UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5767
CIRCUIT CITY STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-0493875
-------- ----------
(State of Incorporation) (I.R.S. Employer
Identification No.)
9950 MAYLAND DRIVE, RICHMOND, VIRGINIA 23233
(Address of Principal Executive Offices and Zip Code)
(804) 527-4000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 2001
----------------------------------------------------------------------------- --------------------------------
Circuit City Stores, Inc. - Circuit City Group Common Stock, par value $0.50 208,721,907
Circuit City Stores, Inc. - CarMax Group Common Stock, par value $0.50 36,459,103
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 48.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
Consolidated Financial Statements:
----------------------------------
Consolidated Balance Sheets -
November 30, 2001, and February 28, 2001 4
Consolidated Statements of Operations -
Three Months and Nine Months Ended November 30, 2001, and 2000 5
Consolidated Statements of Cash Flows -
Nine Months Ended November 30, 2001, and 2000 6
Notes to Consolidated Financial Statements 7
Circuit City Group Financial Statements:
----------------------------------------
Circuit City Group Balance Sheets -
November 30, 2001, and February 28, 2001 24
Circuit City Group Statements of Operations -
Three Months and Nine Months Ended November 30, 2001, and 2000 25
Circuit City Group Statements of Cash Flows -
Nine Months Ended November 30, 2001, and 2000 26
Notes to Circuit City Group Financial Statements 27
CarMax Group Financial Statements:
----------------------------------
CarMax Group Balance Sheets -
November 30, 2001, and February 28, 2001 37
CarMax Group Statements of Earnings -
Three Months and Nine Months Ended November 30, 2001, and 2000 38
CarMax Group Statements of Cash Flows -
Nine Months Ended November 30, 2001, and 2000 39
Notes to CarMax Group Financial Statements 40
Item 2. Management's Discussion and Analysis:
-------------------------------------
Circuit City Stores, Inc. Management's Discussion and Analysis
of Financial Condition and Results of Operations 16
Circuit City Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 32
CarMax Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 43
Page 2 of 49
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
-----------------------------------------------------------
Circuit City Stores, Inc. Quantitative and Qualitative Disclosures 23
About Market Risk
Circuit City Group Quantitative and Qualitative Disclosures 36
About Market Risk
CarMax Group Quantitative and Qualitative Disclosures 47
About Market Risk
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 48
Page 3 of 49
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
Nov. 30, 2001 Feb. 28, 2001
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 709,914 $ 446,131
Net accounts receivable 700,713 585,761
Inventory 2,500,678 1,757,664
Prepaid expenses and other current assets 66,082 57,623
----------- -----------
Total current assets 3,977,387 2,847,179
Property and equipment, net 861,059 988,947
Other assets 33,227 35,207
----------- -----------
TOTAL ASSETS $ 4,871,673 $ 3,871,333
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 102,469 $ 132,388
Accounts payable 1,765,244 902,560
Short-term debt 2,591 1,200
Accrued expenses and other current liabilities 177,432 162,972
Deferred income taxes 142,045 92,479
----------- -----------
Total current liabilities 2,189,781 1,291,599
Long-term debt, excluding current installments 15,212 116,137
Deferred revenue and other liabilities 88,493 92,165
Deferred income taxes 9,194 14,949
----------- -----------
TOTAL LIABILITIES 2,302,680 1,514,850
----------- -----------
Stockholders' equity:
Circuit City Group common stock, $0.50 par value;
350,000,000 shares authorized; 208,440,080 shares
issued and outstanding as of November 30, 2001 104,220 103,510
CarMax Group common stock, $0.50 par value;
175,000,000 shares authorized; 36,416,191 shares
issued and outstanding as of November 30, 2001 18,208 12,820
Capital in excess of par value 800,649 642,838
Retained earnings 1,645,916 1,597,315
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,568,993 2,356,483
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,871,673 $ 3,871,333
=========== ===========
See accompanying notes to consolidated financial statements.
Page 4 of 49
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Nine Months Ended
November 30, November 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales and operating revenues $ 3,054,232 $ 2,887,269 $ 8,620,621 $ 9,141,901
Cost of sales, buying and warehousing 2,412,055 2,305,141 6,807,021 7,174,720
Appliance exit costs - - - 28,326
----------- ----------- ----------- -----------
Gross profit 642,177 582,128 1,813,600 1,938,855
----------- ----------- ----------- -----------
Selling, general and administrative expenses 597,051 677,853 1,712,510 1,829,357
Appliance exit costs - - - 1,670
Interest expense 474 5,061 5,120 14,865
----------- ----------- ----------- -----------
Total expenses 597,525 682,914 1,717,630 1,845,892
----------- ----------- ----------- -----------
Earnings (loss) before income taxes 44,652 (100,786) 95,970 92,963
Income tax provision (benefit) 16,964 (38,299) 36,465 35,325
----------- ----------- ----------- -----------
Net earnings (loss) $ 27,688 $ (62,487) $ 59,505 $ 57,638
=========== =========== =========== ===========
Net earnings (loss) attributed to:
Circuit City Group common stock $ 21,134 $ (64,407) $ 38,091 $ 48,057
CarMax Group common stock 6,554 1,920 21,414 9,581
----------- ----------- ----------- -----------
$ 27,688 $ (62,487) $ 59,505 $ 57,638
=========== =========== =========== ===========
Weighted average common shares:
Circuit City Group:
Basic 205,571 204,079 205,278 203,569
=========== =========== =========== ===========
Diluted 206,639 204,079 206,350 205,651
=========== =========== =========== ===========
CarMax Group:
Basic 36,292 25,570 30,681 25,546
=========== =========== =========== ===========
Diluted 38,316 27,020 32,661 26,965
=========== =========== =========== ===========
Net earnings (loss) per share attributed to:
Circuit City Group common stock:
Basic $ 0.10 $ (0.32) $ 0.19 $ 0.24
=========== ========== =========== ===========
Diluted $ 0.10 $ (0.32) $ 0.18 $ 0.23
=========== ========== =========== ===========
CarMax Group common stock:
Basic $ 0.18 $ 0.08 $ 0.70 $ 0.38
=========== =========== =========== ===========
Diluted $ 0.17 $ 0.07 $ 0.66 $ 0.36
=========== =========== =========== ===========
Dividends paid per share:
Circuit City Group common stock $ 0.0175 $ 0.0175 $ 0.0525 $ 0.0525
=========== =========== =========== ===========
CarMax Group common stock $ - $ - $ - $ -
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
Page 5 of 49
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Nine Months Ended
November 30,
2001 2000
--------- ---------
Operating Activities:
Net earnings $ 59,505 $ 57,638
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities of
continuing operations:
Depreciation and amortization 129,408 105,648
Loss (gain) on sales of property and equipment 7,255 (2,630)
Deferred income taxes 43,811 182
Changes in operating assets and liabilities, net of
effects from business acquisitions:
(Increase) decrease in net accounts receivable (114,952) 28,464
Increase in inventory (743,014) (963,431)
Increase in prepaid expenses and other
current assets (8,456) (86,293)
(Increase) decrease in other assets (121) 1,286
Increase in accounts payable, accrued expenses and
other current liabilities 888,730 529,290
Increase (decrease) in deferred revenue and other liabilities 11,036 (3,684)
--------- ---------
Net cash provided by (used in) operating activities of
continuing operations 273,202 (333,530)
--------- ---------
Investing Activities:
Cash used in business acquisitions - (1,325)
Purchases of property and equipment (137,290) (244,027)
Proceeds from sales of property and equipment 130,564 86,327
--------- ---------
Net cash used in investing activities of
continuing operations (6,726) (159,025)
--------- ---------
Financing Activities:
Proceeds from issuance of short-term debt, net 1,391 148,381
Principal payments on long-term debt (130,844) (176,126)
Issuances of Circuit City Group common stock, net 20,650 32,497
Issuances of CarMax Group common stock, net 1,055 129
Proceeds from CarMax Group stock offering, net 139,633 -
Dividends paid on Circuit City Group common stock (10,904) (10,750)
--------- ---------
Net cash provided by (used in) financing activities
of continuing operations 20,981 (5,869)
--------- ---------
Cash used in discontinued operations (23,674) (23,641)
--------- ---------
Increase (decrease) in cash and cash equivalents 263,783 (522,065)
Cash and cash equivalents at beginning of year 446,131 643,933
--------- ---------
Cash and cash equivalents at end of period $ 709,914 $ 121,868
========= =========
See accompanying notes to consolidated financial statements.
Page 6 of 49
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
---------------------
The common stock of Circuit City Stores, Inc. (the "Company") consists of
two common stock series that are intended to reflect the performance of the
Company's two businesses. The Circuit City Group stock is intended to
reflect the performance of the Circuit City store-related operations, the
shares of CarMax Group stock reserved for the Circuit City Group or for
issuance to holders of Circuit City Group stock and the Company's
investment in Digital Video Express, which has been discontinued (see Note
8). The CarMax Group stock is intended to reflect the performance of the
CarMax Group's operations. The reserved CarMax Group shares are not
outstanding CarMax Group common stock. Any net earnings attributed to the
reserved CarMax Group shares are not included in the CarMax Group's
earnings per share calculations. As of November 30, 2001, 65,923,200 shares
of CarMax Group stock were reserved for the Circuit City Group or for
issuance to holders of Circuit City Group stock. The reserved CarMax Group
shares represented 64.4 percent of the total outstanding and reserved
shares, excluding shares reserved for CarMax employees' stock incentive
plans, of CarMax Group stock at November 30, 2001, and 74.6 percent at both
February 28, 2001, and November 30, 2000. The Company allocates to the
Circuit City Group the portion of the net earnings of the CarMax Group
attributed to the reserved CarMax Group shares. The terms of each series of
common stock are discussed in detail in the Company's Form 8-A registration
statement on file with the Securities and Exchange Commission.
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 the
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
equity structure of the Company do not affect title to the assets or
responsibility for the liabilities of the Company or any of its
subsidiaries. Neither shares of CarMax Group stock nor shares of Circuit
City Group stock represent a direct equity or legal interest solely in the
assets and liabilities allocated to a particular group. Instead, those
shares represent direct equity and legal interests in the assets and
liabilities of the Company. The results of operations or financial
condition of one group could affect the results of operations or financial
condition of the other group. Net losses of either group and dividends or
distributions on, or repurchases of, Circuit City Group stock or CarMax
Group stock will reduce funds legally available for dividends on, or
repurchases of, both stocks. Accordingly, the Company's consolidated
financial statements included in this report should be read in conjunction
with the financial statements of each group and the Company's SEC filings.
2. Accounting Policies
-------------------
The consolidated financial statements of the Company conform to accounting
principles generally accepted in the United States of America. The interim
period financial statements are unaudited; however, in the opinion of
management, all adjustments, which consist only of normal, recurring
adjustments, necessary for a fair presentation of the interim consolidated
financial statements have been included. The fiscal year-end balance sheet
data was derived from the audited financial statements included in the
Company's fiscal 2001 Annual Report on Form 10-K.
Page 7 of 49
3. Net Earnings (Loss) per Share
-----------------------------
Reconciliations of the numerator and denominator of the basic and diluted
net earnings (loss) per share calculations are presented below.
Three Months Ended Nine Months Ended
(Amounts in thousands November 30, November 30,
except per share data) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
Weighted average shares.................................... 205,571 204,079 205,278 203,569
Dilutive potential shares:
Options................................................. 259 - 399 1,167
Restricted stock........................................ 809 - 673 915
--------------------------- ---------------------------
Weighted average shares and
dilutive potential shares............................... 206,639 204,079 206,350 205,651
=========================== ===========================
Net earnings (loss) available to shareholders.............. $ 21,134 $ (64,407) $ 38,091 $ 48,057
Basic net earnings (loss) per share ....................... $ 0.10 $ (0.32) $ 0.19 $ 0.24
Diluted net earnings (loss) per share ..................... $ 0.10 $ (0.32) $ 0.18 $ 0.23
CarMax Group:
Weighted average shares.................................... 36,292 25,570 30,681 25,546
Dilutive potential shares:
Options................................................. 1,997 1,386 1,944 1,314
Restricted stock........................................ 27 64 36 105
--------------------------- ---------------------------
Weighted average shares and
dilutive potential shares............................... 38,316 27,020 32,661 26,965
=========================== ===========================
Net earnings available to shareholders..................... $ 6,554 $ 1,920 $ 21,414 $ 9,581
Basic net earnings per share............................... $ 0.18 $ 0.08 $ 0.70 $ 0.38
Diluted net earnings per share............................. $ 0.17 $ 0.07 $ 0.66 $ 0.36
In a public offering completed during the second quarter, Circuit City
Stores, Inc. sold 9,516,800 CarMax Group shares that had previously been
reserved for the Circuit City Group. Because both the earnings allocation
and the outstanding CarMax shares were adjusted to reflect the impact of
the sale, net earnings per CarMax Group share were not diluted by the sale.
With the impact of the offering, 64.5 percent of the CarMax Group's third
quarter earnings and 70.4 percent of the CarMax Group's nine-month earnings
were allocated to the Circuit City Group. For the same periods last year,
74.6 percent of the CarMax Group's earnings were allocated to the Circuit
City Group. At the end of the third quarter, the reserved CarMax Group
shares represented 64.4 percent of the total outstanding and reserved
shares, excluding shares reserved for CarMax employees' stock incentive
plans, of CarMax Group stock.
Certain options were outstanding and 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 shares. For the three-month
period ended November 30, 2001, options to purchase 8,385,622 shares of
Circuit City Group stock at prices ranging from $13.86 to $43.03 per share
were outstanding and not included in the calculation. For the three-month
period ended November 30, 2000, options to purchase 9,922,445 shares of
Circuit City Group stock at prices ranging from $9.09 to $47.53 per share
were outstanding and not included in the calculation.
Page 8 of 49
For the three-month period ended November 30, 2001, options to purchase
8,406 shares of CarMax Group stock at prices ranging from $16.31 to $16.36
per share were outstanding and not included in the calculation. For the
three-month period ended November 30, 2000, options to purchase 1,365,025
shares of CarMax Group stock at prices ranging from $6.06 to $16.31 per
share were outstanding and not included in the calculation.
4. 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 Circuit City's finance
operation. For transfers of receivables that qualify as sales, the Company
recognizes gains or losses as a component of Circuit City's finance
operation. In these securitizations, the Company retains servicing rights
and subordinated interests. Private-label credit card receivables are
financed through a master trust securitization program. As of November 30,
2001, the private-label master trust securitization program had a capacity
of $1.13 billion. The private-label master trust agreement has no recourse
provisions. Bankcard receivables are financed through a separate master
trust securitization program. As of November 30, 2001, the bankcard master
trust securitization program had a capacity of $1.70 billion. Provisions
under the bankcard master trust agreement provided recourse to the Company
for cash flow deficiencies on $63 million of receivables sold as of
November 30, 2001. At that date, the Company believes no liability existed
under the recourse provisions.
At November 30, 2001, the total principal amount of credit card receivables
managed was $2.66 billion, including $2.57 billion principal amount of
receivables securitized and $91 million principal amount of receivables
held for sale. The aggregate amount of loans that were 31 days or more
delinquent was $199.4 million at November 30, 2001. The principal amount of
losses net of recoveries totaled $65.6 million for the three months ended
November 30, 2001, and $197.5 million for the nine months ended November
30, 2001.
The Company receives annual servicing compensation approximating 2 percent
of the outstanding principal loan balance of the receivables and retains
the rights to future cash flows arising after the investors in the
securitization trusts have received the return for which they contracted.
The servicing fees specified in the credit card securitization agreements
adequately compensate the finance operation for servicing the securitized
assets. Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from and paid to the
securitization trusts:
Three Months Ended Nine Months Ended
(Amounts in thousands) November 30, 2001 November 30, 2001
-------------------------------------------------------------------------------------------------
Proceeds from new securitizations........................ $ 291,800 $ 670,000
Proceeds from collections reinvested
in previous credit card securitizations................ $ 417,755 $1,234,793
Servicing fees received.................................. $ 12,568 $ 38,475
Other cash flows received on retained interests*......... $ 48,920 $ 142,855
*This amount represents cash flows received from retained interests by the
transferor other than servicing fees, including cash flows from
interest-only strips and cash above the minimum required level in cash
collateral accounts.
When determining the fair value of retained interests, the Company
estimates future cash flows using management's best estimates of key
assumptions such as finance charge income, default rates, payment rates,
forward yield curves and discount rates. 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 may qualify for promotional financing.
Page 9 of 49
Future finance income from serviced assets that exceeds the contractually
specified investor returns and servicing fees is carried at fair value,
amounted to $125.8 million at November 30, 2001, and is included in net
accounts receivable. Gains of $45.1 million on sales were recorded for the
three-month period ended November 30, 2001; gains of $124.4 million on
sales were recorded for the nine-month period ended November 30, 2001.
The fair value of retained interests at November 30, 2001, was $302.0
million, with a weighted-average life ranging from 0.08 years to 2.00
years. The following table shows the key economic assumptions used in
measuring the fair value of retained interests at November 30, 2001, and a
sensitivity analysis showing the hypothetical effect on the fair value of
those interests when there are unfavorable variations from the assumptions
used. Key economic assumptions at November 30, 2001, are not materially
different from assumptions used to measure the fair value of retained
interests at the time of securitization. These sensitivities are
hypothetical and should be used with caution. In this table, the effect of
a variation in a particular assumption on the fair value of the retained
interest is calculated without changing any other assumption; in actual
circumstances, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities.
Impact on Fair Impact on Fair
Assumptions Used Value of 10% Value of 20%
(Dollar amounts in thousands) (Annual) Adverse Change Adverse Change
--------------------------------------------------------------------------------------------
Payment rate...................... 6.8%-10.6% $ 8,301 $16,121
Default rate...................... 9.4%-17.9% $23,342 $46,017
Discount rate..................... 8.0%-15.0% $ 2,078 $ 4,129
(B) Automobile Loan Securitizations:
The Company also has asset securitization programs to finance the consumer
installment credit receivables generated by CarMax's automobile loan
finance operation. Automobile loan receivables are sold to special purpose
subsidiaries, which, in turn, securitize those receivables through both
private placement and the public market. For transfers of receivables that
qualify as sales, the Company recognizes gains or losses as a component of
CarMax's finance operation. In these securitizations, the Company retains
servicing rights and subordinated interests. As of November 30, 2001, the
combined capacity of these programs was $1.90 billion. The automobile loan
securitization programs have no recourse provisions.
At November 30, 2001, the total principal amount of automobile loan
receivables managed was $1.52 billion, including $1.51 billion principal
amount of loans securitized and $10 million principal amount of loans held
for sale or investment. The principal amount of loans that were 31 days or
more delinquent was $21.6 million at November 30, 2001. The principal
amount of losses net of recoveries totaled $4.1 million for the three
months ended November 30, 2001, and $8.7 million for the nine months ended
November 30, 2001.
The Company receives annual servicing fees approximating 1 percent of the
outstanding principal balance of the securitized automobile loans and
retains the rights to future cash flows arising after the investors in the
securitization trusts have received the return for which they contracted.
The servicing fees specified in the automobile loan securitization
agreements adequately compensate the finance operation for servicing the
accounts. Accordingly, no servicing asset or liability has been recorded.
Page 10 of 49
The table below summarizes certain cash flows received from and paid to the
securitization trusts:
Three Months Ended Nine Months Ended
(Amounts in thousands) November 30, 2001 November 30, 2001
-----------------------------------------------------------------------------------------------
Proceeds from new securitizations..................... $ 736,725 $1,112,725
Proceeds from collections reinvested
in previous automobile loan securitizations......... $ 132,331 $ 350,725
Servicing fees received............................... $ 3,680 $ 10,417
Other cash flows received on retained interests*...... $ 17,917 $ 48,489
*This amount represents cash flows received from retained interests by the
transferor other than servicing fees, including cash flows from
interest-only strips and cash above the minimum required level in cash
collateral accounts.
When determining the fair value of retained interests, the Company
estimates future cash flows using management's best estimates of key
assumptions such as finance charge income, default rates, prepayment rates
and discount rates. 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 may qualify
for promotional financing.
Future finance income from serviced assets that exceeds the contractually
specified investor returns and servicing fees is carried at fair value,
amounted to $76.0 million at November 30, 2001, and is included in net
accounts receivable. Gains of $15.6 million on sales were recorded for the
three months ended November 30, 2001; gains of $43.4 million on sales were
recorded for the nine months ended November 30, 2001.
The fair value of retained interests at November 30, 2001, was $104.7
million, with a weighted-average life of 1.63 years. The following table
shows the key economic assumptions used in measuring the fair value of
retained interests at November 30, 2001, and a sensitivity analysis showing
the hypothetical effect on the fair value of those interests when there are
unfavorable variations from the assumptions used. Key economic assumptions
at November 30, 2001, are not materially different from assumptions used to
measure the fair value of retained interests at the time of securitization.
These sensitivities are hypothetical and should be used with caution. In
this table, the effect of a variation in a particular assumption on the
fair value of the retained interest is calculated without changing any
other assumption; in actual circumstances, changes in one factor may result
in changes in another, which might magnify or counteract the sensitivities.
Impact on Fair Impact on Fair
Assumptions Used Value of 10% Value of 20%
(Dollar amounts in thousands) (Annual) Adverse Change Adverse Change
-------------------------------------------------------------------------------------------
Prepayment speed................. 1.5%-1.6% $3,599 $7,303
Default rate..................... 1.0%-1.2% $2,065 $4,133
Discount rate.................... 12.0% $1,422 $2,814
5. Financial Derivatives
---------------------
On behalf of the Circuit City Group, the Company enters into interest rate
cap agreements to meet the requirements of the credit card receivable
securitization transactions. In the third quarter of fiscal 2002, the
Company did not enter into any new interest rate caps. At November 30,
2001, the total notional amount of interest rate caps outstanding was $677
million. Purchased interest rate caps are included in net accounts
receivable and had a fair value of $4.2 million as of November 30, 2001.
Written interest rate caps are included in accounts payable and had a fair
value of $4.2 million as of November 30, 2001.
On behalf of the CarMax Group, the Company, in the third quarter of fiscal
2002, entered into three 40-month amortizing interest rate swaps related to
auto loan receivable securitizations. These swaps had an initial
Page 11 of 49
notional amount of approximately $228 million. The total notional amount of
all swaps related to the automobile loan receivable securitizations was
$227 million at November 30, 2001, and $299 million at February 28, 2001.
The total notional amount of the CarMax interest rate swaps was reduced in
the third quarter following the replacement of floating-rate securities
with a $642 million fixed-rate securitization in November 2001. These swaps
are used to better match funding costs and are recorded at fair value. At
November 30, 2001, these swaps totaled a net asset of $7,000 and are
included in accounts receivable.
The market and credit risks associated with interest rate caps and 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 has entered into offsetting
interest rate cap positions, and therefore, does not anticipate significant
market risk arising from interest rate caps. The Company does not
anticipate significant market risk from swaps because they are used to
match funding costs to the use of the funding. Credit risk is the exposure
to nonperformance of another party to an agreement. The Company mitigates
credit risk by dealing with highly rated bank counterparties.
6. Appliance Exit Costs
--------------------
On July 25, 2000, the Company announced plans to exit the major appliance
category and expand its selection of key consumer electronics and home
office products in all Circuit City Superstores. A product profitability
analysis had indicated that the appliance category produced below-average
profits. This analysis, combined with declining appliance sales, expected
increases in appliance competition and the Company's profit expectations
for the consumer electronics and home office categories led to the decision
to exit the major appliance category. To exit the appliance business, the
Company has closed eight distribution centers and eight service centers.
The majority of these closed properties are leased. While the Company has
entered into contracts to sublease some of these properties, it continues
the process of preparing and marketing the remaining properties to be
subleased. The Company maintains control over Circuit City's in-home major
appliance repair business, although repairs are subcontracted to an
unrelated third party.
Approximately 910 employees were terminated as a result of the exit from
the appliance business. These reductions mainly were in the service,
distribution and merchandising functions. Because severance is being paid
to employees on a biweekly schedule based on years of service, cash
payments lag job eliminations. Certain fixed-assets were written down in
connection with the exit from the appliance business, including appliance
build-to-order kiosks in stores and non-salvageable fixed assets and
leasehold improvements at the closed locations.
In the second quarter of fiscal 2001, the Company recorded appliance exit
costs of $30 million. These expenses are reported separately on the fiscal
2001 statement of earnings. The remaining appliance exit cost accrual is
included in the accrued expenses and other current liabilities line item on
the consolidated balance sheet. The composition of the appliance exit cost
accrual and the remaining liability at November 30, 2001, are presented in
the following table.
Total Payments Liability at
Exit Cost or November 30,
(Amounts in millions) Accrual Write-downs 2001
---------------------------------------------------------------------------------
Lease termination costs............. $17.8 $ 4.4 $13.4
Fixed asset write-downs, net........ 5.0 5.0 -
Employee termination benefits....... 4.4 4.0 0.4
Other............................... 2.8 2.8 -
-------------------------------------------
Appliance exit costs................ $30.0 $ 16.2 $13.8
===========================================
Page 12 of 49
7. Operating Segment Information
-----------------------------
The Company conducts business in two operating segments: Circuit City and
CarMax. These segments are identified and managed by the Company based on
the different products and services offered by each. Circuit City refers to
the retail operations bearing the Circuit City name and to all related
operations such as Circuit City's finance operation. This segment is
engaged in the business of selling brand-name consumer electronics,
information technology and entertainment software. CarMax refers to the
used- and new-car retail locations bearing the CarMax name and to all
related operations, such as CarMax's finance operation. Financial
information for these segments for the three- and nine-month periods ended
November 30, 2001, and 2000, is presented below.
Three Months Ended November 30, 2001
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
--------------------------------------------------------------------------------------------------
Revenues from external customers................ $ 2,279,908 $ 774,324 $ 3,054,232
Interest expense................................ 410 64 474
Depreciation and amortization................... 47,792 3,934 51,726
Earnings before income taxes.................... 14,905 29,747 44,652
Provision for income taxes ..................... 5,660 11,304 16,964
Net earnings.................................... 9,245 18,443 27,688
Total assets.................................... $ 4,209,448 $ 661,882 $ 4,871,330
Three Months Ended November 30, 2000
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
--------------------------------------------------------------------------------------------------
Revenues from external customers................ $ 2,325,576 $ 561,693 $ 2,887,269
Interest expense................................ 2,397 2,664 5,061
Depreciation and amortization................... 33,787 4,904 38,691
(Loss) earnings before income taxes............. (112,992) 12,206 (100,786)
Income tax (benefit) provision.................. (42,937) 4,638 (38,299)
Net (loss) earnings............................. (70,055) 7,568 (62,487)
Total assets.................................... $ 3,839,627 $ 668,993 $ 4,508,620
Nine Months Ended November 30, 2001
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
--------------------------------------------------------------------------------------------------
Revenues from external customers................ $ 6,198,114 $ 2,422,507 $ 8,620,621
Interest expense................................ 419 4,701 5,120
Depreciation and amortization................... 116,169 13,239 129,408
(Loss) earnings before income taxes............. (20,814) 116,784 95,970
Income tax (benefit) provision.................. (7,913) 44,378 36,465
Net (loss) earnings............................. (12,901) 72,406 59,505
Total assets.................................... $ 4,209,448 $ 661,882 $ 4,871,330
Page 13 of 49
Nine Months Ended November 30, 2000
Total Operating
(Amounts in thousands) Circuit City CarMax Segments
--------------------------------------------------------------------------------------------------
Revenues from external customers................ $ 7,280,906 $ 1,860,995 $ 9,141,901
Interest expense................................ 5,715 9,150 14,865
Depreciation and amortization................... 91,598 14,050 105,648
Earnings before income taxes.................... 32,024 60,939 92,963
Provision for income taxes...................... 12,169 23,156 35,325
Net earnings.................................... 19,855 37,783 57,638
Total assets.................................... $ 3,839,627 $ 668,993 $ 4,508,620
Net (loss) earnings and total assets for Circuit City in the above tables
exclude the reserved CarMax shares and the discontinued Divx operations,
which are discussed in Note 8.
8. Discontinued Operations
-----------------------
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations, but that
existing, registered customers would be able to view discs during a
two-year phase-out period. Discontinued operations have been segregated on
the consolidated statements of cash flows. However, Divx is not segregated
on the consolidated balance sheets.
A loss on the disposal of Divx was recorded in fiscal 2000, including a
provision for operating losses to be incurred during the phase-out period.
The loss on disposal also included provisions for commitments under
licensing agreements with motion picture distributors, the write-down of
assets to net realizable value, lease termination costs, employee severance
and benefit costs and other contractual commitments. For the three- and
nine-month periods ended November 30, 2001, and 2000, the discontinued Divx
operations had no impact on the earnings of Circuit City Stores, Inc.
The net liabilities of the discontinued Divx operations, reflected in the
consolidated balance sheets as of November 30, 2001, and February 28, 2001,
are comprised of the following:
(Amounts in thousands) November 30, 2001 February 28, 2001
----------------------------------------------------------------------------------------------
Current assets...................................... $ 71 $ 8
Other assets........................................ 272 324
Current liabilities................................. (17,881) (27,522)
Other liabilities................................... - (14,082)
------------------------------------
Net liabilities of discontinued operations.......... $ (17,538) $ (41,272)
====================================
9. Recent Accounting Pronouncements
--------------------------------
In July 2000, the Financial Accounting Standards Board issued Emerging
Issues Task Force Issue No. 00-14, "Accounting for Certain Sales
Incentives," which is effective for fiscal quarters beginning after
December 15, 2001. EITF No. 00-14 provides that sales incentives, such as
mail-in rebates, offered to customers should be classified as a reduction
of revenue. The Company offers certain mail-in rebates that are currently
recorded in cost of sales, buying and warehousing. However, the Company
expects to reclassify these rebate expenses from cost of sales, buying and
warehousing to net sales and operating revenues to be in compliance with
EITF No. 00-14 in the first quarter of fiscal year 2003. For the quarter
ended November 30, 2001, this reclassification would have increased the
gross profit margin by 12 basis points and the expense ratio by 11 basis
points. For the nine months ended November 30, 2001, the reclassification
would have increased both the gross profit margin and the expense ratio by
10 basis points. The Company does not expect the adoption of EITF No. 00-14
to have a material impact on its financial position, results of operations
or cash flows.
Page 14 of 49
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations," effective for business combinations
initiated after June 30, 2001, and SFAS No. 142, "Goodwill and Other
Intangible Assets," effective for fiscal years beginning after December 15,
2001. Under SFAS No. 141, the pooling of interests method of accounting for
business combinations is eliminated, requiring that all business
combinations initiated after the effective date be accounted for using the
purchase method. Also under SFAS No. 141, identified intangible assets
acquired in a purchase business combination must be separately valued and
recognized on the balance sheet if they meet certain requirements. Under
the provisions of SFAS No. 142, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to
annual impairment tests in accordance with the pronouncements. Other
intangible assets that are identified to have finite useful lives will
continue to be amortized in a manner that reflects the estimated decline in
the economic value of the intangible asset and will be subject to review
when events or circumstances arise which indicate impairment. Application
of the nonamortization provisions of SFAS No. 142 in fiscal 2003 is not
expected to have a material impact on the financial position, results of
operations or cash flows of the Company. During fiscal 2003, the Company
will perform the first of the required impairment tests of goodwill and
indefinite-lived intangible assets, as outlined in the new pronouncements.
Based on preliminary estimates, as well as ongoing periodic assessments of
goodwill, the Company does not expect to recognize any material impairment
losses from these tests.
In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees.
This standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period incurred. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The Company has
not yet determined the impact, if any, of adopting this standard.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes both SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," related to the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses
on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated
with SFAS No. 121. The Company is required to adopt SFAS No. 144 no later
than the fiscal year beginning after December 15, 2001, and plans to adopt
the provisions for the quarter ending May 31, 2002. The Company has not yet
determined the impact, if any, of adopting this standard.
10. Reclassifications
-----------------
Certain previously reported amounts have been reclassified to conform with
the current year presentation.
Page 15 of 49
ITEM 2.
CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
In this discussion, "we," "our" and "Circuit City Stores" refer to Circuit City
Stores, Inc. and our wholly owned subsidiaries, unless the context requires
otherwise. "Circuit City business" and "Circuit City" refer to the retail
operations bearing the Circuit City name and to all related operations such as
product service and Circuit City's finance operation. "Circuit City Group"
refers to the Circuit City business and the reserved CarMax Group shares.
"CarMax business," "CarMax" and "CarMax Group" refer to retail locations bearing
the CarMax name and to all related operations such as CarMax's finance
operation.
Net Sales and Operating Revenues and General Comments
-----------------------------------------------------
Circuit City Stores, Inc. Total Circuit City Stores sales for the third quarter
--------------------------
of fiscal 2002 were $3.05 billion, an increase of 6 percent from $2.89 billion
for the same period last year. For the nine months ended November 30, 2001,
total sales were $8.62 billion, a 6 percent decrease from $9.14 billion for the
same period last year.
Our operations, in common with other retailers in general, are subject to
seasonal influences. Historically, the Circuit City business has realized more
of its net sales and net earnings in the fourth quarter, which includes the
December holiday selling season, than in any other fiscal quarter. The CarMax
business, however, has experienced more of its net sales in the first half of
the fiscal year. The net earnings of any interim quarter are seasonally
disproportionate to net sales since administrative and certain operating
expenses remain relatively constant during the year. Therefore, interim results
should not be relied upon as necessarily indicative of results for the entire
fiscal year.
Circuit City Group. Total Circuit City sales for the third quarter of fiscal
------------------
2002 declined 2 percent to $2.28 billion from $2.33 billion in last year's third
quarter. For the nine months ended November 30, 2001, total Circuit City sales
decreased 15 percent to $6.20 billion from $7.28 billion in the prior year.
Comparable store sales changes for the third quarter and first nine months of
fiscal years 2002 and 2001 were as follows:
================================== ============================ ========================
Comparable Store 3rd Quarter Nine Months
---------------------------- ------------------------
Sales FY02 FY01 FY02 FY01
---------------------------------- -------------- ------------- ------------- ----------
Circuit City (4%) (10%) (17%) (1%)
---------------------------------- -------------- ------------- ------------- ----------
Circuit City, excluding the
appliance category (2%) 3% (8%) 6%
================================== ============== ============= ============= ==========
In this year's third quarter, comparable store sales improved progressively each
month, and for the month of November, the same-store sales comparison turned
positive, increasing 6 percent.
Third quarter Circuit City sales improved across a broad base of product
categories. We generated double-digit or higher comparable store sales growth
not only in better featured and newer technologies such as big-screen
televisions, digital satellite systems, digital cameras and wireless phones, but
also in new and expanded product selections including video game hardware,
software and accessories; DVD software; and personal computer software and
accessories. Although personal computer sales continued to reflect the difficult
industry trends, the year-over-year decline in sales moderated over the course
of the quarter.
Page 16 of 49
The percent of merchandise sales represented by each major product category
during the third quarter and the first nine months of fiscal 2002 and 2001 were
as follows:
=========================== ============================== ===============================
3rd Quarter Nine Months
------------------------------ -------------------------------
Product Mix FY02 FY01 FY02 FY01
--------------------------- -------------- --------------- --------------- ---------------
Video 41% 37% 39% 34%
--------------------------- -------------- --------------- --------------- ---------------
Audio 14 16 16 15
--------------------------- -------------- --------------- --------------- ---------------
Information technology 33 37 35 35
--------------------------- -------------- --------------- --------------- ---------------
Entertainment 12 8 10 6
--------------------------- -------------- --------------- --------------- ---------------
Appliances -- 2 -- 10
--------------------------- -------------- --------------- --------------- ---------------
Total 100% 100% 100% 100%
=========================== ============== =============== =============== ===============
Although Circuit City sales volumes and traffic levels were particularly strong
over the Thanksgiving weekend, November comparable store sales were positive
both before and after that weekend. Pricing over the holiday weekend was
promotional, helping to increase store traffic. We believe the recent sales
improvements reflect a number of factors including not only effective pricing
strategies, but also a more effective marketing program covering a variety of
vehicles including newspaper inserts, television, magazines, direct mail and
creative in-store events, as well as improved customer service.
Circuit City gross dollar sales from all extended warranty programs were 5.2
percent of sales in the third quarter of fiscal 2002 and 5.1 percent of sales in
the third quarter of fiscal 2001. Third-party warranty revenue was 4.0 percent
of sales in this year's third quarter and 3.9 percent in the same period last
year. The total extended warranty revenue that is reported in total sales was
3.9 percent of sales in the third quarter of fiscal 2002, compared with 4.0
percent in last year's third quarter.
The following table provides details on the Circuit City retail units:
======================== =================== =================== ================== ===================
Estimate Feb.
Store Mix Nov. 30, 2001 Nov. 30, 2000 28, 2002 Feb. 28, 2001
------------------------ ------------------- ------------------- ------------------ -------------------
Superstores 603 590 604 594
------------------------ ------------------- ------------------- ------------------ -------------------
Mall-based
Express stores 29 39 20 35
------------------------ ------------------- ------------------- ------------------ -------------------
Total 632 629 624 629
======================== =================== =================== ================== ===================
Circuit City expects to open 10 Superstores and relocate 10 Superstores in the
current fiscal year. In the first quarter of fiscal 2002, we opened one Circuit
City Superstore and relocated one Superstore. In the second quarter of fiscal
2002, we opened four Superstores and relocated two Superstores. In the third
quarter of fiscal 2002, we opened five Superstores and relocated five
Superstores.
During fiscal 2002, the company is testing two remodeling approaches in a total
of 24 stores. The most extensive approach is being conducted in 10 stores in the
Chicago market and two stores in Virginia; a second, less costly version is
being tested in 12 stores in the Washington, D.C., and Baltimore, Md., markets.
Remodeling was completed at 23 of the stores in the second quarter, and
remodeling of the 24th store was completed in early November 2001. The
performance of the remodeled stores were evaluated over the course of the
holidays, and the findings will be used to make decisions on the extent and pace
of future remodeling activities.
Page 17 of 49
CarMax Group. Total CarMax sales for the third quarter of fiscal 2002 increased
------------
38 percent to $774.3 million from $561.7 million in last year's third quarter.
For the nine months ended November 30, 2001, CarMax total sales increased 30
percent to $2.42 billion from $1.86 billion in the prior year. Comparable store
vehicle dollar and unit sales for the third quarter and first nine months of
fiscal years 2002 and 2001 were as follows:
============================== ============================== ================================
Comparable Store 3rd Quarter Nine Months
------------------------------ --------------------------------
Sales FY02 FY01 FY02 FY01
------------------------------ -------------- --------------- --------------- ----------------
Vehicle dollars:
------------------------------ -------------- --------------- --------------- ----------------
Used vehicles 36% 15% 31% 15%
------------------------------ -------------- --------------- --------------- ----------------
New vehicles 51% (4%) 28% 11%
------------------------------ -------------- --------------- --------------- ----------------
Total 38% 11% 30% 15%
------------------------------ -------------- --------------- --------------- ----------------
------------------------------ -------------- --------------- --------------- ----------------
Vehicle units:
------------------------------ -------------- --------------- --------------- ----------------
Used vehicles 29% 11% 24% 11%
------------------------------ -------------- --------------- --------------- ----------------
New vehicles 46% (3%) 24% 11%
------------------------------ -------------- --------------- --------------- ----------------
Total 31% 9% 24% 11%
============================== ============== =============== =============== ================
In the third quarter of fiscal 2002, sales in the CarMax business accelerated
beyond the strong sales trend that began in fiscal 2001. Early in the third
quarter, used-car unit sales were consistent with the 20 percent growth trends
experienced throughout the first two quarters of the year. Beginning in late
September, traffic flow to our used-car superstores increased significantly,
which we believe was driven by cross shopping from new-car financing incentive
programs. We converted this increased traffic flow into significantly
accelerated used-car sales in both October and November. The five-year,
zero-percent financing incentives drove extraordinary new-car sales growth in
October. However, the new-car sales growth rate slowed in November as we sold
through most of our close-out inventory of 2001 models and as most zero-percent
financing incentive terms were limited to three years and available on fewer
models. The sales increase also reflects higher average retails for both used-
and new-car sales. The percent of vehicle sales represented by used cars and new
cars for the third quarter and the first nine months of fiscal 2002 and 2001
were as follows:
================================== ============================== ================================
3rd Quarter Nine Months
------------------------------ --------------------------------
Vehicle Sales Mix FY02 FY01 FY02 FY01
---------------------------------- -------------- --------------- --------------- ----------------
Vehicle dollars:
---------------------------------- -------------- --------------- --------------- ----------------
Used vehicles 80% 81% 81% 80%
---------------------------------- -------------- --------------- --------------- ----------------
New vehicles 20% 19% 19% 20%
---------------------------------- -------------- --------------- --------------- ----------------
Total 100% 100% 100% 100%
---------------------------------- -------------- --------------- --------------- ----------------
---------------------------------- -------------- --------------- --------------- ----------------
Vehicle units:
---------------------------------- -------------- --------------- --------------- ----------------
Used vehicles 86% 87% 86% 86%
---------------------------------- -------------- --------------- --------------- ----------------
New vehicles 14% 13% 14% 14%
---------------------------------- -------------- --------------- --------------- ----------------
Total 100% 100% 100% 100%
================================== ============== =============== =============== ================
Page 18 of 49
Average retail selling prices for CarMax vehicles for the third quarter and
first nine months of fiscal 2002 and 2001 were as follows:
================================== ================================ ==============================
Average Retail 3rd Quarter Nine Months
-------------------------------- ------------------------------
Selling Prices FY02 FY01 FY02 FY01
---------------------------------- --------------- ---------------- --------------- --------------
Used vehicles $15,100 $14,400 $15,200 $14,300
---------------------------------- --------------- ---------------- --------------- --------------
New vehicles $23,500 $22,700 $23,100 $22,500
---------------------------------- --------------- ---------------- --------------- --------------
Blended average $16,300 $15,400 $16,300 $15,400
================================== =============== ================ =============== ==============
CarMax gross dollar sales from all extended warranty programs were 3.9 percent
of sales in the third quarter of fiscal 2002 and 4.1 percent in the third
quarter of fiscal 2001. Third-party warranty revenue was 1.7 percent of sales in
this year's third quarter and 1.8 percent in the same period last year. The
total extended warranty revenue that is reported in total sales was 1.7 percent
of sales in the third quarter of fiscal 2002 and 1.8 percent of sales in the
third quarter of fiscal 2001.
The following table provides detail on the CarMax retail units:
====================================== ==================== =================== =================== ==================
Estimate Feb. 28,
Store Mix Nov. 30, 2001 Nov. 30, 2000 2002 Feb. 28, 2001
-------------------------------------- -------------------- ------------------- ------------------- ------------------
"C" and "B" stores 14 14 14 14
-------------------------------------- -------------------- ------------------- ------------------- ------------------
"A" stores 17 17 18 17
-------------------------------------- -------------------- ------------------- ------------------- ------------------
Prototype satellite stores 4 4 5 4
-------------------------------------- -------------------- ------------------- ------------------- ------------------
Stand-alone new-car stores 4 5 3 5
-------------------------------------- -------------------- ------------------- ------------------- ------------------
Total 39 40 40 40
====================================== ==================== =================== =================== ==================
CarMax's geographic growth over the next five years is expected to include
primarily the addition of superstores in new mid-sized markets that can be
served effectively with one CarMax superstore and additional satellite stores in
existing multi-store markets. Mid-sized markets are those with populations of
approximately 1 million to 2.5 million people. During the third quarter, we
closed the new-car stand-alone Mitsubishi franchise in the Los Angeles market,
and after the end of the quarter, in December 2001, we completed the sale of our
Dallas Chrysler new-car stand-alone franchise. We expect to open one
standard-sized used-car superstore and one satellite used-car superstore in late
February 2002. The standard superstore is planned for Greensboro, N.C., and the
satellite for Merrillville, Ind., in the greater Chicago market. In fiscal 2003,
we plan to open four to six stores, and in fiscal years 2004 through 2006, we
plan to open six to eight stores per year. The standard superstore previously
planned for opening at the end of this fiscal year in Sacramento, Calif., now is
planned to open in the first quarter next fiscal year.
Cost of Sales, Buying and Warehousing
-------------------------------------
Circuit City Stores, Inc. The Circuit City Stores gross profit margin was 21.0
--------------------------
percent of sales in the third quarter of fiscal 2002, compared with 20.2 percent
in the same period last year. For the nine months ended November 30, 2001, our
gross profit margin was 21.0 percent, compared with 21.2 percent in the same
period last year.
Circuit City Group. The Circuit City gross profit margin increased to 24.2
-------------------
percent of sales in the third quarter from 22.0 percent in the same period last
year. Appliance merchandise markdowns associated with the exit from the
appliance business reduced last year's Circuit City gross margin by $21 million
in the third quarter and $28 million in the first nine months. Excluding the
impact of the appliance exit costs, last year's third quarter gross profit
margin was 22.9 percent. The improvement in the gross profit margin reflects the
solid sales growth in better-featured products and new technologies, partially
offset by the effect of promotional
Page 19 of 49
activities, especially over the Thanksgiving holiday weekend. For the nine
months ended November 30, 2001, the gross profit margin was 24.4 percent,
compared with 23.2 percent in the same period last year. Excluding the impact of
the appliance exit costs, the gross profit margin for the first nine months of
last year was 24.0 percent.
CarMax Group. The CarMax gross profit margin was 11.8 percent of sales in the
-------------
third quarter of fiscal 2002 versus 12.8 percent for the same period last year.
For the nine months ended November 30, 2001, the gross profit margin was 12.5
percent, compared with 13.3 percent in the same period last year. We achieved
our gross profit margin dollar targets per vehicle; however, used-car higher
average retails and the slightly higher mix of new cars to used cars generated a
decline in the gross profit margin on a percentage basis. Used-car gross dollar
margins are similar across makes and models. Consequently, the gross profit
margin percentage on a higher priced used car is lower than on a more modestly
priced car. The incentive-driven growth in new car sales resulted in the higher
mix of new cars to used cars, and new cars carry much lower gross margins, both
in dollars and on a percentage basis. We also experienced a small amount of
gross profit margin erosion caused by wholesale auction losses that occurred
following the rapid decline in wholesale vehicle prices after September 11.
Selling, General and Administrative Expenses
--------------------------------------------
Circuit City Stores, Inc. Our selling, general and administrative expense ratio
-------------------------
was 19.5 percent of sales in the third quarter of fiscal 2002, compared with
23.5 percent for the same period last year. For the nine-month period ended
November 30, 2001, the selling, general, and administrative expense ratio was
19.9 percent of sales, compared with 20.0 percent for the same period last year.
Circuit City Group. The Circuit City selling, general and administrative expense
------------------
ratio was 23.5 percent of sales in the third quarter of fiscal 2002, compared
with 26.7 percent for the same period last year. Costs associated with partial
remodels to exit the appliance business and add new categories to the stores
increased last year's Circuit City selling, general and administrative expenses
by $30 million in the third quarter and the first nine months. Excluding the
impact of the appliance exit costs, the third quarter expense ratio for fiscal
2001 was 25.0 percent. The decline in the ratio and in the absolute expense
level reflects the benefits of cost control and productivity initiatives,
including more efficient advertising expenditures, as well as the significant
decrease in remodeling costs in this year's third quarter. Last year's third
quarter included costs for our Florida store remodeling activities. Costs
associated with our current year remodeling tests in the Chicago, Washington,
D.C., and Baltimore markets were largely incurred in the second quarter of this
year. For the nine-month period ended November 30, 2001, the Company's selling,
general, and administrative expense ratio was 24.7 percent, compared with 22.7
percent for the same period last year. Excluding the impact of the appliance
exit costs, the selling, general and administrative expense ratio for the
nine-month period ended November 30, 2000, was 22.2 percent.
CarMax Group. The CarMax selling, general and administrative expense ratio
-------------
decreased to 7.9 percent of sales in the third quarter of fiscal 2002 from 10.1
percent of sales for the same period last year. For the nine-month period ended
November 30, 2001, the ratio was 7.5 percent of sales, compared with 9.5 percent
for the same period last year. The expense ratio improvement reflects the
significant expense leverage generated by comparable store vehicle unit sales
growth and higher average retails. As in the first half of this year, we
experienced increased yield spreads from our finance operation, which continues
to benefit from the lower cost of funds.
Page 20 of 49
Interest Expense
----------------
The Circuit City Stores interest expense declined by $4.6 million to $0.5
million for the third quarter of fiscal 2002 and by $9.7 million to $5.1 million
for the nine months ended November 30, 2001, compared with the same periods last
year, reflecting both lower debt levels and interest rates.
Net Earnings (Loss)
------------------
Circuit City Stores, Inc. Net earnings for Circuit City Stores increased to
---------------------------
$27.7 million in the third quarter of fiscal 2002, compared with a net loss of
$62.5 million in last year's third quarter. For the nine-month period ended
November 30, 2001, net earnings for the Company increased to $59.5 million from
$57.6 million for the same period last year.
In a public offering completed during the second quarter, the Company sold
approximately 9.5 million CarMax Group shares that had previously been reserved
for the Circuit City Group or for issuance to holders of Circuit City Group
stock. Because both the earnings allocation and the outstanding CarMax shares
were adjusted to reflect the impact of the sale, net earnings per CarMax Group
share were not diluted by the sale. With the impact of the offering, 64.5
percent of the CarMax Group's third quarter earnings and 70.4 percent of the
CarMax Group's nine-month earnings were allocated to the Circuit City Group. For
the same periods last year, 74.6 percent of the CarMax Group's earnings were
allocated to the Circuit City Group. At the end of the third quarter, the
reserved CarMax Group shares represented 64.4 percent of the total outstanding
and reserved shares, excluding shares reserved for CarMax employees' stock
incentive plans, of CarMax Group stock.
Circuit City Group. Net earnings for the Circuit City business, before income
------------------
attributed to the reserved CarMax Group shares were $9.2 million, or 4 cents per
share, in the third quarter of fiscal 2002, compared with a net loss of $70.1
million, or 34 cents per share, in last year's third quarter. For the first nine
months of this fiscal year, the Circuit City business had a net loss of $12.9
million, or 6 cents per share, compared with net earnings of $19.9 million, or
10 cents per share, in fiscal 2001.
The net earnings attributed to the reserved CarMax Group shares were $11.9
million in the third quarter of this year, compared with $5.6 million in last
year's third quarter, and $51.0 million in the first nine months of this fiscal
year, compared with $28.2 million for the same period last year.
Net earnings of the Circuit City Group were $21.1 million, or 10 cents per
share, in the third quarter of fiscal 2002, versus a net loss of $64.4 million,
or 32 cents per share, in the third quarter of fiscal 2001. For the first nine
months, net earnings of the Circuit City Group were $38.1 million, or 18 cents
per share, this year, compared with net earnings of $48.1 million, or 23 cents
per share, last year.
CarMax Group. Net earnings for the CarMax business, increased 143.7 percent to
------------
$18.4 million in the third quarter of fiscal 2002 from $7.6 million in last
year's third quarter. For the first nine months of the current fiscal year, the
CarMax business had net earnings of $72.4 million, compared with $37.8 million
in fiscal 2001.
Net earnings attributed to the CarMax Group stock increased 241.4 percent to
$6.6 million, or 17 cents per share, in the third quarter of fiscal 2002 from
$1.9 million, or 7 cents per share, in the third quarter of last year. For the
first nine months of the current year, net earnings attributed to the CarMax
Group stock were $21.4 million, or 66 cents per share, compared with $9.6
million, or 36 cents per share, last year.
For the quarter and the nine months ended November 30, 2001, net earnings
attributed to the CarMax Group stock grew faster than total net earnings and net
earnings per CarMax Group share because of the impact of the public offering of
CarMax Group shares during the second quarter of fiscal 2002. Quarterly earnings
per share is calculated by dividing earnings attributed to the CarMax Group
stock for the reported quarter by the weighted average CarMax shares outstanding
for the quarter. Under current accounting standards, year-to-date earnings per
share is calculated by dividing year-to-date earnings attributed to the CarMax
Group stock by the weighted
Page 21 of 49
average shares outstanding for the nine-month period. Therefore, year-to-date
earnings per share does not necessarily equal the sum of the quarterly earnings
per share.
Liquidity and Capital Resources
-------------------------------
For the first nine months, Circuit City Stores generated cash from operating
activities of $273.2 million in fiscal 2002, compared with cash used in
operating activities of $333.5 million in fiscal 2001. The improvement was
primarily the result of working capital efficiencies. While inventories for the
Circuit City business typically increase seasonally at the end of the third
quarter, better supply chain management in that business contributed to a $220.4
million reduction in working capital used for inventories in the first nine
months of this fiscal year, compared with last year. In addition, increases in
accounts payable, accrued expenses and other current liabilities reduced working
capital by $359.4 million, compared with the first nine months of last year and
primarily reflect extended payment terms in the Circuit City business achieved
through supply chain management.
Net cash used in investing activities was $6.7 million in the nine months ended
November 30, 2001, compared with $159.0 million in the first nine months of last
year. Capital expenditures declined to $137.3 million in the first nine months
of fiscal 2002 from $244.0 million in the comparable period last year. Capital
expenditures in the first nine months of fiscal 2001 included spending for the
remodeling of 26 Circuit City Superstores in south Florida and the construction
of 20 new or relocated Circuit City Superstores. Capital expenditures in the
first nine months of fiscal 2002 included spending for the less costly
remodeling of 24 Superstores, including stores in the Chicago, Baltimore and
Washington, D.C., markets and the construction of 18 new or relocated
Superstores. Proceeds from sales of property and equipment increased to $130.6
million in the first nine months of the current year from $86.3 million in the
comparable period of last year. In August 2001, CarMax entered into a
sale-leaseback transaction covering nine superstore properties valued at $102.4
million. This transaction, which represented the first sale-leaseback entered
into by CarMax without a Circuit City Stores guarantee, was structured at
competitive rates with an initial lease term of 15 years and two 10-year renewal
options. In November 2001, Circuit City completed a sale-leaseback transaction
for its Marion, Ill., distribution center valued at $29.0 million. This
transaction was structured at competitive rates with an initial lease term of 20
years and two 10-year renewal options.
As scheduled, in June 2001 Circuit City Stores used existing working capital to
repay a $130 million term loan. At November 30, 2001, the Company had cash and
cash equivalents of $709.9 million and total debt of $120.3 million. Circuit
City Stores maintains a $150 million unsecured revolving credit facility and
$195 million in committed seasonal lines of credit that are renewed annually
with various banks.
Circuit City's finance operation has a master trust securitization program
facility for its private-label credit card that allows for the transfer of up to
$1.13 billion in receivables. A second master trust securitization program
allows for the transfer of up to $1.70 billion in receivables related to the
operation's bankcard programs. Securitized receivables under all Circuit City
programs totaled $2.54 billion at November 30, 2001. The master trust vehicles
permit further expansion of the securitization programs in both the public and
private markets.
The Company also has asset securitization programs to finance the consumer
installment credit receivables generated by CarMax's automobile loan finance
operation. Automobile loan receivables are sold to special purpose subsidiaries
which, in turn, securitize those receivables through both private placement and
the public market. As of November 30, 2001, the combined capacity of these
programs was $1.90 billion. During the quarter, the Company completed its third
public automobile loan receivable securitization program, securitizing $641.7
million of auto loan receivables. Securitized receivables under all CarMax
programs totaled $1.51 billion as of November 30, 2001. We anticipate that we
will be able to expand or enter into new arrangements comparable to these
securitization programs to meet future needs.
During the second quarter, Circuit City Stores completed the public offering of
9,516,800 shares of CarMax Group stock, including the exercise of an
underwriters' over-allotment option for 666,800 shares. The shares
Page 22 of 49
sold in the offering were shares of CarMax Group stock that previously had been
reserved for the Circuit City Group or for issuance to holders of Circuit City
Group stock. The net proceeds from the offering of $139.6 million were allocated
to the Circuit City Group to be used for general purposes of the Circuit City
business, including remodeling of Circuit City Superstores.
We anticipate that fiscal 2002 capital expenditures will continue to be funded
through a combination of internally generated cash, proceeds from sales of
property and equipment and receivables, sale-leaseback transactions, operating
leases, floor plan financing of CarMax inventory or proceeds from the second
quarter public offering of CarMax Group shares.
FORWARD-LOOKING STATEMENTS
--------------------------
This report on Form 10-Q contains "forward-looking statements," which are
subject to risks and uncertainties. Additional discussion of factors that could
cause actual results to differ materially from management's projections,
forecasts, estimates and expectations is contained in our SEC filings, including
our report on Form 10-Q for the quarter ended May 31, 2001.
ITEM 3.
CIRCUIT CITY STORES, INC. QUANTITATIVE AND QUALITATIVE
------------------------------------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
We centrally manage the market risk associated with the private-label and
bankcard revolving loan portfolios of Circuit City's finance operation and the
automobile loan portfolio of CarMax's finance operation. Portions of these
portfolios are securitized and, therefore, are not presented on the consolidated
balance sheets. Interest rate exposure relating to these receivables represents
a market risk exposure that we manage with matched funding and interest rate
swaps.
As of November 30, 2001, the composition of the Circuit City finance operation's
private-label and bankcard portfolios had not changed significantly since
February 28, 2001. However, as a result of CarMax's growth and the amortization
of automobile loan receivables funded through public securitizations, the
composition of the automobile installment loan portfolio has changed
significantly. Financing for these automobile loan receivables is achieved
through asset securitization programs that, in turn, issue both fixed- and
floating-rate securities. Because programs are in place to manage interest rate
exposure relating to the existing automobile loan receivables, we expect to
experience relatively little impact as interest rates fluctuate. Receivables
held for investment or sale are financed with working capital.
CarMax financings at November 30 and February 28, 2001, were as follows:
(Amounts in millions) November 30 February 28
------------------------------------------------------------------------------
Fixed-rate securitizations.................. $ 1,279 $ 984
Floating-rate securitizations
synthetically altered to fixed........... 227 299
Floating-rate securitizations............... 1 1
Held by the Company:
For investment*.......................... 6 9
For sale................................. 4 3
-----------------------------
Total principal outstanding................. $ 1,517 $ 1,296
=============================
* Held by a bankruptcy remote special purpose company.
Page 23 of 49
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Balance Sheets
(Amounts in thousands)
Nov. 30, 2001 Feb. 28, 2001
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 699,900 $ 437,329
Net accounts receivable 532,515 451,099
Merchandise inventory 2,149,668 1,410,527
Prepaid expenses and other current assets 64,023 55,317
----------- -----------
Total current assets 3,446,106 2,354,272
Property and equipment, net 753,524 796,789
Reserved CarMax Group shares 301,483 292,179
Other assets 10,161 9,319
----------- -----------
TOTAL ASSETS $ 4,511,274 $ 3,452,559
=========== ===========
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long-term debt $ 59,431 $ 24,237
Accounts payable 1,672,025 820,077
Short-term debt 1,508 213
Accrued expenses and other current liabilities 153,072 146,818
Deferred income taxes 122,206 74,317
----------- -----------
Total current liabilities 2,008,242 1,065,662
Long-term debt, excluding current installments 14,386 33,080
Deferred revenue and other liabilities 80,687 85,329
Deferred income taxes 5,481 11,329
----------- -----------
TOTAL LIABILITIES 2,108,796 1,195,400
GROUP EQUITY 2,402,478 2,257,159
----------- -----------
TOTAL LIABILITIES AND GROUP EQUITY $ 4,511,274 $ 3,452,559
=========== ===========
See accompanying notes to group financial statements.
Page 24 of 49
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Operations (Unaudited)
(Amounts in thousands)
Three Months Ended Nine Months Ended
November 30, November 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales and operating revenues $ 2,279,908 $ 2,325,576 $ 6,198,114 $ 7,280,906
Cost of sales, buying and warehousing 1,728,757 1,815,127 4,688,026 5,561,415
Appliance exit costs - - - 28,326
----------- ----------- ----------- -----------
Gross profit 551,151 510,449 1,510,088 1,691,165
----------- ----------- ----------- -----------
Selling, general and administrative expenses 535,836 621,044 1,530,483 1,651,756
Appliance exit costs - - - 1,670
Interest expense 410 2,397 419 5,715
----------- ----------- ----------- -----------
Total expenses 536,246 623,441 1,530,902 1,659,141
----------- ----------- ----------- -----------
Earnings (loss) before income taxes and
income attributed to the reserved
CarMax Group shares 14,905 (112,992) (20,814) 32,024
Income tax provision (benefit) 5,660 (42,937) (7,913) 12,169
----------- ----------- ----------- -----------
Earnings (loss) before income attributed to
the reserved CarMax Group shares 9,245 (70,055) (12,901) 19,855
Net earnings attributed to the reserved
CarMax Group shares 11,889 5,648 50,992 28,202
----------- ----------- ----------- -----------
Net earnings (loss) $ 21,134 $ (64,407) $ 38,091 $ 48,057
=========== =========== =========== ===========
See accompanying notes to group financial statements.
Page 25 of 49
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Nine Months Ended
November 30,
2001 2000
---------- ----------
Operating Activities:
Net earnings $ 38,091 $ 48,057
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities of continuing operations:
Net earnings attributed to the reserved CarMax Group shares (50,992) (28,202)
Depreciation and amortization 116,169 91,598
Loss (gain) on sales of property and equipment 7,255 (2,935)
Deferred income taxes 42,041 (6,553)
Changes in operating assets and liabilities:
(Increase) decrease in net accounts receivable (81,416) 7,091
Increase in merchandise inventory (739,141) (925,670)
Increase in prepaid expenses and other current assets (8,703) (86,324)
(Increase) decrease in other assets (894) 1,287
Increase in accounts payable, accrued expenses
and other current liabilities 866,754 522,909
Increase (decrease) in deferred revenue and other liabilities 10,066 (3,369)
---------- ----------
Net cash provided by (used in) operating activities
of continuing operations 199,230 (382,111)
---------- ----------
Investing Activities:
Purchases of property and equipment (114,379) (235,875)
Proceeds from sales of property and equipment 34,220 70,819
---------- ----------
Net cash used in investing activities of continuing operations (80,159) (165,056)
---------- ----------
Financing Activities:
Increase in allocated short-term debt, net 1,295 89,021
Increase (decrease) in allocated long-term debt, net 16,500 (59,553)
Issuances of group equity, net 20,650 32,497
Allocated proceeds from CarMax Group stock offering, net 139,633 -
Dividends paid (10,904) (10,750)
---------- ----------
Net cash provided by financing activities
of continuing operations 167,174 51,215
---------- -----------
Cash used in discontinued operations (23,674) (23,641)
---------- ----------
Increase (decrease) in cash and cash equivalents 262,571 (519,593)
Cash and cash equivalents at beginning of year 437,329 633,952
---------- ----------
Cash and cash equivalents at end of period $ 699,900 $ 114,359
========== ==========
See accompanying notes to group financial statements.
Page 26 of 49
CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
Notes to Group Financial Statements
(Unaudited)
1. Basis of Presentation
---------------------
The common stock of Circuit City Stores, Inc. (the "Company") consists of
two common stock series that are intended to reflect the performance of the
Company's two businesses. The Circuit City Group stock is intended to
reflect the performance of the Circuit City store-related operations, the
shares of CarMax Group stock reserved for the Circuit City Group or for
issuance to holders of Circuit City Group stock and the Company's
investment in Digital Video Express, which has been discontinued (see Note
6). The CarMax Group stock is intended to reflect the performance of the
CarMax Group's operations. The reserved CarMax Group shares represented
64.4 percent of the total outstanding and reserved shares, excluding shares
reserved for CarMax employees' stock incentive plans, of CarMax Group stock
at November 30, 2001, and 74.6 percent at both February 28, 2001, and
November 30, 2000. The Company allocates to the Circuit City Group the
portion of net earnings of the CarMax Group attributed to the reserved
CarMax Group shares. The terms of each series of common stock are discussed
in detail in the Company's Form 8-A registration statement on file with the
Securities and Exchange Commission.
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 the
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
equity structure of the Company do not affect title to the assets or
responsibility for the liabilities of the Company or any of its
subsidiaries. Neither shares of CarMax Group stock nor shares of Circuit
City Group stock represent a direct equity or legal interest solely in the
assets and liabilities allocated to a particular group. Instead, those
shares represent direct equity and legal interests in the assets and
liabilities of the Company. The results of operations or financial
condition of one group could affect the results of operations or financial
condition of the other group. Net losses of either group and dividends or
distributions on, or repurchases of, Circuit City Group stock or CarMax
Group stock will reduce funds legally available for dividends on, or
repurchases of, both stocks. Accordingly, the Circuit City Group financial
statements included in this report should be read in conjunction with the
Company's consolidated financial statements, the CarMax Group financial
statements and the Company's SEC filings.
2. Accounting Policies
-------------------
The Circuit City Group has accounted for the reserved CarMax Group shares
in a manner similar to the equity method of accounting. Accounting
principles generally accepted in the United States of America require that
the CarMax Group be consolidated with the Circuit City Group. Except for
the effects of not consolidating the CarMax Group with the Circuit City
Group, the financial statements of the Circuit City Group conform to
accounting principles generally accepted in the United States of America.
The interim period financial statements are unaudited; however, in the
opinion of management, all adjustments, which consist only of normal,
recurring adjustments, necessary for a fair presentation of the interim
group financial statements have been included. The fiscal year-end balance
sheet data was derived from the audited financial statements included in
the Company's fiscal 2001 Annual Report on Form 10-K.
Page 27 of 49
3. 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 Circuit City's finance
operation. For transfers of receivables that qualify as sales, the Company
recognizes gains or losses as a component of Circuit City's finance
operation. In these securitizations, the Company retains servicing rights
and subordinated interests. Private-label credit card receivables are
financed through a master trust securitization program. As of November 30,
2001, the private-label master trust securitization program had a capacity
of $1.13 billion. The private-label master trust agreement has no recourse
provisions. Bankcard receivables are financed through a separate master
trust securitization program. As of November 30, 2001, the bankcard master
trust securitization program had a capacity of $1.70 billion. Provisions
under the bankcard master trust agreement provided recourse to the Company
for cash flow deficiencies on $63 million of receivables sold as of
November 30, 2001. At that date, the Company believes no liability existed
under the recourse provisions.
At November 30, 2001, the total principal amount of credit card receivables
managed was $2.66 billion, including $2.57 billion principal amount of
receivables securitized and $91 million principal amount of receivables
held for sale. The aggregate amount of loans that were 31 days or more
delinquent was $199.4 million at November 30, 2001. The principal amount of
losses net of recoveries totaled $65.6 million for the three months ended
November 30, 2001, and $197.5 million for the nine months ended November
30, 2001.
The Company receives annual servicing compensation approximating 2 percent
of the outstanding principal loan balance of the receivables and retains
the rights to future cash flows arising after the investors in the
securitization trusts have received the return for which they contracted.
The servicing fees specified in the credit card securitization agreements
adequately compensate the finance operation for servicing the securitized
assets. Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from and paid to the
securitization trusts:
Three Months Ended Nine Months Ended
(Amounts in thousands) November 30, 2001 November 30, 2001
---------------------------------------------------------------------------------------------
Proceeds from new securitizations..................... $ 291,800 $ 670,000
Proceeds from collections reinvested
in previous credit card securitizations............. $ 417,755 $1,234,793
Servicing fees received............................... $ 12,568 $ 38,475
Other cash flows received on retained interests*...... $ 48,920 $ 142,855
*This amount represents cash flows received from retained interests by the
transferor other than servicing fees, including cash flows from
interest-only strips and cash above the minimum required level in cash
collateral accounts.
When determining the fair value of retained interests, the Company
estimates future cash flows using management's best estimates of key
assumptions such as finance charge income, default rates, payment rates,
forward yield curves and discount rates. 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 may qualify for promotional financing.
Future finance income from serviced assets that exceeds the contractually
specified investor returns and servicing fees is carried at fair value,
amounted to $125.8 million at November 30, 2001, and is included in net
accounts receivable. Gains of $45.1 million on sales were recorded for the
three-month period ended November 30, 2001; gains of $124.4 million on
sales were recorded for the nine-month period ended November 30, 2001.
Page 28 of 49
The fair value of retained interests at November 30, 2001, was $302.0
million, with a weighted-average life ranging from 0.08 years to 2.00
years. The following table shows the key economic assumptions used in
measuring the fair value of retained interests at November 30, 2001, and a
sensitivity analysis showing the hypothetical effect on the fair value of
those interests when there are unfavorable variations from the assumptions
used. Key economic assumptions at November 30, 2001, are not materially
different from assumptions used to measure the fair value of retained
interests at the time of securitization. These sensitivities are
hypothetical and should be used with caution. In this table, the effect of
a variation in a particular assumption on the fair value of the retained
interest is calculated without changing any other assumption; in actual
circumstances, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities.
Impact on Fair Impact on Fair
Assumptions Used Value of 10% Value of 20%
(Dollar amounts in thousands) (Annual) Adverse Change Adverse Change
-----------------------------------------------------------------------------------------
Payment rate...................... 6.8%-10.6% $ 8,301 $16,121
Default rate...................... 9.4%-17.9% $23,342 $46,017
Discount rate..................... 8.0%-15.0% $ 2,078 $ 4,129
4. Financial Derivatives
---------------------
On behalf of the Circuit City Group, the Company enters into interest rate
cap agreements to meet the requirements of the credit card receivable
securitization transactions. In the third quarter of fiscal 2002, the
Company did not enter into any new interest rate caps. At November 30,
2001, the total notional amount of interest rate caps outstanding was $677
million. Purchased interest rate caps are included in net accounts
receivable and had a fair value of $4.2 million as of November 30, 2001.
Written interest rate caps are included in accounts payable and had a fair
value of $4.2 million as of November 30, 2001.
The market and credit risks associated with interest rate caps 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 has entered into offsetting interest rate cap
positions, and therefore, does not anticipate significant market risk
arising from interest rate caps. Credit risk is the exposure to
nonperformance of another party to an agreement. The Company mitigates
credit risk by dealing with highly rated bank counterparties.
5. Appliance Exit Costs
--------------------
On July 25, 2000, the Company announced plans to exit the major appliance
category and expand its selection of key consumer electronics and home
office products in all Circuit City Superstores. A product profitability
analysis had indicated that the appliance category produced below-average
profits. This analysis, combined with declining appliance sales, expected
increases in appliance competition and the Company's profit expectations
for the consumer electronics and home office categories led to the decision
to exit the major appliance category. To exit the appliance business, the
Company has closed eight distribution centers and eight service centers.
The majority of these closed properties are leased. While the Company has
entered into contracts to sublease some of these properties, it continues
the process of preparing and marketing the remaining properties to be
subleased. The Company maintains control over Circuit City's in-home major
appliance repair business, although repairs are subcontracted to an
unrelated third party.
Approximately 910 employees were terminated as a result of the exit from
the appliance business. These reductions mainly were in the service,
distribution and merchandising functions. Because severance is being paid
to employees on a biweekly schedule based on years of service, cash
payments lag job eliminations. Certain fixed-assets were written down in
connection with the exit from the appliance
Page 29 of 49
business including appliance build-to-order kiosks in stores and
non-salvageable fixed assets and leasehold improvements at the closed
locations.
In the second quarter of fiscal 2001, the Company recorded appliance exit
costs of $30 million. These expenses are reported separately on the fiscal
2001 statement of earnings. The remaining appliance exit cost accrual is
included in the accrued expenses and other current liabilities line item on
the consolidated balance sheet. The composition of the appliance exit cost
accrual and the remaining liability at November 30, 2001, are presented in
the following table.
Total Payments Liability at
Exit Cost or November 30,
(Amounts in millions) Accrual Write-downs 2001
-----------------------------------------------------------------------------------
Lease termination costs............. $17.8 $ 4.4 $13.4
Fixed asset write-downs, net........ 5.0 5.0 -
Employee termination benefits....... 4.4 4.0 0.4
Other............................... 2.8 2.8 -
-------------------------------------------
Appliance exit costs................ $30.0 $16.2 $13.8
===========================================
6. Discontinued Operations
-----------------------
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations, but that
existing, registered customers would be able to view discs during a
two-year phase-out period. Discontinued operations have been segregated on
the Circuit City Group statements of cash flows. However, Divx is not
segregated on the Circuit City Group balance sheets.
A loss on the disposal of Divx was recorded in fiscal 2000, including a
provision for operating losses to be incurred during the phase-out period.
The loss on disposal also includes provisions for commitments under
licensing agreements with motion picture distributors, the write-down of
assets to net realizable value, lease termination costs, employee severance
and benefit costs and other contractual commitments. For the three- and
nine-month periods ended November 30, 2001, and 2000, the discontinued Divx
operations had no impact on the earnings of the Circuit City Group.
The net liabilities of the discontinued Divx operations, reflected in the
Circuit City Group's balance sheets as of November 30, 2001, and February
28, 2001, are comprised of the following:
(Amounts in thousands) November 30, 2001 February 28, 2001
--------------------------------------------------------------------------------------
Current assets................................. $ 71 $ 8
Other assets................................... 272 324
Current liabilities............................ (17,881) (27,522)
Other liabilities.............................. - (14,082)
------------------------------------
Net liabilities of discontinued operations..... $ (17,538) $ (41,272)
====================================
7. Recent Accounting Pronouncements
--------------------------------
In July 2000, the Financial Accounting Standards Board issued Emerging
Issues Task Force Issue No. 00-14, "Accounting for Certain Sales
Incentives," which is effective for fiscal quarters beginning after
December 15, 2001. EITF No. 00-14 provides that sales incentives, such as
mail-in rebates, offered to customers should be classified as a reduction
of revenue. The Company offers certain mail-in rebates that are currently
recorded in cost of sales, buying and warehousing. However, the Company
expects to reclassify these rebate expenses from cost of sales, buying and
warehousing to net sales and operating revenues to be in compliance with
EITF No. 00-14 in the first quarter of fiscal year 2003. For the quarter
ended November 30, 2001, this reclassification would have increased the
gross profit margin by 18 basis points and the expense ratio by 17 basis
points. For the nine months ended November 30, 2001, the
Page 30 of 49
reclassification would have increased both the gross profit margin and the
expense ratio by 16 basis points. The Company does not expect the adoption
of EITF No. 00-14 to have a material impact on the Circuit City Group's
financial position, results of operations or cash flows.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations," effective for business combinations
initiated after June 30, 2001, and SFAS No. 142, "Goodwill and Other
Intangible Assets," effective for fiscal years beginning after December 15,
2001. Under SFAS No. 141, the pooling of interests method of accounting for
business combinations is eliminated, requiring that all business
combinations initiated after the effective date be accounted for using the
purchase method. Also under SFAS No. 141, identified intangible assets
acquired in a purchase business combination must be separately valued and
recognized on the balance sheet if they meet certain requirements. Under
the provisions of SFAS No. 142, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to
annual impairment tests in accordance with the pronouncements. Other
intangible assets that are identified to have finite useful lives will
continue to be amortized in a manner that reflects the estimated decline in
the economic value of the intangible asset and will be subject to review
when events or circumstances arise which indicate impairment. Application
of the nonamortization provisions of SFAS No. 142 in fiscal 2003 is not
expected to have a material impact on the financial position, results of
operations or cash flows of the Company.
In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees.
This standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period incurred. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The Company has
not yet determined the impact, if any, of adopting this standard.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes both SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," related to the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses
on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated
with SFAS No. 121. The Company is required to adopt SFAS No. 144 no later
than the fiscal year beginning after December 15, 2001, and plans to adopt
the provisions for the quarter ending May 31, 2002. The Company has not yet
determined the impact, if any, of adopting this standard.
8. Reclassifications
-----------------
Certain previously reported amounts have been reclassified to conform with
the current year presentation.
Page 31 of 49
ITEM 2.
CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
In this discussion, "we," "our" and "Circuit City Stores" refer to Circuit City
Stores, Inc. and our wholly owned subsidiaries, unless the context requires
otherwise. "Circuit City business" and "Circuit City" refer to the retail
operations bearing the Circuit City name and to all related operations such as
product service and Circuit City's finance operation. "Circuit City Group"
refers to the Circuit City business and the reserved CarMax Group shares.
"CarMax business," "CarMax" and "CarMax Group" refer to retail locations bearing
the CarMax name and to all related operations such as CarMax's finance
operation.
Net Sales and Operating Revenues and General Comments
-----------------------------------------------------
Circuit City Group. Total Circuit City sales for the third quarter of fiscal
------------------
2002 declined 2 percent to $2.28 billion from $2.33 billion in last year's third
quarter. For the nine months ended November 30, 2001, total Circuit City sales
decreased 15 percent to $6.20 billion from $7.28 billion in the prior year.
Comparable store sales changes for the third quarter and first nine months of
fiscal years 2002 and 2001 were as follows:
================================== ============================== ================================
Comparable Store 3rd Quarter Nine Months
------------------------------ --------------------------------
Sales FY02 FY01 FY02 FY01
---------------------------------- -------------- --------------- --------------- ----------------
Circuit City (4%) (10%) (17%) (1%)
---------------------------------- -------------- --------------- --------------- ----------------
Circuit City, excluding the
appliance category (2%) 3% (8%) 6%
================================== ============== =============== =============== ================
In this current year's third quarter, comparable store sales improved
progressively each month, and for the month of November, the same-store sales
comparison turned positive, increasing 6 percent.
Third quarter Circuit City sales improved across a broad base of product
categories. We generated double-digit or higher comparable store sales growth
not only in better featured and newer technologies such as big-screen
televisions, digital satellite systems, digital cameras and wireless phones, but
also in new and expanded product selections including video game hardware,
software and accessories; DVD software; and personal computer software and
accessories. Although personal computer sales continued to reflect the difficult
industry trends, the year-over-year decline in sales moderated over the course
of the quarter. The percent of merchandise sales represented by each major
product category during the third quarter and the first nine months of fiscal
2002 and 2001 were as follows:
=============================== ============================== ===============================
3rd Quarter Nine Months
------------------------------ -------------------------------
Product Mix FY02 FY01 FY02 FY01
------------------------------- -------------- --------------- --------------- ---------------
Video 41% 37% 39% 34%
------------------------------- -------------- --------------- --------------- ---------------
Audio 14 16 16 15
------------------------------- -------------- --------------- --------------- ---------------
Information technology 33 37 35 35
------------------------------- -------------- --------------- --------------- ---------------
Entertainment 12 8 10 6
------------------------------- -------------- --------------- --------------- ---------------
Appliances -- 2 -- 10
------------------------------- -------------- --------------- --------------- ---------------
Total 100% 100% 100% 100%
=============================== ============== =============== =============== ===============
Page 32 of 49
Although Circuit City sales volumes and traffic levels were particularly strong
over the Thanksgiving weekend, November comparable store sales were positive
both before and after that weekend. Pricing over the holiday weekend was
promotional, helping to increase store traffic. We believe the recent sales
improvements reflect a number of factors including not only effective pricing
strategies, but also a more effective marketing program covering a variety of
vehicles including newspaper inserts, television, magazines, direct mail and
creative in-store events, as well as improved customer service.
Circuit City gross dollar sales from all extended warranty programs were 5.2
percent of sales in the third quarter of fiscal 2002 and 5.1 percent of sales in
the third quarter of fiscal 2001. Third-party warranty revenue was 4.0 percent
of sales in this year's third quarter and 3.9 percent in the same period last
year. The total extended warranty revenue that is reported in total sales was
3.9 percent of sales in the third quarter of fiscal 2002, compared with 4.0
percent in last year's third quarter.
The following table provides details on the Circuit City retail units:
======================== =================== =================== ================== ===================
Estimate Feb.
Store Mix Nov. 30, 2001 Nov. 30, 2000 28, 2002 Feb. 28, 2001
------------------------ ------------------- ------------------- ------------------ -------------------
Superstores 603 590 604 594
------------------------ ------------------- ------------------- ------------------ -------------------
Mall-based
Express stores 29 39 20 35
------------------------ ------------------- ------------------- ------------------ -------------------
Total 632 629 624 629
======================== =================== =================== ================== ===================
Circuit City expects to open 10 Superstores and relocate 10 Superstores in the
current fiscal year. In the first quarter of fiscal 2002, we opened one Circuit
City Superstore and relocated one Superstore. In the second quarter of fiscal
2002, we opened four Superstores and relocated two Superstores. In the third
quarter of fiscal 2002, we opened five Superstores and relocated five
Superstores.
During fiscal 2002, the company is testing two remodeling approaches in a total
of 24 stores. The most extensive approach is being conducted in 10 stores in the
Chicago market and two stores in Virginia; a second, less costly version is
being tested in 12 stores in the Washington, D.C., and Baltimore, Md., markets.
Remodeling was completed at 23 of the stores in the second quarter, and
remodeling of the 24th store was completed in early November 2001. The
performance of the remodeled stores were evaluated over the course of the
holidays, and the findings will be used to make decisions on the extent and pace
of future remodeling activities.
Our operations, in common with other retailers in general, are subject to
seasonal influences. Historically, the Circuit City business has realized more
of its net sales and net earnings in the fourth quarter, which includes the
December holiday selling season, than in any other fiscal quarter. The net
earnings of any interim quarter are seasonally disproportionate to net sales
since administrative and certain operating expenses remain relatively constant
during the year. Therefore, interim results should not be relied upon as
necessarily indicative of results for the entire fiscal year.
Cost of Sales, Buying and Warehousing
-------------------------------------
For the quarter ended November 30, 2001, Circuit City's gross profit margin
increased to 24.2 percent of sales from 22.0 percent in the same period last
year. Appliance merchandise markdowns associated with the exit from the
appliance business reduced last year's Circuit City gross margin by $21 million
in the third quarter and $28 million in the first nine months. Excluding the
impact of the appliance exit costs, last year's third quarter gross profit
margin was 22.9 percent. The improvement in the gross profit margin reflects the
solid sales growth in better-featured products and new technologies, partially
offset by the effect of promotional activities, especially over the Thanksgiving
holiday weekend. For the nine months ended November 30, 2001, the gross profit
margin was 24.4 percent, compared with 23.2 percent in the same period last
year. Excluding
Page 33 of 49
the impact of the appliance exit costs, the gross profit margin for the first
nine months of last year was 24.0 percent.
Selling, General and Administrative Expenses
--------------------------------------------
Circuit City's selling, general and administrative expense ratio was 23.5
percent of sales in the third quarter of fiscal 2002, compared with 26.7 percent
for the same period last year. Costs associated with partial remodels to exit
the appliance business and add new categories to the stores increased last
year's Circuit City selling, general and administrative expenses by $30 million
in the third quarter and the first nine months. Excluding the impact of the
appliance exit costs, the third quarter expense ratio for fiscal 2001 was 25.0
percent. The decline in the ratio and in the absolute expense level reflects the
benefits of cost control and productivity initiatives, including more efficient
advertising expenditures, as well as the significant decrease in remodeling
costs in this year's third quarter. Last year's third quarter included costs for
our Florida store remodeling activities. Costs associated with our current year
remodeling tests in the Chicago, Washington, D.C., and Baltimore markets were
largely incurred in the second quarter of this year. For the nine-month period
ended November 30, 2001, the Company's selling, general, and administrative
expense ratio was 24.7 percent, compared with 22.7 percent for the same period
last year. Excluding the impact of the appliance exit costs, the selling,
general and administrative expense ratio for the nine-month period ended
November 30, 2000, was 22.2 percent.
Interest Expense
----------------
The Circuit City interest expense declined by $2.0 million to $0.4 million for
the third quarter of fiscal 2002 and by $5.3 million to $0.4 million for the
nine months ended November 30, 2001, compared with the same periods last year,
reflecting both lower debt levels and interest rates.
Net Earnings (Loss) Before Income Attributed to the Reserved CarMax Group Shares
--------------------------------------------------------------------------------
Excluding the income attributed to the reserved CarMax Group shares, Circuit
City had third quarter net earnings of $9.2 million, compared with a net loss of
$70.1 million for the same period last year. For the nine months ended November
30, 2001, excluding the income attributed to the reserved CarMax Group shares,
Circuit City incurred a net loss of $12.9 million, compared with net earnings of
$19.9 million for the same period last year.
Net Earnings Attributed to the Reserved CarMax Group Shares
-----------------------------------------------------------
For the third quarter of fiscal 2002, the net earnings attributed to the
reserved CarMax Group shares rose 110.5 percent to $11.9 million, compared with
$5.6 million for the same period last year. For the first nine months of fiscal
2002, net earnings attributed to the reserved CarMax Group shares rose 80.8
percent to $51.0 million, compared with $28.2 million for the same period last
year.
Net Earnings (Loss)
------------------
Net earnings for the Circuit City Group for the quarter ended November 30, 2001,
were $21.1 million, compared with a net loss of $64.4 million in the same period
last year. For the nine months ended November 30, 2001, net earnings for the
Circuit City Group were $38.1 million, compared with $48.1 million for the same
period last year.
Liquidity and Capital Resources
-------------------------------
For the first nine months, the Circuit City business generated cash from
operating activities of $199.2 million in fiscal 2002, compared with cash used
in operating activities of $382.1 million in fiscal 2001. The improvement was
primarily the result of working capital efficiencies. While inventories
typically increase seasonally at the end of the third quarter, better supply
chain management contributed to a $186.5 million reduction in working capital
used for inventories in the first nine months, compared with last year. In
addition, increases in
Page 34 of 49
accounts payable, accrued expenses and other current liabilities reduced working
capital by $343.8 million, compared with the first nine months of last year and
primarily reflect extended payment terms achieved through supply chain
management.
Net cash used in investing activities was $80.2 million in the nine months ended
November 30, 2001, compared with $165.1 million in the first nine months of last
year. Capital expenditures declined to $114.4 million in the first nine months
of fiscal 2002 from $235.9 million in the comparable period of last year.
Capital expenditures in the first nine months of fiscal 2001 included spending
for the remodeling of 26 Circuit City Superstores in south Florida and the
construction of 20 new or relocated Circuit City Superstores. Capital
expenditures in the first nine months of fiscal 2002 included spending for the
less costly remodeling of 24 Superstores including stores in the Chicago,
Baltimore and Washington, D.C., markets and the construction of 18 new or
relocated Superstores. Proceeds from sales of property and equipment totaled
$34.2 million in the first nine months of the current year, compared with $70.8
million in the same period last year. In November 2001, Circuit City completed a
sale-leaseback transaction for its Marion, Ill., distribution center valued at
$29.0 million. This transaction was structured at competitive rates with an
initial lease term of 20 years and two 10-year renewal options.
As scheduled, in June 2001 we used existing working capital to repay a $130
million term loan. Payment of corporate debt will not necessarily reduce Circuit
City Group allocated debt. At November 30, 2001, the Circuit City Group had cash
and cash equivalents of $699.9 million and total debt of $75.3 million. We
maintain a $150 million unsecured revolving credit facility and $195 million in
committed seasonal lines of credit that are renewed annually with various banks.
Circuit City's finance operation has a master trust securitization program
facility for its private-label credit card that allows for the transfer of up to
$1.13 billion in receivables. A second master trust securitization program
allows for the transfer of up to $1.70 billion in receivables related to the
operation's bankcard programs. Securitized receivables under all Circuit City
programs totaled $2.54 billion at November 30, 2001. The master trust vehicles
permit further expansion of the securitization programs in both the public and
private markets.
During the second quarter, we completed the public offering of 9,516,800 shares
of CarMax Group stock, including the exercise of an underwriters' over-allotment
option for 666,800 shares. The shares sold in the offering were shares of CarMax
Group stock that previously had been reserved for the Circuit City Group or for
issuance to holders of Circuit City Group stock. The net proceeds from the
offering of $139.6 million were allocated to the Circuit City Group to be used
for general purposes of the Circuit City business, including remodeling of
Circuit City Superstores.
Circuit City relies on the external debt allocated to it by Circuit City Stores
to provide working capital needed to fund net assets not otherwise financed
through sale-leasebacks or receivable securitizations. We manage all significant
financial activities of the Circuit City business on a centralized basis.
Circuit City's significant financial activities are dependent on our financial
condition as a whole and include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate.
We anticipate that fiscal 2002 capital expenditures will continue to be funded
through a combination of internally generated cash, proceeds from sales of
property and equipment and receivables, sale-leaseback transactions, future
increases in the Circuit City Stores' debt allocated to the Circuit City Group
or proceeds from the public stock offering discussed above.
FORWARD-LOOKING STATEMENTS
--------------------------
This report on Form 10-Q contains "forward-looking statements," which are
subject to risks and uncertainties. Additional discussion of factors that could
cause actual results to differ materially from management's projections,
forecasts, estimates and expectations is contained in our SEC filings, including
our report on Form 10-Q for the quarter ended May 31, 2001.
Page 35 of 49
ITEM 3.
CIRCUIT CITY GROUP QUANTITATIVE AND QUALITATIVE
-----------------------------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
We centrally manage the market risk associated with the private-label and
bankcard revolving loan portfolios of Circuit City's finance operation. Portions
of these portfolios are securitized and, therefore, are not presented on the
Circuit City Group's balance sheets. Interest rate exposure relating to these
receivables represents a market risk exposure that we manage with matched
funding.
As of November 30, 2001, the composition of the Circuit City finance operation's
private-label and bankcard portfolios had not changed significantly since
February 28, 2001.
Page 36 of 49
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Balance Sheets
(Amounts in thousands)
Nov. 30, 2001 Feb. 28, 2001
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,014 $ 8,802
Net accounts receivable 168,198 134,662
Inventory 351,010 347,137
Prepaid expenses and other current assets 2,059 2,306
--------- ---------
Total current assets 531,281 492,907
Property and equipment, net 107,535 192,158
Other assets 23,066 25,888
--------- ---------
TOTAL ASSETS $ 661,882 $ 710,953
========= =========
LIABILITIES AND GROUP EQUITY
Current liabilities:
Current installments of long-term debt $ 43,038 $ 108,151
Accounts payable 93,219 82,483
Short-term debt 1,083 987
Accrued expenses and other current liabilities 24,360 16,154
Deferred income taxes 19,839 18,162
--------- ---------
Total current liabilities 181,539 225,937
Long-term debt, excluding current installments 826 83,057
Deferred revenue and other liabilities 7,806 6,836
Deferred income taxes 3,713 3,620
--------- ---------
TOTAL LIABILITIES 193,884 319,450
GROUP EQUITY 467,998 391,503
--------- ---------
TOTAL LIABILITIES AND GROUP EQUITY $ 661,882 $ 710,953
========= =========
See accompanying notes to group financial statements.
Page 37 of 49
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Earnings (Unaudited)
(Amounts in thousands)
Three Months Ended Nine Months Ended
November 30, November 30,
2001 2000 2001 2000
--------- --------- ---------- ----------
Net sales and operating revenues $ 774,324 $ 561,693 $2,422,507 $1,860,995
Cost of sales 683,298 490,014 2,118,995 1,613,305
--------- --------- ---------- ----------
Gross profit 91,026 71,679 303,512 247,690
--------- --------- ---------- ----------
Selling, general and administrative expenses 61,215 56,809 182,027 177,601
Interest expense 64 2,664 4,701 9,150
--------- --------- ---------- ----------
Total expenses 61,279 59,473 186,728 186,751
--------- --------- ---------- ----------
Earnings before income taxes 29,747 12,206 116,784 60,939
Provision for income taxes 11,304 4,638 44,378 23,156
--------- --------- ---------- ----------
Net earnings $ 18,443 $ 7,568 $ 72,406 $ 37,783
========= ========= ========== ==========
Net earnings attributed to:
Circuit City Group common stock $ 11,889 $ 5,648 $ 50,992 $ 28,202
CarMax Group common stock 6,554 1,920 21,414 9,581
--------- --------- ---------- ----------
$ 18,443 $ 7,568 $ 72,406 $ 37,783
========= ========= ========== ==========
See accompanying notes to group financial statements.
Page 38 of 49
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Nine Months Ended
November 30,
2001 2000
--------- ---------
Operating Activities:
Net earnings $ 72,406 $ 37,783
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 13,239 14,050
Loss on sales of property and equipment - 305
Deferred income taxes 1,770 6,735
Changes in operating assets and liabilities, net of
effects from business acquisitions:
(Increase) decrease in net accounts receivable (33,536) 21,373
Increase in inventory (3,873) (37,761)
Decrease in prepaid expenses, other current assets
and other assets 1,020 30
Increase in accounts payable, accrued expenses and other
current liabilities 21,976 6,381
Increase (decrease) in deferred revenue and other liabilities 970 (315)
--------- ---------
Net cash provided by operating activities 73,972 48,581
--------- ---------
Investing Activities:
Cash used in business acquisitions - (1,325)
Purchases of property and equipment (22,911) (8,152)
Proceeds from sales of property and equipment 96,344 15,508
--------- ---------
Net cash provided by investing activities 73,433 6,031
--------- ---------
Financing Activities:
Increase in allocated short-term debt, net 96 59,360
Decrease in allocated long-term debt, net (147,344) (116,573)
Issuances of group equity, net 1,055 129
--------- ---------
Net cash used in financing activities (146,193) (57,084)
--------- ---------
Increase (decrease) in cash and cash equivalents 1,212 (2,472)
Cash and cash equivalents at beginning of year 8,802 9,981
--------- ---------
Cash and cash equivalents at end of period $ 10,014 $ 7,509
========= =========
See accompanying notes to group financial statements.
Page 39 of 49
CIRCUIT CITY STORES, INC. - CARMAX GROUP
Notes to Group Financial Statements
(Unaudited)
1. Basis of Presentation
---------------------
The common stock of Circuit City Stores, Inc. (the "Company") consists of
two common stock series that are intended to reflect the performance of the
Company's two businesses. The Circuit City Group stock is intended to
reflect the performance of the Circuit City store-related operations, the
shares of CarMax Group stock reserved for the Circuit City Group or for
issuance to holders of Circuit City Group stock and the Company's
investment in Digital Video Express, which has been discontinued. The
CarMax Group stock is intended to reflect the performance of the CarMax
Group's operations. The reserved CarMax Group shares represented 64.4
percent of the total outstanding and reserved shares, excluding shares
reserved for CarMax employees' stock incentive plans, of CarMax Group stock
at November 30, 2001, and 74.6 percent at both February 28, 2001, and
November 30, 2000. The Company allocates to the Circuit City Group the
portion of net earnings of the CarMax Group attributed to the reserved
CarMax Group shares. The terms of each series of common stock are discussed
in detail in the Company's Form 8-A registration statement on file with the
Securities and Exchange Commission.
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 the
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 equity
structure of the Company do not affect title to the assets or
responsibility for the liabilities of the Company or any of its
subsidiaries. Neither shares of CarMax Group stock nor shares of Circuit
City Group stock represent a direct equity or legal interest solely in the
assets and liabilities allocated to a particular group. Instead, those
shares represent direct equity and legal interests in the assets and
liabilities of the Company. The results of operations or financial
condition of one group could affect the results of operations or financial
condition of the other group. Net losses of either group and dividends or
distributions on, or repurchases of, Circuit City Group stock or CarMax
Group stock will reduce funds legally available for dividends on, or
repurchases of, both stocks. Accordingly, the CarMax Group financial
statements included in this report should be read in conjunction with the
Company's consolidated financial statements, the Circuit City Group
financial statements and the Company's SEC filings.
2. Accounting Policies
-------------------
The financial statements of the CarMax Group conform to accounting
principles generally accepted in the United States of America. The interim
period financial statements are unaudited; however, in the opinion of
management, all adjustments, which consist only of normal, recurring
adjustments, necessary for a fair presentation of the interim group
financial statements have been included. The fiscal year-end balance sheet
data was derived from the audited financial statements included in the
Company's fiscal 2001 Annual Report on Form 10-K.
3. Securitizations
---------------
The Company has asset securitization programs to finance the consumer
installment credit receivables generated by CarMax's automobile loan
finance operation. Automobile loan receivables are sold to special purpose
subsidiaries, which, in turn, securitize those receivables through both
private placement and the public market. For transfers of receivables that
qualify as sales, the Company recognizes gains or losses as a component of
CarMax's finance operation. In these securitizations, the Company retains
servicing
Page 40 of 49
rights and subordinated interests. As of November 30, 2001, the combined
capacity of these programs was $1.90 billion. The automobile loan
securitization programs have no recourse provisions.
At November 30, 2001, the total principal amount of automobile loan
receivables managed was $1.52 billion, including $1.51 billion principal
amount of loans securitized and $10 million principal amount of loans held
for sale or investment. The principal amount of loans that were 31 days or
more delinquent was $21.6 million at November 30, 2001. The principal
amount of losses net of recoveries totaled $4.1 million for the three
months ended November 30, 2001, and $8.7 million for the nine months ended
November 30, 2001.
The Company receives annual servicing fees approximating 1 percent of the
outstanding principal balance of the securitized automobile loans and
retains the rights to future cash flows arising after the investors in the
securitization trusts have received the return for which they contracted.
The servicing fees specified in the automobile loan securitization
agreements adequately compensate the finance operation for servicing the
accounts. Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from and paid to the
securitization trusts:
Three Months Ended Nine Months Ended
(Amounts in thousands) November 30, 2001 November 30, 2001
----------------------------------------------------------------------------------------------
Proceeds from new securitizations.................... $ 736,725 $1,112,725
Proceeds from collections reinvested
in previous automobile loan securitizations........ $ 132,331 $ 350,725
Servicing fees received.............................. $ 3,680 $ 10,417
Other cash flows received on retained interests*..... $ 17,917 $ 48,489
*This amount represents cash flows received from retained interests by the
transferor other than servicing fees, including cash flows from
interest-only strips and cash above the minimum required level in cash
collateral accounts.
When determining the fair value of retained interests, the Company
estimates future cash flows using management's best estimates of key
assumptions such as finance charge income, default rates, prepayment rates
and discount rates. 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 may qualify
for promotional financing.
Future finance income from serviced assets that exceeds the contractually
specified investor returns and servicing fees is carried at fair value,
amounted to $76.0 million at November 30, 2001, and is included in net
accounts receivable. Gains of $15.6 million on sales were recorded for the
three months ended November 30, 2001; gains of $43.4 million on sales were
recorded for the nine months ended November 30, 2001.
The fair value of retained interests at November 30, 2001, was $104.7
million, with a weighted-average life of 1.63 years. The following table
shows the key economic assumptions used in measuring the fair value of
retained interests at November 30, 2001, and a sensitivity analysis showing
the hypothetical effect on the fair value of those interests when there are
unfavorable variations from the assumptions used. Key economic assumptions
at November 30, 2001, are not materially different from assumptions used to
measure the fair value of retained interests at the time of securitization.
These sensitivities are hypothetical and should be used with caution. In
this table, the effect of a variation in a particular assumption on the
fair value of the retained interest is calculated without changing any
other assumption; in actual circumstances, changes in one factor may result
in changes in another, which might magnify or counteract the sensitivities.
Page 41 of 49
Impact on Fair Impact on Fair
Assumptions Used Value of 10% Value of 20%
(Dollar amounts in thousands) (Annual) Adverse Change Adverse Change
-------------------------------------------------------------------------------------------
Prepayment speed................. 1.5%-1.6% $3,599 $7,303
Default rate..................... 1.0%-1.2% $2,065 $4,133
Discount rate.................... 12.0% $1,422 $2,814
4. Financial Derivatives
---------------------
On behalf of the CarMax Group, the Company, in the third quarter of fiscal
2002, entered into three 40-month amortizing interest rate swaps related to
auto loan receivable securitizations. These swaps had an initial notional
amount of approximately $228 million. The total notional amount of all
swaps related to the automobile loan receivable securitizations was $227
million at November 30, 2001, and $299 million at February 28, 2001. The
total notional amount of the CarMax interest rate swaps was reduced in the
third quarter following the replacement of floating-rate securitizations
with a $642 million fixed-rate securitization in November 2001. These swaps
are used to better match funding costs and are recorded at fair value. At
November 30, 2001, these swaps totaled a net asset of $7,000 and are
included in accounts receivable.
The market and credit risks associated with 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
because they are used to match funding costs to the use of the funding.
Credit risk is the exposure to nonperformance of another party to an
agreement. The Company mitigates credit risk by dealing with highly rated
bank counterparties.
5. Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations," effective
for business combinations initiated after June 30, 2001, and SFAS No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Under SFAS No. 141, the pooling of
interests method of accounting for business combinations is eliminated,
requiring that all business combinations initiated after the effective date
be accounted for using the purchase method. Also under SFAS No. 141,
identified intangible assets acquired in a purchase business combination
must be separately valued and recognized on the balance sheet if they meet
certain requirements. Under the provisions of SFAS No. 142, goodwill and
intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with
the pronouncements. Other intangible assets that are identified to have
finite useful lives will continue to be amortized in a manner that reflects
the estimated decline in the economic value of the intangible asset and
will be subject to review when events or circumstances arise which indicate
impairment. Application of the nonamortization provisions of SFAS No. 142
in fiscal 2003 is not expected to have a material impact on the financial
position, results of operations or cash flows of the Company. During fiscal
2003, the Company will perform the first of the required impairment tests
of goodwill and indefinite-lived intangible assets, as outlined in the new
pronouncements. Based on preliminary estimates, as well as ongoing periodic
assessments of goodwill, the Company does not expect to recognize any
material impairment losses from these tests.
In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees.
This standard requires entities to record the fair value of a liability for
an asset retirement obligation in the
Page 42 of 49
period incurred. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The Company has not yet determined the impact, if any, of
adopting this standard.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes both SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," related to the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses
on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated
with SFAS No. 121. The Company is required to adopt SFAS No. 144 no later
than the fiscal year beginning after December 15, 2001, and plans to adopt
the provisions for the quarter ending May 31, 2002. The Company has not yet
determined the impact, if any, of adopting this standard.
6. Reclassifications
-----------------
Certain previously reported amounts have been reclassified to conform with
the current year presentation.
ITEM 2.
CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
In this discussion, "we," "our" and "Circuit City Stores" refer to Circuit City
Stores, Inc. and our wholly owned subsidiaries, unless the context requires
otherwise. "CarMax business," "CarMax" and "CarMax Group" refer to retail
locations bearing the CarMax name and to all related operations such as CarMax's
finance operation.
Net Sales and Operating Revenues and General Comments
-----------------------------------------------------
CarMax Group. Total CarMax sales for the third quarter of fiscal 2002 increased
------------
38 percent to $774.3 million from $561.7 million in last year's third quarter.
For the nine months ended November 30, 2001, CarMax total sales increased 30
percent to $2.42 billion from $1.86 billion in the prior year. Comparable store
vehicle dollar and unit sales for the third quarter and first nine months of
fiscal years 2002 and 2001 were as follows:
============================== ============================== ===============================
Comparable Store 3rd Quarter Nine Months
------------------------------ -------------------------------
Sales FY02 FY01 FY02 FY01
------------------------------ -------------- --------------- --------------- ---------------
Vehicle dollars:
------------------------------ -------------- --------------- --------------- ---------------
Used vehicles 36% 15% 31% 15%
------------------------------ -------------- --------------- --------------- ---------------
New vehicles 51% (4%) 28% 11%
------------------------------ -------------- --------------- --------------- ---------------
Total 38% 11% 30% 15%
------------------------------ -------------- --------------- --------------- ---------------
------------------------------ -------------- --------------- --------------- ---------------
Vehicle units:
------------------------------ -------------- --------------- --------------- ---------------
Used vehicles 29% 11% 24% 11%
------------------------------ -------------- --------------- --------------- ---------------
New vehicles 46% (3%) 24% 11%
------------------------------ -------------- --------------- --------------- ---------------
Total 31% 9% 24% 11%
============================== ============== =============== =============== ===============
Page 43 of 49
In the third quarter of fiscal 2002, sales in the CarMax business accelerated
beyond the strong sales trend that began in fiscal 2001. Early in the third
quarter, used-car unit sales were consistent with the 20 percent growth trends
experienced throughout the first two quarters of the year. Beginning in late
September, traffic flow to our used-car superstores increased significantly,
which we believe was driven by cross shopping from new-car financing incentive
programs. We converted this increased traffic flow into significantly
accelerated used-car sales in both October and November. The five-year,
zero-percent financing incentives drove extraordinary new-car sales growth in
October. However, the new-car sales growth rate slowed in November as we sold
through most of our close-out inventory of 2001 models and as most zero-percent
financing incentive terms were limited to three years and available on fewer
models. The sales increase also reflects higher average retails for both used-
and new-car sales. The percent of vehicle sales represented by used cars and new
cars for the third quarter and the first nine months of fiscal 2002 and 2001
were as follows:
================================== ============================== ================================
3rd Quarter Nine Months
------------------------------ --------------------------------
Vehicle Sales Mix FY02 FY01 FY02 FY01
---------------------------------- -------------- --------------- --------------- ----------------
Vehicle dollars:
---------------------------------- -------------- --------------- --------------- ----------------
Used vehicles 80% 81% 81% 80%
---------------------------------- -------------- --------------- --------------- ----------------
New vehicles 20% 19% 19% 20%
---------------------------------- -------------- --------------- --------------- ----------------
Total 100% 100% 100% 100%
---------------------------------- -------------- --------------- --------------- ----------------
---------------------------------- -------------- --------------- --------------- ----------------
Vehicle units:
---------------------------------- -------------- --------------- --------------- ----------------
Used vehicles 86% 87% 86% 86%
---------------------------------- -------------- --------------- --------------- ----------------
New vehicles 14% 13% 14% 14%
---------------------------------- -------------- --------------- --------------- ----------------
Total 100% 100% 100% 100%
================================== ============== =============== =============== ================
Average retail selling prices for CarMax vehicles for the third quarter and
first nine months of fiscal 2002 and 2001 were as follows:
================================== ================================ ================================
Average Retail 3rd Quarter Nine Months
-------------------------------- --------------------------------
Selling Prices FY02 FY01 FY02 FY01
---------------------------------- --------------- ---------------- --------------- ----------------
Used vehicles $15,100 $14,400 $15,200 $14,300
---------------------------------- --------------- ---------------- --------------- ----------------
New vehicles $23,500 $22,700 $23,100 $22,500
---------------------------------- --------------- ---------------- --------------- ----------------
Blended average $16,300 $15,400 $16,300 $15,400
================================== =============== ================ =============== ================
CarMax gross dollar sales from all extended warranty programs were 3.9 percent
of sales in the third quarter of fiscal 2002 and 4.1 percent in the third
quarter of fiscal 2001. Third-party warranty revenue was 1.7 percent of sales in
this year's third quarter and 1.8 percent in the same period last year. The
total extended warranty revenue that is reported in total sales was 1.7 percent
of sales in the third quarter of fiscal 2002 and 1.8 percent of sales in the
third quarter of fiscal 2001.
Page 44 of 49
The following table provides detail on the CarMax retail units:
================================== ==================== =================== =================== ==================
Estimate Feb. 28,
Store Mix Nov. 30, 2001 Nov. 30, 2000 2002 Feb. 28, 2001
---------------------------------- -------------------- ------------------- ------------------- ------------------
"C" and "B" stores 14 14 14 14
---------------------------------- -------------------- ------------------- ------------------- ------------------
"A" stores 17 17 18 17
---------------------------------- -------------------- ------------------- ------------------- ------------------
Prototype satellite stores 4 4 5 4
---------------------------------- -------------------- ------------------- ------------------- ------------------
Stand-alone new-car stores 4 5 3 5
---------------------------------- -------------------- ------------------- ------------------- ------------------
Total 39 40 40 40
================================== ==================== =================== =================== ==================
CarMax's geographic growth over the next five years is expected to include
primarily the addition of superstores in new mid-sized markets that can be
served effectively with one CarMax superstore and additional satellite stores in
existing multi-store markets. Mid-sized markets are those with populations of
approximately 1 million to 2.5 million people. During the third quarter, we
closed the new-car stand-alone Mitsubishi franchise in the Los Angeles market
and after the end of the quarter, in December 2001, we completed the sale of our
Dallas Chrysler new-car stand-alone franchise. We expect to open one
standard-sized used-car superstore and one satellite used-car superstore in late
February 2002. The standard superstore is planned for Greensboro, N.C., and the
satellite for Merrillville, Ind., in the greater Chicago market. In fiscal 2003,
we plan to open four to six stores, and in fiscal years 2004 through 2006, we
plan to open six to eight stores per year. The standard superstore previously
planned for opening at the end of this fiscal year in Sacramento, Calif., now is
planned to open in the first quarter next fiscal year.
Our operations, in common with other retailers in general, are subject to
seasonal influences. Historically, the CarMax business has experienced more of
its net sales in the first half of the fiscal year. The net earnings of any
interim quarter are seasonally disproportionate to net sales since
administrative and certain operating expenses remain relatively constant during
the year. Therefore, interim results should not be relied upon as necessarily
indicative of results for the entire fiscal year.
Cost of Sales
-------------
The gross profit margin was 11.8 percent of sales in the third quarter of fiscal
2002 versus 12.8 percent for the same period last year. For the nine-month
period ended November 30, 2001, the gross profit margin was 12.5 percent,
compared with 13.3 percent for the same period last year. We achieved our gross
profit margin dollar targets per vehicle; however, used-car higher average
retails and the slightly higher mix of new cars to used cars generated a decline
in the gross profit margin on a percentage basis. Used-car gross dollar margins
are similar across makes and models. Consequently, the gross profit margin
percentage on a higher priced used car is lower than on a more modestly priced
car. The incentive-driven growth in new car sales resulted in the higher mix of
new cars to used cars, and new cars carry much lower gross margins, both in
dollars and on a percentage basis. We also experienced a small amount of gross
profit margin erosion caused by wholesale auction losses that occurred following
the rapid decline in wholesale vehicle prices after September 11.
Selling, General and Administrative Expense
-------------------------------------------
The selling, general and administrative expense ratio decreased to 7.9 percent
of sales in the third quarter of fiscal 2002 from 10.1 percent of sales for the
same period last year. For the nine months ended November 30, 2001, the ratio
was 7.5 percent of sales, compared with 9.5 percent in the same period last
year. The expense ratio improvement reflects the significant expense leverage
generated by the comparable store vehicle unit sales growth and higher average
retails. As in the first half of this year, we experienced increased yield
spreads from our finance operation, which continues to benefit from the lower
cost of funds.
Page 45 of 49
Interest Expense
----------------
The CarMax interest expense declined by $2.6 million to $0.1 million for the
third quarter of fiscal 2002 and by $4.4 million to $4.7 million for the nine
months ended November 30, 2001, compared with the same periods last year,
reflecting both lower debt levels and interest rates.
Net Earnings
------------
Net earnings for the CarMax business, increased 143.7 percent to $18.4 million
in the third quarter of fiscal 2002 from $7.6 million in last year's third
quarter. For the first nine months of the current fiscal year, the CarMax
business had net earnings of $72.4 million, compared with $37.8 million in
fiscal 2001.
Net earnings attributed to the CarMax Group stock increased 241.4 percent to
$6.6 million in the third quarter of fiscal 2002 from $1.9 million in the third
quarter of last year. For the first nine months of the current year, net
earnings attributed to the CarMax Group stock were $21.4 million, compared with
$9.6 million last year.
Net earnings attributed to the CarMax Group stock reflect the effect of the
public offering completed in the second quarter of this year. With the impact of
the offering, 64.5 percent of the CarMax Group's nine-month earnings were
allocated to the Circuit City Group. For the same period last year, 74.6 percent
of the CarMax Groups earnings were allocated to the Circuit City Group.
Liquidity and Capital Resources
-------------------------------
For the first nine months, CarMax generated cash from operating activities of
$74.0 million in fiscal 2002, compared with $48.6 million in fiscal 2001. The
improvement was primarily the result of increased net earnings.
Net cash provided by investing activities was $73.4 million in the nine months
ended November 30, 2001, compared with $6.0 million in the first nine months of
last year. This increase of $67.4 million reflects the proceeds from the second
quarter sale-leaseback transaction, partially offset by an increase in capital
expenditures this year related to new store construction. In August 2001, CarMax
entered into a sale-leaseback transaction covering nine superstore properties
valued at $102.4 million. This transaction, which represented the first
sale-leaseback entered into by CarMax without a Circuit City Stores guarantee,
was structured at competitive rates with an initial lease term of 15 years and
two 10-year renewal options.
As scheduled, in June 2001 we used existing working capital to repay a $130
million term loan. Payment of corporate debt will not necessarily reduce CarMax
Group allocated debt. At November 30, 2001, the CarMax Group had cash and cash
equivalents of $10.0 million and total debt of $44.9 million. We maintain a $150
million unsecured revolving credit facility and $195 million in committed
seasonal lines of credit that are renewed annually with various banks.
The Company has asset securitization programs to finance the consumer
installment credit receivables generated by CarMax's automobile loan finance
operation. Automobile loan receivables are sold to special purpose subsidiaries
which, in turn, securitize those receivables through both private placement and
the public market. As of November 30, 2001, the combined capacity of these
programs was $1.90 billion. During the quarter, the Company completed its third
public automobile loan receivable securitization program, securitizing $641.7
million of auto loan receivables. Securitized receivables under all CarMax
programs totaled $1.51 billion as of November 30, 2001. We anticipate that we
will be able to expand or enter into new arrangements comparable to these
securitization programs to meet future needs.
During the second quarter, we completed the public offering of 9,516,800 shares
of CarMax Group stock, including the exercise of an underwriters' over-allotment
option for 666,800 shares. The shares sold in the offering were shares of CarMax
Group stock that previously had been reserved for the Circuit City Group or for
issuance to holders of Circuit City Group stock. The net proceeds from the
offering of $139.6 million were
Page 46 of 49
allocated to the Circuit City Group to be used for general purposes of the
Circuit City business, including remodeling of Circuit City Superstores.
CarMax relies on the external debt allocated to it by Circuit City Stores to
provide working capital needed to fund net assets not otherwise financed through
sale-leasebacks or receivable securitizations. We manage all significant
financial activities of the CarMax business on a centralized basis. CarMax's
significant financial activities are dependent on our financial condition as a
whole and include the investment of surplus cash, issuance and repayment of
debt, securitization of receivables or sale-leasebacks of real estate.
We anticipate that fiscal 2002 capital expenditures will continue to be funded
through a combination of floor plan financing, internally generated cash,
sale-leaseback transactions, proceeds from the sales of receivables or future
increases in Circuit City Stores' debt allocated to the CarMax group.
FORWARD-LOOKING STATEMENTS
--------------------------
This report on Form 10-Q contains "forward-looking statements," which are
subject to risks and uncertainties. Additional discussion of factors that could
cause actual results to differ materially from management's projections,
forecasts, estimates and expectations is contained in our SEC filings, including
our report on Form 10-Q for the quarter ended May 31, 2001.
ITEM 3.
CARMAX GROUP QUANTITATIVE AND QUALITATIVE
-----------------------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
We centrally manage the market risk associated with the automobile loan
portfolio of CarMax's finance operation. A portion of this portfolio is
securitized and, therefore, is not presented on the CarMax Group's balance
sheets. Interest rate exposure relating to these receivables represents a market
risk exposure that we manage with matched funding and interest rate swaps.
Financing for these automobile loan receivables is achieved through asset
securitization programs that, in turn, issue both fixed- and floating-rate
securities. Because programs are in place to manage interest rate exposure
relating to the existing automobile loan receivables, we expect to experience
relatively little impact as interest rates fluctuate. Receivables held for
investment or sale are financed with working capital.
Financings at November 30 and February 28, 2001, were as follows:
(Amounts in millions) November 30 February 28
---------------------------------------------------------------------
Fixed-rate securitizations............. $ 1,279 $ 984
Floating-rate securitizations
synthetically altered to fixed...... 227 299
Floating-rate securitizations.......... 1 1
Held by the Company:
For investment*..................... 6 9
For sale............................ 4 3
-----------------------
Total Principal Outstanding............ $ 1,517 $ 1,296
=======================
* Held by a bankruptcy remote special purpose company.
Page 47 of 49
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(i) Articles of Incorporation
(a) Amended and Restated Articles of Incorporation
of Circuit City Stores, Inc., 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 our 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 our 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.
(3)(ii) Bylaws
(a) Bylaws of Circuit City Stores, Inc., as amended
and restated December 20, 2001, filed herewith.
(b) Reports on Form 8-K
None.
Page 48 of 49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRCUIT CITY STORES, INC.
By: s/ W. Alan McCollough
---------------------------------
W. Alan McCollough
President and
Chief Executive Officer
By: s/ Michael T. Chalifoux
---------------------------------
Michael T. Chalifoux
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
By: s/ Philip J. Dunn
---------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
January 11, 2002
Page 49 of 49