchandise assortment that creates high
productivity in the smallest markets.
The Company's 45 mall-based Circuit City Express stores are located
in regional malls, are approximately 2,000 to 3,000 square feet in size and
specialize in leading-edge technology.
The Company's CarMax operations were conducted in 40 locations as of
April 30, 2000. Late in fiscal 1999, CarMax began testing a hub and satellite
operating strategy in existing multi-store markets. Under the hub and satellite
strategy, a satellite store uses the reconditioning, purchasing and business
office operations of a nearby hub store. The display capacity and consumer offer
are identical in both the hub and satellite stores. A prototypical satellite
store operates on a four-to-six acre site with a 12,000- to 14,000-square-foot
facility that houses sales offices, a showroom, and four to seven service bays
for regular maintenance and warranty service. CarMax opened two prototypical
satellite stores late in fiscal 1999 and two more in fiscal 2000. All other
satellite stores are larger stores and are therefore classified by size, with
"C" stores representing the largest store format. Management anticipates that in
fiscal 2001, and beyond, any new stores will be smaller "A" stores or satellite
stores. In fiscal 2000, CarMax reclassified certain stores based on square
footage. The "Other" category in the following table under the CarMax Group
includes four prototype satellite stores and five stand-alone, new-car stores.
Page 10 of 18
<PAGE>
The following table summarizes the Company's Circuit City and CarMax
stores as of April 30, 2000:
<TABLE>
<S> <C>
Circuit City Group CarMax Group
------------------------------------------------ ----------------------------------------
Superstores Mall Superstores
------------------------ ----------------
D C B A Stores Total C B A Other Total
- - - - ------ ----- - - - ----- -----
Alabama 1 4 - 2 1 8 - - - - -
Arizona 2 6 2 - 1 11 - - - - -
Arkansas - 2 - 2 - 4 - - - - -
California 16 52 12 2 4 86 - 1 - 3 4
Colorado 5 2 2 2 - 11 - - - - -
Connecticut 3 3 1 - 1 8 - - - - -
Delaware - 2 - - 1 3 - - - - -
District of Columbia - - - - 1 1 - - - - -
Florida 5 23 10 2 1 41 1 2 3 1 7
Georgia 4 7 6 - 3 20 1 - 2 - 3
Hawaii 1 - - - - 1 - - - - -
Idaho 1 - - 1 - 2 - - - - -
Illinois 6 19 4 - 3 32 3 - 1 - 4
Indiana 1 5 4 5 - 15 - - - - -
Kansas 1 3 1 - - 5 - - - - -
Kentucky - 5 - 1 - 6 - - - - -
Louisiana - 5 1 2 1 9 - - - - -
Maine - - 2 - - 2 - - - - -
Maryland 1 12 2 - 4 19 1 - 2 1 4
Massachusetts 1 9 3 - 6 19 - - - - -
Michigan 8 6 5 3 1 23 - - - - -
Minnesota 1 7 1 - 1 10 - - - - -
Mississippi - 1 - 2 - 3 - - - - -
Missouri 1 9 1 1 1 13 - - - - -
Nebraska 1 1 - - - 2 - - - - -
Nevada 1 3 - - - 4 - - - - -
New Hampshire - 4 - - 2 6 - - - - -
New Jersey 1 9 3 - - 13 - - - - -
New Mexico 1 - - - - 1 - - - - -
New York 11 7 7 3 2 30 - - - - -
North Carolina 6 5 5 2 1 19 - - 2 - 2
Ohio 7 12 5 2 3 29 - - - - -
Oklahoma - 2 1 1 - 4 - - - - -
Oregon 2 5 - 1 - 8 - - - - -
Pennsylvania 2 11 5 4 2 24 - - - - -
Rhode Island - 1 - - - 1 - - - - -
South Carolina 2 3 2 - - 7 - - 1 - 1
Tennessee 4 5 1 3 - 13 - - 1 - 1
Texas 7 27 5 7 2 48 2 2 3 3 10
Utah 5 - - - - 5 - - - - -
Vermont - - 1 - - 1 - - - - -
Virginia 2 13 5 5 3 28 - - 2 - 2
Washington 4 3 3 1 - 11 - - - - -
West Virginia - - 3 1 - 4 - - - - -
Wisconsin 4 2 1 - - 7 1 - - 1 2
Wyoming - - - 1 - 1 - - - - -
---------------------------------------------------------------------------------------------
118 295 104 56 45 618 9 5 17 9 40
=============================================================================================
</TABLE>
Of the stores open at April 30, 2000, the Company owns six Circuit
City store locations and 10 CarMax store locations. The Company leases the
remaining Circuit City and CarMax locations. During fiscal 2001, the Company
anticipates entering into sale-leaseback transactions for three of the Circuit
City locations owned by the Company as of April 30, 2000.
For information with respect to obligations for Circuit City leases,
see note 10 of the Notes to Circuit City Group Financial Statements on page 61
of the Company's 2000 Annual Report to Stockholders, which is incorporated
herein by
Page 11 of 18
reference. For information with respect to obligations for CarMax leases, see
note 12 of the Notes to CarMax Group Financial Statements on page 79 of the
Company's 2000 Annual Report to Stockholders, which is incorporated herein by
reference.
The Company owns a 388,000-square-foot consumer electronics/appliance
distribution center in Doswell, Va., and a 387,000-square-foot consumer
electronics/appliance distribution center in Atlanta, Ga. These distribution
centers have been financed with Industrial Development Revenue Bonds.
The Company owns a distribution center in Marion, Ill. and an office
building in Kennesaw, Ga. The Company anticipates entering into sale-leaseback
transactions for both of these properties in fiscal 2001. In addition, the
Company owns most of the land but leases the three buildings in which its
corporate headquarters is located. The Company leases space for all warehouse,
service and office facilities except for the aforementioned properties.
Item 3. Legal Proceedings.
In the normal course of business, the Company is involved in various
legal proceedings. Based upon the Company's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the Company's
financial position, liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year ended February 29, 2000.
Executive Officers of the Company.
The following table identifies the present executive officers of the
Company. The Company is not aware of any family relationship between any
executive officers of the Company or any executive officer and any director of
the Company. All executive officers are generally elected annually and serve for
one year or until their successors are elected and qualify. The next general
election of officers will occur in June 2000.
<TABLE>
<S> <C>
Name Age Office
---- --- ------
Richard L. Sharp 53 Chairman of the Board and
Chief Executive Officer
W. Alan McCollough 50 President and
Chief Operating Officer
Richard S. Birnbaum 47 Executive Vice President
Operations
Michael T. Chalifoux 53 Executive Vice President,
Chief Financial Officer and
Corporate Secretary
John W. Froman 46 Executive Vice President
Merchandising
Dennis J. Bowman 46 Senior Vice President and
Chief Information Officer
W. Stephen Cannon 48 Senior Vice President and
General Counsel
Philip J. Dunn 47 Senior Vice President,
Treasurer and Controller
John A. Fitzsimmons 57 Senior Vice President
Administration
Page 12 of 18
Name Age Office
---- --- ------
W. Austin Ligon 49 Senior Vice President
Automotive
Gary Mierenfeld 48 Senior Vice President
Distribution and National Service
Jeffrey S. Wells 54 Senior Vice President
Human Resources
</TABLE>
Mr. Sharp is a director and a member of the Company's executive
committee. He joined the Company in 1982 as executive vice president and was
elected president in 1984, chief executive officer in 1986 and chairman of the
board in 1994. While remaining chairman of the Company, Mr. Sharp will step down
as chief executive officer in June 2000.
Mr. McCollough is a director and a member of the Company's executive
committee. He joined the Company in 1987 as general manager of corporate
operations. He was elected assistant vice president in 1989, vice president and
central division president in 1991, senior vice president - merchandising in
1994, president and chief operating officer in 1997 and chief executive officer,
effective June 2000.
Mr. Birnbaum joined the Company in 1972. He was elected vice
president in 1985, Central Division president in 1986, senior vice president -
marketing in 1991 and executive vice president - operations in 1994.
Mr. Chalifoux is a director and a member of the Company's executive
committee. He joined the Company in 1983 as corporate controller and was elected
vice president and chief financial officer in 1988. He was elected senior vice
president in 1991, corporate secretary in 1993 and executive vice president in
1998.
Mr. Froman joined the Company in 1986 as a store manager and general
manager in training. In 1987, he was promoted to general manager and in 1989 was
named assistant vice president. He was promoted to director of corporate
operations in 1990 and in 1992 added the title of vice president. He was elected
president of the Company's Central Division in 1994, named senior vice president
- - merchandising in 1997 and executive vice president in 2000.
Mr. Bowman joined the Company in 1996 as vice president and chief
information officer. He was elected senior vice president and chief information
officer in 1997. Prior to joining the Company, he had served as senior vice
president - information services for Rite Aid Corporation since 1993 and from
1984 to 1993 was a consultant with McKinsey & Company.
Mr. Cannon joined the Company in 1994 as senior vice president and
general counsel. Prior to joining the Company, he had been, since 1986, a
partner in Wunder, Diefenderfer, Ryan, Cannon & Thelen, a Washington, D.C., law
firm.
Mr. Dunn joined the Company in 1984. He was named treasurer in 1990,
was promoted to vice president in 1992 and added the title of controller in
1996. In 1999, he was elected senior vice president.
Mr. Fitzsimmons joined the Company in 1987 as senior vice president -
administration.
Mr. Ligon joined the Company in 1990 as vice president - corporate
planning and communications. He was elected senior vice president - corporate
planning and communications in 1991, senior vice president - corporate planning
and automotive in 1994 and senior vice president-automotive and CarMax president
in 1996.
Mr. Mierenfeld joined the Company in 1993 as vice president -
distribution. He was elected senior vice president - distribution and national
service in 1999.
Mr. Wells joined the Company in 1996 as senior vice president - human
resources. Prior to joining the Company, he had served as a senior vice
president of Toys "R" Us, Inc. since 1992.
Page 13 of 18
Part II
With the exception of the information incorporated by reference from
the 2000 Annual Report to Stockholders in Item 2 of Part I and Items 5, 6, 7, 7a
and 8 of Part II and Item 14 of Part IV of this Form 10-K, the Company's 2000
Annual Report to Stockholders is not to be deemed filed as a part of this
Report.
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
Incorporated herein by reference is the information appearing under
the heading "Common Stock" on page 29 of the Company's 2000 Annual Report to
Stockholders.
As of April 30, 2000, there were 8,308 shareholders of record of the
Circuit City Group common stock and 550 shareholders of record of the CarMax
Group common stock.
Item 6. Selected Financial Data.
Incorporated herein by reference is the information appearing under
the heading "Reported Historical Information" on page 23 of the Company's 2000
Annual Report to Stockholders.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Incorporated herein by reference is the information appearing under
the heading "Management's Discussion and Analysis of Results of Operations and
Financial Condition" on pages 23 through 29 for Circuit City Stores, Inc., pages
46 through 49 for the Circuit City Group, and pages 64 through 67 for the CarMax
Group of the Company's 2000 Annual Report to Stockholders.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk.
Incorporated herein by reference is the information appearing under
the sub-heading "Market Risk" on page 28 for Circuit City Stores, Inc., page 49
for the Circuit City Group and page 67 for the CarMax Group of the Company's
2000 Annual Report to Stockholders.
Item 8. Financial Statements and Supplementary Data.
Incorporated herein by reference is the information appearing under
the headings "Consolidated Statements of Earnings," "Consolidated Balance
Sheets," "Consolidated Statements of Cash Flows," "Consolidated Statements of
Stockholders' Equity," "Notes to Consolidated Financial Statements," and
"Independent Auditors' Report," on pages 30 through 45 of the Company's 2000
Annual Report to Stockholders.
Incorporated herein by reference is the information appearing under
the headings "Circuit City Group Statements of Earnings," "Circuit City Group
Balance Sheets," "Circuit City Group Statements of Cash Flows," "Circuit City
Group Statements of Group Equity," "Notes to Circuit City Group Financial
Statements," and "Independent Auditors' Report," on pages 50 through 63 of the
Company's 2000 Annual Report to Stockholders.
Incorporated herein by reference is the information appearing under
the headings "CarMax Group Statements of Operations," "CarMax Group Balance
Sheets," "CarMax Group Statements of Cash Flows," "CarMax Group Statements of
Group Equity, " "Notes to CarMax Group Financial Statements," and "Independent
Auditors' Report," on pages 68 through 80 of the Company's 2000 Annual Report to
Stockholders.
Incorporated herein by reference is the information appearing under
the heading "Quarterly Financial Data (Unaudited)" on page 45 for Circuit City
Stores, Inc., page 63 for the Circuit City Group and page 80 for the CarMax
Group of the Company's 2000 Annual Report to Stockholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Page 14 of 18
Part III
With the exception of the information incorporated by reference from
the Company's Proxy Statement in Items 10, 11 and 12 of Part III of this Form
10-K, the Company's Proxy Statement dated May 10, 2000, is not to be deemed
filed as a part of this Report.
Item 10. Directors and Executive Officers of the Company.
The information concerning the Company's directors required by this
Item is incorporated by reference to the section entitled "Item One - Election
of Directors" appearing on pages 2 through 4 of the Company's Proxy Statement
dated May 10, 2000.
The information concerning the Company's executive officers required
by this Item is incorporated by reference to the section in Part I hereof
entitled "Executive Officers of the Company" appearing on pages 12 and 13.
The information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 required by this Item is incorporated by
reference to the section entitled "Section 16(a) Compliance" appearing on page
17 of the Company's Proxy Statement dated May 10, 2000.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the sections entitled "Executive Compensation," "Employment Agreements and
Change-in-Control Arrangements," and "Compensation of Directors," appearing on
pages 9 through 11 and pages 16 through 17 of the Company's Proxy Statement
dated May 10, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to
the section entitled "Beneficial Ownership of Securities" appearing on pages 5
through 7 of the Company's Proxy Statement dated May 10, 2000.
Item 13. Certain Relationships and Related Transactions.
None.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following Financial Statements of
Circuit City Stores, Inc., the Circuit City Group and the CarMax
Group, and the related notes to Financial Statements and the
Independent Auditors' Reports are incorporated by reference to
pages 30 through 45 for Circuit City Stores, Inc., pages 50
through 63 for the Circuit City Group, and pages 68 through 80
for the CarMax Group of the Company's 2000 Annual Report to
Shareholders:
Consolidated Statements of Earnings for the fiscal years ended
February 29 or 28, 2000, 1999 and 1998.
Circuit City Group Statements of Earnings for the fiscal years
ended February 29 or 28, 2000, 1999 and 1998.
CarMax Group Statements of Operations for the fiscal years ended
February 29 or 28, 2000, 1999 and 1998.
Consolidated Balance Sheets at February 29, 2000 and February 28,
1999.
Circuit City Group Balance Sheets at February 29, 2000 and
February 28, 1999.
CarMax Group Balance Sheets at February 29, 2000 and February 28,
1999.
Consolidated Statements of Cash Flows for the fiscal years ended
February 29 or 28, 2000, 1999 and 1998.
Circuit City Group Statements of Cash Flows for the fiscal years
ended February 29 or 28, 2000, 1999 and 1998.
Page 15 of 18
CarMax Group Statements of Cash Flows for the fiscal years ended
February 29 or 28, 2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity for the fiscal
years ended February 29 or 28, 2000, 1999 and 1998.
Circuit City Group Statements of Group Equity for the fiscal
years ended February 29 or 28, 2000, 1999 and 1998.
CarMax Group Statements of Group Equity for the fiscal years
ended February 29 or 28, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
Notes to Circuit City Group Financial Statements.
Notes to CarMax Group Financial Statements.
Independent Auditors' Report, Circuit City Stores, Inc.
Independent Auditors' Report, Circuit City Group.
Independent Auditors' Report, CarMax Group.
2. Financial Statement Schedule. The following financial statement
schedules of Circuit City Stores, Inc., Circuit City Group and
CarMax Group for the fiscal years ended February 29 or 28, 2000,
1999 and 1998, are filed as part of this Report and should be
read in conjunction with the Financial Statements of Circuit City
Stores, Inc., Circuit City Group and CarMax Group.
<TABLE>
<S> <C>
II Valuation and Qualifying Accounts and Reserves, Circuit City Stores, Inc. S-1
II Valuation and Qualifying Accounts and Reserves, Circuit City Group S-1
II Valuation and Qualifying Accounts and Reserves, CarMax Group S-1
Independent Auditors' Report on Circuit City Stores, Inc. Financial Statement Schedule S-2
Independent Auditors' Report on Circuit City Group Financial Statement Schedule S-2
Independent Auditors' Report on CarMax Group Financial Statement Schedule S-2
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits. The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedules
are filed as part of, or incorporated by reference into, this
Report.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the last
fiscal quarter covered by this Report.
Page 16 of 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CIRCUIT CITY STORES, INC.
(Registrant)
By s/ Richard L. Sharp
Richard L. Sharp
Chairman of the Board and
Chief Executive Officer
By s/ Michael T. Chalifoux
Michael T. Chalifoux
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
By s/ Philip J. Dunn
Philip J. Dunn
Senior Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
May 23, 2000
Page 17 of 18
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
<TABLE>
<S> <C>
Signature Title Date
Michael T. Chalifoux* Director May 23, 2000
- --------------------------
Michael T. Chalifoux
Richard N. Cooper* Director May 23, 2000
- --------------------------
Richard N. Cooper
Barbara S. Feigin* Director May 23, 2000
- --------------------------
Barbara S. Feigin
James F. Hardymon* Director May 23, 2000
- --------------------------
James F. Hardymon
Robert S. Jepson Jr.* Director May 23, 2000
- --------------------------
Robert S. Jepson Jr.
W. Alan McCollough* Director May 23, 2000
- --------------------------
W. Alan McCollough
Hugh G. Robinson* Director May 23, 2000
- --------------------------
Hugh G. Robinson
Walter J. Salmon* Director May 23, 2000
- --------------------------
Walter J. Salmon
Mikael Salovaara* Director May 23, 2000
- --------------------------
Mikael Salovaara
s/ Richard L. Sharp Director May 23, 2000
- --------------------------
Richard L. Sharp
John W. Snow* Director May 23, 2000
- --------------------------
John W. Snow
Edward Villanueva* Director May 23, 2000
- --------------------------
Edward Villanueva
Alan L. Wurtzel* Director May 23, 2000
- --------------------------
Alan L. Wurtzel
By: s/ Richard L. Sharp
- -----------------------
Richard L. Sharp,
Attorney-In-Fact
</TABLE>
*The original powers of attorney authorizing Richard L. Sharp and Michael T.
Chalifoux, or either of them, to sign this annual report on behalf of certain
directors and officers of the Company are included as Exhibit 24.
Page 18 of 18
<PAGE>
S-1
Schedule II
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
<TABLE>
<S> <C>
Balance at Charged Charge-offs Balance at
Beginning to less End of
Description of Year Income Recoveries Year
Circuit City Stores, Inc.:
Year ended February 28, 1998:
Allowance for doubtful accounts $ 15,396 $ 8,464 $ (5,554) $ 18,306
======== ======== ========= =========
Year ended February 28, 1999:
Allowance for doubtful accounts $ 18,306 $ 3,918 $ (5,942) $ 16,282
======== ======== ========= =========
Year ended February 29, 2000:
Allowance for doubtful accounts $ 16,282 $ 8,853 $ (6,822) $ 18,313
======== ======== ========= =========
Circuit City Group:
Year ended February 28, 1998:
Allowance for doubtful accounts $ 13,534 $ 5,616 $ (4,627) $ 14,523
======== ======== ========= =========
Year ended February 28, 1999:
Allowance for doubtful accounts $ 14,523 $ 1,374 $ (4,828) $ 11,069
======== ======== ========= =========
Year ended February 29, 2000:
Allowance for doubtful accounts $ 11,069 $ 4,324 $ (2,898) $ 12,495
======== ======== ========= =========
CarMax Group:
Year ended February 28, 1998:
Allowance for doubtful accounts $ 1,862 $ 2,848 $ (927) $ 3,783
======== ======== ========= =========
Year ended February 28, 1999:
Allowance for doubtful accounts $ 3,783 $ 2,544 $ (1,114) $ 5,213
======== ======== ========= =========
Year ended February 29, 2000:
Allowance for doubtful accounts $ 5,213 $ 4,529 $ (3,924) $ 5,818
======== ======== ========= =========
</TABLE>
<PAGE>
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 4, 2000, we reported on the consolidated balance sheets of
Circuit City Stores, Inc. and subsidiaries (the Company) as of February 29, 2000
and February 28, 1999, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the fiscal years in the
three-year period ended February 29, 2000, as contained in the February 29, 2000
annual report to stockholders. These consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year ended February 29, 2000. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related Circuit City Stores, Inc. financial statement schedule as listed in Item
14(a)2 of this Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
s/KPMG LLP
Richmond, Virginia
April 4, 2000
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 4, 2000, we reported on the balance sheets of the Circuit
City Group as of February 29, 2000 and February 28, 1999, and the related
statements of earnings, group equity and cash flows for each of the fiscal years
in the three-year period ended February 29, 2000, as contained in the February
29, 2000 annual report to stockholders. Our report dated April 4, 2000 includes
a qualification related to the effects of not consolidating the CarMax Group
with the Circuit City Group as required by generally accepted accounting
principles. These financial statements and our report thereon are incorporated
by reference in the annual report on Form 10-K of Circuit City Stores, Inc. for
the year ended February 29, 2000. In connection with our audits of the
aforementioned financial statements, we also have audited the related Circuit
City Group financial statement schedule as listed in Item 14(a)2 of this Form
10-K. This financial statement schedule is the responsibility of Circuit City
Stores, Inc.'s management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, except for the effects of not consolidating the CarMax Group
with the Circuit City Group as discussed in the preceding paragraph, such
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
s/KPMG LLP
Richmond, Virginia
April 4, 2000
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 4, 2000, we reported on the balance sheets of the CarMax
Group as of February 29, 2000 and February 28, 1999, and the related statements
of operations, group equity and cash flows for each of the fiscal years in the
three-year period ended February 29, 2000, as contained in the February 29, 2000
annual report to stockholders. These financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K of Circuit City
Stores, Inc. for the year ended February 29, 2000. In connection with our audits
of the aforementioned financial statements, we also have audited the related
CarMax Group financial statement schedule as listed in Item 14(a)2 of this Form
10-K. This financial statement schedule is the responsibility of Circuit City
Stores, Inc.'s management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
s/KPMG LLP
Richmond, Virginia
April 4, 2000
<PAGE>
Circuit City Stores, Inc.
Annual Report on Form 10-K
INDEX TO EXHIBITS
(3) Articles of Incorporation and Bylaws
(a) Amended and Restated Articles of Incorporation of the
Company, effective February 3, 1997, filed as Exhibit
3(i)(a) to the Company's Amended Quarterly Report on
Form 10-Q/A for the quarter ended May 31, 1999, (File
No. 1-5767) are expressly incorporated herein by this
reference.
(b) Articles of Amendment to the Company's Amended and
Restated Articles of Incorporation, effective April
28, 1998, filed as Exhibit 3(i)(b) to the Company's
Amended Quarterly Report on Form 10-Q/A for the
quarter ended May 31, 1999, (File No. 1-5767) are
expressly incorporated herein by this reference.
(c) Articles of Amendment to the Company's Amended and
Restated Articles of Incorporation, effective June
22, 1999, filed as Exhibit 3(i)(c) to the Company's
Amended Quarterly Report on Form 10-Q/A for the
quarter ended May 31, 1999 (File No. 1-5767), are
expressly incorporated herein by this reference.
(d) Bylaws of the Company, as amended and restated
February 15, 2000, filed as Exhibit 4.4 to the
Company's Form S-8 filed on March 24, 2000, are
expressly incorporated herein by this reference.
(4) Instruments Defining the Rights of Security Holders, Including Indentures
(a) First Amended and Restated Rights Agreement dated as
of February 16, 1999, between the Company and Norwest
Bank Minnesota, N.A., as Rights Agent, filed as
Exhibit 1 to the Company's Form 8-A/A filed on May 7,
1999, is expressly incorporated herein by this
reference.
(b) $100,000,000 term loan agreement dated July 28, 1994,
between the Company, The Long-Term Credit Bank of
Japan, Limited, as agent, and the banks named
therein. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
(c) First Amendment to Term Loan Agreement dated October
24, 1995, to the $100,000,000 term loan agreement
dated July 28, 1994, between the Company, The
Long-Term Credit Bank of Japan, Limited, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(d) Second Amendment to Term Loan Agreement dated August
21, 1996, to the $100,000,000 term loan agreement
dated July 28, 1994, between the Company, The
Long-Term Credit Bank of Japan, Limited, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
Page 1 of 4
(e) Third Amendment to Term Loan Agreement dated
September 23, 1999 to the $100,000,000 term loan
agreement dated July 28, 1994, between the Company,
General Electric Capital Corporation, as successor
agent, and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(f) $175,000,000 term loan agreement dated May 26, 1995,
between the Company, LTCB Trust Company, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(g) First Amendment to Term Loan Agreement dated October
24, 1995, to the $175,000,000 term loan agreement
dated May 26, 1995, between the Company, LTCB Trust
Company, as agent, and the banks named therein.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in
lieu of filing a copy of such agreement, the Company
agrees to furnish a copy of such agreement to the
Commission upon request.
(h) Second Amendment to the Term Loan Agreement dated
September 23, 1999 to the $175,000,000 term loan
agreement dated May 26, 1995, between the Company,
General Electric Capital Corporation, as successor
agent, and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(i) $130,000,000 term loan agreement dated June 14, 1996,
between the Company, Royal Bank of Canada, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(j) $150,000,000 Credit Agreement dated August 31, 1996,
between the Company, Crestar Bank, as agent, and the
banks named therein. Pursuant to Item 601(b)(4)(iii)
of Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
(k) First Amendment to Credit Agreement dated May 1,
1998, to the $150,000,000 Credit Agreement dated
August 31, 1996, between the Company, Crestar Bank,
as agent, and the banks named therein. Pursuant to
Item 601(b)(4)(iii) of Regulation S-K, in lieu of
filing a copy of such agreement, the Company agrees
to furnish a copy of such agreement to the Commission
upon request.
(l) Second Amendment to Credit Agreement dated September
1, 1999 to the $150,000,000 Credit Agreement dated
August 31, 1996, between the Company, Crestar Bank,
as agent, and the banks named therein. Pursuant to
Item 601(b)(4)(iii) of Regulation S-K, in lieu of
filing a copy of such agreement, the Company agrees
to furnish a copy of such agreement to the Commission
upon request.
(10) Material Contracts*
(a) The Company's Amended and Restated 1989 Non-Employee
Directors Stock Option Plan, filed as Exhibit A to
the Company's Definitive Proxy Statement dated May 9,
1997, for the Annual Meeting of Stockholders held on
June 17, 1997, is expressly incorporated herein by
this reference.
(b) Amendments adopted June 17, 1997, to the Company's
Amended and Restated 1989 Non-Employee Directors
Stock Option Plan filed as Exhibit 10(ii) to the
Company's
Page 2 of 4
Quarterly Report on Form 10-Q for the quarter ended
May 31, 1997 is expressly incorporated herein by this
reference.
(c) The Company's 1994 Stock Incentive Plan, as amended
as of January 24, 1997, filed as Annex III to the
Company's Definitive Proxy Statement dated December
24, 1996, for a Special Meeting of Shareholders held
on January 24, 1997, (File No. 1-5767) is expressly
incorporated herein by this reference.
(d) Amendment effective June 15, 1999, to the Company's
1994 Stock Incentive Plan, as amended, filed as
Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1999, is expressly
incorporated herein by this reference.
(e) Letter agreement and non-compete agreement dated
January 30, 1996, (revised February 12, 1996),
between the Company and Alan L. Wurtzel filed as
Exhibit 10(g) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1995,
(File No. 1-5767) is expressly incorporated herein by
this reference.
(f) Employment agreement between the Company and Richard
L. Sharp dated October 17, 1986, and amendment dated
August 1, 1989, to the employment agreement, filed as
Exhibit 10(m) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1993,
(File No. 1-5767) is expressly incorporated herein by
this reference.
(g) Employment agreement dated June 1, 1988, between the
Company and John A. Fitzsimmons, filed as Exhibit
10(n) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1989, (File No.
1-5767) is expressly incorporated herein by this
reference.
(h) Amendment dated August 1, 1989, to employment
agreement dated June 1, 1988, between the Company and
John A. Fitzsimmons, filed as Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1993, (File No. 1-5767) is
expressly incorporated herein by this reference.
(i) Employment agreement dated May 25, 1989, between the
Company and Michael T. Chalifoux, filed as Exhibit
10(x) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1991, (File No.
1-5767) is expressly incorporated herein by this
reference.
(j) Employment agreement dated April 24, 1995, between
the Company and W. Alan McCollough filed as Exhibit
10(l) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, (File No.
1-5767), is expressly incorporated herein by this
reference.
(k) Amended and restated employment agreement dated May
12, 1995, between the Company and Richard S. Birnbaum
filed as Exhibit 10(s) to the Company's Annual Report
on Form 10-K for the fiscal year ended February 28,
1995, (File No. 1-5767) is expressly incorporated
herein by this reference.
(l) The Company's Annual Performance-Based Bonus Plan, as
amended as of January 24, 1997, filed as Annex IV to
the Company's Definitive Proxy Statement dated
December 24, 1996, for a Special Meeting of
Shareholders held on January 24, 1997, (File No.
1-5767) is expressly incorporated herein by this
reference.
Page 3 of 4
(m) Program for deferral of director compensation
implemented October 1995 filed as Exhibit 10(i) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 1995, (Filed No. 1-5767)
is expressly incorporated herein by this reference.
(n) Benefit Restoration Plan, effective February 28,
1999, filed as Exhibit 10(m) to the Company's Annual
Report on Form 10-K for the fiscal year ended
February 28, 1999, (File 1-5767) is expressly
incorporated herein by this reference.
(13) Annual Report to Stockholders
(21) Subsidiaries of the Company
(23) Consents of Experts and Counsel
Consent of KPMG LLP to Incorporation by Reference of Independent
Auditors' Reports into the Company's Registration Statements on Form
S-8.
(24) Powers of Attorney
(27) Financial Data Schedule
* All contracts listed under Exhibit 10 are management contracts, compensatory
plans or arrangements of the Company required to be filed as an exhibit.
Page 4 of 4
REPORTED HISTORICAL INFORMATION
<TABLE>
<S> <C>
(Amounts in thousands except per share data) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues.................... $12,614,390 $10,810,468 $8,870,797 $7,663,811 $7,029,123
Earnings from continuing operations................. $ 327,830 $ 211,470 $ 124,947 $ 144,234 $ 184,184
Loss from discontinued operations................... $ (130,240) $ (68,546) $ (20,636) $ (7,820) $ (4,809)
Net earnings........................................ $ 197,590 $ 142,924 $ 104,311 $ 136,414 $ 179,375
Net earnings (loss) per share:
Circuit City Group:
Basic:
Continuing operations...................... $ 1.63 $ 1.09 $ 0.68 $ 0.74 $ 0.95
Discontinued operations.................... $ (0.65) $ (0.34) $ (0.11) $ (0.04) $ (0.02)
Net earnings............................... $ 0.98 $ 0.75 $ 0.57 $ 0.70 $ 0.93
Diluted:
Continuing operations...................... $ 1.60 $ 1.08 $ 0.67 $ 0.73 $ 0.94
Discontinued operations.................... $ (0.64) $ (0.34) $ (0.10) $ (0.04) $ (0.02)
Net earnings............................... $ 0.96 $ 0.74 $ 0.57 $ 0.69 $ 0.92
CarMax Group:
Basic......................................... $ 0.01 $ (0.24) $ (0.35) $ (0.01) $ -
Diluted....................................... $ 0.01 $ (0.24) $ (0.35) $ (0.01) $ -
Total assets........................................ $ 3,955,348 $ 3,445,266 $3,231,701 $3,081,173 $2,526,022
Long-term debt, excluding current installments...... $ 249,241 $ 426,585 $ 424,292 $ 430,290 $ 399,161
Deferred revenue and other liabilities.............. $ 130,020 $ 112,085 $ 145,107 $ 166,295 $ 214,001
Cash dividends per share paid on
Circuit City Group common stock.................. $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.06
=======================================================================
</TABLE>
See notes to consolidated financial statements.
CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The common stock of Circuit City Stores, Inc. consists of two common stock
series, which are intended to reflect the performance of the Company's two
businesses. The Circuit City Group Common Stock is intended to track the
performance of the Circuit City stores and related operations and the Group's
retained interest in the CarMax Group. The effects of the retained interest in
the CarMax Group on the Circuit City Group's financial statements are identified
by the term "Inter-Group." Over the three-year period discussed in this annual
report, the financial results for the Company and the Circuit City Group also
have included 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 stores and related operations. The Inter-Group Interest is not
considered outstanding CarMax Group stock. Therefore, the net earnings or losses
attributed to the Inter-Group Interest are not included in the CarMax Group's
per share calculations.
The following discussion and analysis refers to Circuit City Stores, Inc., which
includes the operations related to both Groups. For additional information,
refer to the "Management's Discussion and Analysis of Results of Operations and
Financial Condition" for each Group.
RESULTS OF OPERATIONS
Sales Growth
Total sales for Circuit City Stores, Inc. increased 17 percent in fiscal 2000 to
$12.61 billion. In fiscal 1999, total sales increased 22 percent to $10.81
billion from $8.87 billion in fiscal 1998.
PERCENTAGE SALES CHANGE FROM PRIOR YEAR
Circuit City Circuit City CarMax
Stores, Inc. Group Group
------------------------------------------------------
Fiscal Total Total Comparable Total Comparable
- ------------------------------------------------------------------------
2000................ 17% 13% 8 % 37% 2 %
1999................ 22% 17% 8 % 68% (2)%
1998................ 16% 12% (1)% 71% 6 %
1997................ 9% 6% (8)% 85% 23 %
1996................ 26% 23% 5 % 258% 12 %
23
THE CIRCUIT CITY GROUP. During the past five years, industry growth, the
addition of new product categories and geographic expansion of the Group's
Superstore base have made varying contributions to total sales growth. Early in
the period, geographic expansion and the addition of product categories such as
personal computers were the primary contributors to growth. In fiscal 1996, a 25
percent increase in Superstore square footage, which included entry into 19
markets, was a significant contributor to the Group's total sales growth. In
that same year, home office products rose to 26 percent of sales from 20 percent
in the prior year. From mid fiscal 1996 through fiscal 1998, a lack of
significant consumer electronics product introductions resulted in weak industry
sales. The industry began to emerge from this period of declining sales in
fiscal 1999, and that trend continued in fiscal 2000. Management believes that
this period of industry growth, driven by digital product technology, can last
throughout the decade and will be the primary contributor to the Group's total
sales growth in the foreseeable future.
Fiscal 2000 sales reflected strong consumer demand across all major product
categories. Home office was the strongest category, reflecting continued
increases in household penetration of personal computers, increased consumer use
of the Internet and new capabilities such as digital imaging and digital audio
recording. In the consumer electronics categories, the Circuit City Group
experienced significant demand for better-featured products and new
technologies, including DVD players, DIRECTV, digital camcorders, wireless
communications and big-screen televisions.
In most states, the Circuit City Group sells extended warranty programs on
behalf of unrelated third parties who are the primary obligors. Under these
third-party warranty programs, the Company has no contractual liability to the
customer. In states where third-party warranty sales are not permitted, the
Group sells a Circuit City extended warranty for which the Company is the
primary obligor. Gross dollar sales from all extended warranty programs were 5.4
percent of the Group's total sales in fiscal years 2000 and 1999, compared with
5.5 percent in fiscal 1998. Total extended warranty revenue, which is reported
in the Group's total sales, was 4.4 percent of sales in fiscal 2000 and 4.6
percent of sales in fiscal years 1999 and 1998. The gross profit margins on
products sold with extended warranties are higher than the gross profit margins
on products sold without extended warranties. Third-party extended warranty
revenue was 4.1 percent of the Group's total sales in fiscal years 2000 and 1999
and 3.6 percent of the Group's total sales in fiscal 1998. The increase in
third-party extended warranty revenue reflects the conversion of stores in 13
states to third-party warranty sales since early fiscal 1998.
THE CARMAX GROUP. During the past five years, geographic expansion of the CarMax
used-car superstore concept and the addition of new-car franchises have been the
primary contributors to CarMax's total sales growth. During the second half of
fiscal 1998, the CarMax Group's used-car sales began to fall below management's
expectations. New-car sales remained strong. These trends continued through
fiscal 1999 when strong comparable store sales growth in new cars was more than
offset by the weak used-car sales trend.
Late in fiscal 1999, CarMax adopted a hub and satellite operating strategy in
existing multi-store markets. In fiscal 1999, five superstores were converted to
satellite locations in the Miami, Houston, Dallas and Chicago markets. Under the
hub and satellite operating process, a satellite store uses the reconditioning,
purchasing and business office operations of a nearby hub store. The display
capacity and consumer offer are identical in both the hub and satellite stores.
A prototypical satellite store operates on a four- to six-acre site with a
12,000- to 14,000-square-foot facility that houses sales offices, a showroom and
four to seven service bays for regular maintenance and warranty service. At the
end of fiscal 1999, CarMax classified two stores as prototype satellite stores.
In fiscal 2000, CarMax limited its geographic expansion to focus on building
sales and profitability in existing markets. During the year, CarMax opened one
used-car superstore in Nashville, Tenn., and one in Duarte, Calif. CarMax
converted one existing store into a satellite operation. In the markets of
Dallas/Fort Worth and Houston, CarMax added two prototypical satellite stores at
year-end. The sales pace at CarMax's used-car superstores, including those
stores with integrated new-car franchises, improved, and the Group generated
comparable store sales growth for the last two quarters and for the fiscal year.
In fiscal 2000, CarMax also opened five stand-alone new-car stores, relocated
its Laurel, Md., Toyota franchise next to its Laurel superstore and acquired a
Nissan franchise that was added to an existing used-car superstore location in
the Washington, D.C./Baltimore market. While the performance of the used-car
superstores and integrated used- and new-car superstores exceeded expectations,
management was disappointed in the performance of the stand-alone new-car stores
during fiscal 2000. Although operations at these stores have improved
significantly versus their levels prior to acquisition, they remain below
management's expectations. CarMax is actively pursuing opportunities to
integrate or co-locate as many of these franchises with existing used-car
superstores as possible.
Late in fiscal 2000, CarMax's primary competitor exited the used-car superstore
business. Management believes their exit from the Dallas/Fort Worth, Houston,
San Antonio, Tampa and Miami markets, where the two companies competed, will
help eliminate consumer confusion over the two offers and increase customer flow
for CarMax.
In most states, CarMax sells extended warranties on behalf of an unrelated third
party who is the primary obligor. Under this third-party warranty program, the
Company has no contractual liability to the customer. In states where
third-party warranty sales are not permitted, CarMax has sold its own extended
warranty for which the Company is the primary obligor. Gross dollar sales from
all extended warranty programs were 3.7 percent of the Group's total sales in
fiscal 2000, 4.3 percent in fiscal 1999 and 3.8 percent in fiscal 1998. The
fiscal 2000 decrease reflects the increase in new-car sales as a percentage of
the overall mix. The fiscal 1999 increase reflects pricing adjustments and a
higher penetration rate achieved by extending warranty coverage to more
vehicles. Total extended warranty revenue, which is reported in the Group's
total sales, was 1.6 percent of total sales in fiscal 2000, 2.0 percent in
fiscal 1999 and 1.5 percent in fiscal 1998. Third-party extended warranty
revenue was
24
1.6 percent of total sales in fiscal 2000, 1.9 percent in fiscal 1999 and 1.4
percent in fiscal 1998.
IMPACT OF INFLATION. Inflation has not been a significant contributor to the
Company's results. For the Circuit City Group, average retail prices have
declined in virtually all product categories during the past three years.
Although product introductions could help reverse this trend in selected areas,
management expects no significant short-term change overall. Because the Group
purchases substantially all products in U.S. dollars, prices are not directly
impacted by the value of the dollar in relation to other foreign currencies,
including the Japanese yen.
For the CarMax Group, inflation has not been a significant contributor to the
Group's results. The Group's profitability is based on achieving specific gross
profit dollars per unit rather than on average retail prices. Because the
wholesale market generally adjusts to reflect retail price trends, management
believes that if the stores meet inventory turn objectives, then changes in
average retail prices will have only a short-term impact on the Group's gross
margin and thus profitability.
Cost of Sales, Buying and Warehousing
The gross profit margin was 22.7 percent of sales in fiscal 2000 and fiscal 1999
compared with 23.0 percent in fiscal 1998. The fiscal 2000 gross profit margin
includes higher gross profit margins for both the Circuit City and CarMax
businesses. The Circuit City improvement reflects a higher percentage of sales
from better-featured products and newer technologies, which carry higher gross
margins, partly offset by the strength in personal computer sales, which carry
lower gross margins. Continued improvements in inventory management also
contributed to the Circuit City Group's gross margin increase. At the end of
fiscal 1998, CarMax instituted a profit improvement plan that included better
inventory management, increased retail service sales, pricing adjustments and
the addition of consumer electronic accessory sales. The success of this plan
was the significant contributor to improved gross profit margins for that
business in both fiscal 2000 and fiscal 1999. The significant increase in
new-car sales as a percentage of total sales partly offset the improvements
since new vehicles carry lower gross profit margins than used vehicles. Because
the CarMax business produces lower gross margins than the Circuit City business,
the increased sales contribution from CarMax reduces the Company's overall gross
profit margin even though the CarMax Group's gross profit margin increased from
fiscal 1999 to fiscal 2000. The Company's fiscal 1999 gross profit margin
reflects, for the Circuit City Group, the strength of the personal computer
business and the competitive price environment partly offset by better inventory
management and increased sales of better-featured products and, for the CarMax
Group, the impact of the profit improvement plan partly offset by the increase
in new-car sales as a percentage of total sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 18.3 percent of sales in
fiscal 2000, compared with 19.3 percent of sales in fiscal 1999 and 20.5 percent
of sales in fiscal 1998. The fiscal 2000 expense ratio primarily reflects
expense leverage from the comparable store sales increase for the Circuit City
Group and expense leverage from the total and comparable store sales increases
and productivity improvements resulting from the slower expansion rate,
implementation of the hub and satellite operating strategy and operating expense
controls for the CarMax Group. The improvement at CarMax was partly offset by
$4.8 million in lease termination costs on undeveloped property and a write-down
of assets associated with excess property for sale. The lower expense ratio in
fiscal 1999 compared with fiscal 1998 primarily reflects the expense leverage
generated by the Circuit City Group's comparable store sales increase. CarMax's
expense ratio exceeded expectations in both years, reflecting the costs
associated with expansion and below-plan sales in both years. Because CarMax
operates with a lower expense structure, it reduces the Company's overall
expense-to-sales ratio. Operating profits generated by the Company's finance
operations are recorded as a reduction to selling, general and administrative
expenses.
Interest Expense
Interest expense was 0.2 percent of sales in fiscal 2000, fiscal 1999 and fiscal
1998. Interest expense was incurred on debt used to fund store expansion and
working capital, including inventory.
Earnings from Continuing Operations
Earnings from continuing operations for Circuit City Stores, Inc. increased 55
percent to $327.8 million in fiscal 2000. The increase reflects a 39 percent
earnings increase achieved by the Circuit City business and a profit achieved by
the CarMax Group. In fiscal 1999, earnings from continuing operations were
$211.5 million compared with earnings from continuing operations of $124.9
million in fiscal 1998.
Loss from Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease marketing
of the Divx home video system and discontinue operations, but existing,
registered customers would be able to view discs during a two-year phase-out
period. The operating results of Divx and the loss on disposal of the Divx
business have been segregated from continuing operations and reported as
separate line items, after tax, on the Company's statements of earnings for the
periods presented.
For fiscal 2000, the loss from the discontinued operations of Divx totaled $16.2
million after an income tax benefit of $9.9 million. The loss from the
discontinued operations of Divx totaled $68.5 million after an income tax
benefit of $42.0 million in fiscal 1999 and $20.6 million after an income tax
benefit of $12.6 million in fiscal 1998.
In fiscal 2000, the loss on the disposal of the Divx business totaled $114.0
million after an income tax benefit of $69.9 million. 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
Net earnings for the Company increased 38 percent to $197.6 million in fiscal
2000. In fiscal 1999, net earnings rose 37 percent to $142.9 million from $104.3
million in fiscal 1998.
25
Operations Outlook
For the Circuit City business, management expects that industry growth,
primarily driven by the introduction of better-featured products and new
technologies, will be the primary contributor to sales and earnings growth
during the coming decade. Management anticipates that growth in the household
penetration of products and services such as digital television, direct
broadcast satellite systems, wireless communications, digital camcorders, DVD
players, multi-function set-top boxes and broadband Internet access will
contribute significantly to overall sales and earnings growth.
In fiscal 2001, the Circuit City Group will build on initiatives begun in fiscal
2000. The planned 25 new Superstores and all 571 existing Superstores will
feature new displays designed to highlight the latest advances in technology.
The Circuit City Group also will remodel 30 to 35 stores in the Richmond, Va.,
and the Miami, West Palm Beach, Tampa, Fort Myers and Orlando, Fla., markets.
These remodeled Superstores will allow management to test a concept dedicated to
consumer electronics and home office products. Superstores opened after the
first fiscal quarter also will be dedicated to consumer electronics and home
office products. In the remodel markets, Circuit City will test approximately
six stand-alone major appliance stores to create better selling space for the
new technologies in the appliance business and to increase consumer awareness of
Circuit City's appliance offering. Management anticipates that the industry's
growth, geographic expansion of Circuit City's Superstore concept, Superstore
remodeling and continued strong operating controls will enable the Circuit City
business to generate earnings growth of 20 percent to 25 percent in fiscal 2001.
In fiscal 2001, CarMax's management will continue to focus on revenue growth and
operating margin enhancement in existing CarMax markets. Management will
concentrate on the hub and satellite operating strategy for its used-car
superstores and seek new-car franchises to integrate or co-locate with used-car
superstores. Management anticipates that in fiscal 2001 and beyond new stores
will be smaller "A" stores or satellite locations. Management believes that
continued sales and profit improvement in the Group's existing markets will
result in solid profitability in fiscal 2001 and allow the Group to resume
moderate and profitable geographic growth thereafter.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137, is effective
for quarters for fiscal years beginning after June 15, 2000. SFAS No. 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and requires that an entity
recognize those items as either assets or liabilities and measure them at fair
value. The Company does not expect SFAS No. 133 to have a material impact on its
financial position, results of operations or cash flows.
FINANCIAL CONDITION
Liquidity and Capital Resources
In fiscal 2000, net cash provided by operating activities of continuing
operations was $593.5 million compared with $309.5 million in fiscal 1999 and
$228.2 million in fiscal 1998. The fiscal 2000 increase primarily reflects
increased earnings from the Circuit City and CarMax businesses and increases in
accounts payable for both Groups, partly offset by increases in inventory for
both Groups. The fiscal 1999 increase primarily reflects a decrease in net
accounts receivable and higher earnings for the Circuit City business, partly
offset by increased inventory for both Circuit City and CarMax.
Most financial activities, including the investment of surplus cash and the
issuance and repayment of short-term and long-term debt, are managed by the
Company on a centralized basis. Interest-bearing loans, with terms determined by
the board of directors, are used to manage cash between the Groups. These loans
are reflected as inter-group receivables or payables on the financial statements
of each Group.
During fiscal 2000, a term loan totaling $175 million and due in May 2000 was
classified as a current liability. Although the Company has the ability to
refinance this loan, it intends to repay the debt using existing working
capital.
Capital expenditures have been funded through sale-leaseback transactions,
landlord reimbursements, proceeds from the February 1997 CarMax Group equity
offering and short- and long-term debt. Capital expenditures of $222.3 million
in fiscal 2000 reflect construction for Circuit City and CarMax stores opened or
remodeled during the year and a portion of the stores opening in fiscal 2001.
The sale-leaseback and landlord reimbursement transactions in fiscal 2000
totaled $100.2 million.
Capital expenditures of $352.4 million in fiscal 1999 and $575.9 million in
fiscal 1998 were largely incurred in connection with the Company's expansion
programs. Sale-leaseback and landlord reimbursement transactions were $273.6
million in fiscal 1999 and $297.1 million in fiscal 1998.
During fiscal 2000, the CarMax Group acquired the Chrysler-Plymouth-Jeep
franchise rights and the related assets of Prince Chrysler-Plymouth-Jeep Company
and the franchise rights and the related assets of LAX Dodge, Inc. in the Los
Angeles market; the Jeep franchise rights and the related assets of Red Bird
Jeep-Eagle and the franchise rights of Hilltop Chrysler-Plymouth, Inc. in the
Dallas market; the franchise rights and related assets of Fairway
Chrysler-Plymouth-Jeep, Inc. in the Orlando market; and the Nissan franchise
rights and related assets of Town & Country Pontiac Nissan, Inc. in the
Washington D.C./Baltimore market for a total of $34.8 million. These
acquisitions were financed through cash resources. Costs in excess of the
acquired net tangible assets, which are primarily inventory, have been recorded
as goodwill and covenants not to compete.
During fiscal 1999, the CarMax Group acquired the Toyota franchise rights and
the related assets of Laurel Automotive Group, Inc. in the Washington
D.C./Baltimore market; the franchise rights and the related assets of Mauro Auto
Mall, Inc. in the Chicago market; the franchise rights and the related assets of
Nissan of Greenville, Inc. in the Greenville, S.C., market; and the Mitsubishi
franchise rights and the related assets of Boomershine
26
Automotive, Inc. in the Atlanta market for a total of $49.6 million. These
acquisitions were financed through cash payments totaling $41.6 million and the
issuance of two promissory notes totaling $8.0 million. Costs in excess of the
acquired net tangible assets, which are primarily inventory, were recorded as
goodwill and covenants not to compete.
Receivables generated by the Company's finance operations are funded through
securitization transactions that allow the operations to sell their receivables
while retaining a small interest in them. The Circuit City Group's finance
operation has a master trust securitization facility for its private-label
credit card that allows the transfer of up to $1.85 billion in receivables
through both private placement and the public market. A second master trust
securitization program allows for the transfer of up to $1.75 billion in
receivables related to the operation's bank card programs. Receivables
securitized under the master trust facilities totaled $2.79 billion at February
29, 2000. In fiscal 1996, Circuit City Stores, Inc. initiated an asset
securitization program on behalf of the CarMax Group. At the end of fiscal 2000,
that program allowed for the transfer of up to $500 million in automobile loan
receivables. In October 1999, the Company formed a second securitization
facility on behalf of the CarMax Group that allowed for a $644 million
securitization of automobile loan receivables in the public market. At February
29, 2000, the program had a capacity of $559.5 million. Securitized receivables
on behalf of the CarMax Group totaled $887.2 million at the end of fiscal 2000.
Under the securitization programs, receivables are sold to an unaffiliated third
party with the servicing rights retained. Management expects that these
securitization programs can be expanded to accommodate future receivables growth
for both businesses.
In fiscal 1999, CarMax entered into a one-year, renewable inventory financing
arrangement with an asset-backed commercial paper conduit. The arrangement had a
total program capacity of $160 million at February 29, 2000, and was created to
provide funding for the acquisition of vehicle inventory through the use of a
non-affiliated special purpose company. During fiscal 2000 and fiscal 1999, the
CarMax Group financed no inventory under this arrangement. This financing
arrangement was terminated in the first quarter of fiscal 2001.
<PAGE>
Capital Structure
Total assets at February 29, 2000, were $3.96 billion, up $510.1 million or 15
percent since February 28, 1999. A $378.1 million increase in cash and a $171.5
million increase in inventory contributed to the increase in total assets.
Over the past three years, expansion for the Groups has been funded with
internally generated cash, sale-leaseback transactions, proceeds from the
February 1997 CarMax equity offering, operating leases and short-term and
long-term debt. Finance operation receivables have been funded through
securitization transactions.
From fiscal 1999 to fiscal 2000, stockholders' equity increased 12 percent to
$2.14 billion. Capitalization for the past five years is illustrated in the
"Capitalization" table below. Higher earnings for the Circuit City business and
the CarMax Group, partly offset by the loss on the discontinuance of the Divx
business, produced a return on equity of 9.8 percent in fiscal 2000, compared
with 7.9 percent in fiscal 1999.
Management anticipates that in fiscal 2001 capital expenditures of approximately
$275 million will be funded through a combination of internally generated cash,
sale-leaseback transactions and operating leases and that securitization
transactions will finance the growth in receivables. At the end of fiscal 2000,
the Company maintained a multi-year, $150 million unsecured revolving credit
agreement and $370 million in committed seasonal lines that are renewed annually
with various banks.
The Groups rely on the external debt of Circuit City Stores, Inc. to provide
working capital needed to fund net assets not otherwise financed through
sale-leasebacks or the securitization of receivables. All significant financial
activities of each Group are managed by the Company on a centralized basis and
are dependent on the financial condition of the Company. These financial
activities include the investment of surplus cash, issuance and repayment of
debt, securitization of receivables, sale-leasebacks of real estate and
inter-group loans.
<TABLE>
<S> <C>
CAPITALIZATION
Fiscal 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions) $ % $ % $ % $ % $ %
- -------------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding
current installments.................. 249.2 10 426.6 17 424.3 18 430.3 19 399.2 23
Other long-term liabilities.............. 157.8 6 149.7 6 171.5 7 199.4 9 231.8 14
Total stockholders' equity............... 2,142.2 84 1,905.1 77 1,730.0 75 1,614.8 72 1,063.9 63
------------------------------------------------------------------------------------
Total capitalization..................... 2,549.2 100 2,481.4 100 2,325.8 100 2,244.5 100 1,694.9 100
====================================================================================
</TABLE>
27
MARKET RISK
The Company manages the private-label and bank card revolving loan portfolios of
the Circuit City Group's finance operation and the automobile 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
sheets. Interest rate exposure relating to these receivables represents a market
risk exposure that the Company has managed with matched funding and interest
rate swaps.
Revolving Loans
Interest rates charged on the accounts in the managed private-label and bank
card portfolios are primarily indexed to the prime rate, adjustable on a monthly
basis, with the balance at a fixed annual percentage rate. Total principal
outstanding at February 29, 2000, and February 28, 1999, had the following APR
structure:
(Amounts in millions) 2000 1999
- -------------------------------------------------------------
Indexed to prime rate.................... $2,631 $2,714
Fixed APR................................ 213 243
-----------------
Total.................................... $2,844 $2,957
=================
<PAGE>
Financing for the securitization programs is achieved primarily through the
issuance of public market debt, which is issued either at floating rates based
on LIBOR or at fixed rates. Certain of the fixed-rate issuances have been
swapped to LIBOR. Receivables held by the Company for investment or sale are
financed with working capital. At February 29, 2000, and February 28, 1999,
financings were as follows:
(Amounts in millions) 2000 1999
- -------------------------------------------------------------
Floating-rate (including synthetic
alteration) securitizations........... $2,544 $2,568
Fixed-rate securitizations .............. 137 187
Held by the Company:
For investment ....................... 145 162
For sale.............................. 18 40
-----------------
Total.................................... $2,844 $2,957
=================
Automobile Installment Loans
Total principal outstanding for fixed-rate automobile loans at February 29,
2000, and February 28, 1999, was as follows:
(Amounts in millions) 2000 1999
- ------------------------------------------------------------
Fixed APR................................ $932 $592
===============
Financing for these receivables is achieved through asset securitization
programs that, 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 February 29, 2000, and February 28, 1999, were as follows:
(Amounts in millions) 2000 1999
- ------------------------------------------------------------
Fixed-rate securitization................ $559 $ -
Floating-rate securitizations
synthetically altered to fixed........ 327 500
Floating-rate securitizations............ 1 39
Held by the Company:
For investment*....................... 22 38
For sale.............................. 23 15
---------------
Total.................................... $932 $592
===============
* Held by a bankruptcy remote special purpose company
The Company has analyzed its interest rate exposure and has concluded that it
did not represent a material market risk at February 29, 2000, or February 28,
1999. Because programs are in place to manage interest rate exposure relating to
the consumer loan portfolios, the Company expects to experience relatively
little impact if interest rates fluctuate. The Company also has the ability to
adjust fixed-APR revolving cards and the index on floating-rate cards, subject
to cardholder ratification, but does not currently anticipate the need to do so.
YEAR 2000 CONVERSION
In fiscal 1997, the Company began a Year 2000 date conversion project to address
necessary code changes, testing and implementation for its systems. Since the
project began, the Company has expensed $17.1 million in project costs,
including $3.9 million in fiscal 2000. These costs were in addition to the
normal budget for information systems and were funded through operating cash
flows. Because the CarMax computer systems were developed in recent years, they
did not require significant remediation; therefore, the CarMax Group did not
incur any material costs related to the Year 2000 issue. To date, because of the
extensive testing and remediation efforts undertaken by the Company prior to
January 1, 2000, no material adverse consequences have been experienced by the
Circuit City Group or the CarMax Group resulting from the Year 2000 date change,
and none are anticipated. In addition, as part of the Company's Year 2000
project, the Company identified its key third-party business partners and
coordinated with them to address potential Year 2000 issues. To date, the
Company has not experienced any material adverse consequences related to its key
third-party business partners, and none are anticipated.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of 1995, which
became law in December 1995, provide companies with a "safe harbor" when making
forward-looking statements. This "safe harbor" encourages companies to provide
prospective information about their companies without fear of litigation. The
Company wishes to take advantage of the "safe harbor" provisions of the Act.
Company statements that are not historical facts, including statements about
management's expectations for fiscal 2001 and beyond, are forward-looking
statements and involve various risks and uncertainties. Factors that could cause
the
28
Company's actual results to differ materially from management's projections,
forecasts, estimates and expectations include, but are not limited to, the
following:
(a) changes in the amount and degree of promotional intensity exerted by current
competitors and potential new competition from both retail stores and
alternative methods or channels of distribution such as online and telephone
shopping services and mail order;
(b) changes in general U.S. or regional U.S. economic conditions including, but
not limited to, consumer credit availability, consumer credit delinquency and
default rates, interest rates, inflation, personal discretionary spending levels
and consumer sentiment about the economy in general;
(c) the presence or absence of, or consumer acceptance of, new products or
product features in the merchandise categories the Company sells and changes in
the Company's actual merchandise sales mix;
(d) significant changes in retail prices for products sold by any of the
Company's businesses, including changes in prices for new and used cars and the
relative consumer demand for new or used cars;
(e) lack of availability or access to sources of supply for appropriate Circuit
City or CarMax inventory;
(f) the ability to retain and grow an effective management team in a dynamic
environment or changes in the cost or availability of a suitable work force to
manage and support the Company's service-driven operating strategies;
(g) changes in availability or cost of capital expenditure and working capital
financing, including the availability of long-term financing to support
development of the Company's businesses and the availability of securitization
financing for credit card and automobile installment loan receivables;
(h) changes in production or distribution costs or cost of materials for the
Company's advertising;
(i) availability of appropriate real estate locations for expansion;
(j) the imposition of new restrictions or regulations regarding the sale of
products and/or services the Company sells, changes in tax rules and regulations
applicable to the Company or its competitors, the imposition of new
environmental restrictions, regulations or laws or the discovery of
environmental conditions at current or future locations or any failure to comply
with such laws or any adverse change in such laws;
(k) adverse results in significant litigation matters;
(l) changes in levels of competition in the car business from either traditional
competitors and/or new nontraditional competitors utilizing auto superstore or
other formats;
(m) the inability of the CarMax business to reach expected mature sales and
earnings potential; and
(n) limited or lack of availability of new-car franchises within a suitable
radius of existing and proposed CarMax stores or limited manufacturer approval
of franchise acquisitions.
The United States retail industry and the specialty retail industry in
particular are dynamic by nature and have undergone significant changes over the
past several years. The Company's ability to anticipate and successfully respond
to continuing challenges is key to achieving its expectations.
<PAGE>
COMMON STOCK
The common stock of Circuit City Stores, Inc. includes two series: Circuit City
Stores, Inc.--Circuit City Group Common Stock and Circuit City Stores,
Inc.--CarMax Group Common Stock. Both Group stocks are traded on the New York
Stock Exchange. The quarterly dividend data shown below applies to the Circuit
City Group Common Stock for the applicable periods. No dividend data is shown
for the CarMax Group Common Stock since it pays no dividends at this time.
<TABLE>
<S> <C>
Circuit City Group* CarMax Group
------------------------------------------------------ --------------------------------
Market Price of Common Stock Dividends Market Price of Common Stock
---------------------------------- --------------- --------------------------------
Fiscal 2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Quarter HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ------------------------------------------------------------------------------------------------------------------
1st........... $39.19 $25.94 $24.82 $18.78 $.0175 $.0175 $5.50 $3.69 $13.50 $8.63
2nd........... $52.97 $35.44 $27.25 $14.97 $.0175 $.0175 $7.13 $3.38 $11.00 $5.56
3rd........... $53.88 $35.00 $19.78 $14.41 $.0175 $.0175 $4.00 $1.75 $ 8.00 $3.63
4th........... $51.69 $32.50 $32.07 $17.69 $.0175 $.0175 $3.25 $1.31 $ 5.75 $3.94
-------------------------------------------------------------------------------------------------
Total $.0700 $.0700
===============
</TABLE>
*Circuit City Group stock prices and dividends per share have been adjusted to
reflect a two-for-one stock split effective June 30, 1999.
29
<PAGE>
<TABLE>
<S> <C>
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended February 29 or 28
(Amounts in thousands except per share data) 2000 % 1999 % 1998 %
- --------------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES............................. $12,614,390 100.0 $10,810,468 100.0 $8,870,797 100.0
Cost of sales, buying and warehousing........................ 9,751,833 77.3 8,354,230 77.3 6,827,133 77.0
------------------------------------------------------------------
GROSS PROFIT................................................. 2,862,557 22.7 2,456,238 22.7 2,043,664 23.0
------------------------------------------------------------------
Selling, general and administrative expenses [NOTE 11]....... 2,309,593 18.3 2,086,838 19.3 1,815,275 20.5
Interest expense [NOTE 5].................................... 24,206 0.2 28,319 0.2 26,861 0.2
------------------------------------------------------------------
TOTAL EXPENSES............................................... 2,333,799 18.5 2,115,157 19.5 1,842,136 20.7
------------------------------------------------------------------
Earnings from continuing operations before income taxes...... 528,758 4.2 341,081 3.2 201,528 2.3
Provision for income taxes [NOTE 6].......................... 200,928 1.6 129,611 1.2 76,581 0.9
------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS.......................... 327,830 2.6 211,470 2.0 124,947 1.4
------------------------------------------------------------------
Discontinued operations (NOTE 15):
Loss from discontinued operations of Divx,
less income tax benefit................................ (16,215) (0.1) (68,546) (0.7) (20,636) (0.2)
Loss on disposal of Divx, including provision for losses
during phase-out period, less income tax benefit....... (114,025) (0.9) - - - -
------------------------------------------------------------------
Loss from discontinued operations............................ (130,240) (1.0) (68,546) (0.7) (20,636) (0.2)
------------------------------------------------------------------
NET EARNINGS................................................. $ 197,590 1.6 $ 142,924 1.3 $ 104,311 1.2
==================================================================
Net earnings (loss) attributed to [NOTES 1 AND 2]:
Circuit City Group common stock:
Continuing operations.................................. $ 327,574 $ 216,927 $ 132,710
Discontinued operations................................ (130,240) (68,546) (20,636)
CarMax Group common stock................................. 256 (5,457) (7,763)
----------- ----------- ----------
$ 197,590 $ 142,924 $ 104,311
=========== =========== ==========
Weighted average common shares [NOTES 2 AND 8]:
Circuit City Group:
Basic.................................................. 201,345 198,304 196,054
=========== =========== ==========
Diluted................................................ 204,321 200,812 198,408
=========== =========== ==========
CarMax Group:
Basic.................................................. 23,778 22,604 22,001
=========== =========== ==========
Diluted................................................ 25,788 22,604 22,001
=========== =========== ==========
NET EARNINGS (LOSS) PER SHARE [NOTES 2 AND 8]:
Circuit City Group:
Basic:
Continuing operations............................... $ 1.63 $ 1.09 $ 0.68
Discontinued operations............................. (0.65) (0.34) (0.11)
----------- ----------- ----------
Net earnings........................................ $ 0.98 $ 0.75 $ 0.57
=========== =========== ==========
Diluted:
Continuing operations............................... $ 1.60 $ 1.08 $0.67
Discontinued operations............................. (0.64) (0.34) (0.10)
----------- ----------- ----------
Net earnings........................................ $ 0.96 $ 0.74 $ 0.57
=========== =========== ==========
CarMax Group:
Basic.................................................. $ 0.01 $ (0.24) $ (0.35)
=========== =========== ==========
Diluted................................................ $ 0.01 $ (0.24) $ (0.35)
=========== =========== ==========
See accompanying notes to consolidated financial statements.
30
<PAGE>
CONSOLIDATED BALANCE SHEETS
At February 29 or 28
(Amounts in thousands except share data) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 643,933 $ 265,880
Net accounts receivable [NOTE 12]...................................................... 593,276 574,316
Inventory.............................................................................. 1,689,209 1,517,675
Prepaid expenses and other current assets.............................................. 16,197 36,644
----------------------------------
TOTAL CURRENT ASSETS................................................................... 2,942,615 2,394,515
Property and equipment, net [NOTES 4 AND 5]............................................ 965,181 1,005,773
Other assets........................................................................... 47,552 44,978
----------------------------------
TOTAL ASSETS........................................................................... $3,955,348 $3,445,266
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTES 5 AND 10]................................ $177,344 $2,707
Accounts payable....................................................................... 960,131 799,733
Short-term debt [NOTE 5]............................................................... 3,005 8,016
Accrued expenses and other current liabilities......................................... 204,561 143,585
Deferred income taxes [NOTE 6]......................................................... 61,118 9,764
----------------------------------
TOTAL CURRENT LIABILITIES.............................................................. 1,406,159 963,805
Long-term debt, excluding current installments [NOTES 5 AND 10]........................ 249,241 426,585
Deferred revenue and other liabilities................................................. 130,020 112,085
Deferred income taxes [NOTE 6]......................................................... 27,754 37,661
----------------------------------
TOTAL LIABILITIES...................................................................... 1,813,174 1,540,136
----------------------------------
STOCKHOLDERS' EQUITY [NOTES 1 AND 7]:
Circuit City Group common stock, $0.50 par value; 350,000,000 shares authorized;
203,868,000 shares issued and outstanding (100,820,000 in 1999)..................... 101,934 50,410
CarMax Group common stock, $0.50 par value; 175,000,000 shares authorized;
25,614,000 shares issued and outstanding (23,116,000 in 1999)....................... 12,807 11,558
Capital in excess of par value......................................................... 576,574 575,686
Retained earnings...................................................................... 1,450,859 1,267,476
----------------------------------
TOTAL STOCKHOLDERS' EQUITY............................................................. 2,142,174 1,905,130
----------------------------------
Commitments and contingent liabilities [NOTES 1, 9, 10, 12, 13, 14 AND 15]
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................. $3,955,348 $3,445,266
==================================
See accompanying notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings.............................................................. $ 197,590 $ 142,924 $ 104,311
Adjustments to reconcile net earnings to net cash provided
by operating activities of continuing operations:
Loss from discontinued operations [NOTE 15]............................ 16,215 68,546 20,636
Loss on disposal of discontinued operations [NOTE 15].................. 114,025 - -
Depreciation and amortization.......................................... 148,164 129,727 114,860
Loss on disposition of property and equipment.......................... 17 3,087 14,093
Provision for deferred income taxes.................................... 43,053 17,235 15,052
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Decrease in deferred revenue and other liabilities.................. (15,565) (33,022) (23,024)
(Increase) decrease in net accounts receivable...................... (18,922) 23,640 (66,061)
Increase in inventory............................................... (184,507) (97,597) (18,182)
Decrease (increase) in prepaid expenses and other current assets.... 81,316 31,257 (6,113)
Decrease (increase) in other assets................................. 240 (607) 10,359
Increase in accounts payable, accrued expenses and
other current liabilities........................................ 211,850 24,315 62,276
----------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS............................................... 593,476 309,505 228,207
----------------------------------------------
INVESTING ACTIVITIES:
Cash used in business acquisitions [NOTE 3]............................... (34,849) (41,562) -
Purchases of property and equipment....................................... (222,268) (352,384) (575,860)
Proceeds from sales of property and equipment............................. 100,151 273,647 297,126
----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES
OF CONTINUING OPERATIONS............................................... (156,966) (120,299) (278,734)
----------------------------------------------
FINANCING ACTIVITIES:
(Payments on) proceeds from issuance of short-term debt, net.............. (5,011) (960) 5,629
Principal payments on long-term debt...................................... (2,707) (1,301) (6,187)
Issuances of Circuit City Group common stock, net......................... 50,205 42,165 22,311
Issuances of CarMax Group common stock, net............................... 3,456 3,983 2,353
Dividends paid on Circuit City Group common stock......................... (14,207) (13,981) (13,792)
----------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES
OF CONTINUING OPERATIONS............................................... 31,736 29,906 10,314
----------------------------------------------
CASH USED IN DISCONTINUED OPERATIONS [NOTE 15]............................... (90,193) (69,844) (45,818)
----------------------------------------------
Increase (decrease) in cash and cash equivalents............................. 378,053 149,268 (86,031)
Cash and cash equivalents at beginning of year............................... 265,880 116,612 202,643
----------------------------------------------
Cash and cash equivalents at end of year..................................... $ 643,933 $ 265,880 $ 116,612
==============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................................................. $ 34,389 $ 31,858 $ 26,697
Income taxes.............................................................. $ 14,908 $ 53,528 $ 47,936
See accompanying notes to consolidated financial statements.
32
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Shares Outstanding Common Stock Capital In
------------------------- -------------------
Circuit City CarMax Circuit City CarMax Excess of Retained
(Amounts in thousands except per share data) Group Group Group Group Par Value Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1997........................... 98,178 21,860 $ 49,089 $ 10,930 $ 506,823 $1,048,014 $1,614,856
-----------------------------------------------------------------------------
Net earnings.................................... - - - - - 104,311 104,311
Exercise of common stock options [NOTE 7]....... 483 273 241 136 6,790 - 7,167
Shares issued under Employee
Stock Purchase Plans [NOTE 7]................ 173 51 87 26 6,648 - 6,761
Shares issued under the 1994 Stock
Incentive Plan [NOTE 7]...................... 605 20 302 10 20,214 - 20,526
Tax benefit from stock issued................... - - - - 8,013 - 8,013
Shares cancelled upon reacquisition by Company.. (157) - (78) - (4,470) - (4,548)
Unearned compensation-restricted stock.......... - - - - (13,255) - (13,255)
Cash dividends-Circuit City Group common
stock ($0.14 per share)...................... - - - - - (13,792) (13,792)
-----------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1998....................... 99,282 22,204 49,641 11,102 530,763 1,138,533 1,730,039
-----------------------------------------------------------------------------
Net earnings.................................... - - - - - 142,924 142,924
Exercise of common stock options [NOTE 7]....... 1,004 543 502 272 16,945 - 17,719
Shares issued under Employee
Stock Purchase Plans [NOTE 7]................ 429 269 215 134 19,431 - 19,780
Shares issued under the 1994 Stock
Incentive Plan [NOTE 7]...................... 360 100 180 50 14,588 - 14,818
Tax benefit from stock issued................... - - - - 9,523 - 9,523
Other........................................... 32 - 16 - 1,445 - 1,461
Shares cancelled upon reacquisition by Company.. (287) - (144) - (14,239) - (14,383)
Unearned compensation-restricted stock.......... - - - - (2,770) - (2,770)
Cash dividends-Circuit City Group common
stock ($0.14 per share)...................... - - - - - (13,981) (13,981)
-----------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1999....................... 100,820 23,116 50,410 11,558 575,686 1,267,476 1,905,130
-----------------------------------------------------------------------------
Effect of two-for-one stock split [NOTE 1]...... 100,820 - 50,410 - (50,410) - -
Net earnings.................................... - - - - - 197,590 197,590
Exercise of common stock options [NOTE 7]....... 2,864 2,027 1,432 1,014 34,232 - 36,678
Shares issued under Employee
Stock Purchase Plans [NOTE 7]................ 502 506 251 253 21,547 - 22,051
Shares issued under the 1994 Stock
Incentive Plan [NOTE 7]...................... 346 30 173 15 13,996 - 14,184
Tax benefit from stock issued................... - - - - 32,459 - 32,459
Shares cancelled upon reacquisition by Company.. (1,484) (65) (742) (33) (52,173) - (52,948)
Unearned compensation-restricted stock.......... - - - - 1,237 - 1,237
Cash dividends-Circuit City Group common
stock ($0.07 per share)...................... - - - - - (14,207) (14,207)
-----------------------------------------------------------------------------
BALANCE AT FEBRUARY 29, 2000....................... 203,868 25,614 $101,934 $12,807 $576,574 $1,450,859 $2,142,174
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The common stock of Circuit City Stores, Inc. consists of two common stock
series, which are intended to reflect the performance of the Company's two
businesses. The Circuit City Group Common Stock is intended to track the
performance of the Circuit City store-related operations, the Group's retained
interest in the CarMax Group and the Company's investment in Digital Video
Express, which has been discontinued (see Note 15). The CarMax Group Common
Stock is intended to track the performance of the CarMax Group's operations. The
Circuit City Group held a 74.7 percent interest in the CarMax Group at February
29, 2000, a 76.6 percent interest at February 28, 1999, and a 77.3 percent
interest at February 28, 1998.
Notwithstanding the attribution of the Company's assets and liabilities,
including contingent liabilities, and stockholders' equity between the Circuit
City Group and the CarMax Group for the purposes of preparing their respective
financial statements, holders of Circuit City Group Stock and holders of CarMax
Group Stock are shareholders of the Company and continue to be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its subsidiaries.
The results of operations or financial condition of one Group could affect the
results of operations or financial condition of the other Group. Accordingly,
the Company's consolidated financial statements included herein should be read
in conjunction with the financial statements of each Group.
On June 15, 1999, the board of directors declared a two-for-one split of the
outstanding Circuit City Group Common Stock in the form of a 100 percent stock
dividend. All share, earnings per share and dividends per share calculations for
the Circuit City Group included in the accompanying consolidated financial
statements reflect this stock split.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Circuit City Group and the CarMax Group, which combined
comprise all accounts of the Company. All significant intercompany balances and
transactions have been eliminated in consolidation.
(B) CASH AND CASH EQUIVALENTS: Cash equivalents of $583,506,000 at February 29,
2000, and $216,129,000 at February 28, 1999, consist of highly liquid debt
securities with original maturities of three months or less.
(C) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For transfers of financial
assets that qualify as sales, the Company recognizes gains or losses as a
component of the Company's finance operations. For transfers of financial assets
to qualify for sale accounting, control over the assets must be surrendered at
the time of sale. Multiple estimates are used to calculate the gain or loss on
sales of receivables under the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Finance charge income, default rates and payment rates are estimated using
projections developed from the prior 12 months of operating history. These
estimates are adjusted for any industry or portfolio trends that have been
observed. The present value of the resulting cash flow projections is calculated
using a discount rate appropriate for the type of asset and risk. Retained
interests (such as residual interests in a securitization trust, cash reserve
accounts and rights to future interest from serviced assets that exceed
contractually specified servicing fees) are included in net accounts receivable
and are carried at fair value with changes in fair value reflected in earnings.
Loan receivables held for sale are carried at the lower of cost or market,
whereas loan receivables held for investment are carried at cost less an
allowance for losses. At February 29, 2000, and February 28, 1999, cost
approximates fair value.
(D) FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of the Company's
financial instruments, excluding interest rate swaps held for hedging purposes,
approximates fair value. Credit risk is the exposure created by the potential
nonperformance of another material party to an agreement because of changes in
economic, industry or geographic factors. The Company mitigates credit risk by
dealing only with counterparties that are highly rated by several financial
rating agencies. Accordingly, the Company does not anticipate material loss for
nonperformance. The Company broadly diversifies all financial instruments along
industry, product and geographic areas.
(E) INVENTORY: Inventory is stated at the lower of cost or market. Cost is
determined by the average cost method for the Circuit City Group's inventory and
by specific identification for the CarMax Group's vehicle inventory. Parts and
labor used to recondition vehicles, as well as transportation and other
incremental expenses associated with acquiring vehicles, are included in the
CarMax Group's inventory.
(F) PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the assets' estimated useful
lives.
Property held under capital lease is stated at the lower of the present value of
the minimum lease payments at the inception of the lease or market value and is
amortized on a straight-line basis over the lease term or the estimated useful
life of the asset, whichever is shorter.
(G) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the Company adopted the
American Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Once the capitalization criteria of the SOP have been met,
external direct costs of materials and services used in the development of
internal-use software and payroll and payroll-related costs for employees
directly involved in the development of internal-use software are capitalized.
Amounts capitalized are amortized on a straight-line basis over a period of
three to five years.
(H) INTANGIBLE ASSETS: Amounts paid for acquired businesses in excess of the
fair value of the net tangible assets acquired are recorded as goodwill, which
is amortized on a straight-line basis over 15 years, and covenants not to
compete, which are amortized on a straight-line basis over the life of the
covenant not to exceed five years. Both goodwill and covenants not to compete
are included in other assets on the accompanying consolidated balance sheets.
Based upon the financial performance of the
34
acquired businesses, the carrying values of intangible assets are periodically
reviewed by the Company and impairments are recognized when the expected future
undiscounted operating cash flows derived from such intangible assets are less
than the carrying values.
(I) PRE-OPENING EXPENSES: Effective March 1, 1999, the Company adopted SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires costs of
start-up activities, including organization and pre- opening costs, to be
expensed as incurred. Adoption of SOP 98-5 did not have a material impact on the
Company's financial position, annual results of operations or liquidity. Prior
to fiscal 2000, the Company capitalized pre-opening costs for new store
locations. Beginning in the month after the store opened for business, the
pre-opening costs were amortized over the remainder of the fiscal year.
(J) INCOME TAXES: The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the impact
of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and the amounts recognized for
income tax purposes, measured by applying currently enacted tax laws. The
Company recognizes deferred tax assets if it is more likely than not that a
benefit will be realized.
(K) DEFERRED REVENUE: The Circuit City Group sells its own extended warranty
contracts and extended warranty contracts on behalf of unrelated third parties.
The contracts extend beyond the normal manufacturer's warranty period, usually
with terms (including the manufacturer's warranty period) between 12 and 60
months. Inasmuch as the Company is the primary obligor on these contracts,
revenue from the sale of the Circuit City Group's own extended warranty
contracts is deferred and amortized on a straight-line basis over the life of
the contracts. Incremental direct costs related to the sale of contracts are
deferred and charged to expense in proportion to the revenue recognized.
Commission revenue for the unrelated third-party extended warranty plans is
recognized at the time of sale, since the third parties are the primary obligors
under these contracts.
The CarMax Group sells service contracts on behalf of an unrelated third party
and, prior to July 1997, sold its own contracts at one location where
third-party warranty sales were not permitted. Contracts usually have terms of
coverage between 12 and 72 months. Inasmuch as the Company is the primary
obligor on these contracts, all revenue from the sale of the CarMax Group's own
service contracts was deferred and amortized over the life of the contracts
consistent with the pattern of repair experience of the industry. Incremental
direct costs related to the sale of contracts were deferred and charged to
expense in proportion to the revenue recognized. Commission revenue for the
unrelated third-party service contracts is recognized at the time of sale, since
the third party is the primary obligor under these contracts.
(L) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating profits generated by
the Company's finance operations are recorded as a reduction to selling, general
and administrative expenses.
(M) ADVERTISING EXPENSES: All advertising costs are expensed as incurred.
(N) NET EARNINGS (LOSS) PER SHARE: The Company calculates earnings per share
based upon SFAS No. 128, "Earnings per Share." Basic net earnings per share for
Circuit City Group Stock is computed by dividing net earnings attributed to
Circuit City Group Stock, including the Circuit City Group's retained interest
in the CarMax Group, by the weighted average number of shares of Circuit City
Group Stock outstanding. Diluted net earnings per share for Circuit City Group
Stock is computed by dividing net earnings attributed to Circuit City Group
Stock, which includes the Circuit City Group's retained interest in the CarMax
Group, by the weighted average number of shares of Circuit City Group Stock
outstanding and dilutive potential Circuit City Group Stock.
Basic net earnings (loss) per share for CarMax Group Stock is computed by
dividing net earnings (loss) attributed to CarMax Group Stock by the weighted
average number of shares of CarMax Group Stock outstanding. Diluted net earnings
per share for CarMax Group Stock is computed by dividing net earnings attributed
to CarMax Group Stock by the weighted average number of shares of CarMax Group
Stock outstanding and dilutive potential CarMax Group Stock.
(O) STOCK-BASED COMPENSATION: The Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, "Accounting For
Stock Issued to Employees," and provides the pro forma disclosures of SFAS No.
123, "Accounting for Stock-Based Compensation."
(P) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into interest rate swap
agreements to manage exposure to interest rates and to more closely match
funding costs to the use of funding. Interest rate swaps relating to long-term
debt are classified as held for purposes other than trading and are accounted
for on a settlement basis. To qualify for this accounting treatment, the swap
must synthetically alter the nature of a designated underlying financial
instrument. Under this method, payments or receipts due or owed under the swap
agreement are accrued through each settlement date and recorded as a component
of interest expense. If a swap designated as a synthetic alteration were to be
terminated, any gain or loss on the termination would be deferred and recognized
over the shorter of the original contractual life of the swap or the related
life of the designated long-term debt.
The Company also enters into interest rate swap agreements as part of its asset
securitization programs. Swaps entered into by a seller as part of a sale of
financial assets are considered proceeds at fair value in the determination of
the gain or loss on the sale. If such a swap were to be terminated, the impact
on the fair value of the financial asset created by the sale of the related
receivables would be estimated and included in earnings.
(Q) RISKS AND UNCERTAINTIES: The Circuit City Group is a leading national
retailer of brand-name consumer electronics, personal computers, major
appliances and entertainment software. The diversity of the Circuit City Group's
products, customers, suppliers and geographic operations significantly reduces
the risk that a severe impact will occur in the near term as a result of changes
in its customer base, competition, sources of supply or markets. It is unlikely
that any one event would have a severe impact on the Company's operating
results.
35
The CarMax Group is a used- and new-car retail business. The diversity of the
CarMax Group's customers and suppliers reduces the risk that a severe impact
will occur in the near term as a result of changes in its customer base or
sources of supply. However, because of the CarMax Group's limited overall size,
management cannot assure that unanticipated events will not have a negative
impact on the Company.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
the disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
(R) CORPORATE ALLOCATIONS: The Company manages corporate general and
administrative costs and other shared services on a centralized basis.
Allocations of these corporate activities and their related expenses to the
Groups are based on methods that the Company believes to be reasonable.
The provision for federal income taxes is determined on a consolidated basis.
The financial statement provision is reflected in each Group's financial
statements in accordance with the Company's tax allocation policy. In general,
this policy provides that the consolidated tax provision is allocated between
the Groups based principally upon the financial income, taxable income, credits
and other amounts directly related to each Group. Tax benefits that cannot be
used by the Group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the Group that generated such benefits.
(S) RECLASSIFICATIONS: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 2000.
3. BUSINESS ACQUISITIONS
The CarMax Group acquired the franchise rights and the related assets of six
new-car dealerships for an aggregate cost of $34.8 million in fiscal 2000. These
acquisitions were financed through available cash resources. During fiscal 1999,
CarMax acquired the franchise rights and the related assets for four new-car
dealerships for an aggregate cost of $49.6 million. These acquisitions were
financed through available cash resources and the issuance of two promissory
notes aggregating $8.0 million. Costs in excess of the fair value of the net
tangible assets acquired (primarily inventory) have been recorded as goodwill
and covenants not to compete. These acquisitions were accounted for under the
purchase method and the results of the operations of the acquired franchises
have been included in the accompanying consolidated financial statements since
the date of acquisition. Unaudited pro-forma information related to these
acquisitions is not included as the impact of these acquisitions on the
accompanying consolidated financial statements is not material.
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29 or 28 is summarized as follows:
(Amounts in thousands) 2000 1999
- -------------------------------------------------------------------------
Land and buildings (20 to 25 years)............ $ 180,422 $ 75,875
Land held for sale............................. 41,850 31,435
Land held for development...................... 17,697 28,781
Construction in progress....................... 69,388 179,664
Furniture, fixtures and equipment
(3 to 8 years).............................. 750,737 705,660
Leasehold improvements
(10 to 15 years)............................ 586,005 549,673
Capital leases, primarily buildings
(20 years).................................. 12,471 12,471
-------------------------
1,658,570 1,583,559
Less accumulated depreciation and
amortization................................ 693,389 577,786
------------------------
Property and equipment, net.................... $ 965,181 $1,005,773
=========================
Land held for development is land owned for future sites that are scheduled to
open more than one year beyond the fiscal year reported.
5. DEBT
Long-term debt at February 29 or 28 is summarized as follows:
(Amounts in thousands) 2000 1999
- -------------------------------------------------------------------------
Term loans..................................... $405,000 $405,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest
ranging from 5.0% to 7.0%................... 5,419 6,564
Obligations under capital leases [NOTE 10]..... 12,416 12,728
Note payable................................... 3,750 5,000
-----------------------
Total long-term debt........................... 426,585 429,292
Less current installments...................... 177,344 2,707
-----------------------
Long-term debt, excluding
current installments........................ $249,241 $426,585
=======================
In July 1994, the Company entered into a seven-year, $100,000,000, unsecured
bank term loan. The loan was restructured in August 1996 as a $100,000,000,
six-year unsecured bank term loan. Principal is due in full at maturity with
interest payable periodically at LIBOR plus 0.40 percent. At February 29, 2000,
the interest rate on the term loan was 6.29 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured bank
term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate
on the term loan was 6.23 percent. This term loan is due in May 2000 and has
been classified as a current liability as of February 29,
36
2000. Although the Company has the ability to refinance this loan, it intends to
repay the debt using existing working capital.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured bank
term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate
on the term loan was 6.23 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving credit
agreement with four banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.18 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2002. No amounts were outstanding under the revolving credit
agreement at February 29, 2000, or February 28, 1999.
The Industrial Development Revenue Bonds are collateralized by land, buildings
and equipment with an aggregate carrying value of approximately $8,404,000 at
February 29, 2000, and $10,740,000 at February 28, 1999.
In November 1998, the CarMax Group entered into a four-year, unsecured
$5,000,000 promissory note. Principal is due annually with interest payable
periodically at 8.25 percent.
<PAGE>
In fiscal 1999, the CarMax Group entered into a one-year, renewable inventory
financing arrangement with an asset-backed commercial paper conduit. The
arrangement had a total program capacity of $160 million at February 29, 2000,
and was created to provide funding for the acquisition of vehicle inventory
through the use of a non-affiliated special-purpose company. During fiscal years
2000 and 1999, no inventory was financed by the CarMax Group under this
arrangement. This financing arrangement was terminated in the first quarter of
fiscal 2001.
The scheduled aggregate annual principal payments on long-term obligations for
the next five fiscal years are as follows: 2001 - $177,344,000;2002 -
$132,485,000; 2003 - $102,594,000; 2004 - $1,507,000; 2005 - $2,521,000.
Under certain of the debt agreements, the Company must meet financial covenants
relating to minimum tangible net worth, current ratios and debt-to-capital
ratios. The Company was in compliance with all such covenants at February 29,
2000, and February 28, 1999.
Short-term debt is funded through committed lines of credit and informal credit
arrangements, as well as the revolving agreement. Amounts outstanding and
committed lines of credit available are as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999
- ---------------------------------------------------------------------
Average short-term debt outstanding.......... $ 44,692 $ 54,505
======================
Maximum short-term debt outstanding.......... $411,791 $463,000
======================
Aggregate committed lines of credit.......... $370,000 $370,000
======================
The weighted average interest rate on the outstanding short-term debt was 5.6
percent during fiscal 2000, 5.1 percent during fiscal 1999 and 5.7 percent
during fiscal 1998.
The Company capitalizes interest in connection with the construction of certain
facilities and software developed or obtained for internal use. In fiscal 2000,
interest capitalized amounted to $3,420,000 ($5,423,000 in fiscal 1999 and
$9,638,000 in fiscal 1998).
6. INCOME TAXES
The Company files a consolidated federal income tax return. The components of
the provision for income taxes from continuing operations are as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------
Current:
Federal................................. $140,119 $ 99,228 $58,453
State................................... 17,756 13,148 3,076
----------------------------------
157,875 112,376 61,529
----------------------------------
Deferred:
Federal................................ 41,762 16,718 12,801
State.................................. 1,291 517 2,251
----------------------------------
43,053 17,235 15,052
----------------------------------
Provision for income taxes................ $200,928 $129,611 $76,581
==================================
The effective income tax rate differed from the Federal statutory income tax
rate as follows:
Years Ended February 29 or 28
2000 1999 1998
- ---------------------------------------------------------------------------
Federal statutory income tax rate............ 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit.................... 3.0 3.0 3.0
---------------------------
Effective income tax rate.................... 38.0% 38.0% 38.0%
===========================
<PAGE>
In accordance with SFAS No. 109, the tax effects of temporary differences that
give rise to a significant portion of the deferred tax assets and liabilities at
February 29 or 28 are as follows:
(Amounts in thousands) 2000 1999
- -------------------------------------------------------------------
Deferred tax assets:
Deferred revenue.......................... $ 1,146 $ 8,332
Inventory capitalization.................. 2,609 2,578
Accrued expenses.......................... 33,484 27,080
Other..................................... 6,330 5,430
--------------------
Total gross deferred tax assets........ 43,569 43,420
--------------------
Deferred tax liabilities:
Depreciation and amortization............. 51,035 48,035
Deferred revenue.......................... 29,656 6,903
Gain on sales of receivables.............. 18,988 14,990
Other prepaid expenses.................... 26,111 20,210
Other..................................... 6,651 707
--------------------
Total gross deferred tax liabilities... 132,441 90,845
--------------------
Net deferred tax liability................... $ 88,872 $47,425
====================
37
Based on the Company's historical and current pretax earnings, management
believes the amount of gross deferred tax assets will be realized through future
taxable income; therefore, no valuation allowance is necessary.
7. ASSOCIATE BENEFIT AND STOCK
INCENTIVE PLANS
(A) 401(k) PLAN: Effective August 1, 1999, the Company sponsors a 401(k) Plan
for all employees meeting certain eligibility criteria. Under the Plan, eligible
employees can contribute up to 15 percent of their salaries, and the Company
matches a portion of those associate contributions. The Company's contribution
to this plan was $2,475,000 in fiscal 2000.
(B) PREFERRED STOCK: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of Circuit City Group Stock and
CarMax Group Stock. The rights are exercisable only upon the attainment of, or
the commencement of a tender offer to attain, a specified ownership interest in
the Company by a person or group. When exercisable, each Circuit City right
would entitle shareholders to buy one eight-hundredth of a share of Cumulative
Participating Preferred Stock, Series E, $20 par value, at an exercise price of
$125 per share subject to adjustment. Each CarMax right, when exercisable, would
entitle shareholders to buy one four-hundredth of a share of Cumulative
Participating Preferred Stock, Series F, $20 par value, at an exercise price of
$100 per share subject to adjustment. A total of 1,000,000 shares of such
preferred stock, which have preferential dividend and liquidation rights, have
been designated. No such shares are outstanding. In the event that an acquiring
person or group acquires the specified ownership percentage of the Company's
common stock (except pursuant to a cash tender offer for all outstanding shares
determined to be fair by the board of directors) or engages in certain
transactions with the Company after the rights become exercisable, each right
will be converted into a right to purchase, for half the current market price at
that time, shares of the related Group stock valued at two times the exercise
price.
The Company also has 1,000,000 shares of undesignated preferred stock authorized
of which no shares are outstanding.
(C) VOTING RIGHTS: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters on which
common shareholders generally are entitled to vote other than a matter on which
the common stock or either series thereof or any series of preferred stock would
be entitled to vote as a separate voting group. On all matters on which both
series of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Group Stock shall have one vote and (ii) each
outstanding share of CarMax Group Stock shall have a number of votes based on
the weighted average ratio of the market value of a share of CarMax Group Stock
to a share of Circuit City Group Stock. If shares of only one series of common
stock are outstanding, each share of that series shall be entitled to one vote.
If either series of common stock is entitled to vote as a separate voting group
with respect to any matter, each share of that series shall, for purposes of
such vote, be entitled to one vote on such matter.
(D) RESTRICTED STOCK: The Company has issued restricted stock under the
provisions of the 1994 Stock Incentive Plan whereby management and key employees
are granted restricted shares of Circuit City Group Stock or CarMax Group Stock.
Shares are awarded in the name of the employee, who has all the rights of a
shareholder, subject to certain restrictions or forfeitures. Restrictions on the
awards generally expire three to seven years from the date of grant. Total
restricted stock awards of 345,644 shares of Circuit City Group Stock and 30,000
shares of CarMax Group Stock were granted to eligible employees in fiscal 2000.
The market value at the date of grant of these shares has been recorded as
unearned compensation and is a component of stockholders' equity. Unearned
compensation is expensed over the restriction periods. In fiscal 2000, a total
of $12,095,900 was charged to operations ($9,167,700 in fiscal 1999 and
$5,073,100 in fiscal 1998). As of February 29, 2000, 1,559,966 restricted shares
of Circuit City Group Stock and 110,833 restricted shares of CarMax Group Stock
were outstanding.
(E) EMPLOYEE STOCK PURCHASE PLANS: The Company has Employee Stock Purchase Plans
for all employees meeting certain eligibility criteria. Under the Circuit City
Group Plan and the CarMax Group Plan, eligible employees may purchase shares of
Circuit City Group Stock or CarMax Group Stock, subject to certain limitations.
For each $1.00 contributed by employees under the Plans, the Company matches
$0.15. Purchases are limited to 10 percent of an employee's eligible
compensation, up to a maximum of $7,500 per year. At February 29, 2000, a total
of 864,046 shares remained available under the Circuit City Group Plan and
1,058,693 shares remained available under the CarMax Group Plan. During fiscal
2000, 501,984 shares of Circuit City Group Stock were issued to or purchased on
the open market for employees (858,710 shares in fiscal 1999 and 901,396 shares
in fiscal 1998), and 580,000 shares of CarMax Group Stock were issued to or
purchased on the open market on behalf of employees (268,532 in fiscal 1999 and
92,775 in fiscal 1998). The average price per share of Circuit City Group Stock
purchased under the Plan was $41.70 in fiscal 2000, $21.69 in fiscal 1999 and
$18.39 in fiscal 1998. The average price per share of CarMax Group Stock
purchased under the Plan was $3.68 in fiscal 2000, $7.56 in fiscal 1999 and
$12.73 in fiscal 1998. The Company match or purchase price discount charged to
operations totaled $2,903,800 in fiscal 2000, $2,984,500 in fiscal 1999 and
$2,670,400 in fiscal 1998.
(F) STOCK INCENTIVE PLANS: Under the Company's stock incentive plans, incentive
and nonqualified stock options may be granted to management, key employees and
outside directors to purchase shares of Circuit City Group Stock or CarMax Group
Stock. The exercise price for incentive stock options for employees and
nonqualified options for outside directors is equal to, or greater than, the
market value at the date of grant; for nonqualified options granted under the
1988 Plan for employees, it is at least 85 percent of the market value at the
date of grant (100 percent under the 1994 Plan). Options generally are
exercisable over a period of from one to 10 years from the date of grant.
A summary of the status of the Company's stock options and changes during the
years ended February 29, 2000, and February 28, 1999 and 1998, are shown in
Table 1. Table 2 summarizes information about stock options outstanding as of
February 29, 2000.
38
<TABLE>
<S> <C>
TABLE 1 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
Outstanding at beginning of year..... 8,894 $18.25 9,988 $16.00 9,656 $14.88
Granted.............................. 1,564 40.75 1,080 21.17 1,452 17.61
Exercised............................ (2,864) 12.65 (2,008) 8.77 (966) 7.50
Cancelled............................ (214) 22.06 (166) 16.80 (154) 14.71
------ ------ -----
Outstanding at end of year........... 7,380 $25.07 8,894 $18.25 9,988 $16.00
------ ------ -----
Options exercisable at end of year... 1,258 $13.89 2,966 $12.02 3,508 $ 9.84
====== ====== =====
CarMax Group:
Outstanding at beginning of year..... 4,380 $ 1.77 4,822 $ 1.49 4,769 $ 0.51
Granted.............................. 1,132 5.89 205 8.63 413 13.04
Exercised............................ (2,027) 0.22 (543) 0.22 (273) 0.22
Cancelled............................ (161) 6.94 (104) 10.54 (87) 6.36
------ ------ -----
Outstanding at end of year........... 3,324 $ 3.87 4,380 $ 1.77 4,822 $ 1.49
------ ------ -----
Options exercisable at end of year... 1,203 $ 2.54 1,566 $ 0.96 762 $ 0.37
====== ====== =====
<PAGE>
TABLE 2 Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
$ 9.09 to 14.75......................... 1,723 3.9 $13.51 883 $12.33
15.18 to 18.00......................... 1,176 4.0 17.31 288 16.74
18.43 to 25.28......................... 958 4.7 21.12 87 20.43
29.50.................................. 2,000 2.1 29.50 - -
34.63 to 47.53......................... 1,523 6.0 40.81 - -
----- -----
Total.................................... 7,380 4.0 $25.07 1,258 $13.89
===== =====
CarMax Group:
$ 0.22.................................. 1,638 2.0 $ 0.22 934 $ 0.22
3.90 to 6.06.......................... 1,098 5.3 5.89 19 4.25
6.25 to 16.31......................... 588 4.0 10.29 250 11.07
----- -----
Total.................................... 3,324 3.4 $ 3.87 1,203 $ 2.54
===== =====
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized. Had compensation cost been determined based on the fair value at the
grant date consistent with the methods of SFAS No. 123, the Circuit City Group's
net earnings and net earnings per share and the CarMax Group's net earnings
(loss) and net earnings (loss) per share would have been changed to the pro
forma amounts indicated in the chart that follows. In accordance with the
transition provisions of SFAS No. 123, the pro forma amounts reflect options
with grant dates subsequent to March 1, 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net earnings (loss) amounts presented because
compensation cost is reflected over the options' vesting periods and
compensation cost of options granted prior to March 1, 1995, is not considered.
The pro forma effect on fiscal year 2000 may not be representative of the pro
forma effects on net earnings (loss) for future years.
39
(Amounts in thousands Years Ended February 29 or 28
except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------
Circuit City Group:
Earnings from continuing operations:
As reported............................ $327,574 $216,927 $132,710
Pro forma.............................. 319,337 211,025 128,035
Net earnings:
As reported............................ $197,334 $148,381 $112,074
Pro forma.............................. 189,097 142,479 107,399
Earnings per share from continuing
operations:
Basic--as reported..................... $ 1.63 $ 1.09 $ 0.68
Basic--pro forma....................... 1.59 1.06 0.65
Diluted--as reported................... $ 1.60 $ 1.08 $ 0.67
Diluted--pro forma..................... 1.56 1.05 0.65
Net earnings per share:
Basic--as reported..................... $ 0.98 $ 0.75 $ 0.57
Basic--pro forma....................... 0.94 0.72 0.55
Diluted--as reported................... $ 0.96 $ 0.74 $ 0.57
Diluted--pro forma..................... 0.93 0.71 0.54
CarMax Group:
Net earnings (loss):
As reported............................ $ 256 $ (5,457) $ (7,763)
Pro forma.............................. 75 (5,537) (7,824)
Net earnings (loss) per share:
Basic--as reported..................... $ 0.01 $ (0.24) $ (0.35)
Basic--pro forma....................... 0.00 (0.24) (0.36)
Diluted--as reported................... $ 0.01 $ (0.24) $ (0.35)
Diluted--pro forma..................... 0.00 (0.24) (0.36)
<PAGE>
For the purpose of computing the pro forma amounts indicated above, the fair
value of each option on the date of grant is estimated using the Black-Scholes
option-pricing model. The weighted average assumptions used in the model are as
follows:
2000 1999 1998
- ----------------------------------------------------------------------
Circuit City Group:
Expected dividend yield................... 0.2% 0.4% 0.4%
Expected stock volatility................. 38% 33% 33%
Risk-free interest rates.................. 6% 6% 6%
Expected lives (in years)................. 5 5 4
CarMax Group:
Expected dividend yield................... - - -
Expected stock volatility................. 62% 50% 50%
Risk-free interest rates.................. 6% 6% 6%
Expected lives (in years)................. 4 3 3
Using these assumptions in the Black-Scholes model, the weighted average fair
value of options granted for the Circuit City Group is $17 in fiscal 2000, $8 in
fiscal 1999 and $7 in fiscal 1998; and for the CarMax Group, $3 in fiscal 2000,
$3 in fiscal 1999 and $6 in fiscal 1998.
8. NET EARNINGS (LOSS) PER SHARE
Reconciliations of the numerator and denominator of basic and diluted net
earnings (loss) per share are presented below.
(Amounts in thousands Years Ended February 29 or 28
except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------
Circuit City Group:
Weighted average common shares............ 201,345 198,304 196,054
Dilutive potential common shares:
Options................................ 2,145 1,700 1,684
Restricted stock....................... 831 808 670
------------------------------
Weighted average common shares
and dilutive potential common
shares................................. 204,321 200,812 198,408
==============================
Earnings from continuing operations
available to common
shareholders........................... $327,574 $216,927 $132,710
==============================
Basic earnings per share from
continuing operations.................. $ 1.63 $ 1.09 $ 0.68
==============================
Diluted earnings per share from
continuing operations.................. $ 1.60 $ 1.08 $ 0.67
==============================
CarMax Group:
Weighted average common shares 23,778 22,604 22,001
Dilutive potential common shares:
Options................................ 1,814 - -
Restricted stock....................... 196 - -
------------------------------
Weighted average common shares
and dilutive potential
common shares.......................... 25,788 22,604 22,001
==============================
Net earnings (loss) available to
common shareholders.................... $ 256 $ (5,457) $ (7,763)
==============================
Basic net earnings (loss) per share....... $ 0.01 $ (0.24) $ (0.35)
==============================
Diluted net earnings (loss) per share..... $ 0.01 $ (0.24) $ (0.35)
==============================
Certain options were not included in the computation of diluted net earnings per
share because the options' exercise prices were greater than the average market
price of the common shares. Options to purchase 2,900 shares of Circuit City
Group Stock ranging from $43.03 to $47.53 per share were outstanding and not
included in the calculation at the end of fiscal 2000; 2,000,000 shares at
$29.50 per share at the end of fiscal 1999; and 3,020,000 shares ranging from
$17.74 to $29.50 per share at the end of fiscal 1998. Options to purchase
1,685,400 shares of CarMax Group Stock ranging from $3.90 to $16.31 per share
were outstanding and not
40
<PAGE>
included in the calculation at the end of fiscal 2000. Prior to fiscal 2000,
dilutive potential common shares of CarMax Group Stock were not included in the
calculation of diluted net loss per share because the Group had a net loss for
those periods.
9. PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 160,000 shares of
Circuit City Group Stock at February 29, 2000, and February 28, 1999.
Contributions required were $12,123,000 in fiscal 2000, $10,306,000 in fiscal
1999 and $11,642,000 in fiscal 1998. The following tables set forth the Plan's
financial status and amounts recognized in the consolidated balance sheets as of
February 29 or 28:
(Amounts in thousands) 2000 1999
- -----------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year.......... $112,566 $ 89,124
Service cost..................................... 14,678 11,004
Interest cost.................................... 7,557 6,202
Actuarial (gain) loss............................ (16,870) 9,526
Benefits paid.................................... (4,151) (3,290)
--------------------
Benefit obligation at end of year................ $113,780 $112,566
--------------------
Change in plan assets:
Fair value of plan assets at beginning of year... $ 95,678 $ 84,251
Actual return on plan assets..................... 13,827 4,411
Employer contributions........................... 12,123 10,306
Benefits paid.................................... (4,151) (3,290)
--------------------
Fair value of plan assets at end of year......... $117,477 $ 95,678
--------------------
Reconciliation of funded status:
Funded status.................................... $ 3,697 $(16,888)
Unrecognized actuarial (gain) loss............... (11,986) 9,720
Unrecognized transition asset.................... (404) (606)
Unrecognized prior service benefit............... (427) (560)
--------------------
Net amount recognized............................ $ (9,120) $ (8,334)
====================
The components of net pension expense are as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------
Service cost................................... $14,678 $11,004 $ 8,584
Interest cost.................................. 7,557 6,202 5,260
Expected return on plan assets................. (9,078) (7,794) (5,133)
Amortization of prior service cost............. (202) (105) (105)
Amortization of transitional asset............. (134) (202) (202)
Recognized actuarial loss...................... 87 - 17
---------------------------
Net pension expense............................ $12,908 $ 9,105 $ 8,421
===========================
Assumptions used in the accounting for the pension plan were:
Years Ended February 29 or 28
2000 1999 1998
- --------------------------------------------------------------------------
Weighted average discount rate................. 8.0% 6.8% 7.0%
Rate of increase in compensation levels........ 6.0% 5.0% 5.0%
Expected rate of return on plan assets......... 9.0% 9.0% 9.0%
========================
<PAGE>
10. LEASE COMMITMENTS
The Company conducts a substantial portion of its business in leased premises.
The Company's lease obligations are based upon contractual minimum rates. For
certain locations, amounts in excess of these minimum rates are payable based
upon specified percentages of sales. Rental expense and sublease income for all
operating leases are summarized as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------
Minimum rentals.............................. $322,598 $296,706 $248,383
Rentals based on sales volume................ 1,327 1,247 730
Sublease income.............................. (16,425) (14,857) (12,879)
-----------------------------
Net.......................................... $307,500 $283,096 $236,234
=============================
The Company computes rent based on a percentage of sales volumes in excess of
defined amounts in certain store locations. Most of the Company's other leases
are fixed-dollar rental commitments, with many containing rent escalations based
on the Consumer Price Index. Most provide that the Company pay taxes,
maintenance, insurance and certain other operating expenses applicable to the
premises.
The initial term of most real property leases will expire within the next 22
years; however, most of the leases have options providing for additional lease
terms of five years to 25 years at terms similar to the initial terms.
41
Future minimum fixed lease obligations, excluding taxes, insurance and other
costs payable directly by the Company, as of February 29, 2000, were:
Operating Operating
(Amounts in thousands) Capital Lease Sublease
Fiscal Leases Commitments Income
- -------------------------------------------------------------------------
2001................................. $ 1,681 $ 313,535 $(13,042)
2002................................. 1,725 309,516 (11,791)
2003................................. 1,726 305,503 (10,801)
2004................................. 1,768 303,380 (9,238)
2005................................. 1,798 301,155 (8,664)
After 2005........................... 14,666 3,303,866 (44,935)
-----------------------------------
Total minimum lease payments......... $23,364 $4,836,955 $(98,471)
=======================
Less amounts representing interest... 10,948
-------
Present value of net minimum capital
lease payments [NOTE 5]........... $12,416
=======
In fiscal 2000, the Company entered into sale-leaseback transactions with
unrelated parties at an aggregate selling price of $36,795,000 ($235,500,000 in
fiscal 1999 and $218,768,000 in fiscal 1998). The Company does not have
continuing involvement under the sale-leaseback transactions.
11. SUPPLEMENTARY FINANCIAL STATEMENT
INFORMATION
Advertising expense from continuing operations, which is included in selling,
general and administrative expenses in the accompanying consolidated statements
of earnings, amounted to $438,781,000 (3.5 percent of net sales and operating
revenues) in fiscal 2000, $426,359,000 (3.9 percent of net sales and operating
revenues) in fiscal 1999 and $399,619,000 (4.5 percent of net sales and
operating revenues) in fiscal 1998.
12. SECURITIZATIONS
(A) CREDIT CARD SECURITIZATIONS: The Company enters into securitization
transactions, which allow for the sale of credit card receivables to unrelated
entities, to finance the consumer revolving credit receivables generated by its
wholly owned finance operation. The reduction in the aggregate securitized
amount was $63.8 million for fiscal 2000, and proceeds from securitization
transactions were $224.6 million for fiscal 1999 and $331.4 million for fiscal
1998.
<PAGE>
Receivables relating to the securitization facilities consist of the following
at February 29 or 28:
(Amounts in thousands) 2000 1999
- ------------------------------------------------------------------
Managed receivables..................... $2,844,377 $2,957,132
Receivables/residual interests held
by the Company:
For sale............................. (18,288) (39,948)
For investment....................... (144,806) (161,996)
------------------------
Net receivables sold.................... $2,681,283 $2,755,188
========================
Net receivables sold with recourse...... $ 229,000 $ 322,000
========================
Program capacity........................ $3,598,350 $3,127,000
========================
Private-label credit card receivables are financed through securitization
programs employing a master trust structure. As of February 29, 2000, these
securitization programs had a capacity of $1.85 billion. The agreement has no
recourse provisions.
During fiscal 1998, a bank card master trust securitization facility was
established and issued two series from the trust. Provisions under the master
trust agreement provide recourse to the Company for any cash flow deficiencies
on $229 million of the receivables sold. The finance charges from the
transferred receivables are used to fund interest costs, charge-offs, servicing
fees and other related costs. The Company believes that as of February 29, 2000,
no liability existed under these recourse provisions. The bank card
securitization program has a total program capacity of $1.75 billion.
Rights recorded for future finance income from serviced assets that exceed the
contractually specified servicing fees are carried at fair value and amounted to
$37.3 million at February 29, 2000, $27.3 million at February 28, 1999, and
$25.0 million at February 28, 1998, and are included in net accounts receivable.
Changes in these retained interests consisted of originated retained interests
of $52.9 million for fiscal 2000, $37.3 million for fiscal 1999 and $33.3
million for fiscal 1998, less amortization of $42.9 million in fiscal 2000,
$35.0 million in fiscal 1999 and $11.5 million in fiscal 1998. The servicing
fees specified in the credit card securitization agreements adequately
compensate the finance operation for servicing the accounts. Accordingly, no
servicing asset or liability has been recorded. The finance operation's
servicing revenue totaled $213.1 million for fiscal 2000, $210.4 million for
fiscal 1999 and $195.7 million for fiscal 1998.
In determining the fair value of retained interests, the Company estimates
future cash flows from finance charge collections reduced by net defaults,
servicing cost and interest cost. The Company employs a risk-based pricing
strategy that increases the stated annual percentage rate for accounts that have
a higher predicted risk of default. Accounts with a lower risk profile also may
qualify for promotional financing.
The APRs of the private-label card programs, excluding promotional balances,
range from 22 percent to 24 percent, with default rates varying based on
portfolio composition, but generally aggregating from 4 percent to 6 percent.
Principal payment rates vary widely both seasonally and by credit terms but are
in the range of 11 percent to 13 percent.
The bank card APRs are based on the prime rate and generally range from 10
percent to 23 percent, with default rates varying by portfolio composition, but
generally aggregating from 8 percent to 12 percent. Principal payment rates vary
widely both seasonally and by credit terms but are in the range of 7 percent to
9 percent.
Interest cost paid by the master trusts varies between series and, at February
29, 2000, ranged from 6.2 percent to 6.7 percent.
(B) AUTOMOBILE LOAN SECURITIZATION: In fiscal 1996, the Company entered into a
securitization agreement to finance the consumer installment credit receivables
generated by its wholly owned automobile loan finance operation. A restructuring
of the facility during fiscal 1997 resulted in the recourse provisions being
eliminated. Proceeds from the automobile loan securitization transaction were
$348 million during fiscal 2000, $271 million
42
during fiscal 1999 and $123 million during fiscal 1998. This auto loan
securitization program has a total program capacity of $500 million.
In October 1999, the Company formed a second securitization facility that
allowed for a $644 million securitization of auto loan receivables in the public
market. The program had a capacity of $559 million as of February 29, 2000, with
no recourse provisions.
Receivables relating to the securitization facilities consist of the following
at February 29 or 28:
(Amounts in thousands) 2000 1999
- ----------------------------------------------------------------
Managed receivables.................... $ 931,745 $589,032
Receivables held by the Company:
For sale............................ (23,477) (14,690)
For investment*..................... (21,096) (35,342)
-----------------------
Net receivables sold................... $ 887,172 $539,000
=======================
Program capacity....................... $1,059,500 $575,000
=======================
*Held by a bankruptcy remote special purpose company
The finance charges from the transferred receivables are used to fund interest
costs, charge-offs and servicing fees. Rights recorded for future finance income
from serviced assets that exceed the contractually specified servicing fees are
carried at fair value and amounted to $15.5 million at February 29, 2000, $14.7
million at February 28, 1999, and $6.8 million at February 28, 1998, and are
included in net accounts receivable. Changes in these retained interests
consisted of originated retained interests of $17.5 million in fiscal 2000,
$16.6 million in fiscal 1999 and $7.3 million in fiscal 1998, less amortization
of $16.7 million in fiscal 2000, $8.7 million in fiscal 1999 and $3.6 million in
fiscal 1998. The finance operation's servicing revenue totaled $36.9 million for
fiscal 2000, $28.2 million for fiscal 1999 and $11.2 million for fiscal 1998.
The servicing fee specified in the auto loan securitization agreements
adequately compensates the finance operation for servicing the accounts.
Accordingly, no servicing asset or liability has been recorded.
In determining the fair value of retained interests, the Company estimates
future cash flows from finance charge collections, reduced by net defaults,
servicing cost and interest cost. The Company employs a risk-based pricing
strategy that increases the stated APR for accounts that have a higher predicted
risk of default. Accounts with a lower risk profile also may qualify for
promotional financing.
The APRs range from 6 percent to 18 percent fixed, with default rates varying
based on credit quality, but generally aggregating 0.75 percent to 1.25 percent.
The weighted average life of the receivables is expected to be in the 18 month
to 20 month range. Interest cost depends on the time at which accounts were
originated, but is in the range of 6.4 percent to 6.6 percent at February 29,
2000.
13. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year interest rate swap
agreements with notional amounts totaling $300 million relating to a public
issuance of securities by the master trust. As part of this issuance, $344
million of five-year, fixed-rate certificates were issued to fund consumer
credit receivables. The credit card finance operation is servicer for the
accounts, and as such, receives its monthly cash portfolio yield after deducting
interest, charge-offs and other related costs. The underlying receivables are
based on a floating rate. The swaps were put in place to better match funding
costs to the receivables being securitized. As a result, the master trust pays
fixed-rate interest, and the Company utilizes the swaps to convert the
fixed-rate obligation to a floating-rate, LIBOR-based obligation. These swaps
were entered into as part of the sales of receivables and are included in the
gain on sales of receivables. In November 1999, these swaps terminated as the
related securities in the master trust matured.
Concurrent with the funding of the $175 million term loan facility in May 1995,
the Company entered into five-year interest rate swaps with notional amounts
aggregating $175 million. These swaps effectively converted the variable-rate
obligation into a fixed-rate obligation. The fair value of the swaps is the
amount at which they could be settled. This value is based on estimates obtained
from the counterparties, which are two banks highly rated by several financial
rating agencies. The swaps are held for hedging purposes and are not recorded at
fair value. Recording the swaps at fair value at February 29, 2000, would result
in a loss of $90,000, and at February 28, 1999, would result in a loss of $2.2
million.
The Company enters into amortizing swaps relating to the auto loan receivable
securitization to convert variable-rate financing costs to fixed-rate
obligations to better match funding costs to the receivables being securitized.
In November 1995, the Company entered into a 50-month amortizing swap with a
notional amount of $75 million and, in October 1996, entered into a 40-month
amortizing swap with a notional amount of $64 million. The Company entered into
four 40-month amortizing swaps with notional amounts totaling approximately $162
million during fiscal 1998, four 40-month amortizing swaps with notional amounts
totaling approximately $387 million in fiscal 1999, and four 40-month amortizing
swaps with notional amounts totaling approximately $344 million in fiscal 2000.
These swaps were entered into as part of sales of receivables and are included
in the gain on sales of receivables. The remaining total notional amount of all
swaps related to the auto loan receivable securitization was approximately $327
million at February 29, 2000, $499 million at February 28, 1999, and $224
million at February 28, 1998. The reduction in the total notional amount of the
CarMax interest rate swaps relates to the replacement of floating rate
securitizations with a $644 million fixed-rate securitization in October 1999.
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Company does not anticipate significant market risk from swaps, since their
use is to match more closely funding costs to the use of the funding. Credit
risk is the exposure to nonperformance of another party to an agreement. The
Company mitigates credit risk by dealing with highly rated counterparties.
43
14. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the Company's evaluation of the information presently
available, management believes that the ultimate resolution of any such
proceedings will not have a material adverse effect on the Company's financial
position, liquidity or results of operations.
15. DISCONTINUED OPERATIONS
On June 16, 1999, Digital Video Express announced that it would cease marketing
the Divx home video system and discontinue operations, but existing, registered
customers would be able to view discs during a two-year phase-out period. The
operating results of Divx and the loss on disposal of the Divx business have
been segregated from continuing operations and reported as separate line items,
after tax, on the consolidated statements of earnings for the periods presented.
Discontinued operations also have been segregated on the consolidated statements
of cash flows for the periods presented. The consolidated balance sheets,
however, include Divx.
The loss from the discontinued Divx operations totaled $16.2 million after an
income tax benefit of $9.9 million in fiscal 2000, $68.5 million after an income
tax benefit of $42.0 million in fiscal 1999 and $20.6 million after an income
tax benefit of $12.6 million in fiscal 1998. The loss on the disposal of the
Divx business totaled $114.0 million after an income tax benefit of $69.9
million in fiscal 2000. 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. At February 29, 2000, the provision for operating losses during the
phase-out period increased to $6.2 million from the original estimate of $3.0
million because of higher than expected operating costs during the early stages
of discontinuing the business. This increase was offset by reductions in the
provisions for non-operating costs.
The net liabilities or assets of the discontinued Divx operations reflected in
the accompanying consolidated balance sheets at February 29 or 28 are comprised
of the following:
(Amounts in thousands) 2000 1999
- ----------------------------------------------------------------------------
Current assets........................................ $ 612 $ 25,630
Property and equipment, net........................... 513 23,589
Other assets.......................................... - 7,895
Current liabilities................................... (32,650) (23,126)
Other liabilities..................................... (35,291) (3,397)
--------------------
Net (liabilities) assets of discontinued operations... $(66,816) $ 30,591
====================
16. OPERATING SEGMENT INFORMATION
The Company conducts business in two operating segments: the Circuit City Group
and the CarMax Group. These segments are identified and managed by the Company
based on the different products and services offered by each. The Circuit City
Group refers to the retail operations bearing the Circuit City name and to all
related operations, such as its finance operation. This segment is engaged in
the business of selling brand-name consumer electronics, personal computers,
major appliances and entertainment software. The CarMax Group refers to the
used- and new-car retail locations bearing the CarMax name and to all related
operations, such as its finance operation. Divx is no longer included as an
operating segment because it was discontinued on June 16, 1999. Prior year
financial information has been adjusted to reflect this change. Financial
information for these segments for fiscal 2000, 1999 and 1998 are shown in Table
3.
<PAGE>
<TABLE>
<S> <C>
TABLE 3
- -----------------------------------------------------------------------------------------------------------------------------
2000 Total
(Amounts in thousands) Circuit City Group CarMax Group Segments
- -----------------------------------------------------------------------------------------------------------------------------
Revenues from external customers.................................. $10,599,406 $2,014,984 $12,614,390
Interest expense.................................................. 13,844 10,362 24,206
Depreciation and amortization..................................... 132,923 15,241 148,164
Earnings from continuing operations before income taxes........... 526,955 1,803 528,758
Income tax provision.............................................. 200,243 685 200,928
Earnings from continuing operations............................... 326,712 1,118 327,830
Total assets...................................................... $ 3,278,728 $ 675,495 $ 3,954,223
1999 Total
(Amounts in thousands) Circuit City Group CarMax Group Segments
- -----------------------------------------------------------------------------------------------------------------------------
Revenues from external customers.................................. $ 9,344,170 $1,466,298 $10,810,468
Interest expense.................................................. 21,926 6,393 28,319
Depreciation and amortization..................................... 119,724 10,003 129,727
Earnings (loss) from continuing operations before income taxes... 379,630 (38,549) 341,081
Income tax provision (benefit).................................... 144,646 (15,035) 129,611
Earnings (loss) from continuing operations........................ 234,984 (23,514) 211,470
Total assets...................................................... $ 2,816,954 $ 571,198 $ 3,388,152
44
TABLE 3 (continued)
- -----------------------------------------------------------------------------------------------------------------------------
1998 Total
(Amounts in thousands) Circuit City Group CarMax Group Segments
- -----------------------------------------------------------------------------------------------------------------------------
Revenues from external customers.................................. $ 7,996,591 $ 874,206 $ 8,870,797
Interest expense.................................................. 25,072 1,789 26,861
Depreciation and amortization..................................... 110,283 4,577 114,860
Earnings (loss) from continuing operations before income taxes.... 257,632 (56,104) 201,528
Income tax provision (benefit).................................... 98,462 (21,881) 76,581
Earnings (loss) from continuing operations........................ 159,170 (34,223) 124,947
Total assets...................................................... $ 2,752,402 $ 448,322 $ 3,200,724
Earnings from continuing operations and total assets for the Circuit City Group
exclude: (1) the Inter-Group Interest in the CarMax Group and (2) the
discontinued Divx operations as discussed in Note 15.
<PAGE>
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales and operating
revenues.......... $2,690,982 $2,271,061 $2,958,394 $2,517,827 $2,984,607 $2,618,198 $3,980,407 $3,403,382 $12,614,390 $10,810,468
---------------------------------------------------------------------------------------------------------------
Gross profit....... $ 602,727 $ 504,908 $ 668,283 $ 572,824 $ 670,910 $ 593,148 $ 920,637 $ 785,358 $ 2,862,557 $ 2,456,238
---------------------------------------------------------------------------------------------------------------
Net earnings (loss) attributed to:
Circuit City Group Stock:
Continuing
operations...... $ 41,398 $ 21,339 $ 73,692 $ 43,773 $ 52,335 $ 32,710 $ 160,149 $ 119,105 $ 327,574 $ 216,927
---------------------------------------------------------------------------------------------------------------
Discontinued
operations...... $ (130,240)$ (8,070)$ - $ (11,626)$ - $ (16,765)$ - $ (32,085)$ (130,240)$ (68,546)
---------------------------------------------------------------------------------------------------------------
CarMax Group
Stock............ $ 646 $ (736)$ 775 $ (685)$ (757)$ (1,701)$ (408)$ (2,335)$ 256 $ (5,457)
---------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share:
Circuit City Group Stock:
Basic:
Continuing
operations..... $ 0.21 $ 0.11 $ 0.37 $ 0.22 $ 0.26 $ 0.16 $ 0.79 $ 0.60 $ 1.63 $ 1.09
---------------------------------------------------------------------------------------------------------------
Discontinued
operations..... $ (0.65)$ (0.04)$ - $ (0.06)$ - $ (0.08)$ - $ (0.16)$ (0.65)$ (0.34)
---------------------------------------------------------------------------------------------------------------
Net (loss)
earnings....... $ (0.44)$ 0.07 $ 0.37 $ 0.16 $ 0.26 $ 0.08 $ 0.79 $ 0.44 $ 0.98 $ 0.75
---------------------------------------------------------------------------------------------------------------
Diluted:
Continuing
operations..... $ 0.20 $ 0.11 $ 0.36 $ 0.22 $ 0.26 $ 0.16 $ 0.78 $ 0.59 $ 1.60 $ 1.08
---------------------------------------------------------------------------------------------------------------
Discontinued
operations..... $ (0.64)$ (0.04)$ - $ (0.06)$ - $ (0.08)$ - $ (0.16)$ (0.64)$ (0.34)
---------------------------------------------------------------------------------------------------------------
Net (loss)
earnings....... $ (0.44)$ 0.07 $ 0.36 $ 0.16 $ 0.26 $ 0.08 $ 0.78 $ 0.43 $ 0.96 $ 0.74
---------------------------------------------------------------------------------------------------------------
CarMax Group Stock
Basic............ $ 0.03 $ (0.03)$ 0.03 $ (0.03)$ (0.03)$ (0.07)$ (0.02)$ (0.10)$ 0.01 $ (0.24)
---------------------------------------------------------------------------------------------------------------
Diluted.......... $ 0.03 $ (0.03)$ 0.03 $ (0.03)$ (0.03)$ (0.07)$ (0.02)$ (0.10)$ 0.01 $ (0.24)
---------------------------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Circuit City
Stores, Inc. and subsidiaries as of February 29, 2000 and February 28, 1999 and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the fiscal years in the three-year period ended February 29,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Circuit City Stores,
Inc. and subsidiaries as of February 29, 2000 and February 28, 1999 and the
results of their operations and their cash flows for each of the fiscal years in
the three-year period ended February 29, 2000 in conformity with generally
accepted accounting principles.
/s/KPMG LLP
Richmond, Virginia
April 4, 2000
45
CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The common stock of Circuit City Stores, Inc. consists of two common stock
series, which are intended to reflect the performance of the Company's two
businesses. The Circuit City Group Common Stock is intended to track the
performance of the Circuit City stores and related operations and the Group's
retained interest in the CarMax Group. The effects of the retained interest in
the CarMax Group on the Circuit City Group's financial statements are identified
by the term "Inter-Group." Over the three-year period discussed in this annual
report, the financial results for the Company and the Circuit City Group also
have included 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 stores and related operations. The Inter-Group Interest is not
considered outstanding CarMax Group stock. Therefore, the net earnings or losses
attributed to the Inter-Group Interest are not included in the CarMax Group's
per share calculations.
The following discussion and analysis relates to the Circuit City Group. The
Circuit City Group held a 74.7 percent interest in the CarMax Group at February
29, 2000, a 76.6 percent interest at February 28, 1999, and a 77.3 percent
interest at February 28, 1998. For additional information, refer to the
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" for Circuit City Stores, Inc. and for the CarMax Group.
RESULTS OF OPERATIONS
Sales Growth
Total sales for the Circuit City Group increased 13 percent in fiscal 2000 to
$10.60 billion. In fiscal 1999, total sales were $9.34 billion, a 17 percent
increase from $8.00 billion in fiscal 1998. The fiscal 2000 total sales increase
reflects an 8 percent increase in comparable store sales and the net addition of
34 Circuit City Superstores into new and existing Circuit City markets.
PERCENTAGE SALES CHANGE FROM PRIOR YEAR
Circuit City Group
------------------
Fiscal Total Comparable Industry*
- -------------------------------------------------------------
2000........................... 13% 8 % 6 %
1999........................... 17% 8 % 5 %
1998........................... 12% (1)% (3)%
1997........................... 6% (8)% (8)%
1996........................... 23% 5 % 6 %
* The industry sales rates are derived from the Consumer Electronics
Association, Recording Industry Association of America and Company estimates of
audio, video, home office, telecommunications, appliance and music software
sales.
PERCENTAGE SALES CHANGE FROM PRIOR YEAR. During the past five years, industry
growth, the addition of new product categories and geographic expansion of the
Group's Superstore base have made varying contributions to total sales growth.
Early in the period, geographic expansion and the addition of product categories
such as personal computers were the primary contributors to growth. In fiscal
1996, a 25 percent increase in Superstore square footage, which included entry
into 19 markets, was a significant contributor to the Group's total sales
growth. In that same year, home office products rose to 26 percent of sales from
20 percent in the prior year. From mid fiscal 1996 through fiscal 1998, a lack
of significant consumer electronics product introductions resulted in weak
industry sales. The industry began to emerge from this period of declining sales
in fiscal 1999, and that trend continued in fiscal 2000. Management believes
that this period of industry growth, driven by digital product technology, can
last throughout the decade and will be the primary contributor to total sales
growth in the foreseeable future.
PERCENT MERCHANDISE SALES BY CATEGORY
Fiscal 2000 1999 1998 1997 1996
- -------------------------------------------------------------
TV ...................... 18% 18% 18% 18% 17%
VCR/Camcorders........... 13% 13% 13% 14% 13%
Audio.................... 15% 16% 17% 18% 19%
Home Office.............. 29% 27% 25% 24% 26%
Appliance................ 14% 15% 15% 15% 14%
Other.................... 11% 11% 12% 11% 11%
----------------------------------
Total.................... 100% 100% 100% 100% 100%
==================================
MERCHANDISE SALES BY CATEGORY. Fiscal 2000 sales reflected strong consumer
demand across all major product categories. Home office was the strongest
category, reflecting continued increases in household penetration of personal
computers, increased consumer use of the Internet and new capabilities such as
digital imaging and digital audio recording. In the consumer electronics
categories, the Group saw significant demand for better-featured products and
new technologies, including DVD players, DIRECTV, digital camcorders, wireless
communications and big-screen televisions.
In most states, the Group sells extended warranty programs on behalf of
unrelated third parties who are the primary obligors. Under these third-party
warranty programs, the Company has no contractual liability to the customer. In
states where third-party warranty sales are not permitted, the Group sells a
Circuit City extended warranty for which the Company is the primary obligor.
Gross dollar sales from all extended warranty programs were 5.4 percent of the
Group's total sales in fiscal 2000 and fiscal 1999, compared with 5.5 percent in
fiscal 1998. Total extended warranty revenue, which is reported in the Group's
total sales, was 4.4 percent of sales in fiscal 2000 and 4.6 percent of sales in
fiscal years 1999 and 1998. The gross profit margins on products sold with
extended warranties are higher than the gross profit margins on products sold
without extended warranties. Third-party extended warranty revenue was 4.1
percent of the Group's total sales in fiscal 2000 and fiscal 1999 and 3.6
percent of the Group's total sales in fiscal 1998. The increase in third-party
extended warranty revenue reflects the conversion of stores in 13 states to
third-party warranty sales since early fiscal 1998.
SUPERSTORE SALES PER TOTAL SQUARE FOOT
Fiscal
- -------------------------------------------------------------
2000................................................... $555
1999................................................... $514
1998................................................... $478
1997................................................... $499
1996................................................... $577
46
SUPERSTORE SALES PER TOTAL SQUARE FOOT. The fiscal 2000 sales per square foot
increase reflects the comparable store sales increase and management's
commitment to maximizing sales in existing stores. The decline in Superstore
sales per total square foot from fiscal 1996 through fiscal 1998 reflects the
impact of the larger-format "D" stores, which generate lower sales per square
foot than smaller stores, declines in comparable store sales and declines in
industry sales.
STORE MIX
Retail Units at Year-End
----------------------------------
Fiscal 2000 1999 1998 1997 1996
- -------------------------------------------------------------
Superstore
"D" Superstore......... 118 118 114 95 61
"C" Superstore......... 295 294 289 278 259
"B" Superstore......... 102 82 72 54 46
"A" Superstore......... 56 43 25 16 12
Electronics-Only.......... - 2 4 5 5
Circuit City Express...... 45 48 52 45 36
--------------------------------
Total..................... 616 587 556 493 419
================================
STORE MIX. In fiscal 2000, the Group opened 38 Superstores. The openings include
32 Superstores in new and existing markets, the relocation of four existing
Superstores and the replacement of the two remaining consumer electronics-only
stores.
The Group classifies its Circuit City Superstores into four categories based on
square footage. At the end of fiscal 2000, selling space for the "D"-format
stores averaged about 23,000 square feet and total square footage for all "D"
stores averaged 43,043. The "C" format constituted the largest percentage of the
store base. At the end of fiscal 2000, selling space in the "C"-format stores
averaged about 15,000 square feet, with total square footage for all "C" stores
averaging 34,006; selling space in the "B" stores averaged approximately 13,000
square feet, with an average total square footage of 27,078; and selling space
for all "A" stores averaged approximately 9,000 square feet with total square
footage averaging 19,098.
The Group also operates 45 mall-based Circuit City Express stores. These stores
are located in regional malls and are approximately 2,000 to 3,000 square feet
in size.
IMPACT OF INFLATION. Inflation has not been a significant contributor to the
Group's results. In fact, during the past two years, average retail prices have
declined in virtually all of the Group's product categories. Although product
introductions could help reverse this trend in selected areas, management
expects no significant short-term change overall. Because the Group purchases
substantially all products in U.S. dollars, prices are not directly impacted by
the value of the dollar in relation to other foreign currencies, including the
Japanese yen.
<PAGE>
Cost of Sales, Buying and Warehousing
The gross profit margin was 24.7 percent of sales in fiscal 2000, 24.4 percent
of sales in fiscal 1999 and 24.6 percent of sales in fiscal 1998. The
improvement in the gross margin primarily reflected the higher percentage of
sales from better-featured products and newer technologies, which carry higher
gross margins. The margin impact of these sales was partly offset by the
strength in personal computer sales, which carry lower gross margins. Continued
improvements in inventory management also contributed to the gross margin
increase.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 19.6 percent of sales in
fiscal 2000 compared with 20.1 percent of sales in fiscal 1999 and 21.1 percent
of sales in fiscal 1998. The improved expense ratio in both years primarily
reflects the leverage gained from the comparable store sales increase. Operating
profits generated by the Group's finance operation are recorded as a reduction
to selling, general and administrative expenses.
Interest Expense
Interest expense was 0.1 percent of sales in fiscal 2000, 0.2 percent of sales
in fiscal 1999 and 0.3 percent of sales in fiscal 1998. Interest expense was
incurred on allocated debt used to fund store expansion and working capital.
Income Taxes
The Group's effective income tax rate was 38.0 percent in fiscal year 2000, 38.1
percent in fiscal year 1999 and 38.3 percent in fiscal 1998. The shifts in the
tax rates reflect variations in state tax rates and the percentage of sales
produced in each state.
Earnings from Continuing Operations Before the Inter-Group
Interest in the CarMax Group
Earnings from continuing operations before the Inter-Group Interest in the
CarMax Group increased 39 percent to $326.7 million, or $1.60 per share, in
fiscal 2000. In fiscal 1999, earnings from continuing operations before the
Inter-Group Interest in the CarMax Group increased 48 percent to $235.0 million,
or 1.17 per share, from $159.2 million, or 80 cents per share, in fiscal 1998.
Net Earnings (Loss) Related to the Inter-Group
Interest in the CarMax Group
The net earnings attributed to the Circuit City Group's Inter-Group Interest in
the CarMax Group were $862,000 in fiscal 2000, compared with a net loss of $18.1
million in fiscal 1999 and a net loss of $26.5 million in fiscal 1998.
Earnings from Continuing Operations
Earnings from continuing operations for the Circuit City Group were $327.6
million, or $1.60 per share, in fiscal 2000, $216.9 million, or $1.08 per share,
in fiscal 1999 and $132.7 million, or 67 cents per share, in fiscal 1998. The 51
percent earnings increase in fiscal 2000 reflects the strength in the Company's
Circuit City business and the profit produced by the CarMax Group. The 63
percent increase in fiscal 1999 reflects the renewed strength of the Circuit
City business, partly offset by the losses at CarMax.
Loss from Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease marketing
of the Divx home video system and discontinue operations, but existing,
registered customers would be able to view discs during a two-year phase-out
period. The operating results of Divx and the loss on disposal of the Divx
business have been segregated from continuing operations and reported as
separate line items, after tax, on the Circuit City Group statements of earnings
for the periods presented.
47
For fiscal 2000, the loss from the discontinued operations of Divx totaled $16.2
million after an income tax benefit of $9.9 million. The loss from the
discontinued operations of Divx totaled $68.5 million after an income tax
benefit of $42.0 million in fiscal 1999 and $20.6 million after an income tax
benefit of $12.6 million in fiscal 1998.
In fiscal 2000, the loss on the disposal of the Divx business totaled $114.0
million after an income tax benefit of $69.9 million. 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
Net earnings for the Circuit City Group rose 33 percent to $197.3 million, or 96
cents per share, in fiscal 2000. Net earnings for the Circuit City Group
increased 32 percent to $148.4 million, or 74 cents per share, in fiscal 1999,
from $112.1 million, or 57 cents per share, in fiscal 1998.
<PAGE>
Operations Outlook
Management expects that industry growth, primarily driven by the introduction of
better-featured products and new technologies, will be the primary contributor
to sales and earnings growth for the Circuit City business during the coming
decade. Management anticipates that growth in the household penetration of
products and services such as digital television, direct broadcast satellite
systems, wireless communications, digital camcorders, DVD players,
multi-function set-top boxes and broadband Internet access will contribute
significantly to overall sales and earnings growth.
During fiscal 2000, the Group undertook several significant merchandising
initiatives. Consistent with past practice, the Group added displays for new
products, which in fiscal 2000 included digital televisions, digital imaging and
high-speed broadband Internet access. The Group also announced two significant
vendor initiatives. Circuit City entered into a strategic alliance with America
Online, Inc. to provide in-store promotion of AOL products and services and to
increase Circuit City's presence on the Internet by featuring Circuit City as an
anchor tenant on key Shop@ online destinations across several America Online,
Inc. brands. Circuit City and Sony Electronics Inc. also announced plans to
co-promote Memory Stick media and hardware. In virtually all of the Circuit City
Superstores opened since the fall, the Group significantly expanded the number
of self-service products. In July, the Group launched its electronic Superstore,
circuitcity.com, and it has continued to develop the site. The Group's
e-commerce business is tightly integrated with its brick-and-mortar locations,
allowing for product pickup, returns and exchanges at the store.
In fiscal 2001, the Group will build on the initiatives begun in fiscal 2000.
The planned 25 new Superstores and all 571 existing Superstores will feature new
displays designed to highlight the latest advances in technology. These displays
will include AOL Internet Centers; a Sony Memory Stick Interactive Universe;
significantly expanded displays highlighting digital audio recording technology;
redesigned wireless phone displays; more prominent digital video displays; and
additional digital television displays and assortment. A full selection of video
game hardware and software will be added to all new stores and to a significant
percentage of existing stores. These enhancements will help ensure that Circuit
City is in the best position to capture the sales opportunity presented by the
digital cycle.
The Group also will remodel 30 to 35 stores in the Richmond, Va., and the Miami,
West Palm Beach, Tampa, Fort Myers and Orlando, Fla., markets. These remodeled
Superstores will allow management to test a concept dedicated to consumer
electronics and home office products. These stores will feature the technology
displays discussed above; expanded assortments of entertainment and computer
software, peripherals and accessories; and additional self-service areas.
Superstores opened after the first fiscal quarter also will be dedicated to
consumer electronics and home office products. In the remodel markets, Circuit
City will test approximately six stand-alone major appliance stores to create
better selling space for the new technologies in the appliance business and to
increase consumer awareness of Circuit City's appliance offering.
Circuit City has established its presence in virtually all of the nation's top
100 markets and will continue adding to the existing store base as attractive
market opportunities arise. Management believes that the Group has the
opportunity to operate approximately 800 Superstores within the United States.
In fiscal 2001, the Group will continue to expand its Superstore concept into
new trade areas, adding approximately 25 stores that are either new-market
entries or fill-in locations in existing Circuit City markets.
Management anticipates that the industry's growth, geographic expansion,
Superstore remodeling and continued strong operating controls will enable the
Circuit City business to generate earnings growth of 20 percent to 25 percent in
fiscal 2001. Management believes that continued emphasis on revenue growth and
operating margin enhancements at CarMax will deliver solid profitability in
fiscal 2001. The Circuit City Group's Inter-Group Interest in CarMax will partly
reflect the CarMax results.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the "Management's Discussion and Analysis of Results of Operations and
Financial Condition" for Circuit City Stores, Inc. for a review of recent
accounting pronouncements.
FINANCIAL CONDITION
In fiscal 2000, net cash provided by operating activities of continuing
operations was $618.6 million compared with $391.5 million in fiscal 1999 and
$314.3 million in fiscal 1998. The fiscal 2000 increase reflects a 51 percent
increase in earnings from continuing operations for the Circuit City Group and
an increase in accounts payable, partly offset by an increase in inventory. The
fiscal 1999 increase primarily reflects a decrease in net accounts receivable
and improvements in net earnings for the Circuit City business.
Most financial activities, including the investment of surplus cash and the
issuance and repayment of short-term and long-term debt, are managed by the
Company on a centralized basis. Allocated debt of the Circuit City Group
consists of (1) Company debt, if any, that has been allocated in its entirety to
the Circuit City Group and (2) a portion of the Company's debt that is allocated
between the Groups. This pooled debt bears interest at a rate based on the
average pooled debt balance. Expenses related to
48
increases in pooled debt are reflected in the weighted average interest rate of
the pooled debt.
In addition to the allocation of cash and debt, interest-bearing loans, with
terms determined by the board of directors, are used to manage cash between the
Groups. These loans are reflected as inter-group payables or receivables on the
financial statements of each Group. During fiscal 1998, an inter-group note was
issued by the Circuit City Group on behalf of the CarMax Group as a temporary
financing vehicle for CarMax inventory. At the end of fiscal 2000 and fiscal
1999, the Circuit City Group maintained no inter-group notes, payables or
receivables with the CarMax Group.
During fiscal 2000, a term loan totaling $175 million and due in May 2000 was
classified as a current liability. Although the Company has the ability to
refinance this loan, it intends to repay the debt using existing working
capital. Payment of corporate debt will not necessarily reduce Circuit City
Group allocated debt.
The Circuit City Group's capital expenditures were $176.9 million in fiscal
2000, $214.1 million in fiscal 1999 and $341.6 million in fiscal 1998. Circuit
City's capital expenditures through fiscal 2000 primarily were related to
Superstore expansion. Capital expenditures for the Circuit City Group have been
funded through sale-leaseback transactions, landlord reimbursements and
allocated short- and long-term debt. In fiscal 2001, the Group anticipates
capital expenditures of approximately $245 million, primarily related to
construction of new Superstores and the remodeling of 30 to 35 existing
Superstores. Sale-leaseback and landlord reimbursement transactions totaled
$74.8 million in fiscal 2000, $134.3 million in fiscal 1999 and $199.0 million
in fiscal 1998.
The Group's finance operation primarily funds its credit card programs through
securitization transactions that allow the operation to sell its receivables
while retaining a small interest in them. The finance operation has a master
trust securitization facility for its private-label credit card that allows the
transfer of up to $1.85 billion in receivables through both private placement
and the public market. A second master trust securitization program allows for
the transfer of up to $1.75 billion in receivables related to the operation's
bank card programs. Securitized receivables totaled $2.79 billion at February
29, 2000. Under the securitization programs, receivables are sold to an
unaffiliated third party with the servicing rights retained. Management expects
that both securitization programs can be expanded to accommodate future
receivables growth.
At the end of fiscal 2000, the Circuit City Group retained a 74.7 percent
interest in the equity of the CarMax Group. As of February 29, 2000, the Circuit
City Group's equity in the CarMax Group was $257.5 million.
Management believes that proceeds from sales of property and equipment and
receivables, future increases in Circuit City Stores, Inc. debt allocated to the
Circuit City Group and cash generated by operations will be sufficient to fund
the capital expenditures and operations of the Circuit City business.
MARKET RISK
The Company manages the private-label and bank card revolving loan portfolios of
the Group's finance operation. Portions of these portfolios are securitized and,
therefore, are not presented on the Group's balance sheets. Interest rate
exposure relating to these receivables represents a market risk exposure that
the Company has managed with matched funding and interest rate swaps.
Interest rates charged on the accounts in the managed private-label and bank
card portfolios are primarily indexed to the prime rate, adjustable on a monthly
basis, with the balance at a fixed annual percentage rate. Total principal
outstanding at February 29, 2000, and February 28, 1999, had the following APR
structure:
(Amounts in millions) 2000 1999
- -------------------------------------------------------------
Indexed to prime rate.................... $2,631 $2,714
Fixed APR................................ 213 243
-------------------
Total.................................... $2,844 $2,957
===================
<PAGE>
Financing for the securitization programs is achieved primarily through the
issuance of public market debt, which is issued either at floating rates based
on LIBOR or at fixed rates. Certain of the fixed-rate issuances have been
swapped to LIBOR. Receivables held by the Company for investment or sale are
financed with working capital. At February 29, 2000, and February 28, 1999,
financings were as follows:
(Amounts in millions) 2000 1999
- -------------------------------------------------------------
Floating-rate (including synthetic
alteration) securitizations........... $2,544 $2,568
Fixed-rate securitizations............... 137 187
Held by the Company:
For investment........................ 145 162
For sale.............................. 18 40
-------------------
Total.................................... $2,844 $2,957
===================
The Company has analyzed its interest rate exposure and has concluded that it
did not represent a material market risk at February 29, 2000, or February 28,
1999. Because programs are in place to manage interest rate exposure relating to
the consumer loan portfolios, the Company expects to experience relatively
little impact if interest rates fluctuate. The Company also has the ability to
adjust fixed-APR revolving cards and the index on floating-rate cards, subject
to cardholder ratification, but does not currently anticipate the need to do so.
YEAR 2000 CONVERSION
Refer to the "Management's Discussion and Analysis of Results of Operations and
Financial Condition" for Circuit City Stores, Inc. for a discussion of the Year
2000 issue and its impact on the Group's financial statements.
FORWARD-LOOKING STATEMENTS
Company statements that are not historical facts, including statements about
management's expectations for fiscal year 2001 and beyond, are forward-looking
statements and involve various risks and uncertainties. Refer to the "Circuit
City Stores, Inc. Management's Discussion and Analysis of Results of Operations
and Financial Condition" for a review of possible risks and uncertainties.
49
<PAGE>
<TABLE>
<S> <C>
CIRCUIT CITY GROUP STATEMENTS OF EARNINGS
Years Ended February 29 or 28
(Amounts in thousands except per share data) 2000 % 1999 % 1998 %
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES................................. $10,599,406 100.0 $9,344,170 100.0 $7,996,591 100.0
Cost of sales, buying and warehousing............................ 7,977,214 75.3 7,060,198 75.6 6,026,434 75.4
-----------------------------------------------------------------
GROSS PROFIT..................................................... 2,622,192 24.7 2,283,972 24.4 1,970,157 24.6
-----------------------------------------------------------------
Selling, general and administrative expenses [NOTES 3 AND 11].... 2,081,393 19.6 1,882,416 20.1 1,687,453 21.1
Interest expense [NOTES 3 AND 5]................................. 13,844 0.1 21,926 0.2 25,072 0.3
-----------------------------------------------------------------
TOTAL EXPENSES................................................... 2,095,237 19.7 1,904,342 20.3 1,712,525 21.4
-----------------------------------------------------------------
Earnings from continuing operations before income taxes and
Inter-Group Interest in the CarMax Group...................... 526,955 5.0 379,630 4.1 257,632 3.2
Provision for income taxes [NOTES 3 AND 6]....................... 200,243 1.9 144,646 1.6 98,462 1.2
-----------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INTER-GROUP INTEREST
IN THE CARMAX GROUP........................................... 326,712 3.1 234,984 2.5 159,170 2.0
Net earnings (loss) related to Inter-Group Interest in the
CarMax Group [NOTES 1 AND 2].................................. 862 0.0 (18,057) (0.2) (26,460) (0.3)
-----------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS.............................. 327,574 3.1 216,927 2.3 132,710 1.7
-----------------------------------------------------------------
Discontinued operations [NOTE 15]:
Loss from discontinued operations of Divx,
less income tax benefit.................................... (16,215) (0.1) (68,546) (0.7) (20,636) (0.3)
Loss on disposal of Divx, including provision for losses
during phase-out period, less income tax benefit........... (114,025) (1.1) - - - -
-----------------------------------------------------------------
Loss from discontinued operations................................ (130,240) (1.2) (68,546) (0.7) (20,636) (0.3)
-----------------------------------------------------------------
NET EARNINGS..................................................... $ 197,334 1.9 $ 148,381 1.6 $ 112,074 1.4
-----------------------------------------------------------------
Weighted average common shares [NOTES 2 AND 8]:
Basic......................................................... 201,345 198,304 196,054
=========== ========== ==========
Diluted....................................................... 204,321 200,812 198,408
=========== ========== ==========
NET EARNINGS (LOSS) PER SHARE [NOTES 2 AND 8]:
Basic:
Continuing operations...................................... $ 1.63 $ 1.09 $ 0.68
Discontinued operations.................................... (0.65) (0.34) (0.11)
----------- ---------- ----------
Net earnings............................................... $ 0.98 $ 0.75 $ 0.57
=========== ========== ==========
Diluted:
Continuing operations...................................... $ 1.60 $ 1.08 $ 0.67
Discontinued operations.................................... (0.64) (0.34) (0.10)
----------- ---------- ----------
Net earnings............................................... $ 0.96 $ 0.74 $ 0.57
=========== ========== ==========
See accompanying notes to group financial statements.
50
<PAGE>
CIRCUIT CITY GROUP BALANCE SHEETS
At February 29 or 28
(Amounts in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 633,952 $ 248,201
Net accounts receivable [NOTE 12]....................................................... 464,023 476,952
Merchandise inventory................................................................... 1,405,617 1,292,215
Prepaid expenses and other current assets............................................... 13,353 36,024
--------------------------------
TOTAL CURRENT ASSETS.................................................................... 2,516,945 2,053,392
Property and equipment, net [NOTES 4 AND 5]............................................. 753,325 801,827
Inter-Group Interest in the CarMax Group [NOTE 2]....................................... 257,535 260,758
Other assets............................................................................ 9,583 18,849
--------------------------------
TOTAL ASSETS............................................................................ $3,537,388 $3,134,826
================================
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTES 5 AND 10]................................. $ 85,735 $ 1,457
Accounts payable........................................................................ 884,172 739,895
Short-term debt [NOTE 5]................................................................ 1,453 3,411
Accrued expenses and other current liabilities.......................................... 184,705 135,029
Deferred income taxes [NOTE 6].......................................................... 53,971 2,090
--------------------------------
TOTAL CURRENT LIABILITIES............................................................... 1,210,036 881,882
Long-term debt, excluding current installments [NOTES 5 AND 10]......................... 127,984 286,865
Deferred revenue and other liabilities.................................................. 122,771 107,070
Deferred income taxes [NOTE 6].......................................................... 21,877 33,536
--------------------------------
TOTAL LIABILITIES....................................................................... 1,482,668 1,309,353
GROUP EQUITY............................................................................ 2,054,720 1,825,473
--------------------------------
Commitments and contingent liabilities [NOTES 1, 9, 10, 12, 13, 14 AND 15]
TOTAL LIABILITIES AND GROUP EQUITY...................................................... $3,537,388 $3,134,826
================================
See accompanying notes to group financial statements.
51
<PAGE>
CIRCUIT CITY GROUP STATEMENTS OF CASH FLOWS
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings................................................................. $ 197,334 $ 148,381 $ 112,074
Adjustments to reconcile net earnings to net cash provided by
operating activities of continuing operations:
Loss from discontinued operations [NOTE 15]............................... 16,215 68,546 20,636
Loss on disposal of discontinued operations [NOTE 15]..................... 114,025 - -
Net (earnings) loss related to Inter-Group Interest in the CarMax Group... (862) 18,057 26,460
Depreciation and amortization............................................. 132,923 119,724 110,283
(Gain) loss on sales of property and equipment............................ (418) 3,087 2,593
Provision for deferred income taxes....................................... 41,828 5,951 16,919
Decrease in deferred revenue and other liabilities........................ (17,799) (32,771) (23,859)
Decrease (increase) in net accounts receivable............................ 12,967 60,138 (33,545)
(Increase) decrease in merchandise inventory.............................. (144,598) (16,107) 43,528
Decrease (increase) in prepaid expenses and other current assets.......... 83,540 5,543 (8,856)
(Increase) decrease in other assets....................................... (1,015) 202 10,296
Increase in accounts payable, accrued expenses and
other current liabilities.............................................. 184,429 10,745 37,804
-----------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS.................................................. 618,569 391,496 314,333
-----------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment.......................................... (176,873) (214,085) (341,608)
Proceeds from sales of property and equipment................................ 74,811 134,315 199,028
-----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES
OF CONTINUING OPERATIONS.................................................. (102,062) (79,770) (142,580)
-----------------------------------------------
FINANCING ACTIVITIES:
(Decrease) increase in allocated short-term debt, net......................... (1,958) (2,180) 5,244
Decrease in inter-group payable.............................................. - - (48,147)
Decrease in allocated long-term debt, net.................................... (74,603) (109,885) (33,573)
Equity issuances, net........................................................ 50,205 42,165 22,311
Dividends paid............................................................... (14,207) (13,981) (13,792)
-----------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES
OF CONTINUING OPERATIONS.................................................. (40,563) (83,881) (67,957)
-----------------------------------------------
CASH USED IN DISCONTINUED OPERATIONS [NOTE 15].................................. (90,193) (69,844) (45,818)
-----------------------------------------------
Increase in cash and cash equivalents........................................... 385,751 158,001 57,978
Cash and cash equivalents at beginning of year.................................. 248,201 90,200 32,222
-----------------------------------------------
Cash and cash equivalents at end of year........................................ $ 633,952 $ 248,201 $ 90,200
===============================================
See accompanying notes to group financial statements.
52
<PAGE>
CIRCUIT CITY GROUP STATEMENTS OF GROUP EQUITY
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1997.......................................................................................... $1,526,697
----------
Net earnings................................................................................................... 112,074
Equity issuances, net.......................................................................................... 22,311
Cash dividends................................................................................................. (13,792)
Inter-Group Interest adjustment [NOTE 2]....................................................................... 1,042
----------
BALANCE AT FEBRUARY 28, 1998...................................................................................... 1,648,332
----------
Net earnings................................................................................................... 148,381
Equity issuances, net.......................................................................................... 42,165
Cash dividends................................................................................................. (13,981)
Inter-Group Interest adjustment [NOTE 2]....................................................................... 576
----------
BALANCE AT FEBRUARY 28, 1999...................................................................................... 1,825,473
----------
Net earnings................................................................................................... 197,334
Equity issuances, net.......................................................................................... 50,205
Cash dividends................................................................................................. (14,207)
Inter-Group Interest adjustment [NOTE 2]....................................................................... (4,085)
----------
BALANCE AT FEBRUARY 29, 2000...................................................................................... $2,054,720
==========
See accompanying notes to group financial statements.
</TABLE>
53
NOTES TO CIRCUIT CITY GROUP FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The common stock of Circuit City Stores, Inc. consists of two common stock
series, which are intended to reflect the performance of the Company's two
businesses. The Circuit City Group Common Stock is intended to track the
performance of the Circuit City store-related operations, the Group's retained
interest in the CarMax Group and the Company's investment in Digital Video
Express, which has been discontinued (see Note 15). The effects of this retained
interest on the Circuit City Group's financial statements are identified by the
term "Inter-Group." The CarMax Group Common Stock is intended to track the
performance of the CarMax operations. The Inter-Group Interest is not considered
outstanding CarMax Group Stock. Therefore, any net earnings or loss attributed
to the Inter-Group Interest is not included in the CarMax Group's per share
calculations. The Circuit City Group held a 74.7 percent interest in the CarMax
Group at February 29, 2000, a 76.6 percent interest at February 28, 1999, and a
77.3 percent interest at February 28, 1998.
Notwithstanding the attribution of the Company's assets and liabilities,
including contingent liabilities, and stockholders' equity between the Circuit
City Group and the CarMax Group for the purposes of preparing their respective
financial statements, holders of Circuit City Group Stock and holders of CarMax
Group Stock are shareholders of the Company and continue to be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its subsidiaries.
The results of operations or financial condition of one Group could affect the
results of operations or financial condition of the other Group. Accordingly,
the Circuit City Group financial statements included herein should be read in
conjunction with the Company's consolidated financial statements and the CarMax
Group financial statements.
On June 15, 1999, the board of directors declared a two-for-one split of the
outstanding Circuit City Group Common Stock in the form of a 100 percent stock
dividend. All share, earnings per share and dividends per share calculations for
the Circuit City Group included in the accompanying Group financial statements
reflect this stock split.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS: Allocated cash equivalents of $581,736,000 at
February 29, 2000, and $201,379,000 at February 28, 1999, consist of highly
liquid debt securities with original maturities of three months or less.
(B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For transfers of financial
assets that qualify as sales, the Company recognizes gains or losses as a
component of the Company's finance operations. For transfers of financial assets
to qualify for sale accounting, control over the assets must be surrendered at
the time of sale. Multiple estimates are used to calculate the gain or loss on
sales of receivables under the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Finance charge income, default rates and payment rates are estimated using
projections developed from the prior 12 months of operating history. These
estimates are adjusted for any industry or portfolio trends that have been
observed. The present value of the resulting cash flow projections is calculated
using a discount rate appropriate for the type of asset and risk. Retained
interests (such as residual interests in a securitization trust, cash reserve
accounts and rights to future interest from serviced assets that exceed
contractually specified servicing fees) are included in net accounts receivable
and are carried at fair value with changes in fair value reflected in earnings.
Loan receivables held for sale are carried at the lower of cost or market,
whereas loan receivables held for investment are carried at cost less an
allowance for losses. At February 29, 2000, and February 28, 1999, cost
approximates fair value.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company enters into financial
instruments on behalf of the Circuit City Group. The carrying value of the
Circuit City Group's financial instruments, excluding interest rate swaps held
for hedging purposes, approximates fair value. Credit risk is the exposure to
the potential nonperformance of another material party to an agreement because
of changes in economic, industry or geographic factors and is mitigated by
dealing only with counterparties that are highly rated by several financial
rating agencies. Accordingly, the Circuit City Group does not anticipate
material loss for nonperformance. All financial instruments are broadly
diversified along industry, product and geographic areas.
(D) MERCHANDISE INVENTORY: Inventory is stated at the lower of cost or market.
Cost is determined by the average cost method.
(E) PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the assets' estimated useful
lives.
Property held under capital lease is stated at the lower of the present value of
the minimum lease payments at the inception of the lease or market value and is
amortized on a straight-line basis over the lease term or the estimated useful
life of the asset, whichever is shorter.
(F) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the Company adopted the
American Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Once the capitalization criteria of the SOP have been met,
external direct costs of materials and services used in the development of
internal-use software and payroll and payroll-related costs for employees
directly involved in the development of internal-use software are capitalized.
Amounts capitalized are amortized on a straight-line basis over a period of
three to five years.
(G) PRE-OPENING EXPENSES: Effective March 1, 1999, the Company adopted SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires costs of
start-up activities, including organization and pre-opening costs, to be
expensed as incurred. Adoption of SOP 98-5 did not have a material impact on the
Group's financial position, annual results of operations or liquidity. Prior to
fiscal 2000, the Company capitalized pre-opening costs for new store locations.
Beginning in the month after the store opened for business, the pre-opening
costs were amortized over the remainder of the fiscal year.
54
(H) INCOME TAXES: Income taxes are accounted for in accordance with SFAS No.
109, "Accounting for Income Taxes." Deferred income taxes reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and the amounts recognized for income tax
purposes, measured by applying currently enacted tax laws. A deferred tax asset
is recognized if it is more likely than not that a benefit will be realized.
(I) DEFERRED REVENUE: The Circuit City Group sells its own extended warranty
contracts and extended warranty contracts on behalf of unrelated third parties.
The contracts extend beyond the normal manufacturer's warranty period, usually
with terms (including the manufacturer's warranty period) between 12 and 60
months. Inasmuch as the Company is the primary obligor on these contracts,
revenue from the sale of the Circuit City Group's own extended warranty
contracts is deferred and amortized on a straight-line basis over the life of
the contracts. Incremental direct costs related to the sale of contracts are
deferred and charged to expense in proportion to the revenue recognized.
Commission revenue for the unrelated third-party extended warranty plans is
recognized at the time of sale, since the third parties are the primary obligors
under these contracts.
(J) INTER-GROUP INTEREST: The Circuit City Group held a 74.7 percent Inter-Group
Interest in the CarMax Group at February 29, 2000, a 76.6 percent Inter-Group
Interest at February 28, 1999, and a 77.3 percent Inter-Group Interest at
February 28, 1998. For purposes of these group financial statements, the Circuit
City Group accounts for the Inter-Group Interest in a manner similar to the
equity method of accounting. Accordingly, the Circuit City Group's Inter-Group
Interest in the Company's equity value that is attributed to the CarMax Group is
reflected as "Inter-Group Interest in the CarMax Group" on the Circuit City
Group balance sheets. Similarly, the net earnings (loss) of the CarMax Group
attributed to the Circuit City Group's Inter-Group Interest are reflected as
"Net earnings (loss) related to Inter-Group Interest in the CarMax Group" on the
Circuit City Group statements of earnings. All amounts corresponding to the
Circuit City Group's Inter-Group Interest in the CarMax Group in these group
financial statements represent the Circuit City Group's proportional interest in
the businesses, assets and liabilities and income and expenses of the CarMax
Group.
The carrying value of the Circuit City Group's Inter-Group Interest in the
CarMax Group has been adjusted proportionally for the net earnings (loss) of the
CarMax Group. In addition, in the event of any dividend or other distribution on
CarMax Group Stock, an amount that is proportionate to the aggregate amount paid
in respect to shares of CarMax Group Stock would be transferred to the Circuit
City Group from the CarMax Group with respect to its Inter-Group Interest and
would reduce the related book value.
(K) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating profits generated by
the finance operation are recorded as a reduction to selling, general and
administrative expenses.
(L) ADVERTISING EXPENSES: All advertising costs are expensed as incurred.
(M) NET EARNINGS PER SHARE: The Company calculates earnings per share based upon
SFAS No. 128, "Earnings per Share." Basic net earnings per share is computed by
dividing net earnings attributed to Circuit City Group Stock, including the
Circuit City Group's retained interest in the CarMax Group, by the weighted
average number of common shares outstanding. Diluted net earnings per share is
computed by dividing net earnings attributed to Circuit City Group Stock, which
includes the Circuit City Group's retained interest in the CarMax Group, by the
weighted average number of common shares outstanding and dilutive potential
common shares.
(N) STOCK-BASED COMPENSATION: The Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and provides the pro forma disclosures of SFAS No.
123, "Accounting for Stock-Based Compensation."
(O) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into interest rate swap
agreements to manage exposure to interest rates and to more closely match
funding costs to the use of funding. Interest rate swaps relating to long-term
debt are classified as held for purposes other than trading and are accounted
for on a settlement basis. To qualify for this accounting treatment, the swap
must synthetically alter the nature of a designated underlying financial
instrument. Under this method, payments or receipts due or owed under the swap
agreement are accrued through each settlement date and recorded as a component
of interest expense. If a swap designated as a synthetic alteration were to be
terminated, any gain or loss on the termination would be deferred and recognized
over the shorter of the original contractual life of the swap or the related
life of the designated long-term debt.
The Company also enters into interest rate swap agreements as part of its asset
securitization programs. Swaps entered into by a seller as part of a sale of
financial assets are considered proceeds at fair value in the determination of
the gain or loss on the sale. If such a swap were to be terminated, the impact
on the fair value of the financial asset created by the sale of the related
receivables would be estimated and included in earnings.
(P) RISKS AND UNCERTAINTIES: The Circuit City Group is a leading national
retailer of brand-name consumer electronics, personal computers, major
appliances and entertainment software. The diversity of the Circuit City Group's
products, customers, suppliers and geographic operations significantly reduces
the risk that a severe impact will occur in the near term as a result of changes
in its customer base, competition, sources of supply or markets. It is unlikely
that any one event would have a severe impact on the Circuit City Group's
operating results.
Because of the Inter-Group Interest, the Circuit City Group also is subject to
risks and uncertainties related to the CarMax Group. The CarMax Group is a used-
and new-car retail business. The diversity of the CarMax Group's customers and
suppliers reduces the risk that a severe impact will occur in the near term as a
result of changes in its customer base or sources of supply. However, because of
the CarMax Group's limited overall size, management cannot assure that
unanticipated events will not have a negative impact on the Circuit City Group.
55
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
the disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
(Q) RECLASSIFICATIONS: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 2000.
3. CORPORATE ACTIVITIES
The Circuit City Group's financial statements reflect the application of the
management and allocation policies adopted by the board of directors to various
corporate activities, as described below:
(A) FINANCIAL ACTIVITIES: Most financial activities are managed by the Company
on a centralized basis. Such financial activities include the investment of
surplus cash and the issuance and repayment of short-term and long-term debt.
Allocated invested surplus cash of the Circuit City Group consists of (i)
Company cash equivalents, if any, that have been allocated in their entirety to
the Circuit City Group and (ii) a portion of the Company's cash equivalents that
are allocated between the Groups. Allocated debt of the Circuit City Group
consists of (i) Company debt, if any, that has been allocated in its entirety to
the Circuit City Group and (ii) a portion of the Company's pooled debt, which is
debt allocated between the Groups. The pooled debt bears interest at a rate
based on the average pooled debt balance. Expenses related to increases in
pooled debt are reflected in the weighted average interest rate of such pooled
debt as a whole.
(B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporate general and
administrative costs and other shared services generally have been allocated to
the Circuit City Group based upon utilization of such services by the Group.
Where determinations based on utilization alone have been impractical, other
methods and criteria were used that management believes are equitable and
provide a reasonable estimate of the costs attributable to the Group.
(C) INCOME TAXES: The Circuit City Group is included in the consolidated federal
income tax return and certain state tax returns filed by the Company.
Accordingly, the provision for federal income taxes and related payments of tax
are determined on a consolidated basis. The financial statement provision and
the related tax payments or refunds are reflected in each Group's financial
statements in accordance with the Company's tax allocation policy for such
Groups. In general, this policy provides that the consolidated tax provision and
related tax payments or refunds will be allocated between the Groups based
principally upon the financial income, taxable income, credits and other amounts
directly related to each Group. Tax benefits that cannot be used by the Group
generating such attributes, but can be utilized on a consolidated basis, are
allocated to the Group that generated such benefits. As a result, the allocated
Group amounts of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the Groups had filed separate tax returns.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29 or 28 is summarized as follows:
(Amounts in thousands) 2000 1999
- -------------------------------------------------------------------------
Land and buildings (20 to 25 years)............ $ 98,537 $ 59,823
Construction in progress....................... 51,378 103,309
Furniture, fixtures and equipment
(3 to 8 years).............................. 690,512 654,156
Leasehold improvements
(10 to 15 years)............................ 566,103 534,015
Capital leases, primarily buildings
(20 years).................................. 12,471 12,471
-------------------------
1,419,001 1,363,774
Less accumulated depreciation and
amortization................................ 665,676 561,947
-------------------------
Property and equipment, net.................... $ 753,325 $ 801,827
=========================
<PAGE>
5. DEBT
Long-term debt of the Company at February 29 or 28 is summarized as follows:
(Amounts in thousands) 2000 1999
- -----------------------------------------------------------------------
Term loans..................................... $405,000 $405,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest ranging
from 5.0% to 7.0%........................... 5,419 6,564
Obligations under capital
leases [NOTE 10]............................ 12,416 12,728
Note payable................................... 3,750 5,000
-----------------------
Total long-term debt........................... 426,585 429,292
Less current installments...................... 177,344 2,707
-----------------------
Long-term debt, excluding
current installments........................ 249,241 426,585
=======================
Portion of long-term debt allocated
to the Circuit City Group................... $213,719 $288,322
=======================
In July 1994, the Company entered into a seven-year, $100,000,000, unsecured
bank term loan. The loan was restructured in August 1996 as a $100,000,000,
six-year unsecured bank term loan. Principal is due in full at maturity with
interest payable periodically at LIBOR plus 0.40 percent. At February 29, 2000,
the interest rate on the term loan was 6.29 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured bank
term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate
on the term loan was 6.23 percent. This term loan is due in May 2000 and has
been classified as a current liability as of February 29,
56
2000. Although the Company has the ability to refinance this loan, it intends to
repay the debt using existing working capital.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured bank
term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate
on the term loan was 6.23 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving credit
agreement with four banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.18 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2002. No amounts were outstanding under the revolving credit
agreement at February 29, 2000, or February 28, 1999.
The Industrial Development Revenue Bonds are collateralized by land, buildings
and equipment with an aggregate carrying value of approximately $8,404,000 at
February 29, 2000, and $10,740,000 at February 28, 1999.
Under certain of the debt agreements, the Company must meet financial covenants
relating to minimum tangible net worth, current ratios and debt-to-capital
ratios. The Company was in compliance with all such covenants at February 29,
2000, and February 28, 1999.
Short-term debt of the Company is funded through committed lines of credit and
informal credit arrangements, as well as the revolving credit agreement. Amounts
outstanding and committed lines of credit available are as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999
- ----------------------------------------------------------------------
Average short-term debt outstanding.......... $ 44,692 $ 54,505
=======================
Maximum short-term debt outstanding.......... $411,791 $463,000
=======================
Aggregate committed lines of credit.......... $370,000 $370,000
=======================
The weighted average interest rate on the outstanding short-term debt was 5.6
percent during fiscal 2000, 5.1 percent during fiscal 1999 and 5.7 percent
during fiscal 1998.
<PAGE>
Interest expense allocated by the Company to the Circuit City Group, excluding
interest capitalized, was $13,844,000 in fiscal 2000, $21,926,000 in fiscal 1999
and $25,072,000 in fiscal 1998. The Circuit City Group capitalizes interest in
connection with the construction of certain facilities and the development or
purchase of software for internal use. In fiscal 2000, interest capitalized
amounted to $2,166,000 ($2,749,000 in fiscal 1999 and $4,759,000 in fiscal
1998).
6. INCOME TAXES
The components of the provision for income taxes on earnings from continuing
operations before income taxes and Inter-Group Interest in the CarMax Group are
as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------
Current:
Federal............................... $141,514 $123,001 $75,554
State................................. 16,901 15,694 5,989
-----------------------------------
158,415 138,695 81,543
-----------------------------------
Deferred:
Federal............................... 40,572 5,773 14,060
State................................. 1,256 178 2,859
-----------------------------------
41,828 5,951 16,919
-----------------------------------
Provision for income taxes............... $200,243 $144,646 $98,462
===================================
The effective income tax rate differed from the Federal statutory income tax
rate as follows:
Years Ended February 29 or 28
2000 1999 1998
- --------------------------------------------------------------------------
Federal statutory income tax rate........... 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit................... 3.0 3.1 3.3
---------------------------
Effective income tax rate................... 38.0% 38.1% 38.3%
===========================
In accordance with SFAS No. 109, the tax effects of temporary differences that
give rise to a significant portion of the deferred tax assets and liabilities at
February 29 or 28 are as follows:
(Amounts in thousands) 2000 1999
- ---------------------------------------------------------------------
Deferred tax assets:
Deferred revenue........................... $ 1,055 $ 8,202
Inventory capitalization................... 7,264 7,198
Accrued expenses........................... 27,974 24,110
Other...................................... 6,112 5,246
---------------------
Total gross deferred tax assets......... 42,405 44,756
---------------------
Deferred tax liabilities:
Depreciation and amortization.............. 44,854 43,600
Deferred revenue........................... 29,656 6,903
Gain on sales of receivables............... 14,069 10,337
Other prepaid expenses..................... 23,023 18,835
Other...................................... 6,651 707
---------------------
Total gross deferred tax liabilities.... 118,253 80,382
---------------------
Net deferred tax liability.................... $ 75,848 $35,626
=====================
57
Based on the Company's historical and current pretax earnings, management
believes the amount of gross deferred tax assets will be realized through future
taxable income; therefore, no valuation allowance is necessary.
7. ASSOCIATE BENEFIT AND STOCK
INCENTIVE PLANS
(A) 401(k) PLAN: Effective August 1, 1999, the Company sponsors a 401(k) Plan
for all employees meeting certain eligibility criteria. Under the Plan, eligible
employees can contribute up to 15 percent of their salaries, and the Company
matches a portion of those associate contributions. The Company's contributions
to this plan for Circuit City Group associates was $2,158,000 in fiscal 2000.
(B) PREFERRED STOCK: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of Circuit City Group Stock.
The rights are exercisable only upon the attainment of, or the commencement of a
tender offer to attain, a specified ownership interest in the Company by a
person or group. When exercisable, each Circuit City Group right would entitle
shareholders to buy one eight-hundredth of a share of Cumulative Participating
Preferred Stock, Series E, $20 par value, at an exercise price of $125 per share
subject to adjustment. A total of 500,000 shares of such preferred stock, which
have preferential dividend and liquidation rights, have been designated. No such
shares are outstanding. In the event that an acquiring person or group acquires
the specified ownership percentage of the Company's common stock (except
pursuant to a cash tender offer for all outstanding shares determined to be fair
by the board of directors) or engages in certain transactions with the Company
after the rights become exercisable, each right will be converted into a right
to purchase, for half the current market price at that time, shares of the
related Group stock valued at two times the exercise price.
The Company also has 1,000,000 shares of undesignated preferred stock authorized
of which no shares are outstanding and an additional 500,000 shares of preferred
stock designated as Series F which are related to similar rights held by CarMax
Group shareholders.
(C) VOTING RIGHTS: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters on which
common shareholders generally are entitled to vote other than a matter on which
the common stock or either series thereof or any series of preferred stock would
be entitled to vote as a separate voting group. On all matters on which both
series of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Group Stock shall have one vote and (ii) each
outstanding share of CarMax Group Stock shall have a number of votes based on
the weighted average ratio of the market value of a share of CarMax Group Stock
to a share of Circuit City Group Stock. If shares of only one series of common
stock are outstanding, each share of that series shall be entitled to one vote.
If either series of common stock is entitled to vote as a separate voting group
with respect to any matter, each share of that series shall, for purposes of
such vote, be entitled to one vote on such matter.
(D) RESTRICTED STOCK: The Company has issued restricted stock under the
provisions of the 1994 Stock Incentive Plan whereby management and key employees
are granted restricted shares of Circuit City Group Stock. Shares are awarded in
the name of the employee, who has all the rights of a shareholder, subject to
certain restrictions or forfeitures. Restrictions on the awards generally expire
three to seven years from the date of grant. Total restricted stock awards of
345,644 shares of Circuit City Group Stock were granted to eligible employees in
fiscal 2000. The market value at the date of grant of these shares has been
recorded as unearned compensation and is a component of group equity. Unearned
compensation is expensed over the restriction periods. In fiscal 2000, a total
of $11,648,700 was charged to operations ($8,741,100 in fiscal 1999 and
$4,995,400 in fiscal 1998). As of February 29, 2000, 1,559,966 restricted shares
of Circuit City Group Stock were outstanding.
(E) EMPLOYEE STOCK PURCHASE PLAN: The Company has Employee Stock Purchase Plans
for all employees meeting certain eligibility criteria. Under the Circuit City
Group Plan, eligible employees may purchase shares of Circuit City Group Stock,
subject to certain limitations. For each $1.00 contributed by employees under
the Plan, the Company matches $0.15. Purchases are limited to 10 percent of an
employee's eligible compensation, up to a maximum of $7,500 per year. At
February 29, 2000, a total of 864,046 shares remained available under the
Circuit City Group Plan. During fiscal 2000, 501,984 shares were issued to or
purchased on the open market for employees (858,710 shares in fiscal 1999 and
901,396 in fiscal 1998). The average price per share purchased under the Plan
was $41.70 in fiscal 2000, $21.69 in fiscal 1999 and $18.39 in fiscal 1998. The
Company match or purchase price discount charged to Circuit City Group
operations totaled $2,682,300 in fiscal 2000, $2,716,400 in fiscal 1999 and
$2,509,500 in fiscal 1998.
(F) STOCK INCENTIVE PLANS: Under the Company's stock incentive plans, incentive
and nonqualified stock options may be granted to management, key employees and
outside directors to purchase shares of Circuit City Group Stock. The exercise
price for incentive stock options for employees and nonqualified options for
outside directors is equal to, or greater than, the market value at the date of
grant; for nonqualified options granted under the 1988 Plan for employees, it is
at least 85 percent of the market value at the date of grant (100 percent under
the 1994 Plan). Options generally are exercisable over a period of from one to
10 years from the date of grant.
A summary of the status of the Circuit City Group's stock options and changes
during the years ended February 29, 2000, and February 28, 1999 and 1998, are
shown in Table 1. Table 2 summarizes information about stock options outstanding
as of February 29, 2000.
58
<TABLE>
<S> <C>
TABLE 1 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year..... 8,894 $18.25 9,988 $16.00 9,656 $14.88
Granted.............................. 1,564 40.75 1,080 21.17 1,452 17.61
Exercised............................ (2,864) 12.65 (2,008) 8.77 (966) 7.50
Cancelled............................ (214) 22.06 (166) 16.80 (154) 14.71
------ ------ -----
Outstanding at end of year........... 7,380 $25.07 8,894 $18.25 9,988 $16.00
====== ====== =====
Options exercisable at end of year... 1,258 $13.89 2,966 $12.02 3,508 $ 9.84
====== ====== =====
TABLE 2 Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
$ 9.09 to 14.75............................ 1,723 3.9 $13.51 883 $12.33
15.18 to 18.00............................ 1,176 4.0 17.31 288 16.74
18.43 to 25.28............................ 958 4.7 21.12 87 20.43
29.50..................................... 2,000 2.1 29.50 - -
34.63 to 47.53............................ 1,523 6.0 40.81 - -
----- -----
Total....................................... 7,380 4.0 $25.07 1,258 $13.89
===== =====
</TABLE>
The Circuit City Group applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the Circuit City
Group's net earnings and net earnings per share would have been reduced to the
pro forma amounts indicated in the following table. In accordance with the
transition provisions of SFAS No. 123, the pro forma amounts reflect options
with grant dates subsequent to March 1, 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net earnings amounts presented because compensation
cost is reflected over the options' vesting periods and compensation cost of
options granted prior to March 1, 1995, is not considered. The pro forma effect
on fiscal year 2000 may not be representative of the pro forma effects on net
earnings for future years.
(Amounts in thousands Years Ended February 29 or 28
except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------
Earnings from continuing operations:
As reported............................ $327,574 $216,927 $132,710
Pro forma.............................. 319,337 211,025 128,035
Net earnings:
As reported............................ $197,334 $148,381 $112,074
Pro forma.............................. 189,097 142,479 107,399
Earnings per share from continuing
operations:
Basic--as reported..................... $ 1.63 $ 1.09 $ 0.68
Basic--pro forma....................... 1.59 1.06 0.65
Diluted--as reported................... $ 1.60 $ 1.08 $ 0.67
Diluted--pro forma..................... 1.56 1.05 0.65
Net earnings per share:
Basic--as reported..................... $ 0.98 $ 0.75 $ 0.57
Basic--pro forma....................... 0.94 0.72 0.55
Diluted--as reported................... $ 0.96 $ 0.74 $ 0.57
Diluted--pro forma..................... 0.93 0.71 0.54
59
For the purpose of computing the pro forma amounts indicated, the fair value of
each option on the date of grant is estimated using the Black-Scholes
option-pricing model. The weighted average assumptions used in the model are as
follows:
2000 1999 1998
- -----------------------------------------------------------------
Expected dividend yield............... 0.2% 0.4% 0.4%
Expected stock volatility............. 38% 33% 33%
Risk-free interest rates.............. 6% 6% 6%
Expected lives (in years)............. 5 5 4
Using these assumptions in the Black-Scholes model, the weighted average fair
value of options granted for the Circuit City Group is $17 in fiscal 2000, $8 in
fiscal 1999 and $7 in fiscal 1998.
8. EARNINGS PER SHARE
Reconciliations of the numerator and denominator of basic and diluted earnings
per share from continuing operations are presented below.
(Amounts in thousands Years Ended February 29 or 28
except per share data) 2000 1999 1998
- ------------------------------------------------------------------------
Weighted average common shares...... 201,345 198,304 196,054
Dilutive potential common shares:
Options.......................... 2,145 1,700 1,684
Restricted stock................. 831 808 670
----------------------------------
Weighted average common shares
and dilutive potential
common shares.................... 204,321 200,812 198,408
==================================
Earnings from continuing operations
available to common
shareholders..................... $327,574 $216,927 $132,710
==================================
Basic earnings per share from
from continuing operations....... $ 1.63 $ 1.09 $ 0.68
==================================
Diluted earnings per share from
continuing operations............ $ 1.60 $ 1.08 $ 0.67
==================================
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. Options to purchase 2,900 shares of Circuit City
Group Stock ranging from $43.03 to $47.53 per share were outstanding and not
included in the calculation at the end of fiscal 2000; 2,000,000 shares at
$29.50 per share at the end of fiscal 1999; and 3,020,000 shares ranging from
$17.74 to $29.50 per share at the end of fiscal 1998.
9. PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 160,000 shares of
Circuit City Stock at February 29, 2000, and February 28, 1999.
Eligible employees of the Circuit City Group participate in the Company's plan.
Pension costs for these employees have been allocated to the Circuit City Group
based on its proportionate share of the projected benefit obligation. The
following tables set forth the Circuit City Group's share of the Plan's
financial status and amounts recognized in the balance sheets as of February 29
or 28:
(Amounts in thousands) 2000 1999
- -------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year........... $110,001 $ 88,166
Service cost...................................... 13,428 10,479
Interest cost..................................... 7,384 6,135
Actuarial (gain) loss............................. (17,325) 8,511
Benefits paid..................................... (4,151) (3,290)
----------------------
Benefit obligation at end of year................. $109,337 $110,001
----------------------
Change in plan assets:
Fair value of plan assets at beginning of year.... $ 94,125 $ 83,009
Actual return on plan assets...................... 13,568 4,342
Employer contributions............................ 11,498 10,064
Benefits paid..................................... (4,151) (3,290)
----------------------
Fair value of plan assets at end of year.......... $115,040 $ 94,125
----------------------
Reconciliation of funded status:
Funded status..................................... $ 5,703 $(15,876)
Unrecognized actuarial (gain) loss................ (13,326) 8,657
Unrecognized transition asset..................... (398) (598)
Unrecognized prior service benefit................ (421) (552)
----------------------
Net amount recognized............................. $ (8,442) $ (8,369)
======================
<PAGE>
The components of net pension expense are as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------
Service cost................................. $13,428 $10,479 $ 8,365
Interest cost................................ 7,384 6,135 5,221
Expected return on plan assets............... (8,919) (7,675) (5,060)
Amortization of prior service cost........... (199) (104) (104)
Amortization of transitional asset........... (132) (199) (199)
Recognized actuarial loss.................... 10 - -
-------------------------------
Net pension expense.......................... $11,572 $ 8,636 $ 8,223
===============================
Assumptions used in the accounting for the pension plan were:
Years Ended February 29 or 28
2000 1999 1998
- ------------------------------------------------------------------------
Weighted average discount rate............... 8.0% 6.8% 7.0%
Rate of increase in compensation levels...... 6.0% 5.0% 5.0%
Expected rate of return on plan assets....... 9.0% 9.0% 9.0%
========================
60
10. LEASE COMMITMENTS
The Circuit City Group conducts a substantial portion of its business in leased
premises. The Circuit City Group's lease obligations are based upon contractual
minimum rates. For certain locations, amounts in excess of these minimum rates
are payable based upon specified percentages of sales. Rental expense and
sublease income for all operating leases are summarized as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------
Minimum rentals.............................. $288,037 $273,185 $236,962
Rentals based on sales volume................ 1,327 1,247 730
Sublease income.............................. (16,425) (14,857) (12,879)
---------------------------------
Net.......................................... $272,939 $259,575 $224,813
=================================
The Circuit City Group computes rent based on a percentage of sales volumes in
excess of defined amounts in certain store locations. Most of the Circuit City
Group's other leases are fixed-dollar rental commitments, with many containing
rent escalations based on the Consumer Price Index. Most provide that the
Circuit City Group pay taxes, maintenance, insurance and certain other operating
expenses applicable to the premises.
The initial term of most real property leases will expire within the next 22
years; however, most of the leases have options providing for additional lease
terms of five years to 25 years at terms similar to the initial terms.
Future minimum fixed lease obligations, excluding taxes, insurance and other
costs payable directly by the Circuit City Group, as of February 29, 2000, were:
Operating Operating
(Amounts in thousands) Capital Lease Sublease
Fiscal Leases Commitments Income
- -------------------------------------------------------------------------
2001................................... $ 1,681 $ 279,204 $(13,042)
2002................................... 1,725 276,428 (11,791)
2003................................... 1,726 272,626 (10,801)
2004................................... 1,768 271,123 (9,238)
2005................................... 1,798 269,236 (8,664)
After 2005............................. 14,666 2,845,835 (44,935)
---------------------------------
Total minimum lease payments........... $23,364 $4,214,452 $(98,471)
======================
Less amounts representing interest..... 10,948
-------
Present value of net minimum capital
lease payments [NOTE 5]............. $12,416
=======
In fiscal 2000, the Company entered into sale-leaseback transactions with
unrelated parties on behalf of the Circuit City Group at an aggregate selling
price of $24,295,000 ($103,750,000 in fiscal 1999 and $120,670,000 in fiscal
1998). Neither the Company nor the Circuit City Group has continuing involvement
under the sale-leaseback transactions.
<PAGE>
11. SUPPLEMENTARY FINANCIAL STATEMENT
INFORMATION
Advertising expense from continuing operations, which is included in selling,
general and administrative expenses in the accompanying statements of earnings,
amounted to $390,144,000 (3.7 percent of net sales and operating revenues) in
fiscal 2000, $376,316,000 (4.0 percent of net sales and operating revenues) in
fiscal 1999 and $369,998,000 (4.6 percent of net sales and operating revenues)
in fiscal 1998.
12. SECURITIZATIONS
On behalf of the Circuit City Group, the Company enters into securitization
transactions, which allow for the sale of credit card receivables to unrelated
entities, to finance the consumer revolving credit receivables generated by its
wholly owned finance operation. The reduction in the aggregate securitized
amount was $63.8 million for fiscal 2000, and proceeds from securitization
transactions were $224.6 million for fiscal 1999 and $331.4 million for fiscal
1998.
Receivables relating to the securitization facilities consist of the following
at February 29 or 28:
(Amounts in thousands) 2000 1999
- -----------------------------------------------------------------
Managed receivables.................... $2,844,377 $2,957,132
Receivables/residual interests held
by the Circuit City Group:
For sale............................ (18,288) (39,948)
For investment...................... (144,806) (161,996)
------------------------
Net receivables sold................... $2,681,283 $2,755,188
========================
Net receivables sold with recourse..... $ 229,000 $ 322,000
========================
Program capacity....................... $3,598,350 $3,127,000
========================
Private-label credit card receivables are financed through securitization
programs employing a master trust structure. As of February 29, 2000, these
securitization programs had a capacity of $1.85 billion. The agreement has no
recourse provisions.
During fiscal 1998, a bank card master trust securitization facility was
established and issued two series from the trust. Provisions under the master
trust agreement provide recourse to the Company for any cash flow deficiencies
on $229 million of the receivables sold. The finance charges from the
transferred receivables are used to fund interest costs, charge-offs, servicing
fees and other related costs. The Company believes that as of February 29, 2000,
no liability existed under these recourse provisions. The bank card
securitization program has a total program capacity of $1.75 billion.
Rights recorded for future finance income from serviced assets that exceed the
contractually specified servicing fees are carried at fair value and amounted to
$37.3 million at February 29, 2000, $27.3 million at February 28, 1999, and
$25.0 million at February 28, 1998, and are included in net accounts receivable.
Changes in these retained interests consisted of originated retained interests
of $52.9 million for fiscal 2000, $37.3 million for fiscal 1999 and $33.3
million for fiscal 1998, less amortization of $42.9 million in fiscal 2000,
$35.0 million in fiscal 1999 and $11.5 million in fiscal 1998. The servicing
fees specified in the credit card securitization agreements adequately
compensate the finance operation for servicing the accounts. Accordingly, no
servicing asset or liability has been recorded. The finance operation's
servicing revenue totaled $213.1 million for fiscal 2000, $210.4 million for
fiscal 1999 and $195.7 million for fiscal 1998.
61
In determining the fair value of retained interests, the Company estimates
future cash flows from finance charge collections, reduced by net defaults,
servicing cost and interest cost. The Company employs a risk-based pricing
strategy that increases the stated annual percentage rate for accounts that have
a higher predicted risk of default. Accounts with a lower risk profile also may
qualify for promotional financing.
The APRs of the private-label card programs, excluding promotional balances,
range from 22 percent to 24 percent, with default rates varying based on
portfolio composition, but generally aggregating from 4 percent to 6 percent.
Principal payment rates vary widely both seasonally and by credit terms but are
in the range of 11 percent to 13 percent.
The bank card APRs are based on the prime rate and generally range from 10
percent to 23 percent, with default rates varying by portfolio composition, but
generally aggregating from 8 percent to 12 percent. Principal payment rates vary
widely both seasonally and by credit terms but are in the range of 7 percent to
9 percent.
Interest cost paid by the master trusts varies between series and, at February
29, 2000, ranged from 6.2 percent to 6.7 percent.
13. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year interest rate swap
agreements with notional amounts totaling $300 million relating to a public
issuance of securities by the master trust. As part of this issuance, $344
million of five-year, fixed-rate certificates were issued to fund consumer
credit receivables. The finance operation is servicer for the accounts, and as
such, receives its monthly cash portfolio yield after deducting interest,
charge-offs and other related costs. The underlying receivables are based on a
floating rate. The swaps were put in place to better match funding costs to the
receivables being securitized. As a result, the master trust pays fixed-rate
interest, and the Company utilizes the swaps to convert the fixed-rate
obligation to a floating-rate, LIBOR-based obligation. These swaps were entered
into as part of the sales of receivables and are included in the gain on sales
of receivables. In November 1999, these swaps terminated as the related
securities in the master trust matured.
Concurrent with the funding of the $175 million term loan facility in May 1995,
the Company entered into five-year interest rate swaps with notional amounts
aggregating $175 million. These swaps effectively converted the variable-rate
obligation into a fixed-rate obligation. The fair value of the swaps is the
amount at which they could be settled. This value is based on estimates obtained
from the counterparties, which are two banks highly rated by several financial
rating agencies. The swaps are held for hedging purposes and are not recorded at
fair value. Recording the swaps at fair value at February 29, 2000, would result
in a loss of $90,000, and at February 28, 1999, would result in a loss of $2.2
million.
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Company does not anticipate significant market risk from swaps, since their
use is to match more closely funding costs to the use of the funding. Credit
risk is the exposure to nonperformance of another party to an agreement. Credit
risk is mitigated by dealing with highly rated counterparties.
14. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the Circuit City Group's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the Circuit City
Group's financial position, liquidity or results of operations.
15. DISCONTINUED OPERATIONS
On June 16, 1999, Digital Video Express announced that it would cease marketing
the Divx home video system and discontinue operations, but existing, registered
customers would be able to view discs during a two-year phase-out period. The
operating results of Divx and the loss on disposal of the Divx business have
been segregated from continuing operations and reported as separate line items,
after tax, on the Circuit City Group statements of earnings for the periods
presented. Discontinued operations also have been segregated on the Circuit City
Group statements of cash flows for the periods presented. The Circuit City Group
balance sheets, however, include Divx.
The loss from the discontinued Divx operations totaled $16.2 million after an
income tax benefit of $9.9 million in fiscal 2000, $68.5 million after an income
tax benefit of $42.0 million in fiscal 1999 and $20.6 million after an income
tax benefit of $12.6 million in fiscal 1998. The loss on the disposal of the
Divx business totaled $114.0 million after an income tax benefit of $69.9
million in fiscal 2000. 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. At February 29, 2000, the provision for operating losses during the
phase-out period increased to $6.2 million from the original estimate of $3.0
million because of higher than expected operating costs during the early stages
of discontinuing the business. This increase was offset by reductions in the
provisions for non-operating costs.
<PAGE>
The net liabilities or assets of the discontinued Divx operations reflected in
the accompanying Group balance sheets at February 29 or 28 are comprised of the
following:
(Amounts in thousands) 2000 1999
- -----------------------------------------------------------------------------
Current assets........................................ $ 612 $ 25,630
Property and equipment, net........................... 513 23,589
Other assets.......................................... - 7,895
Current liabilities................................... (32,650) (23,126)
Other liabilities..................................... (35,291) (3,397)
----------------------
Net (liabilities) assets of discontinued operations... $(66,816) $ 30,591
======================
62
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<S> <C>
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales and operating
revenues........... $2,204,919 $1,924,698 $2,422,667 $2,117,796 $2,495,649 $2,272,258 $3,476,171 $3,029,418 $10,599,406 $9,344,170
--------------------------------------------------------------------------------------------------------------
Gross profit........ $ 540,731 $ 465,012 $ 604,503 $ 526,622 $ 618,182 $ 553,388 $ 858,776 $ 738,950 $ 2,622,192 $2,283,972
--------------------------------------------------------------------------------------------------------------
Earnings from continuing
operations before Inter-Group
Interest in the
CarMax Group....... $ 39,311 $ 23,818 $ 71,234 $ 46,053 $ 54,714 $ 38,340 $ 161,453 $ 126,773 $ 326,712 $ 234,984
--------------------------------------------------------------------------------------------------------------
Earnings from continuing
operations......... $ 41,398 $ 21,339 $ 73,692 $ 43,773 $ 52,335 $ 32,710 $ 160,149 $ 119,105 $ 327,574 $ 216,927
--------------------------------------------------------------------------------------------------------------
Loss from discontinued
operations......... $ (130,240)$ (8,070)$ - $ (11,626)$ - $ (16,765)$ - $ (32,085)$ (130,240)$ (68,546)
--------------------------------------------------------------------------------------------------------------
Net (loss)
earnings........... $ (88,842)$ 13,269 $ 73,692 $ 32,147 $ 52,335 $ 15,945 $ 160,149 $ 87,020 $ 197,334 $ 148,381
--------------------------------------------------------------------------------------------------------------
Net (loss) earnings per share:
Basic:
Continuing
operations....... $ 0.21 $ 0.11 $ 0.37 $ 0.22 $ 0.26 $ 0.16 $ 0.79 $ 0.60 $ 1.63 $ 1.09
--------------------------------------------------------------------------------------------------------------
Discontinued
operations....... $ (0.65)$ (0.04)$ - $ (0.06)$ - $ (0.08)$ - $ (0.16)$ (0.65)$ (0.34)
--------------------------------------------------------------------------------------------------------------
Net (loss)
earnings........ $ (0.44)$ 0.07 $ 0.37 $ 0.16 $ 0.26 $ 0.08 $ 0.79 $ 0.44 $ 0.98 $ 0.75
--------------------------------------------------------------------------------------------------------------
Diluted:
Continuing
operations....... $ 0.20 $ 0.11 $ 0.36 $ 0.22 $ 0.26 $ 0.16 $ 0.78 $ 0.59 $ 1.60 $ 1.08
--------------------------------------------------------------------------------------------------------------
Discontinued
operations....... $ (0.64)$ (0.04)$ - $ (0.06)$ - $ (0.08)$ - $ (0.16)$ (0.64)$ (0.34)
--------------------------------------------------------------------------------------------------------------
Net (loss)
earnings........ $ (0.44)$ 0.07 $ 0.36 $ 0.16 $ 0.26 $ 0.08 $ 0.78 $ 0.44 $ 0.96 $ 0.74
--------------------------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the Circuit City Group (as
defined in Note 1) as of February 29, 2000 and February 28, 1999 and the related
statements of earnings, group equity and cash flows for each of the fiscal years
in the three-year period ended February 29, 2000. These financial statements are
the responsibility of Circuit City Stores, Inc.'s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully discussed in Note 1, the financial statements of the Circuit City
Group should be read in conjunction with the consolidated financial statements
of Circuit City Stores, Inc. and subsidiaries and the financial statements of
the CarMax Group.
The Circuit City Group has accounted for its interest in the CarMax Group in a
manner similar to the equity method of accounting. Generally accepted accounting
principles require that the CarMax Group be consolidated with the Circuit City
Group.
In our opinion, except for the effects of not consolidating the CarMax Group
with the Circuit City Group as discussed in the preceding paragraph, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Circuit City Group as of February 29, 2000 and
February 28, 1999 and the results of its operations and its cash flows for each
of the fiscal years in the three-year period ended February 29, 2000 in
conformity with generally accepted accounting principles.
/s/KPMG LLP
Richmond, Virginia
April 4, 2000
63
CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The common stock of Circuit City Stores, Inc. consists of two common stock
series, which are intended to reflect the performance of the Company's two
businesses. The CarMax Group Common Stock is intended to track the performance
of the CarMax stores and related operations. The Circuit City Group Common Stock
is intended to track the performance of the Circuit City stores and related
operations and the Group's retained interest in the CarMax Group. The effects of
the retained interest held by the Circuit City Group on the CarMax Group's
financial statements are identified by the term "Inter-Group." The Inter-Group
Interest is not considered outstanding CarMax Group stock. Therefore, the net
earnings or losses attributed to the Inter-Group Interest are not included in
the CarMax Group's per share calculations.
The following discussion and analysis relates to the CarMax Group. Reported
earnings and losses attributed to the CarMax Group Common Stock exclude the
earnings and losses attributed to the Circuit City Group's Inter-Group Interest,
which was 74.7 percent at February 29, 2000, 76.6 percent at February 28, 1999,
and 77.3 percent at February 28, 1998. For additional information, refer to the
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" for Circuit City Stores, Inc. and for the Circuit City Group.
RESULTS OF OPERATIONS
Sales Growth
Total sales for the CarMax Group increased 37 percent in fiscal 2000 to $2.01
billion. In fiscal 1999, total sales increased 68 percent to $1.47 billion from
$874.2 million in fiscal 1998. The fiscal 2000 total sales increase reflects a 2
percent increase in comparable store sales and the addition of superstores and
new-car franchises.
PERCENTAGE SALES CHANGE FROM PRIOR YEAR
Fiscal Total Comparable
- -------------------------------------------------------------
2000.................................... 37% 2 %
1999.................................... 68% (2)%
1998.................................... 71% 6 %
1997.................................... 85% 23 %
1996.................................... 258% 12 %
PERCENT VEHICLE SALES BY CATEGORY
2000 1999 1998 1997 1996
- -------------------------------------------------------------
Vehicle Dollars:
Used Vehicles............ 79% 90% 89% 88% 100%
New Vehicles............. 21% 10% 11% 12% 0%
Vehicle Units:
Used Vehicles............ 86% 94% 93% 92% 100%
New Vehicles............. 14% 6% 7% 8% 0%
During the past five years, geographic expansion of the CarMax used-car
superstore concept and the addition of new-car franchises have been the primary
contributors to CarMax's total sales growth. During the second half of fiscal
1998, the Group's used-car sales began to fall below management's expectations.
New-car sales remained strong. These trends continued through fiscal 1999 when
strong comparable store sales growth in new cars was more than offset by the
weak used-car sales trend.
Late in fiscal 1999, CarMax adopted a hub and satellite operating strategy in
existing multi-store markets. In fiscal 1999, five superstores were converted to
satellite locations in the Miami, Houston, Dallas and Chicago markets. Under the
hub and satellite operating process, a satellite store uses the reconditioning,
purchasing and business office operations of a nearby hub store. The display
capacity and consumer offer are identical in both the hub and satellite stores.
A prototypical satellite store operates on a four- to six-acre site with a
12,000- to 14,000-square-foot facility that houses sales offices, a showroom and
four to seven service bays for regular maintenance and warranty service. At the
end of fiscal 1999, CarMax classified two stores as prototype satellite stores.
In fiscal 2000, CarMax limited its geographic expansion to focus on building
sales and profitability in existing markets. During the year, CarMax opened one
used-car superstore in Nashville, Tenn., and one in Duarte, Calif. CarMax
converted one existing store into a satellite operation. In the markets of
Dallas/Fort Worth and Houston, CarMax added two prototypical satellite stores
that opened at year-end. The sales pace at CarMax's used-car superstores,
including those stores with integrated new-car franchises, improved, and the
Group generated comparable store sales growth for the last two quarters and for
the fiscal year.
In fiscal 2000, CarMax also opened five stand-alone new-car stores, relocated
its Laurel, Md., Toyota franchise next to its Laurel superstore and acquired a
Nissan franchise that was added to an existing used-car superstore location in
the Washington, D.C./Baltimore market. While the performance of the used-car
superstores and integrated used- and new-car superstores exceeded expectations,
management was disappointed in the performance of the stand-alone new-car stores
during fiscal 2000. Although operations at these stores have improved
significantly versus their levels prior to acquisition, they remain below
management's expectations. CarMax is actively pursuing opportunities to
integrate or co-locate as many of these franchises with existing used-car
superstores as possible.
Late in fiscal 2000, CarMax's primary competitor exited the used-car superstore
business. Management believes their exit from the Dallas/Fort Worth, Houston,
San Antonio, Tampa and Miami markets, where the two companies competed, will
help eliminate consumer confusion over the two offers and increase customer flow
for CarMax.
STORE MIX*
Retail Units at Year-End
Fiscal 2000 1999 1998 1997 1996
- ---------------------------------------------------------------
"C" and "B" Stores.......... 14 13 8 2 1
"A" Store................... 17 16 10 5 3
Satellite Prototype Store... 4 2 - - -
Stand-Alone New-Car Store... 5 - - - -
---------------------------------
Total....................... 40 31 18 7 4
=================================
* CarMax opened two prototypical satellite stores in late fiscal 1999 and two
prototypical satellite stores in fiscal 2000. In addition to the four satellite
prototype stores in operation, six "A," "B" or "C" stores have been converted to
satellite operations. "C" stores represent the largest format. In fiscal 2000,
CarMax reclassified certain stores on the basis of square footage. Prior year
information has been reclassified to reflect this change.
64
NEW-CAR FRANCHISES*
New-Car Franchises
Fiscal 2000 1999 1998 1997 1996
- -----------------------------------------------------------------
Integrated/Co-Located
New-Car Franchises....... 15 16 2 1 -
Stand-Alone New-Car
Franchises............... 5 - - - -
-----------------------------------
Total New-Car Franchises.... 20 16 2 1 -
===================================
* In fiscal 2000, CarMax reclassified certain franchises as "co-located." Prior
period information has been reclassified to reflect this change.
In most states, CarMax sells extended warranties on behalf of an unrelated third
party who is the primary obligor. Under this third-party warranty program, the
Company has no contractual liability to the customer. In states where
third-party warranty sales are not permitted, CarMax has sold its own extended
warranty for which the Company is the primary obligor. Gross dollar sales from
all extended warranty programs were 3.7 percent of the Group's total sales in
fiscal 2000, 4.3 percent in fiscal 1999 and 3.8 percent in fiscal 1998. The
fiscal 2000 decrease reflects the increase in new-car sales as a percentage of
the overall mix. The fiscal 1999 increase reflects pricing adjustments and a
higher penetration rate achieved by extending warranty coverage to more
vehicles. Total extended warranty revenue, which is reported in the Group's
total sales, was 1.6 percent of total sales in fiscal 2000, 2.0 percent in
fiscal 1999 and 1.5 percent in fiscal 1998. Third-party extended warranty
revenue was 1.6 percent of total sales in fiscal 2000, 1.9 percent in fiscal
1999 and 1.4 percent in fiscal 1998.
IMPACT OF INFLATION. Inflation has not been a significant contributor to the
Group's results. The Group's profitability is based on achieving specific gross
profit dollars per unit rather than on average retail prices. Because the
wholesale market generally adjusts to reflect retail price trends, management
believes that if the stores meet inventory turn objectives then changes in
average retail prices will have only a short-term impact on the Group's gross
margin and thus profitability.
Cost of Sales
The gross profit margin was 11.9 percent in fiscal 2000, 11.7 percent in fiscal
1999 and 8.4 percent in fiscal 1998. At the end of fiscal 1998, CarMax
instituted a profit improvement plan that included better inventory management,
increased retail service sales, pricing adjustments and the addition of consumer
electronic accessory sales. The success of this plan was the significant
contributor to the improved gross profit margins in fiscal 2000 and fiscal 1999.
The significant increase in new-car sales as a percentage of total sales partly
offset the fiscal 2000 and fiscal 1999 improvements since new vehicles carry
lower gross profit margins than used vehicles.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 11.3 percent of sales in
fiscal 2000, 13.9 percent of sales in fiscal 1999 and 14.6 percent of sales in
fiscal 1998. The improved selling, general and administrative expense ratio in
fiscal 2000 reflects expense leverage from the total and comparable store sales
increases and productivity improvements resulting from the slower expansion
rate, implementation of the hub and satellite operating strategy, and operating
expense controls. The improvements were partly offset by $4.8 million in charges
related to lease termination costs on undeveloped property and a write-down of
assets associated with excess property for sale. Excluding these costs, the
fiscal 2000 expense ratio would have been 11.1 percent of sales. The higher
ratios in fiscal 1999 and fiscal 1998 reflect the costs associated with the
expansion of CarMax superstores and the below-plan sales in a number of
multi-store metropolitan markets. The fiscal 1998 ratio also includes an $11.5
million write-down of assets associated with the closure and disposal of the
Group's centralized reconditioning facilities and excess property at some
locations. Excluding the write-down of assets, the selling, general and
administrative expense ratio would have been 13.3 percent of sales in fiscal
1998.
Profits generated by CarMax's finance operation and fees received for arranging
financing through third parties are recorded as a reduction to selling, general
and administrative expenses.
Interest Expense
Interest expense was 0.5 percent of sales in fiscal 2000, 0.4 percent of sales
in fiscal 1999 and 0.2 percent of sales in fiscal 1998. During fiscal 2000 and
fiscal 1999, interest expense was incurred primarily on allocated debt to fund
new store growth, franchise acquisitions and working capital, including
inventory. In fiscal 1998, interest expense was incurred primarily on an
inter-group note used to finance inventory for much of the year.
Earnings (Loss) Before Income Taxes
Earnings before income taxes were $1.8 million in fiscal 2000. The fiscal 2000
pretax earnings exceeded management's expectations. At the end of fiscal 2000,
CarMax recorded a pretax charge of $4.8 million relating to lease termination
costs on undeveloped property and the write-down of assets associated with
excess property for sale. Excluding these charges, earnings before income taxes
were $6.6 million.
For fiscal 1999, CarMax recorded a pretax loss of $38.5 million. This loss
exceeded management's expectations and reflected the underperformance of stores
in some multi-store metropolitan markets. The fiscal 1998 pretax loss, which
includes an $11.5 million write-down of assets, was $56.1 million. Excluding the
write-down, the fiscal 1998 pretax loss was $44.6 million.
Income Taxes
The Group's effective income tax rate was 38.0 percent in fiscal 2000, compared
with 39.0 percent in fiscal 1999 and fiscal 1998. In fiscal 1999 and fiscal
1998, the CarMax Group generated losses and as a result recorded related income
tax benefits.
Net Earnings (Loss)
Net earnings were $1.1 million in fiscal 2000. Excluding the lease termination
costs and the write-down of assets, net earnings would have been $4.1 million
compared with a net loss of $23.5 million in fiscal 1999. In fiscal 1998, the
net loss was $34.2 million. Excluding the impact of the write-down of assets,
the fiscal 1998 net loss was $27.2 million.
65
<PAGE>
Earnings attributed to the CarMax Group common stock were $256,000, or 1 cent
per share, in fiscal 2000, compared with a net loss of $5.5 million, or 24 cents
per share, in fiscal 1999 and a net loss of $7.8 million, or 35 cents per share
in fiscal 1998.
Operations Outlook
In fiscal 2001, management will continue to focus on revenue growth and
operating margin enhancement in existing CarMax markets. Management will
concentrate on the hub and satellite operating strategy for its used-car
superstores and seek new-car franchises to integrate or co-locate with used-car
superstores. Management anticipates that in fiscal 2001 and beyond new stores
will be smaller "A" stores or satellite locations.
Management also remains focused on building consumer awareness of the CarMax
offer. In fiscal 2000, CarMax began a new advertising campaign; enhanced its Web
site, carmax.com; and launched an online buying service that provides firm
prices on new vehicles.
Management believes that continued sales and profit improvement in the Group's
existing markets will result in solid profitability in fiscal 2001 and allow the
Group to resume moderate and profitable geographic growth thereafter.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the "Management's Discussion and Analysis of Results of Operations and
Financial Condition" for Circuit City Stores, Inc. for a review of recent
accounting pronouncements.
FINANCIAL CONDITION
Net cash used in operating activities was $25.1 million in fiscal 2000, $82.0
million in fiscal 1999 and $86.1 million in fiscal 1998. For the three-year
period, cash primarily was used to purchase inventory for store openings and
additional new-car franchises. In fiscal 1999 and fiscal 1998, cash also was
used to fund net losses.
Most financial activities, including the investment of surplus cash and the
issuance and repayment of short-term and long-term debt, are managed by the
Company on a centralized basis. Investment of surplus cash from the February
1997 equity offering has been allocated to the CarMax Group. Allocated debt of
the CarMax Group consists of (1) Company debt, if any, that has been allocated
in its entirety to the CarMax Group and (2) a portion of the Company's debt that
is allocated between the Circuit City Group and the CarMax Group. This pooled
debt bears interest at a rate based on the average pooled debt balance. Expenses
related to increases in pooled debt are reflected in the weighted average
interest rate of the pooled debt.
During fiscal 2000, a term loan totaling $175 million and due in May 2000 was
classified as a current liability. Although the Company has the ability to
refinance this loan, it intends to repay the debt using existing working
capital. Payment of corporate debt will not necessarily reduce CarMax Group
allocated debt.
The CarMax Group's capital expenditures were $45.4 million in fiscal 2000,
$138.3 million in fiscal 1999 and $234.3 million in fiscal 1998. CarMax's
capital expenditures through fiscal 2000 primarily were related to store
expansion. Capital expenditures have been funded through sale-leaseback
transactions, landlord reimbursements, proceeds from the February 1997 CarMax
Group equity offering and allocated short- and long-term debt. In fiscal 2001,
the Group anticipates capital expenditures of approximately $30 million.
Sale-leaseback and landlord reimbursement transactions totaled $25.3 million in
fiscal 2000, $139.3 million in fiscal 1999 and $98.1 million in fiscal 1998.
During fiscal 2000, the CarMax Group acquired the Chrysler-Plymouth-Jeep
franchise rights and the related assets of Prince Chrysler-Plymouth-Jeep Company
and the franchise rights and the related assets of LAX Dodge, Inc. in the Los
Angeles market; the Jeep franchise rights and the related assets of Red Bird
Jeep-Eagle and the franchise rights of Hilltop Chrysler-Plymouth, Inc. in the
Dallas market; the franchise rights and related assets of Fairway
Chrysler-Plymouth-Jeep, Inc. in the Orlando market; and the Nissan franchise
rights and related assets of Town & Country Pontiac Nissan, Inc. in the
Washington D.C./Baltimore market for a total of $34.8 million. These
acquisitions were financed through cash resources. Costs in excess of the
acquired net tangible assets, which are primarily inventory, have been recorded
as goodwill and covenants not to compete.
During fiscal 1999, the CarMax Group acquired the Toyota franchise rights and
the related assets of Laurel Automotive Group, Inc. in the Washington,
D.C./Baltimore market; the franchise rights and the related assets of Mauro Auto
Mall, Inc. in the Chicago market; the franchise rights and the related assets of
Nissan of Greenville, Inc. in the Greenville, S.C., market; and the Mitsubishi
franchise rights and the related assets of Boomershine Automotive, Inc. in the
Atlanta market for a total of $49.6 million. The acquisitions were financed
through cash payments totaling $41.6 million and the issuance of two promissory
notes totaling $8.0 million. Costs in excess of the acquired net tangible
assets, which are primarily inventory, were recorded as goodwill and covenants
not to compete.
In fiscal 1996, Circuit City Stores, Inc. initiated an asset securitization
program on behalf of the CarMax Group. At the end of fiscal 2000, that program
allowed the transfer of up to $500 million in automobile loan receivables. In
October 1999, the Company formed a second securitization facility on behalf of
the CarMax Group that allowed for a $644 million securitization of automobile
loan receivables in the public market. At February 29, 2000, the program had a
capacity of $559.5 million. Securitized receivables on behalf of the CarMax
Group totaled $887.2 million at the end of fiscal 2000. The receivables are sold
to an unaffiliated third party with the servicing rights retained. Management
expects that securitization programs which allow for the transfer of receivables
through both private placement and the public market can be used to fund
increases in receivables resulting from CarMax's continued growth.
In fiscal 1999, CarMax entered into a one-year, renewable inventory financing
arrangement with an asset-backed commercial paper conduit. The arrangement had a
total program capacity of $160 million at February 29, 2000, and was created to
provide funding for the acquisition of vehicle inventory through the use of a
non-affiliated special purpose company. During fiscal 2000 and fiscal 1999, the
CarMax Group financed no inventory under this arrangement. This financing
arrangement was terminated in the first quarter of fiscal 2001.
66
Management believes that the proceeds from sales of property and equipment and
receivables, future increases in the Company's debt allocated to the CarMax
Group, inter-group loans and cash generated by operations will be sufficient to
fund the CarMax Group's capital expenditures and operations.
MARKET RISK
The Company manages the automobile installment loan portfolio of the Group's
finance operation. A portion of this portfolio is securitized and, therefore, is
not presented on the Group's balance sheets. Interest rate exposure relating to
these receivables represents a market risk exposure that the Company has managed
with matched funding and interest rate swaps. Total principal outstanding for
fixed-rate automobile loans at February 29, 2000, and February 28, 1999, was as
follows:
(Amounts in millions) 2000 1999
- -------------------------------------------------------------
Fixed APR................................... $932 $592
================
Financing for these receivables is achieved through asset securitization
programs that, 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 February 29, 2000, and February 28,
1999, were as follows:
(Amounts in millions) 2000 1999
- -------------------------------------------------------------
Fixed-rate securitizations.................. $559 $ -
Floating-rate securitizations
synthetically altered to fixed........... 327 500
Floating-rate securitizations............... 1 39
Held by the Company:
For investment*.......................... 22 38
For sale................................. 23 15
----------------
Total....................................... $932 $592
================
* Held by a bankruptcy remote special purpose company
The Company has analyzed its interest rate exposure and has concluded that it
did not represent a material market risk at February 29, 2000, or February 28,
1999. Because it has a program in place to manage interest rate exposure
relating to its installment loan portfolio, the Company expects to experience
relatively little impact if interest rates fluctuate.
YEAR 2000 CONVERSION
Refer to the "Management's Discussion and Analysis of Results of Operations and
Financial Condition" for Circuit City Stores, Inc. for a complete discussion of
the Year 2000 issue and its impact on the Group's financial statements.
FORWARD-LOOKING STATEMENTS
Company statements that are not historical facts, including statements about
management's expectations for fiscal year 2001 and beyond, are forward-looking
statements and involve various risks and uncertainties. Refer to the "Circuit
City Stores, Inc. Management's Discussion and Analysis of Results of Operations
and Financial Condition" for a review of possible risks and uncertainties.
67
<PAGE>
<TABLE>
<S> <C>
CARMAX GROUP STATEMENTS OF OPERATIONS
Years Ended February 29 or 28
(Amounts in thousands except per share data) 2000 % 1999 % 1998 %
- ---------------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES................................ $2,014,984 100.0 $1,466,298 100.0 $874,206 100.0
Cost of sales................................................... 1,774,619 88.1 1,294,032 88.3 800,699 91.6
----------------------------------------------------------------
GROSS PROFIT.................................................... 240,365 11.9 172,266 11.7 73,507 8.4
----------------------------------------------------------------
Selling, general and administrative expenses [NOTES 3 AND 13]... 228,200 11.3 204,422 13.9 127,822 14.6
Interest expense [NOTES 3 AND 7]................................ 10,362 0.5 6,393 0.4 1,789 0.2
----------------------------------------------------------------
TOTAL EXPENSES.................................................. 238,562 11.8 210,815 14.3 129,611 14.8
----------------------------------------------------------------
Earnings (loss) before income taxes............................. 1,803 0.1 (38,549) (2.6) (56,104) (6.4)
Income tax provision (benefit) [NOTES 3 AND 8].................. 685 0.0 (15,035) (1.0) (21,881) (2.5)
----------------------------------------------------------------
NET EARNINGS (LOSS)............................................. $ 1,118 0.1 $ (23,514) (1.6) $(34,223) (3.9)
================================================================
Net earnings (loss) attributed to [NOTE 1]:
Circuit City Group common stock.............................. $ 862 $ (18,057) $(26,460)
CarMax Group common stock.................................... 256 (5,457) (7,763)
---------- ---------- --------
$ 1,118 $ (23,514) $(34,223)
========== ========== ========
Weighted average common shares [NOTES 2 AND 10]:
Basic........................................................ 23,778 22,604 22,001
========== ========== ========
Diluted...................................................... 25,788 22,604 22,001
========== ========== ========
NET EARNINGS (LOSS) PER SHARE [NOTES 2 AND 10]:
Basic........................................................ $ 0.01 $ (0.24) $ (0.35)
========== ========== ========
Diluted...................................................... $ 0.01 $ (0.24) $ (0.35)
========== ========== ========
See accompanying notes to group financial statements.
68
<PAGE>
CARMAX GROUP BALANCE SHEETS
At February 29 or 28
(Amounts in thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 9,981 $ 17,679
Net accounts receivable [NOTE 5].......................................................... 129,253 97,364
Inventory................................................................................. 283,592 225,460
Prepaid expenses and other current assets................................................. 2,844 620
------------------------------
TOTAL CURRENT ASSETS...................................................................... 425,670 341,123
Property and equipment, net [NOTES 6 AND 7]............................................... 211,856 203,946
Other assets.............................................................................. 37,969 26,129
------------------------------
TOTAL ASSETS.............................................................................. $675,495 $571,198
==============================
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTE 7]........................................... $ 91,609 $ 1,250
Accounts payable.......................................................................... 75,959 59,838
Short-term debt [NOTE 7].................................................................. 1,552 4,605
Accrued expenses and other current liabilities............................................ 19,856 8,556
Deferred income taxes [NOTE 8]............................................................ 7,147 7,674
------------------------------
TOTAL CURRENT LIABILITIES................................................................. 196,123 81,923
Long-term debt, excluding current installments [NOTE 7]................................... 121,257 139,720
Deferred revenue and other liabilities.................................................... 7,249 5,015
Deferred income taxes [NOTE 8]............................................................ 5,877 4,125
------------------------------
TOTAL LIABILITIES......................................................................... 330,506 230,783
GROUP EQUITY.............................................................................. 344,989 340,415
------------------------------
Commitments and contingent liabilities [NOTES 1, 5, 11, 12, 14 AND 15]
TOTAL LIABILITIES AND GROUP EQUITY........................................................ $675,495 $571,198
==============================
See accompanying notes to group financial statements.
69
<PAGE>
CARMAX GROUP STATEMENTS OF CASH FLOWS
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings (loss)........................................................ $ 1,118 $ (23,514) $ (34,223)
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Depreciation and amortization........................................... 15,241 10,003 4,577
Gain on disposition of property and equipment........................... (820) - -
Lease termination costs and write-down of assets [NOTE 13].............. 4,755 - 11,500
Provision for deferred income taxes..................................... 1,225 11,284 (1,867)
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Increase (decrease) in deferred revenue and other liabilities........ 2,234 (251) 835
Increase in net accounts receivable.................................. (31,889) (36,498) (32,516)
Increase in inventory................................................ (39,909) (81,490) (61,710)
(Increase) decrease in prepaid expenses and other current assets..... (2,224) 25,714 2,743
Decrease (increase) in other assets.................................. 1,255 (809) 63
Increase in accounts payable, accrued expenses and
other current liabilities......................................... 23,921 13,570 24,472
---------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES...................................... (25,093) (81,991) (86,126)
---------------------------------------------
INVESTING ACTIVITIES:
Cash used in business acquisitions [NOTE 4]................................ (34,849) (41,562) -
Purchases of property and equipment........................................ (45,395) (138,299) (234,252)
Proceeds from sales of property and equipment.............................. 25,340 139,332 98,098
Decrease in inter-group receivable, net.................................... - - 48,147
---------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES...................................... (54,904) (40,529) (88,007)
---------------------------------------------
FINANCING ACTIVITIES:
(Decrease) increase in allocated short-term debt, net...................... (3,053) 1,220 385
Increase in allocated long-term debt, net.................................. 71,896 108,584 27,386
Equity issuances, net...................................................... 3,456 3,983 2,353
---------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. 72,299 113,787 30,124
---------------------------------------------
Decrease in cash and cash equivalents......................................... (7,698) (8,733) (144,009)
Cash and cash equivalents at beginning of year................................ 17,679 26,412 170,421
---------------------------------------------
Cash and cash equivalents at end of year...................................... $ 9,981 $ 17,679 $ 26,412
=============================================
See accompanying notes to group financial statements.
70
<PAGE>
CARMAX GROUP STATEMENTS OF GROUP EQUITY
(Amounts in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1997........................................................................................... $391,816
--------
Net loss........................................................................................................ (34,223)
Equity issuances, net........................................................................................... 2,353
--------
BALANCE AT FEBRUARY 28, 1998....................................................................................... 359,946
--------
Net loss........................................................................................................ (23,514)
Equity issuances, net........................................................................................... 3,983
--------
BALANCE AT FEBRUARY 28, 1999....................................................................................... 340,415
--------
Net earnings.................................................................................................... 1,118
Equity issuances, net........................................................................................... 3,456
--------
BALANCE AT FEBRUARY 29, 2000....................................................................................... $344,989
========
</TABLE>
See accompanying notes to group financial statements.
71
NOTES TO CARMAX GROUP FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The common stock of Circuit City Stores, Inc. consists of two common stock
series, which are intended to reflect the performance of the Company's two
businesses. The Circuit City Group Common Stock is intended to track the
performance of the Circuit City store-related operations, the Group's retained
interest in the CarMax Group and the Company's investment in Digital Video
Express, which has been discontinued. The effects of this retained interest on
the Circuit City Group's financial statements are identified by the term
"Inter-Group." The CarMax Group Common Stock is intended to track the
performance of the CarMax Group's operations. The Inter-Group Interest is not
considered outstanding CarMax Group Stock. Therefore, any net earnings or loss
attributed to the Inter-Group Interest is not included in the CarMax Group's per
share calculations. The Circuit City Group held a 74.7 percent interest in the
CarMax Group at February 29, 2000, 76.6 percent interest at February 28, 1999,
and a 77.3 percent interest at February 28, 1998.
Notwithstanding the attribution of the Company's assets and liabilities,
including contingent liabilities, and stockholders' equity between the CarMax
Group and the Circuit City Group for the purposes of preparing their respective
financial statements, holders of CarMax Group Stock and holders of Circuit City
Group Stock are shareholders of the Company and continue to be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its subsidiaries.
The results of operations or financial condition of one Group could affect the
results of operations or financial condition of the other Group. Accordingly,
the CarMax Group financial statements included herein should be read in
conjunction with the Company's consolidated financial statements and the Circuit
City Group financial statements.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS: Allocated cash equivalents of $1,770,000 at
February 29, 2000, and $14,750,000 at February 28, 1999, consist of highly
liquid debt securities with original maturities of three months or less.
(B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For transfers of financial
assets that qualify as sales, the Company recognizes gains or losses as a
component of the Company's finance operations. For transfers of financial assets
to qualify for sale accounting, control over the assets must be surrendered at
the time of sale. Multiple estimates are used to calculate the gain or loss on
sales of receivables under the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Finance charge income, default rates and payment rates are estimated using
projections developed from the prior 12 months of operating history. These
estimates are adjusted for any industry or portfolio trends that have been
observed. The present value of the resulting cash flow projections is calculated
using a discount rate appropriate for the type of asset and risk. Retained
interests (such as residual interests in a securitization trust, cash reserve
accounts and rights to future interest from serviced assets that exceed
contractually specified servicing fees) are included in net accounts receivable
and are carried at fair value with changes in fair value reflected in earnings.
Loan receivables held for sale are carried at the lower of cost or market,
whereas loan receivables held for investment are carried at cost less an
allowance for losses. At February 29, 2000, and February 28, 1999, cost
approximates fair value.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company enters into financial
instruments on behalf of the CarMax Group. The carrying value of the CarMax
Group's financial instruments approximates fair value. Credit risk is the
exposure to the potential nonperformance of another material party to an
agreement because of changes in economic, industry or geographic factors and is
mitigated by dealing only with counterparties that are highly rated by several
financial rating agencies. Accordingly, the CarMax Group does not anticipate
material loss for nonperformance. All financial instruments are broadly
diversified along industry, product and geographic areas.
(D) INVENTORY: Inventory is stated at the lower of cost or market. Vehicle
inventory cost is determined by specific identification. Parts and labor used to
recondition vehicles, as well as transportation and other incremental expenses
associated with acquiring vehicles, are included in inventory.
(E) PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less
accumulated depreciation. Depreciation is calculated using the straight-line
method over the assets' estimated useful lives.
(F) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the Company adopted the
American Institute of Certified Public Accountants Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Once the capitalization criteria of the SOP have been met,
external direct costs of materials and services used in the development of
internal-use software and payroll and payroll-related costs for employees
directly involved in the development of internal-use software are capitalized.
Amounts capitalized are amortized on a straight-line basis over a period of
three to five years.
(G) INTANGIBLE ASSETS: Amounts paid for acquired businesses in excess of the
fair value of the net tangible assets acquired are recorded as goodwill, which
is amortized on a straight-line basis over 15 years, and covenants not to
compete, which are amortized on a straight-line basis over the life of the
covenant not to exceed five years. Both goodwill and covenants not to compete
are included in other assets on the accompanying CarMax Group balance sheets.
Based upon the financial performance of the acquired businesses, the carrying
values of intangible assets are periodically reviewed by the Company and
impairments are recognized when the expected future undiscounted operating cash
flows derived from such intangible assets are less than the carrying values.
(H) PRE-OPENING EXPENSES: Effective March 1, 1999, the Company adopted SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires costs of
start-up activities, including organization and pre-opening costs, to be
expensed as incurred. Adoption of SOP 98-5 did not have a material impact on the
Group's financial position, annual results of operation or liquidity. Prior to
fiscal 2000, the Company capitalized pre-opening costs for new store locations.
Beginning in the month after the store opened for business, the pre-opening
costs were amortized over the remainder of the fiscal year.
72
(I) INCOME TAXES: Income taxes are accounted for in accordance with SFAS No.
109, "Accounting for Income Taxes." Deferred income taxes reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and the amounts recognized for income tax
purposes, measured by applying currently enacted tax laws. A deferred tax asset
is recognized if it is more likely than not that a benefit will be realized.
(J) DEFERRED REVENUE: The CarMax Group sells service contracts on behalf of an
unrelated third party and, prior to July 1997, sold its own contracts at one
location where third-party warranty sales were not permitted. Contracts usually
have terms of coverage between 12 and 72 months. Inasmuch as the Company is the
primary obligor on these contracts, revenue from the sale of the CarMax Group's
own service contracts was deferred and amortized over the life of the contracts
consistent with the pattern of repair experience of the industry. Incremental
direct costs related to the sale of contracts were deferred and charged to
expense in proportion to the revenue recognized. Commission revenue for the
unrelated third-party service contracts is recognized at the time of sale, since
the third party is the primary obligor under these contracts.
(K) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating profits generated by
the finance operation are recorded as a reduction to selling, general and
administrative expenses.
(L) ADVERTISING EXPENSES: All advertising costs are expensed as incurred.
(M) NET EARNINGS (LOSS) PER SHARE: The Company calculates earnings per share
based upon SFAS No. 128, "Earnings per Share." Basic net earnings (loss) per
share for CarMax Group Stock is computed by dividing net earnings (loss)
attributed to CarMax Group Stock by the weighted average number of shares of
CarMax Group Stock outstanding. Diluted net earnings per share for CarMax Group
Stock is computed by dividing net earnings attributed to CarMax Group Stock by
the weighted average number of shares of CarMax Group Stock outstanding and
dilutive potential CarMax Group Stock.
(N) STOCK-BASED COMPENSATION: The Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, "Accounting For
Stock Issued to Employees," and provides the pro forma disclosures of SFAS No.
123, "Accounting for Stock-Based Compensation."
(O) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into interest rate swap
agreements to manage exposure to interest rates and to more closely match
funding costs to the use of funding. Interest rate swaps relating to long-term
debt are classified as held for purposes other than trading and are accounted
for on a settlement basis. To qualify for this accounting treatment, the swap
must synthetically alter the nature of a designated underlying financial
instrument. Under this method, payments or receipts due or owed under the swap
agreement are accrued through each settlement date and recorded as a component
of interest expense. If a swap designated as a synthetic alteration were to be
terminated, any gain or loss on the termination would be deferred and recognized
over the shorter of the original contractual life of the swap or the related
life of the designated long-term debt.
The Company also enters into interest rate swap agreements as part of its asset
securitization programs. Swaps entered into by a seller as part of a sale of
financial assets are considered proceeds at fair value in the determination of
the gain or loss on the sale. If such a swap were to be terminated, the impact
on the fair value of the financial asset created by the sale of the related
receivables would be estimated and included in earnings.
(P) RISKS AND UNCERTAINTIES:The CarMax Group is a used- and new-car retail
business. The diversity of the CarMax Group's customers and suppliers reduces
the risk that a severe impact will occur in the near term as a result of changes
in its customer base or sources of supply. However, because of the CarMax
Group's limited overall size, management cannot assure that unanticipated events
will not have a negative impact on the Group.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
the disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
(Q) RECLASSIFICATIONS: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 2000.
3. CORPORATE ACTIVITIES
The CarMax Group's financial statements reflect the application of the
management and allocation policies adopted by the board of directors to various
corporate activities, as described below:
(A) FINANCIAL ACTIVITIES: Most financial activities are managed by the Company
on a centralized basis. Such financial activities include the investment of
surplus cash and the issuance and repayment of short-term and long-term debt.
Allocated invested surplus cash of the CarMax Group consists of (i) Company cash
equivalents, if any, that have been allocated in their entirety to the CarMax
Group and (ii) a portion of the Company's cash equivalents that are allocated
between the Groups. Investment of surplus cash from the February 1997 CarMax
Group equity offering has been allocated to the CarMax Group. Allocated debt of
the CarMax Group consists of (i) Company debt, if any, that has been allocated
in its entirety to the CarMax Group and (ii) a portion of the Company's pooled
debt, which is debt allocated between the Groups. The pooled debt bears interest
at a rate based on the average pooled debt balance. Expenses related to
increases in pooled debt are reflected in the weighted average interest rate of
such pooled debt as a whole.
(B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporate general and
administrative costs and other shared services generally have been allocated to
the CarMax Group based upon utilization of such services by the Group. Where
determinations based on utilization alone have been impractical, other methods
and criteria were used that management believes are equitable and provide a
reasonable estimate of the costs attributable to the Group. Costs allocated to
the CarMax Group totaled approximately $5.6 million for fiscal 2000, $7.5
million for fiscal 1999 and $6.2 million for fiscal 1998.
73
(C) INCOME TAXES: The CarMax Group is included in the consolidated federal
income tax return and in certain state tax returns filed by the Company.
Accordingly, the provision for federal income taxes and related payments of tax
are determined on a consolidated basis. The financial statement provision and
the related tax payments or refunds are reflected in each Group's financial
statements in accordance with the Company's tax allocation policy for such
Groups. In general, this policy provides that the consolidated tax provision and
related tax payments or refunds will be allocated between the Groups based
principally upon the financial income, taxable income, credits and other amounts
directly related to each Group. Tax benefits that cannot be used by the Group
generating such attributes, but can be utilized on a consolidated basis, are
allocated to the Group that generated such benefits. As a result, the allocated
Group amounts of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the Groups had filed separate tax returns.
4. BUSINESS ACQUISITIONS
The CarMax Group acquired the franchise rights and the related assets of six
new-car dealerships for an aggregate cost of $34.8 million in fiscal 2000. The
acquisitions were financed through available cash resources. During fiscal 1999,
CarMax acquired the franchise rights and the related assets for four new-car
dealerships for an aggregate cost of $49.6 million. These acquisitions were
financed through available cash resources and the issuance of two promissory
notes aggregating $8.0 million. Costs in excess of the fair value of the net
tangible assets acquired (primarily inventory) have been recorded as goodwill
and covenants not to compete. These acquisitions were accounted for under the
purchase method and the results of the operations of the acquired franchises
have been included in the accompanying CarMax Group financial statements since
the date of acquisition. Unaudited pro forma information related to these
acquisitions is not included as the impact of these acquisitions on the
accompanying CarMax Group financial statements is not material.
5. ACCOUNTS RECEIVABLE AND
SECURITIZATION TRANSACTIONS
Accounts receivable consist of the following at February 29 or 28:
(Amounts in thousands) 2000 1999
- --------------------------------------------------------------
Trade receivables...................... $ 70,763 $ 23,649
Installment receivables:
Held for sale....................... 23,477 14,690
Held for investment................. 22,088 38,093
Retained interests.................. 18,743 26,145
---------------------
Total accounts receivable.............. 135,071 102,577
Less allowance for doubtful accounts... 5,818 5,213
---------------------
Net accounts receivable................ $129,253 $ 97,364
=====================
In fiscal 1996, the Company entered into a securitization transaction on behalf
of the CarMax Group to finance the installment receivables generated by the
Group's wholly owned finance operation. A restructuring of the facility during
fiscal 1997 resulted in the recourse provisions being eliminated. Proceeds from
the auto loan securitization transaction were $348 million during fiscal 2000,
$271 million during fiscal 1999 and $123 million during fiscal 1998. This auto
loan securitization program has a total program capacity of $500 million.
In October 1999, the Company formed a second securitization facility that
allowed for a $644 million securitization of auto loan receivables in the public
market. The program had a capacity of $559 million as of February 29, 2000, with
no recourse provisions.
Receivables relating to the securitization facilities consist of the following
at February 29 or 28:
(Amounts in thousands) 2000 1999
- -----------------------------------------------------------------
Managed receivables.................... $ 931,745 $589,032
Receivables held by the CarMax Group:
For sale............................ (23,477) (14,690)
For investment*..................... (21,096) (35,342)
------------------------
Net receivables sold................... $ 887,172 $539,000
========================
Program capacity....................... $1,059,500 $575,000
========================
*Held by a bankruptcy remote special purpose company
The finance charges from the transferred receivables are used to fund interest
costs, charge-offs and servicing fees. Rights recorded for future finance income
from serviced assets that exceed the contractually specified servicing fees are
carried at fair value and amounted to $15.5 million at February 29, 2000, $14.7
million at February 28, 1999, and $6.8 million at February 28, 1998, and are
included in net accounts receivable. Changes in these retained interests
consisted of originated retained interests of $17.5 million in fiscal 2000,
$16.6 million in fiscal 1999 and $7.3 million in fiscal 1998, less amortization
of $16.7 million in fiscal 2000, $8.7 million in fiscal 1999 and $3.6 million in
fiscal 1998. The finance operation's servicing revenue totaled $36.9 million for
fiscal 2000, $28.2 million for fiscal 1999 and $11.2 million for fiscal 1998.
The servicing fee specified in the auto loan securitization agreements
adequately compensates the finance operation for servicing the accounts.
Accordingly, no servicing asset or liability has been recorded.
In determining the fair value of retained interests, the Company estimates
future cash flows from finance charge collections, reduced by net defaults,
servicing cost and interest cost. The Company employs a risk-based pricing
strategy that increases the stated annual percentage rate for accounts that have
a higher predicted risk of default. Accounts with a lower risk profile also may
qualify for promotional financing.
The APRs range from 6 percent to 18 percent fixed, with default rates varying
based on credit quality, but generally aggregating 0.75 percent to 1.25 percent.
The weighted average life of the receivables is expected to be in the 18 month
to 20 month range. Interest cost depends on the time at which accounts were
originated, but is in the range of 6.4 percent to 6.6 percent at February 29,
2000.
74
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29 or 28 is summarized as follows:
(Amounts in thousands) 2000 1999
- ------------------------------------------------------------------
Land and buildings (20 to 25 years).... $ 81,885 $ 16,052
Land held for sale..................... 41,850 31,435
Land held for development.............. 17,697 28,781
Construction in progress............... 18,010 76,355
Furniture, fixtures and equipment
(3 to 8 years)...................... 60,225 51,504
Leasehold improvements
(10 to 15 years).................... 19,902 15,658
-----------------------
239,569 219,785
Less accumulated depreciation.......... 27,713 15,839
-----------------------
Property and equipment, net............ $211,856 $203,946
=======================
Land held for development is land owned for future sites that are scheduled to
open more than one year beyond the fiscal year reported.
7. DEBT
Long-term debt of the Company at February 29 or 28 is summarized as follows:
(Amounts in thousands) 2000 1999
- -------------------------------------------------------------
Term loans........................... $405,000 $405,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest
ranging from 5.0% to 7.0%......... 5,419 6,564
Obligations under capital leases..... 12,416 12,728
Note payable......................... 3,750 5,000
-----------------------
Total long-term debt................. 426,585 429,292
Less current installments............ 177,344 2,707
-----------------------
Long-term debt, excluding
current installments.............. $249,241 $426,585
=======================
Portion of long-term debt allocated
to the CarMax Group............... $212,866 $140,970
=======================
In July 1994, the Company entered into a seven-year, $100,000,000, unsecured
bank term loan. The loan was restructured in August 1996 as a $100,000,000,
six-year unsecured bank term loan. Principal is due in full at maturity with
interest payable periodically at LIBOR plus 0.40 percent. At February 29, 2000,
the interest rate on the term loan was 6.29 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured bank
term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate
on the term loan was 6.23 percent. This term loan is due in May 2000 and has
been classified as a current liability as of February 29, 2000. Although the
Company has the ability to refinance this loan, it intends to repay the debt
using existing working capital.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured bank
term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate
on the term loan was 6.23 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving credit
agreement with four banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.18 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2002. No amounts were outstanding under the revolving credit
agreement at February 29, 2000, or February 28, 1999.
Under certain of the debt agreements, the Company must meet financial covenants
relating to minimum tangible net worth, current ratios and debt-to-capital
ratios. The Company was in compliance with all such covenants at February 29,
2000, and February 28, 1999.
In November 1998, the CarMax Group entered into a four-year, unsecured
$5,000,000 promissory note. Principal is due annually with interest payable
periodically at 8.25 percent.
In fiscal 1999, the CarMax Group entered into a one-year, renewable inventory
financing arrangement with an asset-backed commercial paper conduit. The
arrangement had a total program capacity of $160 million at February 29, 2000,
and was created to provide funding for the acquisition of vehicle inventory
through the use of a non-affiliated special-purpose company. During fiscal years
2000 and 1999, no inventory was financed by the CarMax Group under this
arrangement. This financing arrangement was terminated in the first quarter of
fiscal 2001.
Short-term debt of the Company is funded through committed lines of credit and
informal credit arrangements, as well as the revolving credit agreement. Amounts
outstanding and committed lines of credit available are as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999
- -------------------------------------------------------------------
Average short-term debt outstanding.... $ 44,692 $ 54,505
==========================
Maximum short-term debt outstanding.... $411,791 $463,000
==========================
Aggregate committed lines of credit.... $370,000 $370,000
==========================
The weighted average interest rate on the outstanding short-term debt was 5.6
percent during fiscal 2000, 5.1 percent during fiscal 1999 and 5.7 percent
during fiscal 1998.
Interest expense allocated by the Company to the CarMax Group, excluding
interest capitalized, was $10,362,000 in fiscal 2000, $6,393,000 in fiscal 1999
and $1,789,000 in fiscal 1998. The CarMax Group capitalizes interest in
connection with the construction of certain facilities. In fiscal 2000, interest
capitalized amounted to $1,254,000 ($2,674,000 in fiscal 1999 and $4,879,000 in
fiscal 1998).
75
8. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- ----------------------------------------------------------------------
Current:
Federal......................... $(1,395) $(23,773) $(17,101)
State........................... 855 (2,546) (2,913)
---------------------------------
(540) (26,319) (20,014)
---------------------------------
Deferred:
Federal......................... 1,190 10,945 (1,259)
State........................... 35 339 (608)
---------------------------------
1,225 11,284 (1,867)
---------------------------------
Income tax provision (benefit)..... $ 685 $(15,035) $(21,881)
=================================
The effective income tax rate differed from the Federal statutory income tax
rate as follows:
Years Ended February 29 or 28
2000 1999 1998
- -----------------------------------------------------------------------
Federal statutory income tax rate........ 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit................ 3.0 4.0 4.0
-------------------------
Effective income tax rate................ 38.0% 39.0% 39.0%
==========================
<PAGE>
In accordance with SFAS No. 109, the tax effects of temporary differences that
give rise to a significant portion of the deferred tax assets and liabilities at
February 29 or 28 are as follows:
(Amounts in thousands) 2000 1999
- -------------------------------------------------------------------
Deferred tax assets:
Deferred revenue........................... $ 91 $ 130
Accrued expenses........................... 5,510 2,970
Other...................................... 218 184
--------------------
Total gross deferred tax assets......... 5,819 3,284
--------------------
Deferred tax liabilities:
Depreciation............................... 6,181 4,435
Inventory capitalization................... 4,655 4,620
Gain on sales of receivables............... 4,919 4,653
Prepaid expenses........................... 3,088 1,375
--------------------
Total gross deferred tax liabilities.... 18,843 15,083
--------------------
Net deferred tax liability.................... $13,024 $11,799
====================
In assessing the realizability of deferred tax assets, management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies. Based on these considerations, management believes
that it is more likely than not that the gross deferred tax assets at February
29, 2000, and February 28, 1999, will be realized by the CarMax Group;
therefore, no valuation allowance is necessary.
9. ASSOCIATE BENEFIT AND STOCK
INCENTIVE PLANS
(A) 401(k) PLAN: Effective August 1, 1999, the Company sponsors a 401(k) Plan
for all employees meeting certain eligibility criteria. Under the Plan, eligible
employees can contribute up to 15 percent of their salaries, and the Company
matches a portion of those associate contributions. The Company's contribution
to this plan for CarMax Group associates was $317,000 in fiscal 2000.
(B) PREFERRED STOCK: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of CarMax Group Stock. The
rights are exercisable only upon the attainment of, or the commencement of a
tender offer to attain, a specified ownership interest in the Company by a
person or group. When exercisable, each CarMax Group right would entitle
shareholders to buy one four-hundredth of a share of Cumulative Participating
Preferred Stock, Series F, $20 par value, at an exercise price of $100 per share
subject to adjustment. A total of 500,000 shares of such preferred stock, which
have preferential dividend and liquidation rights, have been designated and
reserved. No such shares are outstanding. In the event that an acquiring person
or group acquires the specified ownership percentage of the Company's common
stock (except pursuant to a cash tender offer for all outstanding shares
determined to be fair by the board of directors) or engages in certain
transactions with the Company after the rights become exercisable, each right
will be converted into a right to purchase, for half the current market price at
that time, shares of the related Group stock valued at two times the exercise
price.
The Company also has 1,000,000 shares of undesignated preferred stock authorized
of which no shares are outstanding and an additional 500,000 shares of preferred
stock designated as Series E which are related to similar rights held by Circuit
City Group shareholders.
(C) VOTING RIGHTS: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters on which
common shareholders generally are entitled to vote other than a matter on which
the common stock or either series thereof or any series of preferred stock would
be entitled to vote as a separate voting group. On all matters on which both
series of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Group Stock shall have one vote and (ii) each
outstanding share of CarMax Group Stock shall have a number of votes based on
the weighted average ratio of the market value of a share of CarMax Group Stock
to a share of Circuit City Group Stock. If shares of only one series of common
stock are outstanding, each share of that series shall be entitled to one vote.
If either series of common stock is entitled to vote as a separate voting group
with respect to any matter, each share of that series shall, for purposes of
such vote, be entitled to one vote on such matter.
(D) RESTRICTED STOCK: The Company has issued restricted stock under the
provisions of the 1994 Stock Incentive Plan whereby management and
76
<PAGE>
<TABLE>
<S> <C>
TABLE 1 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year..... 4,380 $1.77 4,822 $ 1.49 4,769 $ 0.51
Granted.............................. 1,132 5.89 205 8.63 413 13.04
Exercised............................ (2,027) 0.22 (543) 0.22 (273) 0.22
Cancelled............................ (161) 6.94 (104) 10.54 (87) 6.36
------ ----- -----
Outstanding at end of year........... 3,324 $3.87 4,380 $ 1.77 4,822 $ 1.49
====== ===== =====
Options exercisable at end of year... 1,203 $2.54 1,566 $ 0.96 762 $ 0.37
====== ===== =====
TABLE 2 Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
$ 0.22...................................... 1,638 2.0 $ 0.22 934 $ 0.22
3.90 to 6.06.............................. 1,098 5.3 5.89 19 4.25
6.25 to 16.31............................. 588 4.0 10.29 250 11.07
----- -----
Total....................................... 3,324 3.4 $ 3.87 1,203 $ 2.54
===== =====
</TABLE>
key employees are granted restricted shares of CarMax Group Stock. Shares are
awarded in the name of the employee, who has all the rights of a shareholder,
subject to certain restrictions or forfeitures. Restrictions on the awards
generally expire five years from the date of grant. In fiscal 2000, restricted
stock awards for 30,000 shares were granted to eligible employees. The market
value at the date of grant of these shares has been recorded as unearned
compensation and is a component of Group equity. Unearned compensation is
expensed over the restriction periods. In fiscal 2000, a total of $447,200 was
charged to CarMax Group operations ($426,600 in fiscal 1999 and $77,700 in
fiscal 1998). As of February 29, 2000, 110,833 restricted shares were
outstanding.
(E) EMPLOYEE STOCK PURCHASE PLAN: The Company has Employee Stock Purchase Plans
for all employees meeting certain eligibility criteria. The CarMax Group Plan
allows eligible employees to purchase shares of CarMax Group Stock, subject to
certain limitations. For each $1.00 contributed by employees under the Plan, the
Company matches $0.15. Purchases are limited to 10 percent of an employee's
eligible compensation, up to a maximum of $7,500 per year. At February 29, 2000,
a total of 1,058,693 shares remained available under the CarMax Group Plan.
During fiscal 2000, 580,000 shares were issued to or purchased on the open
market on behalf of the employees (268,532 in fiscal 1999 and 92,775 in fiscal
1998). The average price per share purchased under the Plan was $3.68 in fiscal
2000, $7.56 in fiscal 1999 and $12.73 in fiscal 1998. The Company match or
purchase price discount charged to CarMax Group operations totaled $221,500 in
fiscal 2000, $268,100 in fiscal 1999 and $160,900 in fiscal 1998.
(F) STOCK INCENTIVE PLANS: Under the Company's stock incentive plans, incentive
and nonqualified stock options may be granted to management, key employees and
outside directors to purchase shares of CarMax Group Stock. The exercise price
for nonqualified options granted under the 1994 plan is equal to, or greater
than, the market value at the date of grant. Options generally are exercisable
over various periods ranging from one to seven years from the date of grant.
A summary of the status of the CarMax Group's stock options and changes during
the years ended February 29, 2000, and February 28, 1999 and 1998, are shown in
Table 1. Table 2 summarizes information about stock options outstanding as of
February 29, 2000.
The CarMax Group applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the CarMax
Group's net earnings (loss) and net earnings (loss) per share would have changed
to the pro forma amounts indicated below. In accordance with the transition
provisions of SFAS No. 123, the pro forma amounts reflect options with grant
dates subsequent to March 1, 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net earnings (loss) amounts presented below because compensation cost
is reflected over the options' vesting periods and compensation cost of options
granted prior to March 1, 1995, is not considered. The pro forma effect on
fiscal year 2000 may not be representative of the pro forma effects on net
earnings (loss) for future years.
<PAGE>
(Amounts in thousands Years Ended February 29 or 28
except per share data) 2000 1999 1998
- -------------------------------------------------------------------
Net earnings (loss):
As reported...................... $ 256 $(5,457) $(7,763)
Pro forma........................ 75 (5,537) (7,824)
Net earnings (loss) per share:
Basic--as reported................ $0.01 $ (0.24) $ (0.35)
Basic--pro forma.................. 0.00 (0.24) (0.36)
Diluted--as reported.............. $0.01 $ (0.24) $ (0.35)
Diluted--pro forma................ 0.00 (0.24) (0.36)
77
For the purpose of computing the pro forma amounts indicated, the fair value of
each option on the date of grant is estimated using the Black-Scholes
option-pricing model. The weighted average assumptions used in the model are as
follows:
2000 1999 1998
- -------------------------------------------------------------
Expected dividend yield................. - - -
Expected stock volatility............... 62% 50% 50%
Risk-free interest rates................ 6% 6% 6%
Expected lives (in years)............... 4 3 3
Using these assumptions in the Black-Scholes model, the weighted average fair
value of options granted for the CarMax Group is $3 in fiscal 2000, $3 in fiscal
1999 and $6 in fiscal 1998.
10. NET EARNINGS (LOSS) PER SHARE
The calculation of net earnings (loss) per share is presented below:
(Amounts in thousands Years Ended February 29 or 28
except per share data) 2000 1999 1998
- -------------------------------------------------------------------------
Weighted average common shares............ 23,778 22,604 22,001
Dilutive potential common shares:
Options................................ 1,814 - -
Restricted stock....................... 196 - -
------------------------------
Weighted average common shares
and dilutive potential
common shares.......................... 25,788 22,604 22,001
==============================
Net earnings (loss) available to common
shareholders........................... $ 256 $(5,457) $(7,763)
==============================
Basic net earnings (loss) per share....... $ 0.01 $ (0.24) $ (0.35)
==============================
Diluted net earnings (loss) per share..... $ 0.01 $ (0.24) $ (0.35)
==============================
Certain options were not included in the computation of diluted net earnings per
share because the options' exercise prices were greater than the average market
price of the common shares. Options to purchase 1,685,400 shares of CarMax Group
Stock ranging from $3.90 to $16.31 per share were outstanding and not included
in the calculation at the end of fiscal 2000. Prior to fiscal 2000, dilutive
potential common shares of CarMax Group Stock were not included in the
calculation of diluted net loss per share because the Group had a net loss for
those periods.
11. PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 160,000 shares of
Circuit City Group Stock at February 29, 2000 and February 28, 1999.
<PAGE>
Eligible employees of the CarMax Group participate in the Company's plan.
Pension costs for these employees have been allocated to the CarMax Group based
on its proportionate share of the projected benefit obligation. The following
tables set forth the CarMax Group's share of the Plan's financial status and
amounts recognized in the balance sheets as of February 29 or 28:
(Amounts in thousands) 2000 1999
- -------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year........... $ 2,565 $ 958
Service cost...................................... 1,250 525
Interest cost..................................... 173 67
Actuarial loss.................................... 455 1,015
-----------------------
Benefit obligation at end of year................. $ 4,443 $ 2,565
----------------------
Change in plan assets:
Fair value of plan assets at beginning of year.... $ 1,553 $ 1,242
Actual return on plan assets...................... 259 69
Employer contributions............................ 625 242
----------------------
Fair value of plan assets at end of year.......... $ 2,437 $ 1,553
----------------------
Reconciliation of funded status:
Funded status..................................... $(2,006) $(1,012)
Unrecognized actuarial loss ...................... 1,340 1,063
Unrecognized transition asset..................... (6) (8)
Unrecognized prior service benefit................ (6) (8)
----------------------
Net amount recognized............................. $ (678) $ 35
======================
The components of net pension expense are as follows:
Years Ended February 29 or 28
(Amounts in thousands) 2000 1999 1998
- ------------------------------------------------------------------
Service cost............................ $1,250 $ 525 $219
Interest cost........................... 173 67 39
Expected return on plan assets.......... (159) (119) (73)
Amortization of prior service cost...... (3) (1) (1)
Amortization of transitional asset...... (2) (3) (3)
Recognized actuarial loss............... 77 - 17
-------------------------
Net pension expense..................... $1,336 $ 469 $198
=========================
Assumptions used in the accounting for the pension plan were:
Years Ended February 29 or 28
2000 1999 1998
- ----------------------------------------------------------------------
Weighted average discount rate............. 8.0% 6.8% 7.0%
Rate of increase in compensation levels.... 6.0% 5.0% 5.0%
Expected rate of return on plan assets..... 9.0% 9.0% 9.0%
=========================
78
12. LEASE COMMITMENTS
The CarMax Group conducts substantially all of its business in leased premises.
The CarMax Group's lease obligations are based upon contractual minimum rates.
Rental expense for all operating leases were $34,561,000 in fiscal 2000,
$23,521,000 in fiscal 1999 and $11,421,000 in fiscal 1998. Most leases provide
that the CarMax Group pay taxes, maintenance, insurance and certain other
operating expenses applicable to the premises.
The initial term of most real property leases will expire within the next 22
years; however, most of the leases have options providing for additional lease
terms of 10 years to 20 years at terms similar to the initial terms.
<PAGE>
Future minimum fixed lease obligations, excluding taxes, insurance and other
costs payable directly by the CarMax Group, as of February 29, 2000, were:
Operating
(Amounts in thousands) Lease
Fiscal Commitments
- --------------------------------------------------------------
2001.............................................. $ 34,331
2002.............................................. 33,088
2003.............................................. 32,877
2004.............................................. 32,257
2005.............................................. 31,919
After 2005........................................ 458,031
--------
Total minimum lease payments...................... $622,503
========
In fiscal 2000, the Company entered into sale-leaseback transactions on behalf
of the CarMax Group with unrelated parties at an aggregate selling price of
$12,500,000 ($131,750,000 in fiscal 1999 and $98,098,000 in fiscal 1998).
Neither the Company nor the CarMax Group has continuing involvement under the
sale-leaseback transactions.
13. SUPPLEMENTARY FINANCIAL STATEMENT
INFORMATION
(A) ADVERTISING EXPENSE: Advertising expense, which is included in selling,
general and administrative expenses in the accompanying statements of
operations, amounted to $48,637,000 (2.4 percent of net sales and operating
revenues) in fiscal 2000, $50,042,000 (3.4 percent of net sales and operating
revenues) in fiscal 1999 and $29,621,000 (3.4 percent of net sales and operating
revenues) in fiscal 1998.
(B) LEASE TERMINATION COSTS AND WRITE-DOWN OF ASSETS: In the fourth quarter of
fiscal 2000, CarMax recorded $4.8 million in charges related to lease
termination costs on undeveloped property and a write-down of assets associated
with excess property for sale at several locations. The loss related to
operating leases was calculated based on expected lease termination costs and
costs associated with subleasing the property.
In fiscal 1998, CarMax recorded a loss of $11.5 million related to the closure
and disposal of its centralized reconditioning facilities and costs associated
with excess property at some locations. The reconditioning facilities and the
excess property were disposed of in fiscal 1999 and 2000. Of the total loss for
fiscal 1998, $9.7 million was for the write-down of assets and $1.8 million was
for a liability for operating leases. The loss related to a write-down of assets
represents the difference between the carrying value and the estimated fair
value of the assets less any disposal costs. The estimated fair value is based
on sales prices for comparable assets or expected future cash flows. The loss
related to operating leases in fiscal 1998 was calculated as the difference
between the present value of the required rental payments on the original lease
obligations and the present value of the future rental receipts that are
expected from subleasing the property.
14. INTEREST RATE SWAPS
The Company enters into amortizing swaps relating to the auto loan receivable
securitization to convert variable-rate financing costs to fixed-rate
obligations to better match funding costs to the receivables being securitized.
In November 1995, the Company entered into a 50-month amortizing swap with a
notional amount of $75 million and, in October 1996, entered into a 40-month
amortizing swap with a notional amount of $64 million. The Company entered into
four 40-month amortizing swaps with notional amounts totaling approximately $162
million in fiscal 1998, four 40-month amortizing swaps with notional amounts
totaling approximately $387 million in fiscal 1999, and four 40-month amortizing
swaps with notional amounts totaling approximately $344 million in fiscal 2000.
These swaps were entered into as part of sales of receivables and are included
in the gain on sales of receivables. The remaining total notional amount of all
swaps related to the auto loan receivable securitization was approximately $327
million at February 29, 2000, $499 million at February 28, 1999, and $224
million at February 28, 1998. The reduction in the total notional amount of the
CarMax interest rate swaps relates to the replacement of floating rate
securitizations with a $644 million fixed-rate securitization in October 1999.
Concurrent with the funding of the $175 million term loan facility in May 1995,
the Company entered into five-year interest rate swaps with notional amounts
aggregating $175 million. These swaps effectively converted the variable-rate
obligation into a fixed-rate obligation. The fair value of the swaps is the
amount at which they could be settled. This value is based on estimates obtained
from the counterparties, which are two banks highly rated by several financial
rating agencies. The swaps are held for hedging purposes and are not recorded at
fair value. Recording the swaps at fair value at February 29, 2000, would result
in a loss of $90,000 and at February 28, 1999, would result in a loss of $2.2
million.
<PAGE>
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Company does not anticipate significant market risk from swaps, since their
use is to match more closely funding costs to the use of the funding. Credit
risk is the exposure to nonperformance of another party to an agreement. Credit
risk is mitigated by dealing with highly rated counterparties.
15. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the CarMax Group's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the CarMax Group's
financial position, liquidity or results of operations.
79
<TABLE>
<S> <C>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues.... $486,063 $346,363 $535,727 $400,031 $488,958 $345,940 $504,236 $373,964 $2,014,984 $1,466,298
---------------------------------------------------------------------------------------------
Gross profit........................ $ 61,996 $ 39,896 $ 63,780 $ 46,202 $ 52,728 $ 39,760 $ 61,861 $ 46,408 $ 240,365 $ 172,266
---------------------------------------------------------------------------------------------
Net earnings (loss)................. $ 2,733 $ (3,215)$ 3,233 $ (2,965)$ (3,136)$ (7,331)$ (1,712)$(10,003)$ 1,118 $ (23,514)
---------------------------------------------------------------------------------------------
Net earnings (loss) attributed
to CarMax Group Stock............ $ 646 $ (736)$ 775 $ (685)$ (757)$ (1,701)$ (408)$ (2,335)$ 256 $ (5,457)
---------------------------------------------------------------------------------------------
Net earnings (loss) per share:
Basic............................ $ 0.03 $ (0.03)$ 0.03 $ (0.03)$ (0.03)$ (0.07)$ (0.02)$ (0.10)$ 0.01 $ (0.24)
---------------------------------------------------------------------------------------------
Diluted.......................... $ 0.03 $ (0.03)$ 0.03 $ (0.03)$ (0.03)$ (0.07)$ (0.02)$ (0.10)$ 0.01 $ (0.24)
---------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the CarMax Group (as defined
in Note 1) as of February 29, 2000 and February 28, 1999 and the related
statements of operations, group equity and cash flows for each of the fiscal
years in the three-year period ended February 29, 2000. These financial
statements are the responsibility of Circuit City Stores, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully discussed in Note 1, the financial statements of the CarMax Group
should be read in conjunction with the consolidated financial statements of
Circuit City Stores, Inc. and subsidiaries and the financial statements of the
Circuit City Group.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the CarMax Group as of February
29, 2000 and February 28, 1999 and the results of its operations and its cash
flows for each of the fiscal years in the three-year period ended February 29,
2000 in conformity with generally accepted accounting principles.
/s/KPMG LLP
Richmond, Virginia
April 4, 2000
80
Exhibit 21
CIRCUIT CITY STORES, INC.
Subsidiaries of the Company
Jurisdiction of
Incorporation
Subsidiary or Organization
CC Distribution Company of Virginia, Inc. Virginia
CarMax, Inc. Virginia
CarMax Auto Superstores, Inc. Virginia
CarMax Auto Superstores West Coast, Inc. Virginia
Circuit City Stores West Coast, Inc. California
DIVX Direct, Inc. Virginia
DIVX Entertainment, Inc. California
DIVX Management, Inc. Virginia
DIVX Services, Inc. Virginia
First North American National Bank National Bank
Located in Georgia
Northern National Insurance Ltd. Bermuda
Patapsco Designs, Inc. Maryland
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Circuit City Stores, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-56697, 33-36650, 33-64757, 333-02971, 333-20303, 333-22759, 333-25451,
333-27933, 333-34539, 333-33212, 333-86439, 333-52935 and 333-81799) on Form S-8
of Circuit City Stores, Inc. of our reports dated April 4, 2000, relating to the
consolidated balance sheets of Circuit City Stores, Inc. and subsidiaries (the
Company) as of February 29, 2000 and February 28, 1999, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the fiscal years in the three-year period ended February 29, 2000, and
the related financial statement schedule, which reports are included, or
incorporated by reference from the annual report to stockholders, in the
February 29, 2000 annual report on Form 10-K of Circuit City Stores, Inc.
We also consent to incorporation by reference in the foregoing registration
statements of our reports dated April 4, 2000, relating to the balance sheets of
the Circuit City Group as of February 29, 2000 and February 28, 1999, and the
related statements of earnings, group equity and cash flows for each of the
fiscal years in the three-year period ended February 29, 2000, and the related
financial statement schedule, which reports are included, or incorporated by
reference from the annual report to stockholders, in the February 29, 2000
annual report on Form 10-K of Circuit City Stores, Inc. Our reports on the
Circuit City Group dated April 4, 2000, include a qualification related to the
effects of not consolidating the CarMax Group with the Circuit City Group as
required by generally accepted accounting principles.
We also consent to incorporation by reference in the foregoing registration
statements of our reports dated April 4, 2000, relating to the balance sheets of
the CarMax Group as of February 29, 2000 and February 28, 1999, and the related
statements of operations, group equity and cash flows for each of the fiscal
years in the three-year period ended February 29, 2000, and the related
financial statement schedule, which reports are included, or incorporated by
reference from the annual report to stockholders, in the February 29, 2000
annual report on Form 10-K of Circuit City Stores, Inc.
s/KPMG LLP
Richmond, Virginia
May 22, 2000
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Richard L. Sharp my true and lawful attorney-in-fact
to sign on my behalf, as an individual and in the capacity stated below, the
Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year
ended February 29, 2000 and any amendment with such attorney-in-fact may deem
appropriate or necessary.
Signature: /s/Michael T. Chalifoux
Print Name: Michael T. Chalifoux
Title: Executive Vice President,
Chief Financial Officer
Corporate Secretary
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 29, 2000 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Richard N. Cooper
Print Name: Richard N. Cooper
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 29, 2000 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Barbara S. Feigin
Print Name: Barbara S. Feigin
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 29, 2000 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/James F. Hardymon
Print Name: James F. Hardymon
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 29, 2000 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Robert S. Jepson Jr.
Print Name: Robert S. Jepson Jr.
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Richard L. Sharp my true and lawful attorney-in-fact
to sign on my behalf, as an individual and in the capacity stated below, the
Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year
ended February 29, 2000 and any amendment with such attorney-in-fact may deem
appropriate or necessary.
Signature: /s/W. Alan McCollough
Print Name: W. Alan McCollough
Title: President and
Chief Operating Officer
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 29, 2000 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Hugh G. Robinson
Print Name: Hugh G. Robinson
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 29, 2000 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Walter J. Salmon
Print Name: Walter J. Salmon
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 29, 2000 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Mikael Salovaara
Print Name: Mikael Salovaara
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 29, 2000 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/John W. Snow
Print Name: John W. Snow
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 29, 2000 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Edward Villanueva
Print Name: Edward Villanueva
Title: Director
Exhibit 24
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 29, 2000 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: /s/Alan Wurtzel
Print Name: Alan Wurtzel
Title: Vice-Chairman
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Column 1 = Consolidated
Column 2 = Circuit City Group
Column 3 = Carmax Group
Changes Caption = Allocation of Inter-Group Interest in CarMax earnings
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> Feb-29-2000 Feb-29-2000 Feb-29-2000
<PERIOD-END> Feb-29-2000 Feb-29-2000 Feb-29-2000
<CASH> 643,933 633,952 9,981
<SECURITIES> 0 0 0
<RECEIVABLES> 593,276 464,023 129,253
<ALLOWANCES> 0 0 0
<INVENTORY> 1,689,209 1,405,617 283,592
<CURRENT-ASSETS> 2,942,615 2,516,945 425,670
<PP&E> 1,658,570 1,419,001 239,569
<DEPRECIATION> 693,389 665,676 27,713
<TOTAL-ASSETS> 3,955,348 3,537,388 675,495
<CURRENT-LIABILITIES> 1,406,159 1,210,036 196,123
<BONDS> 249,241 127,984 121,257
0 0 0
0 0 0
<COMMON> 114,741 101,934 12,807
<OTHER-SE> 2,027,433 1,952,786 332,182
<TOTAL-LIABILITY-AND-EQUITY> 3,955,348 3,537,388 675,495
<SALES> 12,614,390 10,599,406 2,014,984
<TOTAL-REVENUES> 12,614,390 10,599,406 2,014,984
<CGS> 9,751,833 7,977,214 1,774,619
<TOTAL-COSTS> 9,751,833 7,977,214 1,774,619
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 24,206 13,844 10,362
<INCOME-PRETAX> 528,758 526,955 1,803
<INCOME-TAX> 200,928 200,243 685
<INCOME-CONTINUING> 327,830 326,712 1,118
<DISCONTINUED> 130,240 130,240 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 862 (862)
<NET-INCOME> 197,590 197,334 256
<EPS-BASIC> 0.00 0.98 0.01
<EPS-DILUTED> 0.00 0.96 0.01
</TABLE>
