UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________ to _________
Commission File No.: 1-5767
CIRCUIT CITY STORES, INC.
(Exact name of Registrant as specified in its charter)
VIRGINIA 54-0493875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9950 Mayland Drive
Richmond, VA 23233
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (804) 527-4000
Securities registered pursuant to Section 12(b)of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Circuit City Stores, Inc.-Circuit City Group Common Stock, Par Value $0.50 New York Stock Exchange
Circuit City Stores, Inc.-CarMax Group Common Stock, Par Value $0.50 New York Stock Exchange
Rights to Purchase Preferred Stock,
Series E, Par Value $20.00 New York Stock Exchange
Series F, Par Value $20.00 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [|X|]
On April 30, 2002, the Company had outstanding 209,845,675 shares of
Circuit City Group Common Stock and 37,030,117 shares of CarMax Group Common
Stock. The aggregate market value of the common shares held by non-affiliates
(without admitting that any person whose shares are not included in determining
such value is an affiliate) was $4,524,272,753 for the Circuit City Group and
$1,092,388,452 for the CarMax Group based upon the closing price of these shares
as reported by the New York Stock Exchange on April 30, 2002.
Page 1 of 130
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2002 Annual Meeting
of Shareholders are incorporated by reference in Part III of this Form 10-K/A
Report: "Item One - Election of Directors," "Beneficial Ownership of
Securities," "Compensation of Executive Officers," "Compensation of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance."
EXPLANATORY NOTE
To reflect reclassifications of CarMax wholesale sales and additional
disclosures relating to the Company's finance operations that were effective in
the Form 10-Q, which was filed July 15, 2002, this amendment to the Company's
Report on Form 10-K, which was filed May 28, 2002, is filed for the purpose of
revising the disclosures contained in Part II, Items 6 through 8. The
information in this amended report has not been otherwise updated to reflect
events or developments since the Company's Report on Form 10-K was initially
filed. Other sections of the report have been revised for the convenience of the
reader and to cross reference the information included in the revised items. The
reader is directed to the Company's more recent reports, including its report on
Form 10-Q for the quarter ended May 31, 2002, for more current information.
TABLE OF CONTENTS
Item Page
PART I
1. Business 3
2. Properties 12
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 14
Executive Officers of the Company 14
PART II
5. Market for the Company's Common Equity and Related Stockholder Matters 16
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Results of Operations and Financial Condition 18
7a. Quantitative and Qualitative Disclosures about Market Risk 56
8. Financial Statements and Supplementary Data 57
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 118
PART III
10. Directors and Executive Officers of the Company 118
11. Executive Compensation 118
12. Security Ownership of Certain Beneficial Owners and Management 118
13. Certain Relationships and Related Transactions 118
Page 2 of 130
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 118
PART I
Item 1. Business.
Circuit City Stores, Inc. (the Company) was incorporated under the laws
of the Commonwealth of Virginia in 1949. Its corporate headquarters are located
at 9950 Mayland Drive, Richmond, Virginia. Its retail operations consist of
Circuit City Superstores and mall-based Circuit City Express stores. Certain of
the Company's subsidiaries operate CarMax Auto Superstores, a used- and new-car
retail business. The Company has wholly owned finance operations that provide
consumer revolving credit and automobile installment loans.
In this document, the following terms and definitions are used:
The Company refers to Circuit City Stores, Inc. and subsidiaries,
including the Circuit City retail stores and related operations and the
CarMax retail stores and related operations.
Circuit City refers to the retail operations bearing the Circuit City
name and to all related operations such as Circuit City's finance
operation and product service.
Circuit City Group refers to the Circuit City and Circuit City-related
operations and the shares of CarMax Group Common Stock reserved for the
Circuit City Group or for issuance to holders of Circuit City Group
Common Stock.
CarMax Group and CarMax refer to retail locations bearing the CarMax
name and to all related operations such as CarMax's finance operation.
Capital Structure. The common stock of Circuit City Stores, Inc.
consists of two common stock series that are intended to reflect the performance
of the Company's two businesses. The Circuit City Group Common Stock is intended
to reflect the performance of the Circuit City stores and related operations and
the shares of CarMax Group Common Stock reserved for the Circuit City Group or
for issuance to holders of Circuit City Group Common Stock. The CarMax Group
Common Stock is intended to reflect the performance of the CarMax stores and
related operations.
On February 22, 2002, Circuit City Stores, Inc. announced that its
board of directors had authorized management to initiate a process that would
separate the CarMax auto superstore business from the Circuit City consumer
electronics business through a tax-free transaction in which CarMax, Inc.,
presently a wholly owned subsidiary of Circuit City Stores, Inc., would become
an independent, separately traded public company. CarMax, Inc. holds
substantially all of the businesses, assets and liabilities of the CarMax Group.
The separation plan calls for Circuit City Stores, Inc. to redeem the
outstanding shares of CarMax Group Common Stock in exchange for shares of common
stock of CarMax, Inc. Simultaneously, shares of CarMax, Inc. common stock,
representing the shares of CarMax Group Common Stock reserved for the holders of
Circuit City Group Common Stock, would be distributed as a tax-free dividend to
the holders of Circuit City Group Common Stock.
In the proposed separation, the holders of CarMax Group Common Stock
would receive one share of CarMax, Inc. common stock for each share of stock
redeemed by the Company. We anticipate that the holders of Circuit City Group
Common Stock would receive a fraction of a share of CarMax, Inc. common stock
for each share of Circuit City Group Common Stock they hold. The exact fraction
would be determined on the record date for the distribution. The separation is
expected to be completed by late summer, subject to shareholder approval and
final approval from the board of directors. CarMax, Inc. has filed a
registration statement regarding this transaction with the Securities and
Exchange Commission. This registration statement contains pro forma financial
information that is intended to reflect the potential effects of the separation
of the two businesses.
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 Common Stock and holders of
CarMax Group Common 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
Circuit City Group Common Stock nor shares of CarMax Group Common 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 Common
Stock or CarMax Group Common Stock will reduce funds legally available for
dividends on, or repurchases of, both stocks.
Page 3 of 130
Accordingly, the Company's consolidated financial statements should be read in
conjunction with the financial statements of each Group and the Company's SEC
filings.
The financial statements of the Company reflect the performance of each
Group's business as well as the allocation of the Company's assets, liabilities,
expenses and cash flows between the Groups in accordance with the policies
adopted by the board of directors. These policies may be modified or rescinded,
or new policies may be adopted, at the sole discretion of the board of
directors, although the board of directors has no present plans to do so except
for the possible effects of the proposed CarMax separation. These management and
allocation policies include the following:
Dividends. Future dividends on the Circuit City Group Common Stock and
the CarMax Group Common Stock will be based primarily upon the financial
condition, results of operations and business requirements of the relevant Group
and the Company as a whole, as well as any limitations specified in the
Company's governing documents.
CarMax currently operates 23 of its locations pursuant to various
leases under which Circuit City Stores, Inc. was the original tenant and primary
obligor. Circuit City Stores, Inc., and not CarMax, had originally entered into
these leases so that CarMax could take advantage of the favorable economic terms
available to the Company as a large retailer. The Company has assigned each of
these leases to CarMax. Despite the assignment and pursuant to the terms of the
leases, the Company remains contingently liable under the leases. For example,
if CarMax were to fail to make lease payments under one or more of the leases,
the Company may be required to make these payments on CarMax's behalf. In
recognition of this ongoing contingent liability, CarMax has agreed to make a
one-time special dividend payment to Circuit City Stores, Inc. on the separation
date, assuming the separation is completed. We currently expect this special
dividend to be between $25 million and $35 million.
Optional Conversion of Series of Common Stock. The board of directors
may, at any time, at its sole discretion, decide to convert shares of one
Group's common stock into shares of the other Group's common stock at a 15
percent premium or a 10 percent premium following any dividend or partial
redemption undertaken in connection with a disposition of all or substantially
all of the properties or assets attributed to the Group whose common stock is
being converted.
Conflicts of Interest. The existence of separate series of common stock
could result in conflicts of interest between the holders of Circuit City Group
Common Stock and the holders of CarMax Group Common Stock. When making decisions
with regard to matters that could create diverging interests, the board of
directors would act in good faith to serve the best interests of the Company,
taking into consideration the interests of all shareholders.
Effects of Corporate Events on Rights of Shareholders. Although the
common stock of each Group is intended to reflect the separate performance of
that Group, a person interested in acquiring control of only one Group without
negotiation with the Company's management would still be required to seek
control of the voting power represented by all of the outstanding common stock
of the Company. In the event of liquidation, dissolution or termination of the
Company, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the Company and full preferential
amounts to which holders of any series of Preferred Stock are entitled, the
shareholders of each Group would be entitled to receive the net assets, if any,
of the Company remaining for distribution to holders of common stock on a per
share basis in proportion to the liquidation units per share of each series.
Each share of Circuit City Group Common Stock would have one liquidation unit
and each share of CarMax Group Common Stock would have one-half of a liquidation
unit.
Circuit City Group:
General. Circuit City is a leading national retailer of brand-name
consumer electronics, personal computers and entertainment software. It sells
video equipment, including televisions, digital satellite systems, DVD players,
video cassette recorders, camcorders and cameras; audio equipment, including
home and portable audio systems and compact disc players; mobile electronics,
including car audio, video and security systems; home office products, including
personal computers, printers, peripherals, software and facsimile machines;
entertainment software, including video games, DVD movies and music; and other
consumer electronics products, including wireless phones, corded and cordless
phones and accessories. Merchandise lines vary from location to location based
on store size and market characteristics. Most merchandise is supplied directly
to the stores by regional warehouse distribution facilities.
Prior to fiscal year 2002, Circuit City sold major appliances. In
fiscal year 2001, 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. See "Appliance Exit" section below for
further information.
Through a 75 percent owned business Digital Video Express that has been
discontinued and for which Circuit City was allocated 100 percent of the losses
from inception, the Company developed a new digital video system for watching
movies at home. This system was marketed in fiscal years 1999 and 2000. Divx was
primarily engaged in the business of replicating and distributing specially
encrypted DVDs at wholesale. See section "Discontinued Operations" below for
further information.
Page 4 of 130
Expansion. At April 30, 2002, Circuit City operated 623 retail
locations throughout the United States. Circuit City has established its
presence in virtually all of the nation's top 100 markets and, therefore,
contemplates only limited geographic expansion. We expect to continue adding to
the existing store base as attractive market opportunities arise. In fiscal
2003, Circuit City expects to open approximately 10 new Circuit City Superstores
and relocate approximately 10 Superstores. Over the past two years, we have
experimented with several remodel designs and product category tests to expand
the benefits of our new Circuit City store design to the existing store base. In
fiscal 2003, we plan to draw on these remodel and product category tests to roll
out a remodeled video department and lighting upgrade to approximately 300
Superstores. We believe that rolling out this remodeled department will enable
us to increase market share in the growing and highly profitable big-screen
television category and further solidify our position in the overall video
category. The fiscal 2003 remodeling plan will allow us to affect a large number
of Superstores in a manner that has significant potential for incremental
benefit, while minimizing the disruptive impact of the remodeling process. We
expect the remodeling activities will take approximately two weeks to complete
in each store. We will continue testing design ideas for other departments. We
plan to continue improving the Circuit City store base in fiscal 2004 and fiscal
2005 by completing the remodel of these 300 stores and by relocating additional
stores to provide a shopping experience that we believe is more consistent with
the preferences of today's consumer.
Merchandising. Each Circuit City store location follows detailed
operating procedures and merchandising programs. Included are procedures for
inventory maintenance, customer relations, store administration, merchandise
display, store security and the demonstration and sale of products. Most
merchandise is supplied directly to the stores from one of Circuit City's seven
automated distribution centers, which are strategically located around the
country, and from a centrally located automated software entertainment
distribution center. Circuit City's operating regions use a centralized buying
organization. The central buying staff reduces costs by purchasing in large
volumes and structuring a sound basic merchandising program. Circuit City's
merchandising strategy emphasizes a broad selection of products, including the
industry's newest technologies, and a wide range of prices. Merchandise mix and
displays are controlled centrally to help ensure a high level of consistency
among the stores. Merchandise pricing varies by market to reflect local
competitive conditions.
Suppliers. During fiscal 2002, Circuit City's 10 largest suppliers
accounted for approximately 68 percent of merchandise purchased. Circuit City's
major suppliers include Sony Electronics, Hewlett Packard, Compaq, Panasonic,
JVC Company of America, Thomson Multimedia, Inc., Hitachi America LTD, Toshiba,
Philips Computer Electronics and Universal Music and Video Distribution.
Brand-name advertised products are sold by all of the Circuit City retail
locations. Circuit City has no significant long-term contracts for the purchase
of merchandise.
Advertising. Circuit City's business relies on considerable amounts of
advertising to maintain high levels of consumer awareness. Advertising
expenditures from continuing operations were 3.8 percent of net sales and
operating revenues in fiscal 2002, 4.0 percent in fiscal 2001 and 3.7 percent in
fiscal 2000. The Circuit City business is generally one of the largest newspaper
advertisers in the markets that it serves. Circuit City uses multi-page vehicles
and run-of-press newspaper advertisements, network and cable television
advertising, magazine advertising, direct mail and interactive media. The
multi-page vehicles provide an extensive presentation of the broad selection of
products and price ranges Circuit City carries. As part of its competitive
strategy, Circuit City advertises low prices and provides customers with a
low-price guarantee. For every product that Circuit City sells, with some
restrictions, we will meet any advertised price from a local store stocking the
same new item. In most cases, if a customer finds a lower advertised price,
including Circuit City's own sale price, within 30 days, Circuit City will
refund the difference plus 10 percent of the difference to the customer.
Competition. The consumer electronics industry is highly competitive.
Circuit City's competitors include large specialty, discount or warehouse
retailers as well as local, regional and non-brick-and-mortar retailers. Circuit
City uses service, selection and pricing to differentiate its stores from the
competition. As part of Circuit City's competitive strategy, the Circuit City
Superstores offer a broad selection of brand-name merchandise. Professionally
trained sales counselors, convenient credit options, factory-authorized product
repair, home delivery, installation centers for automotive electronics, exchange
and no-lemon policies and extended warranties reflect a strong commitment to
customer service. Circuit City strives to maintain highly competitive prices and
offers customers a low-price guarantee.
Customer Satisfaction. Circuit City conducts market research to monitor
store operations and help ensure customer satisfaction. Market research
techniques used include focus groups, online customer satisfaction surveys from
BizRate.com, telephone interviews, exit interviews and "mystery shops," in which
a professional mystery shopper acts as a customer to evaluate customer service
performance. Quick feedback enables management to identify issues that need to
be addressed, ensuring that store and individual performance remain focused on
providing the highest possible level of customer service.
Employees/Training. At April 30, 2002, the Company had 34,252 hourly
and salaried employees and 14,915 employees who worked on a commission basis.
Circuit City Superstores are staffed with commissioned and hourly sales
associates; sales support personnel such as customer service associates,
merchandise specialists and stockpersons; a store manager; one or more sales
managers; and an operations manager. At April 30, 2002, Circuit City Group had
28,994 hourly and
Page 5 of 130
salaried employees and 12,685 employees who worked on a commission basis. None
of these employees are subject to a collective bargaining agreement. Additional
personnel may be employed during peak selling seasons.
Store Associates receive continuous training delivered by customized
Web-based interactive courses, supported with in-store mentoring. Courses
include product knowledge with an emphasis on new technology, customer service
and store operations. Associates also receive online tutoring with links to
vendor Web sites for additional resources. In fiscal 2003, a certification
program is being implemented to establish minimum proficiency levels and measure
each sales counselor's product knowledge and product service. Management
training programs are designed to prepare future leaders and include Web-based
training, in-store activities, online tutoring and classroom instruction.
Consumer Credit. Because consumer electronics and personal computers
represent relatively large purchases for the average consumer, Circuit City's
business is affected by consumer credit availability, which varies with the
state of the economy and the location of a particular store. In fiscal 1991,
Circuit City established a credit card finance operation to issue a
private-label credit card. In fiscal 2002, approximately 15 percent of Circuit
City's total sales were made through its private-label credit card and
approximately 50 percent through third-party credit sources. The finance
operation's credit extension, customer service and collection operations are
fully automated with state-of-the-art technology to maintain a high level of
profitability and customer service. The credit card finance operation also
manages a MasterCard and VISA bankcard portfolio. Receivables generated by both
the private-label credit card and bankcard programs are financed through asset
securitization programs. In fiscal 2003, the Company plans to offer a co-branded
VISA credit card that will be issued by Circuit City's finance operation.
Systems. Circuit City's in-store point-of-sale system maintains an
online record of all transactions and allows management to track performance by
region, store and individual sales counselor. The information gathered by the
system supports automatic replenishment of in-store inventory from the regional
distribution centers and is incorporated into product buying decisions. The POS
system is interfaced with the finance operation's credit approval system. The
in-store POS system also is seamlessly integrated with the Company's e-commerce
Web site, circuitcity.com. This integration provides the capability for in-store
pickup of merchandise ordered from circuitcity.com and allows for in-store
ordering of merchandise for shipment directly to the customer's home. In the
stores, electronic signature capture for all credit card purchases, automatic
printing of manufacturers' rebates, bar-code scanning for product returns and
repairs, automatic price tag printing for price changes and computerized home
delivery scheduling enhance Circuit City's customer service. These enhancements
eliminate time-consuming administrative tasks for store Associates and reduce
costs through smoother store-level execution. The POS system also is directly
integrated with the registration systems of major Internet service providers
such as America Online, CompuServe and MSN, allowing in-store registration with
the interactive services to be completed in approximately five minutes. At
in-store kiosks, the POS system also allows customers to sign up for high speed
Internet (broadband) service, and to special order custom-built computers from
major PC vendors.
Circuit City's Customer Service Information System maintains an online
history of customer purchases and enables sales counselors to better assist
customers with purchases by ensuring that new products can be integrated with
existing products in the home. This system also facilitates product returns and
repairs.
The Company also is utilizing comprehensive, Internet-based training
systems to enhance the product knowledge of in-store Associates.
E-Commerce. Circuit City's e-Superstore Web site provides broad product
selection, convenient purchase and delivery options and in-depth product
comparison information. Internet customers can check the inventory of up to
three Circuit City Superstores in nearby locations, in addition to the in-stock
availability from the e-Superstore. The Web site inventory also is accessible
from any store location. Products can be shipped through the e-Superstore for
normal shipping charges or they can be picked up, using the Express Pickup
service, at a local Superstore. Products purchased through the e-Superstore are
shipped from an existing distribution center directly to the customer. Products
purchased through the Web site can be serviced through, exchanged at or returned
to any Circuit City Superstore location.
In addition to Circuit City's own Web site, the Company has partnered
with Amazon.com to increase selection and convenience for Amazon's consumer
electronics shoppers by providing immediate in-store pickup at Circuit City
Stores nationwide on thousands of electronics items. In cases where both
Amazon.com and Circuit City offer the same electronics products, customers have
a choice between traditional Amazon.com shipping options and immediate pickup
from a nearby Circuit City Superstore. Items offered exclusively by Circuit City
are available for in-store pickup only; and merchandise offered exclusively by
Amazon.com will be delivered from Amazon.com.
Distribution. As of April 30, 2002, Circuit City operated seven
automated regional Circuit City electronics distribution centers, each designed
to serve stores within a 500-mile range. These centers use conveyor systems and
laser bar-code scanners to reduce labor requirements, prevent inventory damage
and maintain inventory control. Circuit City also operates smaller distribution
centers handling primarily larger non-conveyable electronics products. Circuit
City believes that for most merchandise the use of the distribution centers
enables it to distribute efficiently a broad selection of merchandise to its
Page 6 of 130
stores, reduce inventory requirements at individual stores, benefit from volume
purchasing and maintain accounting control. Additionally, Circuit City operates
an automated centralized entertainment software distribution center that serves
all stores. Most of Circuit City's store merchandise is distributed through its
distribution centers, although it expects to add direct-to-store delivery in
fiscal 2003 for key products where timely delivery to the store is critical to
sales.
Service. Circuit City offers service and repairs for most of the hard
goods it sells. Customers also are able to purchase extended warranties on most
of the merchandise that it sells. Circuit City sells extended warranty programs
on behalf of unrelated third parties who are the primary obligors. Under these
third-party warranty programs, Circuit City has no contractual liability to the
customer. In the three states where third-party warranty sales are not
permitted, Circuit City sells an extended warranty for which it is the primary
obligor. During fiscal 2001, Circuit City initiated the Replacement Protection
Plan, a third-party program which covers various types of electronics
merchandise, including some types of TVs, VCRs, MP3 players and Mini Disc
players. If the customer purchases an RPP, the customer can return defective
merchandise during the plan period and receive a check for the original purchase
price of the merchandise, plus any shipping and handling.
As of April 30, 2002, Circuit City had 22 regional, factory-authorized
repair facilities. To meet customer needs, merchandise that requires service or
repair usually is moved by truck from the stores to the nearest regional service
facility and is returned to the store for customer pick-up after repair. Circuit
City also has in-home technicians who service large items not conveniently
carried to the store.
Seasonality. Like many retail businesses, Circuit City's sales are
greater in the fourth quarter of the fiscal year than in other periods of the
fiscal year because of holiday buying patterns. A corresponding pre-season
inventory build-up is associated with this sales volume. This increased sales
volume results in a lower ratio of fixed costs to sales and a higher ratio of
operating income to sales in the fourth fiscal quarter. The Circuit City Group's
sales from continuing operations for the fourth fiscal quarter, which includes
the holiday season, were $3.39 billion in fiscal 2002, $3.18 billion in fiscal
2001 and $3.48 billion in fiscal 2000. Fourth quarter sales represented
approximately 35 percent of total sales in fiscal 2002, 30 percent in fiscal
2001 and 33 percent in fiscal 2000.
Appliance Exit. 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. The Company maintains control
over Circuit City's in-home major appliance repair business, although repairs
are subcontracted to an unrelated third party.
To exit the appliance business, the Company 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 marketing the remaining properties to be
subleased.
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 was paid to
employees on a biweekly schedule based on years of service, cash payments lagged
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.
Discontinued Operations. On June 16, 1999, Digital Video Express
announced that it would cease marketing the Divx home video system and
discontinue operations. Discontinued operations have been segregated on the
consolidated statements of cash flows; however, Divx is not segregated on the
consolidated balance sheets.
For fiscal 2002 and 2001, the discontinued Divx operations had no
impact on the net earnings of Circuit City Stores, Inc. In fiscal 2000, the loss
from the discontinued Divx operations totaled $16.2 million after an income tax
benefit of $9.9 million and the loss on the disposal of the Divx business
totaled $114.0 million after an income tax benefit of $69.9 million. The loss on
the disposal included a provision for operating losses to be incurred during the
phase-out period. It 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.
As of February 28, 2002, entities comprising the discontinued Divx
operations have been dissolved. The remaining liabilities, totaling $18.5
million, have been assumed by the Company and are included in the consolidated
and Circuit City Group balance sheets.
CarMax Group:
General. CarMax is the nation's largest specialty retailer of used cars
and light trucks. In 1993, CarMax pioneered the used-car superstore concept when
it opened its first location in Richmond, Virginia. CarMax purchases,
reconditions and sells used vehicles. In addition, CarMax sells new vehicles
under franchise agreements with DaimlerChrysler, Mitsubishi, Nissan,
Page 7 of 130
Toyota, Ford and General Motors. CarMax provides its customers the opportunity
to purchase vehicles the same way they buy other retail products, with
non-negotiated, low prices and friendly service. CarMax has separated the
practice of trading in a used vehicle in conjunction with the purchase of
another vehicle into two distinct and independent transactions. CarMax provides
an appraisal that allows current vehicle owners to sell their cars to CarMax
regardless of their intent to purchase a vehicle from CarMax. CarMax also
provides its customers with a full range of related services, including the
financing of vehicle purchases through its own finance operation and third-party
lenders, the sale of extended warranties and vehicle repair service.
Expansion. At April 30, 2002, CarMax operated 41 retail units from 39
locations, including 36 used-car superstores and three stand-alone new-car
franchises. At April 30, 2002, CarMax operated 18 new-car franchises, 15 of
which were co-located or integrated with its used-car superstores. Used-car
sales, which are the major part of CarMax's business, represented 82 percent of
its total vehicle sales in dollars in fiscal 2002. CarMax stores are located in
the Southeastern, Midwestern, Mid-Atlantic and Western United States.
Since 1999, CarMax has modified and re-established its new-store growth
model to move away from large-format superstores. Despite the success of its
large-format superstores in Norcross, Ga., and Laurel, Md., this format proved
less effective in its Miami, Tampa, Houston, Dallas and Chicago markets. CarMax
found that customers in these metropolitan markets were unwilling to travel
great distances to its large-format superstores, resulting in stores that were
too large and that underserved CarMax's target customer in these markets.
Rather, customers preferred to patronize stores that were closer to their homes.
Consequently, CarMax plans to expand its number of stores by adding standard
superstores (formerly referred to as "A" superstores) in new, mid-sized markets
that can be served effectively with one CarMax superstore, together with
satellite fill-in superstores in existing multi-store markets. In
fully-developed mid-sized markets, CarMax intends to test whether increased
penetration can be achieved by adding a satellite superstore. CarMax believes
that by focusing on mid-sized markets and satellite fill-in superstores over the
near term, it can achieve a higher return on its investment with lower risk.
This approach also allows CarMax to postpone entering large multi-store markets
until its hub-and-satellite model in existing large multi-store markets has
matured further and provides CarMax the opportunity to better anticipate the
number, location and types of stores that will be required in such markets.
CarMax plans to open 22 to 30 stores over the next four years. CarMax
opened two superstores late in fiscal 2002, a standard-sized superstore in the
new market of Greensboro, N.C., and a satellite superstore in the greater
Chicago market. In April 2002, CarMax opened a standard-size superstore in
Roseville, Calif., in the Sacramento market. CarMax intends to open an
additional four or five superstores in fiscal 2003, including superstores in new
mid-sized markets and additional satellite superstores in existing markets.
CarMax expects to open six to eight new stores, including superstores and
satellite superstores, in each of fiscal 2004, 2005 and 2006, depending upon
market opportunities and management's comfort with sales and profitability
projections.
A "mid-sized market" typically has a population of 1.0 million to 2.5
million people. CarMax currently operates stores in nine mid-sized markets
including Richmond, Raleigh, Charlotte, Orlando, San Antonio, Greenville,
Nashville, Greensboro, and Sacramento. CarMax believes that more than 30
additional mid-sized markets may be suitable for its standard store prototype.
The standard store prototype is approximately 40,000 to 60,000 square feet on 10
to 14 acres with approximately 24 service and reconditioning bays.
Under CarMax's hub-and-satellite strategy, a satellite superstore uses
the reconditioning, purchasing and business office operations of a nearby
full-sized hub superstore. The consumer offer is identical in both hub
superstores and satellite superstores. These hub stores have service facilities
that provide regular maintenance and warranty service typical of most new-car
dealerships and also recondition all used vehicles prior to sale at both the hub
superstore and any related satellite superstore. A prototypical satellite
superstore operates on a five- to six-acre site with an approximately
14,000-square-foot facility. The satellite facility houses offices, a showroom
and four to seven service bays for regular maintenance and warranty service.
In addition to entering new mid-sized markets, CarMax plans to focus on
adding satellite fill-in superstores in underserved trade areas in its existing
multi-store markets, which include Washington/Baltimore, Chicago, Atlanta,
Dallas, Houston, Miami and Tampa. CarMax has identified approximately 10
underserved trade areas to target in these markets.
Merchandising. CarMax offers its customers a broad selection of makes
and models of used vehicles, including both domestic and imported cars and light
trucks, at competitive prices. CarMax's used-car selection covers popular brands
from manufacturers such as DaimlerChrysler, Ford, General Motors, Honda,
Mitsubishi, Nissan and Toyota and specialty brands like BMW and Lexus. To appeal
to the vast array of consumer preferences and budgets, CarMax offers used
vehicles under two programs--the CarMax program and the ValuMax program. CarMax
used cars are less than six years old, have fewer than 60,000 miles and
generally range in price from $8,500 to $30,000. ValuMax used cars are more than
six years old or have 60,000 miles or more and generally range in price from
$5,500 to $19,000.
CarMax's commitment to quality is demonstrated to the customer through
a five-day or 250-mile money-back guarantee and an industry-leading 30-day
limited warranty. Each CarMax vehicle must pass a comprehensive quality
inspection
Page 8 of 130
that covers all major and minor mechanical systems and all safety functions as
well as cosmetic criteria. Each ValuMax vehicle must pass a quality inspection
covering most major mechanical systems and all safety functions. For ValuMax,
concentration is placed on providing good, basic, mechanically-sound
transportation. Cosmetic corrections or repairs of convenience or luxury items,
such as electric mirrors or electric antennas, are generally not performed.
At all new-car locations, a full selection of the manufacturer's models
related to the franchise is available. CarMax operates new-car dealerships under
separate franchise or dealer agreements with DaimlerChrysler, Mitsubishi,
Nissan, Toyota, Ford and General Motors.
CarMax has implemented an everyday low-price strategy under which
CarMax sets "no-haggle" prices on its used and new vehicles. In fiscal 2002, its
used-car prices were, on average, $1,700 below retail Kelley Blue Book price.
CarMax believes most prices are at or below the best negotiated price in the
market. Prices on all vehicles are clearly displayed on each vehicle's
information sticker, on carmax.com and in CarMax's newspaper advertising. CarMax
has extended its no-haggle philosophy to every stage of the vehicle transaction,
including trade-ins, financing rates, accessories, extended warranty pricing and
its low vehicle documentation fees.
CarMax has replaced the traditional "trade-in" transaction with a
process in which CarMax trained buyers appraise any vehicle, usually in 30
minutes or less, and provide the vehicle's owner with a written, guaranteed cash
offer that is good for seven days or 300 miles. An appraisal is available to
everyone free of charge, whether or not the individual is purchasing a vehicle
from CarMax. In contrast to traditional dealers who seek to combine the vehicle
purchase and trade-in transactions, the CarMax sales process enables the
customer to separately evaluate and make an informed decision with respect to
each transaction.
Suppliers. CarMax acquires its used-vehicle inventory directly from
consumers through its unique appraisal process and through other sources,
including local and regional auctions, wholesalers, franchised and independent
dealers, and fleet owners, such as leasing companies and rental companies. In
stores open for more than one year, CarMax acquires a larger portion of its
used-vehicle inventory from consumers than from any other source. This buying
strategy provides an inventory of makes and models that reflects the tastes of
the market.
All used vehicles are evaluated on the basis of their wholesale and
reconditioning costs, and, for off-site purchases, cost of delivery to the store
where they will be reconditioned. Buyers based at the stores purchase most of
CarMax's inventory. CarMax's buyers, in collaboration with its headquarters
staff, rely on the extensive inventory and sales trend data available through
the CarMax information system.
Based on consumer acceptance of the appraisal process at existing
CarMax stores and CarMax's experience and success to date in acquiring vehicles
from auctions and other sources, CarMax believes that its sources of used
vehicles will continue to be sufficient to meet current needs and to support
planned expansion.
New-car inventory for the franchise locations is governed by the terms
of the sales and service agreements with DaimlerChrysler, Mitsubishi, Nissan,
Toyota, Ford and General Motors.
Reconditioning. An integral part of CarMax's used-car consumer offer is
the reconditioning process. This process includes a comprehensive, certified
quality inspection of the engine, cooling and fuel system, drive axle,
transmission, electronic systems, suspension, brake system, steering, air
conditioning, interior and optional equipment. Based on this quality inspection,
CarMax determines the reconditioning necessary to bring the vehicle up to
CarMax's high quality standards. Cars in the ValuMax program must meet the same
mechanical, electrical and safety standards, but fewer cosmetic and optional
equipment standards. Vehicle inspections are completed by CarMax's mechanics,
approximately half of whom are Automotive Service Excellence (A.S.E.) certified.
CarMax performs most routine mechanical and minor body repairs
in-house; however, for some reconditioning services, CarMax engages third
parties specializing in those services. Over the past several years, CarMax has
been performing an increasing percentage of reconditioning services in-house
and, based on the cost savings realized, CarMax expects that trend to continue.
Advertising. CarMax's marketing strategies are focused on developing
awareness of the advantages of shopping at CarMax, attracting customers who are
already in the market to purchase a vehicle and targeting specific segments of
the market through special promotions. CarMax's marketing strategies are
implemented primarily through newspaper, television and radio advertising, and
the CarMax Web site. Newspaper advertisements promote CarMax's broad selection
of vehicles and price leadership, targeting consumers with immediate purchase
intentions. Television and radio broadcast advertisements are designed to
enhance consumer awareness of the CarMax name, carmax.com and key components of
the CarMax offer. Both newspaper and broadcast advertisements are designed to
drive customers to the CarMax Web site and to its stores. The style and
substance of CarMax's advertisements are distinctly different from those placed
by most automobile dealers. The third major marketing support for CarMax is its
Web site, carmax.com, which acts as a marketing tool for communicating its
Page 9 of 130
consumer offer in detail, a sophisticated search engine for finding the right
vehicle and a sales channel for customers who prefer to complete a part of the
shopping and sales process online with one of CarMax's internet sales
consultants.
In fiscal 2001, CarMax refined its advertising approach by eliminating
spending that research showed to be unprofitable and by increasing the
efficiency of its television advertising. In fiscal 2002, CarMax continued to
refine the advertising approach implemented in fiscal 2001. CarMax employs a
targeted, high-frequency, low-cost-per-impression television strategy, coupled
with more targeted newspaper advertising. Advertising expenditures were 1.3
percent of net sales and operating revenues in fiscal 2002, 1.6 percent in
fiscal 2001 and 2.2 percent in fiscal 2000. CarMax's fiscal 2002, 2001 and 2000
advertising expense ratios reflect leverage from the total and comparable store
sales increases and changes in media buying strategy.
As additional satellite superstores are opened in a particular market,
CarMax expects to further leverage its advertising expenses in that market over
a larger number of stores. CarMax utilizes market awareness and customer
satisfaction surveys to help tailor its marketing efforts to the purchasing
habits and preferences of customers in each market.
Franchises. CarMax operates new-car dealerships under separate
franchise or dealer agreements with manufacturers. These agreements generally
allow CarMax to sell manufacturers' brands, perform warranty work on these
vehicles and sell related parts and services within a specified market area.
Designation of specified market areas generally does not guarantee exclusivity
within a specified territory. These agreements generally impose operational
requirements and restrictions, including inventory levels, working capital,
monthly financial reporting, signage and cooperation with marketing strategies.
A manufacturer may terminate a dealer agreement under certain circumstances,
including a change in ownership without prior manufacturer approval, failure to
maintain adequate customer satisfaction ratings or a material breach of other
provisions of the agreement. CarMax also has entered into framework agreements
with several major vehicle manufacturers. These agreements generally contain
provisions relating to the acquisition, ownership structure, advertising and
management of a dealership franchised by those manufacturers.
Various U.S. federal and state laws governing the relationship between
automotive dealerships and vehicle manufacturers also might affect CarMax. These
laws include statutes prohibiting manufacturers from terminating or failing to
renew franchise agreements without proper cause and unreasonably withholding
approval for proposed ownership changes.
Competition. The used- and new-car retail business is highly
competitive. Consumers typically have many choices when deciding where to
purchase a used or new vehicle. In both the used- and new-vehicle markets,
CarMax seeks to distinguish itself from traditional dealerships through its
consumer offer, sales approach and other innovative operating strategies. In the
used-vehicle market, CarMax competes with existing franchised and independent
dealers, rental companies and private parties. Many franchised new-car
dealerships also have increased their focus on the used-vehicle market.
CarMax believes that the principal competitive factors in used-vehicle
sales are price; ability to offer a wide selection of vehicles, including the
more popular makes and models; quality of the vehicles; location of retail
sites; and degree of customer satisfaction with the car-buying experience. Other
competitive factors include the ability to offer or arrange customer financing
on competitive terms and the quality and cost of primary and extended
warranties. CarMax believes that it is competitive in all of these areas and
enjoys advantages over competitors that employ traditional selling methods.
In the new-vehicle market, CarMax competes with other franchised
dealers offering vehicles produced by the same or other manufacturers and with
auto brokers and leasing companies. CarMax believes that the principal
competitive factors in new-vehicle sales are price; dealer sales promotions;
ability of dealerships to offer a wide selection of the most popular vehicles;
location of retail sites; and quality of customer service. The new-vehicle
market has historically been served primarily by dealerships employing
traditional high-pressure, negotiation-oriented sales techniques. CarMax
believes that its customer-friendly, low-pressure sales methods will introduce
points of competitive differentiation in which it may have an advantage.
Customer Satisfaction. The CarMax process enables customers to evaluate
separately each step of the sales process and to make informed decisions at each
step based on comprehensive information about their options and the associated
prices. To increase efficiency, the same sales consultant and the
customer-friendly, proprietary CarMax inventory information system are available
to assist the customer throughout the CarMax sales process. CarMax designed the
elements of the CarMax offer to create a customer-friendly experience. CarMax's
no-haggle pricing allows its sales consultants to focus solely on its customers'
needs. The entire purchase process, including a test-drive and financing, can be
completed in less than one hour. CarMax conducts extensive market research to
measure its customer service record and to refine its consumer offer.
CarMax's sales consultants play a significant role in ensuring a
customer-friendly sales process. CarMax places great emphasis on integrity and
customer-relations skills in its hiring policies and training programs. Although
few of CarMax's sales consultants have had prior experience in automobile sales,
most of CarMax's sales consultants have had prior retail experience before
joining CarMax. Sales consultants, including both full- and part-time employees,
are compensated on a commission basis. The amount of the commission is a fixed
dollar amount per vehicle sold. In contrast, sales and finance personnel at
Page 10 of 130
traditional dealerships often receive higher commissions for negotiating higher
prices and for steering customers toward vehicles with higher gross margins.
Training. CarMax is committed to providing exceptional training to its
associates. New store associates are offered structured, self-paced training
programs that introduce them to company policies and their specific job
responsibilities. Associate participation and performance in each training
program are measured by a unique, intranet-based testing and tracking system.
Most new associates are assigned mentors who provide on-the-job guidance and
support. Many of CarMax's compensation programs reward associates for
continuously improving their skills.
CarMax also offers comprehensive, facilitated classroom training
courses to sales consultants, buyers, automotive technicians and managers. All
sales consultants receive extensive customer service training both initially and
on an ongoing basis. Each buyer undergoes a 12- to 24-month apprenticeship under
the tutelage of an experienced buyer and appraises thousands of cars before
making his or her first independent purchase. Approximately half of CarMax's
service technicians are A.S.E.-certified, the industry standard for technician
training. All technicians attend in-house training programs designed to develop
their skills in performing routine repair services on the diverse makes and
models of vehicles that CarMax sells. Technicians at CarMax's new-car franchises
also attend manufacturer-sponsored training programs to stay abreast of current
diagnostic, repair and maintenance techniques for the specific manufacturer
vehicles. In addition, utilization of technician support groups allows for
greater on-the-job training opportunities for new technicians. At April 30,
2002, CarMax's 39 general managers averaged five years of CarMax experience and
more than nine years of prior management experience.
Consumer Credit. CarMax offers its customers an opportunity to obtain
prime financing for vehicle purchases through its own finance operation or Bank
of America. In addition, Chrysler Financial, Ford Motor Credit, General Motors
Acceptance, Mitsubishi Motors Credit, Nissan Motors Acceptance and Toyota Motors
Financial Services offer prime financing to customers purchasing new vehicles at
applicable CarMax locations. Non-prime financing is offered by TransSouth
Financial, Wells Fargo Financial Acceptance and AmeriCredit Financial Services,
with no financial recourse to CarMax. Sales consultants use CarMax's proprietary
information system to electronically submit financing applications and receive
responses from multiple lenders, generally in less than five minutes from prime
lenders. Financings are typically installment sale contracts secured by the
vehicles financed. Customers are permitted to refinance their loans within three
days of a purchase without incurring any finance or related charges. CarMax's
arrangements with third-party lenders provide for payment of a fee to CarMax at
the time of financing, provided the loan is not refinanced within three days.
CarMax has no recourse liability on loans arranged with third-party lenders.
The CarMax finance operation generates income solely from the prime
credit CarMax provides to qualified customers through the sale and servicing of
the contract receivables originated by CarMax. In addition, the finance
operation enables CarMax to make credit decisions based on overall business
considerations and thus helps to ensure the reasonable availability of credit to
support CarMax's vehicle sales, while retaining its credit standards, in the
event third-party lenders should curtail credit availability due to market
considerations. CarMax believes that the high quality of its used vehicles as
well as the broad scope of the extended warranties CarMax sells reduces default
rates on its customers' loans by helping to keep the purchased vehicles
operational. The lower default rates enable CarMax to provide and arrange
financing at competitive rates. Receivables generated by the finance operation
are financed through asset securitization programs.
Systems. CarMax's stores are supported by an advanced information
system that improves the customer experience while providing tightly integrated
automation of all operating functions. Customers can select a range of vehicles
using touch-screen computers that display their choices and provide a map of the
lot to assist them in their selection of a vehicle. CarMax's inventory
management system includes bar codes on each vehicle and each on-site parking
place. Daily scanning tracks movement of vehicles on the lot and an electronic
gate helps track test drives for vehicles and sales consultants. Online
financing and computer-assisted document preparation ensure rapid completion of
the sales transaction. Behind the scenes, CarMax's proprietary store technology
provides its management with real-time intelligence about every aspect of store
operation, such as inventory management, pricing, vehicle transfers, wholesale
auctions and sales consultant productivity.
Advanced information systems, which are a key to CarMax's successful
inventory management, provide CarMax stores with the ability to anticipate
future inventory needs and manage its pricing strategy. Through this centralized
system, CarMax is able to immediately integrate new stores into its network of
CarMax stores, allowing the new stores to rapidly achieve operating efficiency.
CarMax continues to enhance and refine its information systems, which CarMax
believes to be a core competitive strength.
E-Commerce. The CarMax Web site, carmax.com, offers complete inventory
and pricing search capabilities. Inventory information on the more than 14,000
cars available in the CarMax nationwide inventory is updated daily. Carmax.com
includes all the detailed vehicle information, such as pictures of each vehicle,
prices, features, specifications and store locations, available at the store as
well as sorting and comparison features that allow consumers to easily compare
vehicles. The site also includes features such as detailed vehicle reviews,
payment calculators and an option to estimate trade-in values via a link with
Kelley Blue Book. CarMax believes these features make it easier for consumers to
meet all of their auto
Page 11 of 130
research needs on carmax.com. Both used-car and new-car customers can contact
dedicated Internet sales consultants online via carmax.com, by telephone or by
fax. Customers can work with these sales consultants from the comfort of home -
including applying for financing - and need only visit the store to sign the
paperwork and pick up their vehicle.
Service. All CarMax used-car locations provide vehicle repair service,
including used-car warranty service. Factory-authorized service also is provided
at all new-car franchises. In fiscal 2000 and fiscal 2001, CarMax expanded its
retail service operations as its customer base increased. In fiscal 2002, CarMax
continued its retail service expansion through additional marketing and growth
in its customer base. CarMax has developed systems and procedures that are
intended to ensure that its retail repair service operations are conducted in
the same customer-friendly and efficient manner as its other operations. CarMax
offers retail repair service to the public at all existing locations.
CarMax believes that the efficiency of its service and reconditioning
operations are enhanced by its use of technician support groups, as well as by
its compensation programs. These support groups and compensation programs are
designed to increase the productivity of its service technicians and result in
reduced costs and higher-quality repairs and reconditioning. Each group contains
a small number of service professionals with different skills and levels of
experience. The experienced technicians in the group perform the more
complicated repairs with assistance from the apprentices, who also perform
simpler functions on their own. Rather than paying technicians on an hourly
basis, each technician receives a flat rate for each repair or service
performed. CarMax is able to track the productivity of each technician through
the CarMax information system.
In all the states in which CarMax operates, it sells warranties on
behalf of unrelated third parties that are the primary obligors. Under these
third-party warranty programs, CarMax has no contractual liability to the
customer. Contracts usually have terms of coverage between 12 and 72 months.
Seasonality. CarMax's business is seasonal, with each location
generally experiencing more of its net sales in the first half of the fiscal
year. During the fall quarter, new-model-year introductions and discounting on
close-out vehicles can cause rapid depreciation of used-car prices, especially
on late-model vehicles. CarMax anticipates that the seasonality of the business
may vary from region to region as its operations expand geographically.
Employees. On April 30, 2002, CarMax had 5,258 hourly and salaried
employees and 2,230 sales employees who worked on a commission basis. No CarMax
employee is subject to a collective bargaining agreement. Additional CarMax
personnel are employed during peak selling seasons.
Environmental. As with automobile dealerships generally, and service
operations in particular, CarMax's business involves the use, handling and
disposal of hazardous or toxic substances, including motor oil, gasoline,
transmission fluid, solvents, lubricants and other materials. The business also
involves the past and current operation and/or removal of aboveground and
underground storage tanks containing such substances. Accordingly, CarMax is
subject to U.S. federal, state and local laws and regulations governing air and
water quality and the handling, storage and disposal of hazardous or toxic
substances. CarMax believes that it does not have any material environmental
liabilities and that compliance with such laws and regulations will not,
individually or in the aggregate have a material adverse effect on its results
of operations or financial condition.
Item 2. Properties.
At April 30, 2002, the Company's Circuit City retail operations were
conducted in 623 locations, including 603 Superstores and 20 mall-based Circuit
City Express Stores. At April 30, 2002, CarMax's operations were conducted in 41
retail units from 39 locations.
Page 12 of 130
The following table summarizes the Company's Circuit City and CarMax
retail units as of April 30, 2002:
Circuit City Group CarMax Group
-------------------------------- ------------------------------------------------
Superstores
------------------------------
Express Prototype New
Superstores Stores Total Mega Standard Satellite Car Total
----------- ------ ----- ------------------------------------- -----
Alabama 7 - 7 - - - - -
Arizona 10 1 11 - - - - -
Arkansas 4 - 4 - - - - -
California 82 2 84 1 1 - 2 4
Colorado 11 - 11 - - - - -
Connecticut 7 1 8 - - - - -
Delaware 2 - 2 - - - - -
Florida 46 - 46 3 3 - 1 7
Georgia 21 2 23 1 2 - - 3
Hawaii 1 - 1 - - - - -
Idaho 2 - 2 - - - - -
Illinois 33 - 33 3 1 - - 4
Indiana 15 - 15 - - 1 - 1
Kansas 5 - 5 - - - - -
Kentucky 6 - 6 - - - - -
Louisiana 8 1 9 - - - - -
Maine 2 - 2 - - - - -
Maryland 16 - 16 1 1 1 1 4
Massachusetts 14 4 18 - - - - -
Michigan 23 1 24 - - - - -
Minnesota 9 1 10 - - - - -
Mississippi 3 - 3 - - - - -
Missouri 11 - 11 - - - - -
Nebraska 2 - 2 - - - - -
Nevada 6 - 6 - - - - -
New Hampshire 5 1 6 - - - - -
New Jersey 13 - 13 - - - - -
New Mexico 1 - 1 - - - - -
New York 29 - 29 - - - - -
North Carolina 18 1 19 - 3 - - 3
Ohio 27 2 29 - - - - -
Oklahoma 4 - 4 - - - - -
Oregon 8 - 8 - - - - -
Pennsylvania 26 1 27 - - - - -
Rhode Island 2 - 2 - - - - -
South Carolina 8 - 8 - 1 - - 1
Tennessee 13 - 13 - 1 - - 1
Texas 48 - 48 4 3 2 - 9
Utah 5 - 5 - - - - -
Vermont 1 - 1 - - - - -
Virginia 25 2 27 - 2 - - 2
Washington 12 - 12 - - - - -
West Virginia 4 - 4 - - - - -
Wisconsin 7 - 7 - - 1 1 2
Wyoming 1 - 1 - - - - -
----------------------------------------------------------------------------------
603 20 623 13 18 5 5 41
==================================================================================
Page 13 of 130
Of the stores open at April 30, 2002, the Company owns three Circuit
City and three CarMax stores. The Company leases the remaining Circuit City and
CarMax stores. During fiscal 2003, the Company anticipates entering into
sale-leaseback transactions for all six of the Circuit City and CarMax store
locations owned by the Company as of April 30, 2002.
For information with respect to obligations for Circuit City leases,
see Note 8 to the Circuit City Group Financial Statements on page 95 of this
document. For information with respect to obligations for CarMax leases, see
Note 8 to the CarMax Group Financial Statements on page 113 of this document.
Of the Company's ten distribution centers, nine are leased. The Company
owns a 388,000-square-foot consumer electronics distribution center in Doswell,
Va., which has been financed with Industrial Development Revenue Bonds.
In addition, the Company owns most of the land but leases the three
buildings in which its corporate headquarters is located. The CarMax
headquarters, which is located near the site of the first CarMax retail store,
is also leased. The Company leases space for all warehouse, service and office
facilities except for the aforementioned properties.
Item 3. Legal Proceedings.
In the normal course of business, the Company is involved in various
legal proceedings. Based upon the Company's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the Company's
financial position, liquidity or results of operations.
On or about April 22, 2002, Kevin Smith, individually and on behalf of
all others similarly situated, filed a complaint against the Company and W. Alan
McCollough in the United States District Court for the Eastern District of
Virginia, Richmond Division. The Complaint seeks certification of a class, which
would include all purchasers of the Company's common stock between December 6,
2001, and February 22, 2002, and alleges that, during the specified time period,
the Company and Mr. McCollough violated federal securities laws by
misrepresenting material facts about the business and operations of the Circuit
City Group. The plaintiff seeks unspecified compensatory damages, attorneys'
fees and costs. Although the complaint uses the general term common stock in
describing the class of stockholders it seeks to clarify, the specific
allegations regarding stock price all relate to the Circuit City Group Common
Stock. Regardless, the Company believes that the allegations are without merit
and that the Company has substantial defenses to the claims alleged. As a
result, the Company intends to defend the action vigorously.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended February 28, 2002.
Executive Officers of the Company.
The following table identifies the present executive officers of the
Company. The Company is not aware of any family relationship between any
executive officers of the Company or any executive officer and any director of
the Company. All executive officers are generally elected annually and serve for
one year or until their successors are elected and qualify. The next general
election of officers will occur in June 2002.
Name Age Office
W. Alan McCollough 52 President and
Chief Executive Officer
Michael T. Chalifoux 55 Executive Vice President,
Chief Financial Officer and
Corporate Secretary
John W. Froman 48 Executive Vice President
Chief Operating Officer
Kim D. Maguire 46 Executive Vice President
Merchandising
Page 14 of 130
Name Age Office
Ann-Marie Austin-Stephens 43 Senior Vice President
Store Innovation and Development
Dennis J. Bowman 48 Senior Vice President and
Chief Information Officer
W. Stephen Cannon 50 Senior Vice President and
General Counsel
Fiona P. Dias 36 Senior Vice President
Marketing
Philip J. Dunn 49 Senior Vice President,
Treasurer and Controller
W. Austin Ligon 51 Senior Vice President
Automotive
Gary M. Mierenfeld 50 Senior Vice President
Supply Chain
Jeffrey S. Wells 56 Senior Vice President
Human Resources and Training
Mr. McCollough is a director and a member of the Company's executive
committee. He joined the Company in 1987 as general manager of corporate
operations. He was elected assistant vice president in 1989, vice president and
Central Division president in 1991, senior vice president - merchandising in
1994, president and chief operating officer in 1997 and chief executive officer
in June 2000.
Mr. Chalifoux is a director and a member of the Company's executive
committee. He joined the Company in 1983 as corporate controller and was elected
vice president and chief financial officer in 1988. He became senior vice
president and chief financial officer in 1990, corporate secretary in 1993 and
executive vice president in 1998.
Mr. Froman joined the Company in 1986 as a store manager and general
manager in training. In 1987, he was promoted to general manager and in 1989 was
named assistant vice president. He was promoted to director of corporate
operations in 1990 and in 1992 added the title of vice president. He was elected
Central Division president in 1994, named senior vice president - merchandising
in 1997 and was promoted to executive vice president in 2000. He was named chief
operating officer in 2001.
Mr. Maguire joined the Company in 2001 as executive vice president -
merchandising. Prior to joining the Company, Mr. Maguire had been employed by
Target Stores for 20 years, most recently as senior vice president - hardlines.
Ms. Austin-Stephens joined the Company in 1999 as vice president of
Strategic Planning. She was elected senior vice president in 2000. Before
joining the Company, she had served more than three years as the director of
technology and brand marketing for The Frito-Lay Company and 13 years with The
Procter and Gamble Company in various marketing, strategy and product
development positions.
Mr. Bowman joined the Company in 1996 as vice president and chief
information officer. He was elected senior vice president and chief information
officer in 1997. Prior to joining the Company, he had served, since 1993, as
senior vice president - information services for Rite Aid Corporation; from 1984
to 1993, he was a consultant with McKinsey & Company.
Mr. Cannon joined the Company in 1994 as senior vice president and
general counsel. Prior to joining the Company, he had been, since 1986, a
partner in Wunder, Diefenderfer, Ryan, Cannon & Thelen, a Washington, D.C., law
firm.
Ms. Dias joined the Company in 2000 as senior vice president -
marketing. Before joining the Company, she was chief marketing officer at Stick
Networks, Inc.; vice president - marketing and development for the Frito-Lay
Company from 1999 to 2000; from 1996 to 1999, she was director of brand
management and corporate development at Pennzoil Quaker State Company; and,
prior to 1996, held various brand management positions with The Procter and
Gamble Company.
Mr. Dunn joined the Company in 1984. He was named treasurer in 1990,
was promoted to vice president in 1992 and added the title of controller in
1996. In 1999, he was elected senior vice president.
Page 15 of 130
Mr. Ligon joined the Company in 1990 as vice president - corporate
planning and communications. He was elected senior vice president - corporate
planning and communications in 1991, senior vice president - corporate planning
and automotive in 1994 and senior vice president - automotive and CarMax
president in 1996.
Mr. Mierenfeld joined the Company in 1993 as vice president -
distribution. He was elected senior vice president - supply chain in 1999.
Mr. Wells joined the Company in 1996 as senior vice president - human
resources and training. Prior to joining the Company, he had served as a senior
vice president of Toys "R" Us, Inc. since 1992.
Part II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
The common stock of Circuit City Stores, Inc. includes two series:
Circuit City Stores, Inc. - Circuit City Group Common Stock and Circuit City
Stores, Inc. - CarMax Group Common Stock. Both Group stocks are traded on the
New York Stock Exchange. The quarterly dividend data shown below applies to the
Circuit City Group Common Stock for the applicable periods. No dividend data is
shown for the CarMax Group Common Stock since it pays no dividends at this time.
Circuit City Group CarMax Group
--------------------------------------------------------- ---------------------------------
Market Price of Common Stock Dividends Market Price of Common Stock
------------------------------------ ---------------- ---------------------------------
Fiscal 2002 2001 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------
Quarter HIGH LOW HIGH LOW HIGH LOW HIGH LOW
------------------------------------------------------------------------------------------------------------------
1st............. $16.85 $10.34 $65.19 $37.25 $.0175 $.0175 $15.49 $ 4.70 $4.25 $1.56
2nd............. $20.25 $14.50 $56.63 $21.00 $.0175 $.0175 $20.50 $11.50 $4.88 $2.63
3rd............. $17.84 $ 9.55 $28.25 $11.56 $.0175 $.0175 $21.00 $ 9.20 $5.38 $3.38
4th............. $31.40 $16.08 $19.90 $ 8.69 $.0175 $.0175 $29.02 $19.35 $5.50 $3.69
-------------------------------------------------------------------------------------------------
Total........... $.0700 $.0700
===============
As of April 30, 2002, there were 8,195 shareholders of record of the
Circuit City Group Common Stock and 405 shareholders of record of the CarMax
Group Common Stock.
Page 16 of 130
Item 6. Selected Financial Data.
Reported Historical Information
(Amounts in thousands except per share data) 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues...................... $13,107,871 $13,205,087 $12,790,795 $10,942,887 $8,942,839
Earnings from continuing operations................... $ 218,795 $ 160,802 $ 327,830 $ 211,470 $ 124,947
Loss from discontinued operations..................... $ - $ - $ (130,240) $ (68,546) $ (20,636)
Net earnings.......................................... $ 218,795 $ 160,802 $ 197,590 $ 142,924 $ 104,311
Net earnings (loss) per share attributed to:
Circuit City Group:
Basic:
Continuing operations........................ $ 0.93 $ 0.73 $ 1.63 $ 1.09 $ 0.68
Discontinued operations...................... $ - $ - $ (0.65) $ (0.34) $ (0.11)
Net earnings................................. $ 0.93 $ 0.73 $ 0.98 $ 0.75 $ 0.57
Diluted:
Continuing operations........................ $ 0.92 $ 0.73 $ 1.60 $ 1.08 $ 0.67
Discontinued operations...................... $ - $ - $ (0.64) $ (0.34) $ (0.10)
Net earnings................................. $ 0.92 $ 0.73 $ 0.96 $ 0.74 $ 0.57
CarMax Group:
Basic........................................... $ 0.87 $ 0.45 $ 0.01 $ (0.24) $ (0.35)
Diluted......................................... $ 0.82 $ 0.43 $ 0.01 $ (0.24) $ (0.35)
Total assets.......................................... $ 4,539,386 $ 3,871,333 $ 3,955,348 $ 3,445,266 $3,231,701
Long-term debt, excluding current installments........ $ 14,064 $ 116,137 $ 249,241 $ 426,585 $ 424,292
Deferred revenue and other liabilities................ $ 149,269 $ 92,165 $ 130,020 $ 112,085 $ 145,107
Cash dividends per share paid on
Circuit City Group Common Stock.................... $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.07
=====================================================================
Page 17 of 130
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
As previously announced, CarMax, Inc. has filed a registration
statement related to the proposed separation of the CarMax auto superstore
business from the Circuit City consumer electronics business. The risk factors
contained in that registration statement are incorporated by reference in
Exhibit 99 to this report and should be read in conjunction with the cautionary
statements listed under "Management's Discussion and Analysis of Results of
Operations and Financial Condition" on pages 35 and 36 of this document.
CIRCUIT CITY STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The common stock of Circuit City Stores, Inc. consists of two common
stock series that are intended to reflect the performance of the Company's two
businesses. The Circuit City Group Common Stock is intended to reflect the
performance of the Circuit City stores and related operations and the shares of
CarMax Group Common Stock reserved for the Circuit City Group or for issuance to
holders of Circuit City Group Common Stock. The fiscal 2000 financial results
for the Company and the Circuit City Group also include the Company's investment
in Digital Video Express, which was discontinued. The CarMax Group Common Stock
is intended to reflect the performance of the CarMax stores and related
operations. The reserved CarMax Group shares are not outstanding CarMax Group
Common Stock. The net earnings attributed to the reserved CarMax Group shares
are included in the Circuit City Group's net earnings and per share
calculations. These earnings are not included in the CarMax Group per share
calculations.
Excluding shares reserved for CarMax employee stock incentive plans,
the reserved CarMax Group shares represented 64.1 percent of the total
outstanding and reserved shares of CarMax Group Common Stock at February 28,
2002; 74.6 percent at February 28, 2001; and 74.7 percent at February 29, 2000.
The reserved CarMax Group shares at February 28, 2002, reflect the effect of the
public offering of CarMax Group Common Stock completed during the second quarter
of fiscal 2002. Since both the attribution of earnings and the outstanding
CarMax Group shares were adjusted to reflect the impact of this sale, the net
earnings per CarMax Group share were not diluted by this transaction. Refer to
the "Earnings from Continuing Operations" and "Financing Activities" sections
below for further discussion of the public offering.
On February 22, 2002, Circuit City Stores, Inc. announced that its
board of directors had authorized management to initiate a process that would
separate the CarMax auto superstore business from the Circuit City consumer
electronics business through a tax-free transaction in which CarMax, Inc.,
presently a wholly owned subsidiary of Circuit City Stores, Inc., would become
an independent, separately traded public company. CarMax, Inc. holds
substantially all of the businesses, assets and liabilities of the CarMax Group.
The separation plan calls for Circuit City Stores, Inc. to redeem all
outstanding shares of CarMax Group Common Stock in exchange for shares of common
stock of CarMax, Inc. Simultaneously, shares of CarMax, Inc. common stock,
representing the shares of CarMax Group Common Stock reserved for the holders of
Circuit City Group Common Stock, would be distributed as a tax-free dividend to
the holders of Circuit City Group Common Stock.
In the proposed separation, the holders of CarMax Group Common Stock
would receive one share of CarMax, Inc. common stock for each share of stock
redeemed by the Company. We anticipate that the holders of Circuit City Group
Common Stock would receive a fraction of a share of CarMax, Inc. common stock
for each share of Circuit City Group Common Stock they hold. The exact fraction
would be determined on the record date for the distribution. The separation is
expected to be completed by late summer, subject to shareholder approval and
final approval from the board of directors. CarMax, Inc. has filed a
registration statement regarding this transaction with the Securities and
Exchange Commission. This registration statement contains pro forma financial
information that is intended to reflect the potential effects of the separation
of the two businesses.
Holders of Circuit City Group Common Stock and holders of CarMax Group
Common Stock are shareholders of Circuit City Stores and as such are subject to
all of the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. The results of operations or financial
condition of one Group could affect the results of operations or financial
condition of the other Group. The discussion and analysis for Circuit City
Stores, Inc. presented below should be read in conjunction with the discussion
and analysis presented for each Group and in conjunction with all the Company's
SEC filings.
Page 18 of 130
Critical Accounting Policies
In Management's Discussion and Analysis, we discuss the results of
operations and financial condition as reflected in the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. Preparation of
financial statements requires us to make estimates and assumptions affecting the
reported amounts of assets, liabilities, revenues and expenses and the
disclosures of contingent assets and liabilities. We use our historical
experience and other relevant factors when developing our estimates and
assumptions. We continually evaluate these estimates and assumptions. Note 2 to
the Company's consolidated financial statements includes a discussion of our
significant accounting policies. The accounting policies discussed below are
those we consider critical to an understanding of the Company's consolidated
financial statements because their application places the most significant
demands on our judgment. Our financial results might have been different if
different assumptions had been used or other conditions had prevailed.
Calculation of the Value of Retained Interests in Securitization
Transactions
The Company securitizes credit card and automobile loan receivables.
The fair value of retained interests from securitization activities is based on
the present value of expected future cash flows. The present value is determined
by using management's projections of key factors, such as finance charge income,
default rates, payment rates, forward interest rate curves and discount rates
appropriate for the type of asset and risk. These projections are derived from
historical experience, projected economic trends and anticipated interest rates.
Adjustments to one or more of these projections may have a material impact on
the fair value of the retained interests. These projections may be affected by
external factors, such as changes in the behavior patterns of our customers,
changes in the strength of the economy and developments in the interest rate
markets. Note 2(C) to the Company's consolidated financial statements includes a
discussion of our accounting policies related to securitizations. Note 11 to the
Company's consolidated financial statements includes a discussion of our credit
card and automobile loan securitizations.
Calculation of the Liability for Lease Termination Costs
The Company accounts for lease termination costs in accordance with
Emerging Issues Task Force No. 88-10, "Costs Associated with Lease Modification
or Termination." The Company records a liability for remaining costs related to
leased properties that are no longer used for operating purposes, reduced by any
estimated sublease income. Inherent in the calculation are certain significant
management estimates including, among others, vacancy periods and future
sublease revenues. Fluctuations in the economy and in marketplace demand for
commercial properties can result in material changes in the liability for lease
termination costs. Note 2(H) to the Company's consolidated financial statements
includes a discussion of our accounting policies related to leased properties
that are no longer used for operating purposes.
Results of Operations
Certain prior year amounts have been reclassified to conform to the
current presentation. Wholesale sales have been reclassified and reported in net
sales and operating revenues for all periods presented. In previous periods,
wholesale sales were recorded as a reduction to total cost of sales. Note 2(S)
to the Company's consolidated financial statements contains further discussion
of the reclassifications.
Net Sales and Operating Revenues
Total sales for Circuit City Stores, Inc. decreased 1 percent in fiscal
2002 to $13.11 billion. In fiscal 2001, total sales increased 3 percent to
$13.21 billion from $12.79 billion in fiscal 2000.
Percent Sales Change From Prior Year
Circuit City
Stores, Inc. Circuit City Group CarMax Group
Fiscal Total Total Comparable(1) Total Comparable(1)
-------------------------------------------------------------------------------
2002........ (1)% (8)% (10)% 28% 28 %
2001........ 3 % (1)% (4)% 25% 17 %
2000........ 17 % 13 % 8 % 37% 2 %
1999........ 22 % 17 % 8 % 69% (2)%
1998........ 17 % 12 % (1)% 50% 6 %
(1) Circuit City and CarMax stores are included in comparable store retail sales
after the store has been open for a full year.
Page 19 of 130
Circuit City Group
Total sales for the Circuit City Group decreased 8 percent in fiscal
2002 to $9.59 billion. In fiscal 2001, total sales decreased 1 percent to $10.46
billion from $10.60 billion in fiscal 2000. The fiscal 2002 total sales decline
primarily reflects a 10 percent decline in comparable store sales, partly offset
by the net addition of 10 Circuit City Superstores. In fiscal 2002, we opened 11
Superstores in existing markets, closed one Superstore and relocated eight
Superstores. We also closed 15 mall-based Express stores. Excluding the major
appliance category, from which we completed our exit in November 2000,
comparable store sales declined 4 percent in fiscal 2002.
Fiscal 2002 was marked by significant variation in sales performance
between the first half and the second half of the year. As expected, the sales
slowdown experienced in the latter part of fiscal 2001 continued in the first
half of fiscal 2002, with comparable store sales declining 23 percent. The
slowing economy, continued industry-wide weakness in personal desktop computer
sales, declining average retail prices for many products and the absence of the
major appliance business all contributed to lower first half sales. The sales
declines moderated in the third quarter, and in the fourth quarter comparable
store sales grew 6 percent in part because of the lessening impact of the exit
from the appliance business and the seasonal upturn in categories, such as video
game hardware, software and accessories; DVD software; PC software; and digital
cameras, all of which were added or expanded following our exit from the
appliance category. Throughout fiscal 2002, new technologies, better- featured
consumer electronics and the new and expanded product selections produced solid
comparable store sales growth. We believe our second half sales also benefited
from new marketing, merchandising and customer service initiatives implemented
earlier in the year. Inventory shortages and limited selections in some product
categories following the strong holiday period limited sales growth in the last
two months of the fiscal year.
The fiscal 2001 total sales decline reflects a 4 percent decline in
comparable store sales, partly offset by the net addition of 23 Superstores. In
July 2000, spurred by a declining sales pace, expected increases in competition
and the results of a product profitability analysis that indicated major
appliances produced below-average profits, we announced plans to exit the major
appliance business. We completed the exit and associated remerchandising of the
appliance selling space in November 2000. Throughout fiscal 2001, we experienced
significant variability in the comparable store sales pace, and sales softened
substantially in the last two months of the fiscal year. We believe the
variability reflected the slower consumer spending experienced by most retailers
during the second half of the year, some disruption caused by the partial
remodeling to remerchandise the appliance space, significant declines in average
retail prices and industry-wide declines in desktop personal computer sales by
year-end. Excluding the appliance category from fiscal 2001 and fiscal 2000
sales, comparable store sales rose 3 percent in fiscal 2001.
In fiscal 2000 and fiscal 1999, Circuit City benefited from a period of
renewed industry growth and product introductions. Industry growth was augmented
by geographic expansion, with the net addition of 34 Superstores in fiscal 2000
and 37 Superstores in fiscal 1999. In fiscal 1998, a lack of significant
consumer electronics product introductions resulted in weak industry sales, and
so, geographic expansion was the primary contributor to our sales growth, with
the net addition of 57 Superstores.
Circuit City Percent of Merchandise Sales by Category
Fiscal 2002 2001 2000 1999 1998
------------------------------------------------------------------------
Video........................ 39% 35% 32% 31% 31%
Audio........................ 15 16 16 17 18
Information Technology....... 34 35 33 32 30
Entertainment................ 12 7 5 5 6
Appliances................... - 7 14 15 15
----------------------------------------
Total........................ 100% 100% 100% 100% 100%
=======================================
In most states, Circuit City sells extended warranty programs on behalf
of unrelated third parties who are the primary obligors. Under these third-party
warranty programs, we have no contractual liability to the customer. In the
three states where third-party warranty sales are not permitted, Circuit City
sells an extended warranty for which we are the primary obligor. Gross dollar
sales from all extended warranty programs were 5.1 percent of total sales of the
Circuit City business in fiscal 2002 and fiscal 2001 and 5.4 percent in fiscal
2000. Total extended warranty revenue, which is reported in total sales, was 3.9
percent of sales in fiscal 2002, 4.0 percent in fiscal 2001 and 4.4 percent in
fiscal 2000. The gross profit margins on products sold with extended warranties
are higher than the gross profit margins on products sold without extended
warranties. The decline in extended warranty sales as a percent of total sales
since fiscal 2000 reflects the increased selection of products, such as
entertainment software, for which extended warranties are not available.
Third-party extended warranty revenue was 4.0 percent of total sales in fiscal
2002, 3.9 percent in fiscal 2001 and 4.1 percent in fiscal 2000.
Page 20 of 130
Circuit City Superstore Sales Per Total Square Foot
Fiscal
-------------------------------------------------------------
2002................................................... $478
2001................................................... $528
2000................................................... $555
1999................................................... $514
1998................................................... $478
At the end of fiscal 2002, total space for all Circuit City Superstores
equaled 20,046,725 square feet and selling space equaled 11,755,124 square feet.
At the end of fiscal 2001, total space equaled 19,706,588 square feet and
selling space equaled 11,469,092 square feet. The decreases in sales per total
square foot in fiscal 2002 and fiscal 2001 reflect the declines in comparable
store sales in those years. The improvements in fiscal 1999 and fiscal 2000 were
driven by comparable store sales growth in those years.
Circuit City Store Mix
Retail Units at Year-End
Fiscal 2002 2001 2000 1999 1998
---------------------------------------------------------------------
Superstores................ 604 594 571 537 500
Circuit City Express....... 20 35 45 48 52
Electronics-only........... - - - 2 4
----------------------------------------
Total...................... 624 629 616 587 556
========================================
CarMax Group
Total sales for the CarMax Group increased 28 percent in fiscal 2002 to
$3.52 billion. In fiscal 2001, total sales increased 25 percent to $2.75 billion
from $2.19 billion in fiscal 2000.
Retail Vehicle Sales. Retail vehicle sales for CarMax increased 28
percent in fiscal 2002 to $3.06 billion. In fiscal 2001, retail vehicle sales
increased 23 percent to $2.39 billion from $1.93 billion in fiscal 2000. In
fiscal 2002, used vehicle sales increased 29 percent to $2.50 billion. In fiscal
2001, used vehicle sales increased 26 percent to $1.93 billion from $1.53
billion in fiscal 2000. New vehicle sales in fiscal 2002 rose 23 percent to
$559.9 million. In fiscal 2001, new vehicle sales were $456.9 million, up 14
percent over fiscal 2000 sales of $401.2 million. CarMax stores are included in
comparable store retail sales after the store has been open for a full year.
Comparable store vehicle dollar and unit sales for the years ended
February 28, 2002 and 2001 and February 29, 2000 were as follows:
CarMax Comparable Store Sales Change
Fiscal 2002 2001 2000
------------------------------------------------------------
Vehicle dollars:
Used vehicles.............. 30% 19% (4)%
New vehicles............... 24% 9% 50 %
Total......................... 28% 17% 2 %
Vehicle units:
Used vehicles.............. 24% 13% (8)%
New vehicles............... 21% 9% 49 %
Total......................... 23% 12% (4)%
CarMax Average Retail Selling Prices
Fiscal 2002 2001 2000
----------------------------------------------------------------
Used vehicles................. $15,100 $14,400 $13,700
New vehicles.................. $23,100 $22,600 $22,500
Blended average............... $16,200 $15,500 $14,900
Page 21 of 130
CarMax Retail Vehicle Sales Mix
Fiscal 2002 2001 2000
------------------------------------------------------------
Vehicle dollars:
Used vehicles.............. 82% 81% 79%
New vehicles............... 18 19 21
-----------------------------
Total......................... 100% 100% 100%
============================
Vehicle units:
Used vehicles.............. 87% 87% 86%
New vehicles............... 13 13 14
-----------------------------
Total......................... 100% 100% 100%
============================
The fiscal 2002 used and new retail vehicle sales growth primarily
resulted from a 28 percent increase in the comparable store vehicle dollar sales
of the CarMax business. We opened two CarMax used-car superstores in fiscal 2002
during the last month of the fiscal year, and so they were not significant
contributors to sales growth in fiscal 2002. The growth in comparable store
vehicle dollar sales reflects increased store traffic that, combined with better
in-store execution, resulted in comparable store unit sales growth for both used
and new cars. We believe that the higher traffic levels were driven by the
effectiveness of our marketing programs, carmax.com and word-of-mouth customer
referrals. In addition, traffic was bolstered in October, November and December
by cross-shopping from zero-percent financing incentive programs introduced by
new-car manufacturers to counteract an industry-wide slowdown in new-car sales.
New-car manufacturers returned to more conventional sales and financing
incentives in January 2002. Increased average retail prices resulting from a
higher mix of later-model used cars, luxury vehicles and sport utility vehicles
and higher new-car average retail prices also contributed to the sales growth.
In late February 2002, CarMax opened one standard-sized used-car
superstore and one satellite used-car superstore. During fiscal 2002, CarMax
also relinquished the franchise rights for one stand-alone new-car franchise and
one new-car franchise that had been integrated with a used-car superstore and
sold one new-car stand-alone franchise and one new-car franchise that had been
integrated with a used-car superstore. Although new-car stores that are
integrated or co-located with used-car superstores have performed at or above
our expectations, the three remaining stand-alone new-car stores are still
performing below our expectations. We intend to integrate or co-locate these
stores with used-car superstores. We expect this integration or co-location to
occur within the next fiscal year for the store located in Orlando, Fla., and we
expect to co-locate the two remaining new-car stores, which are in Los Angeles,
Calif., with one used-car superstore within the next two fiscal years.
The fiscal 2001 used and new retail vehicle sales increase reflects a
17 percent increase in the comparable store vehicle dollar sales of the CarMax
business, driven by higher-than-anticipated used-car sales, and the net addition
of two used-car superstores, two prototype satellite stores and six new-car
franchises since the end of fiscal 1999. The new stores and four of the
franchises moved into the comparable store sales base throughout fiscal 2001. In
fiscal 2001, CarMax also added two new-car franchises, integrating them with
existing used-car superstores. We believe CarMax's fiscal 2001 sales performance
primarily reflects the improved execution of the CarMax offer at individual
stores, increased consumer awareness and use of carmax.com and the exit of
CarMax's primary used-car superstore competitor late in fiscal 2000. We believe
this competitor's exit from five multi-store markets helped eliminate consumer
confusion over the two offers. CarMax's used-car comparable store vehicle dollar
and unit sales growth has remained strong in all these CarMax markets since this
competitor's exit from the used-car superstore business.
Geographic expansion of CarMax used-car superstores and the addition of
new-car franchises generated the retail sales growth in the first half of fiscal
2000 and, along with comparable store sales growth for the last two quarters and
for the fiscal year, contributed to retail sales growth for the full year.
During fiscal 2000, we opened two CarMax used-car superstores, two prototype
satellite used-car superstores, five stand-alone new-car stores and one new-car
franchise that was integrated with a used-car superstore. CarMax also converted
one existing store into a satellite operation and relocated one new-car
franchise next to a used-car superstore. In the second half of fiscal 2000,
CarMax limited its geographic expansion to focus on building sales and
profitability in existing markets.
Page 22 of 130
CarMax Retail Stores
Retail Stores at Year-End
Fiscal 2002 2001 2000
-------------------------------------------------------------
Mega superstores (1)................... 13 13 13
Standard superstores (2)............... 17 16 16
Prototype satellite superstores........ 5 4 4
Co-located new-car stores (3).......... 2 2 2
Stand-alone new-car stores............. 3 5 5
------------------
Total.................................. 40 40 40
==================
(1) Formerly "C" and "B" stores; 70,000 to 100,000 square feet.
(2) Formerly "A" stores; 40,000 to 60,000 square feet.
(3) Formerly included as "A" and "C" stores.
CarMax New-Car Franchises
New-Car Franchises at Year-End
Fiscal 2002 2001 2000
---------------------------------------------------------------------
Integrated/co-located new-car franchises.. 15 17 15
Stand-alone new-car franchises............ 3 5 5
-----------------------
Total..................................... 18 22 20
=======================
Wholesale Vehicle Sales. Total wholesale vehicle sales for CarMax were
$325.6 million in fiscal 2002, $253.5 million in fiscal 2001 and $181.2 million
in fiscal 2000. The increase in fiscal year 2002 was primarily due to an
increase in customer traffic. The increase in fiscal 2001 was attributable to an
increase in customer traffic and an increase in the average wholesale price per
vehicle.
Other Sales and Revenues. Other sales and revenues which include
extended warranty revenues, service department sales and processing fees
collected from consumers for the purchase of their vehicles at a CarMax retail
location were $135.4 million in fiscal 2002, $108.3 million in fiscal 2001 and
$76.8 million in fiscal 2000.
CarMax sells extended warranties on behalf of unrelated third parties
who are the primary obligors. Under these third-party warranty programs, CarMax
has no contractual liability to the customer. Extended warranty revenue was
$55.3 million in fiscal 2002, $45.0 million in fiscal 2001 and $33.5 million in
fiscal 2000. The increase in extended warranty revenues over the three year
period was due to increased vehicle sales. In addition to increased vehicle
sales, the increase in fiscal 2001 was the result of increased warranty
penetration. Used vehicles achieve a higher warranty penetration rate than new
vehicles.
Service sales were $55.9 million in fiscal 2002, $44.8 million in
fiscal 2001 and $32.8 million in fiscal 2000. The increase in fiscal 2002
relates to an overall increase in retail vehicle sales while the increase in
fiscal 2001 service sales was due to an overall increase in retail vehicle sales
as well as an increased focus on retail service sales.
Processing fees were $24.2 million in fiscal 2002, $18.5 million in
fiscal 2001 and $10.5 million in fiscal 2000. Consumers are assessed this fee
when selling a vehicle to a CarMax retail location after the appraisal process.
The increase in fiscal 2002 was the result of increased traffic, increased
consumer response to CarMax's vehicle purchase program and an increase in the
fee amount. The increase in fiscal 2001 was directly attributable to a full year
of processing fees after the mid-year introduction of the fee in fiscal 2000 and
increased traffic and consumer response.
Impact of Inflation
Inflation has not been a significant contributor to the Company's
results. For the Circuit City business, average retail prices have declined in
many of Circuit City's product categories during the past three years. Although
product introductions could help reverse this trend in selected areas, we expect
no significant short-term change overall. Because we purchase substantially all
products sold in Circuit City stores in U.S. dollars, prices are not directly
impacted by the value of the dollar in relation to foreign currencies.
For the CarMax business, profitability is based on achieving specific
gross profit dollars per vehicle rather than on average retail prices. Because
the wholesale market generally adjusts to reflect retail price trends, we
believe that if the stores meet inventory turn objectives, then changes in
average retail prices will have only a short-term impact on the gross margin and
thus profitability.
Page 23 of 130
Cost of Sales, Buying and Warehousing
For the Company, the gross profit margin was 20.8 percent in fiscal
2002, compared with 21.2 percent in fiscal 2001 and 22.4 percent in fiscal 2000.
The fiscal 2002 gross profit margin includes higher gross profit margins for the
Circuit City business and lower gross profit margins for the CarMax business,
compared with fiscal 2001. The lower gross profit margin of the CarMax business
relative to the Circuit City business and the increased sales contribution from
CarMax reduced the Company's overall gross profit margin. Excluding the
appliance exit costs and the appliance merchandise markdowns incurred by the
Circuit City business in fiscal 2002 and fiscal 2001, the Company's gross profit
margin would have been 20.9 percent in fiscal 2002 and 21.4 percent in fiscal
2001.
Circuit City Group
For the Circuit City business, the gross profit margin was 24.3 percent
in fiscal 2002, 23.6 percent in fiscal 2001 and 24.7 percent in fiscal 2000. The
fiscal 2001 gross profit margin was reduced by costs of $28.3 million and
merchandise markdowns of $28.0 million associated with the exit from the
appliance business. The appliance exit costs included lease terminations,
employee severance, fixed-asset impairment and other related costs. The fiscal
2002 gross profit margin was reduced by additional lease termination costs of
$10.0 million related to the exit from the appliance business. In the fourth
quarter of fiscal year 2002, we increased our liability for lease termination
costs related to the appliance exit because of the weakening in the economy and
in marketplace demand for commercial properties during the year. Excluding the
appliance exit costs and the appliance merchandise markdowns, the gross profit
margin would have been 24.4 percent in fiscal 2002 and 24.1 percent in fiscal
2001.
The improvement in the gross profit margin in fiscal 2002 reflected
solid sales growth in new and better-featured products, which generally carry
higher-than-average gross profit margins, and the reduction in personal computer
sales, which carry lower-than-average gross profit margins. In fiscal 2001, the
decline in the gross profit margin reflected significantly lower appliance gross
profit margins prior to the announced plans to exit that business and a
merchandise mix that included a high percentage of traditional products that
carry lower gross profit margins. The decline was partly offset by lower
personal computer sales and continued double-digit sales growth in new
technologies and in higher margin categories where selection was expanded as
part of the exit from the appliance business.
CarMax Group
For the CarMax business, total gross profit margin was 11.5 percent in
fiscal 2002, 12.0 percent in fiscal 2001 and 11.0 percent in fiscal 2000.
Retail Vehicle Gross Profit Margin. The gross profit margin for retail
vehicle sales was 9.7 percent in fiscal 2002, 10.2 percent in fiscal 2001 and
9.8 percent in fiscal 2000. Used vehicle gross margins were 10.9 percent in
fiscal 2002, 11.4 percent in fiscal 2001 and 11.1 percent in fiscal 2000. New
vehicle gross margins for this same period were 4.5 percent, 5.1 percent and 4.7
percent, respectively. Although CarMax achieved its specific used vehicle gross
profit dollar targets per vehicle, increased average retail prices resulting
from a higher mix of later-model used cars, luxury vehicles and sport utility
vehicles generated the decline in gross profit as a percentage of sales in
fiscal 2002. Used vehicle gross profit dollars are similar across makes and
models. Consequently, the gross profit on a higher-priced used vehicle is a
lower percentage of the retail selling price than on a more modestly priced
vehicle. In fiscal 2002, the new vehicle gross margin decrease was attributable
to increases in average retail prices along with a more competitive marketplace.
In fiscal 2001, strong inventory management throughout the year, especially
during the second half when the model-year transition occurs in the new-car
industry, contributed to a higher gross margin on used and new vehicles.
Wholesale Vehicle Gross Profit Margin. The gross profit margin for
wholesale sales was 5.6 percent in fiscal 2002, 6.5 percent in fiscal 2001 and
3.3 percent in fiscal 2000. The gross profit margin was relatively stable from
fiscal 2001 to fiscal 2002. The increase in gross profit margin in fiscal 2001
was due to an increase in the average gross profit margin dollars per vehicle
and to additional auction fees charged to purchasers of wholesale vehicles.
Other Gross Profit Margin. Gross margin for other sales and revenues
was 64.6 percent in both fiscal 2002 and 2001 and 59.2 percent in fiscal 2000.
The increase in fiscal 2001 resulted from the addition of processing fees and an
increased focus on retail service.
Selling, General and Administrative Expenses
For the Company, selling, general and administrative expenses were 18.1
percent of sales in fiscal 2002, compared with 19.0 percent in fiscal 2001 and
18.1 percent in fiscal 2000. Interest income is recorded as a reduction to
selling, general and administrative expenses.
Circuit City Group
For the Circuit City business, selling, general and administrative
expenses were 22.1 percent of sales in fiscal 2002, compared with 21.7 percent
in fiscal 2001 and 19.6 percent in fiscal 2000.
Page 24 of 130
The fiscal 2002 expenses included $19.3 million for store remodeling
and relocation. In fiscal 2002, we continued to conduct a number of remodeling
and remerchandising tests to determine how we can efficiently and effectively
upgrade the Circuit City Superstore base. During the year, we fully remodeled 24
Circuit City Superstores, including 10 stores in the Chicago, Ill., market and
two stores in Virginia, and completed a less costly remodel in 12 stores in the
Washington, D.C., and Baltimore, Md., markets. We also relocated eight
Superstores during fiscal 2002. In addition, we tested individual department
remodels and display changes in a smaller set of stores. The fiscal 2001
expenses included $41.9 million in remodeling costs, $30.0 million in partial
remodeling costs associated with the exit from the appliance business and $5.0
million in severance costs related to a workforce reduction. Excluding these
costs and the estimated fiscal 2001 sales disruption during the seven to 10 days
of partial remodeling for each store, the expense ratio would have been 21.9
percent in fiscal 2002 and 20.9 percent in fiscal 2001.
The fiscal 2002 rise in the expense ratio reflects the 8 percent
decline in total sales. However, selling, general and administrative expenses
declined by $92.5 million during this period, exclusive of the remodeling,
relocation and severance costs, reflecting cost control and productivity
initiatives, including more efficient advertising expenditures. Advertising
expense was 3.8 percent of sales in fiscal 2002, 4.0 percent in fiscal 2001 and
3.7 percent in fiscal 2000. An increased contribution from the finance operation
also reduced net selling, general and administrative expenses in fiscal 2002.
Increased expenses and the decline in sales produced the expense ratio
rise in fiscal 2001. In addition to the remodeling and severance costs
previously noted, fiscal 2001 selling, general and administrative costs included
a higher level of advertising costs than in the prior fiscal year.
Finance Operation. For the past three years, pretax finance operation
income, which is recorded as a reduction to selling, general and administrative
expenses, was as follows:
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
--------------------------------------------------------------------------------
Securitization income....................... $226.5 $198.8 $242.2
Payroll and fringe expenses................. 41.6 43.0 46.8
Other direct expenses....................... 78.7 79.0 94.0
------------------------------
Finance operation income.................... $106.2 $ 76.8 $101.4
==============================
Receivables generated by the Circuit City finance operation are sold
through securitization transactions. Circuit City continues to service the
securitized receivables for a fee. For the year ended February 28, 2002,
serviced receivables averaged $2.65 billion compared to $2.72 billion for the
year ended February 28, 2001. Included in securitization income is the gain on
the sale of these receivables and other income related to servicing these
receivables. Future finance income from securitized credit card receivables that
exceeds the sum of the contractually specified investor returns and servicing
fees (interest-only strips) is carried at fair value and amounted to $131.9
million at February 28, 2002, and $131.0 million at February 28, 2001. The
change in the interest-only strips for securitization transactions was a $0.9
million increase for fiscal 2002 and a $5.7 million decrease for fiscal 2001.
The key assumptions and estimates in determining the fair value of
interest-only strips include management's projections of key factors, such as
finance charge income, default rates, payment rates, forward interest rate
curves and discount rates appropriate for the type of asset and risk. Management
reviews the assumptions and estimates used in determining the fair value of the
interest-only strips on a quarterly basis. If these assumptions change or the
actual results differ from the projected results, securitization income would be
affected. The decrease for the year ended February 28, 2001 was primarily the
result of an increase in the default assumption. During months of increasing
interest rates, the securitization trusts experience reduced spreads between
interest received and interest paid due to the time lag between Federal Reserve
actions and when the rate increases can be passed on and collected from credit
card holders. This is the case when interest rate ceilings are not in effect for
cardholders. The reverse is true during periods of decreasing rates.
The reduction in securitization income from fiscal 2000 to fiscal 2001
was the result of a decrease in the fair value of the interest-only strips of
$5.7 million for fiscal 2001 compared with a $10.0 million increase for fiscal
2000, and an increase in interest costs of the securitization trusts. From
fiscal 2001 to fiscal 2002, the increase in securitization income was the result
of a reduction in interest costs, which was partially offset by an increase in
defaults.
From fiscal 2000 to fiscal 2001 other direct expenses declined by $15.0
million, largely as a result of implementing new collection strategies that
allowed the finance operation to reduce payroll costs, at the same time,
significantly reducing reliance on third party collection agencies. Payroll
expenses generally vary with the size of the serviced portfolio, and decreased
only slightly in fiscal 2002 and in fiscal 2001. For the Circuit City Group, the
finance operation income does not include any allocation of indirect costs or
income. Examples of indirect costs not included are corporate expenses such as
human resources, administrative services, marketing, information systems,
accounting, legal, treasury, and executive payroll as
Page 25 of 130
well as retail store expenses. Other direct expenses, which did not change
significantly in fiscal 2002 from fiscal 2001, include third party data
processing, rent, credit promotion expenses, VISA and MasterCard fees, and other
operating expenses.
CarMax Group
For the CarMax business, selling, general and administrative expenses
were 7.2 percent of total sales in fiscal 2002, 8.9 percent in fiscal 2001 and
10.4 percent in fiscal 2000.
The improvement in the fiscal 2002 expense ratio reflects significant
expense leverage generated by strong comparable store sales growth and continued
expense management, particularly of non-store expenses, the benefit of which
more than offset higher second half expenses related to renewed geographic
expansion. In addition, a lower cost of funds increased yield spreads and
contributed to higher profits from the finance operation in fiscal 2002. The
decline in the fiscal 2001 expense ratio reflects leverage from strong
comparable store sales growth, more efficient advertising expenditures and
overall improvements in store productivity, including those achieved through the
hub-and-satellite operating strategy that we adopted in multi-store markets.
Advertising expense was 1.3 percent of total sales in fiscal 2002, 1.6 percent
in fiscal 2001 and 2.2 percent in fiscal 2000.
In fiscal 2001, the improvement in the expense ratio was partly offset
by an $8.7 million write-off of goodwill associated with two underperforming
stand-alone new-car franchises. Excluding these costs, the fiscal 2001 expense
ratio would have been 8.6 percent. The fiscal 2000 expense ratio reflects $4.8
million in charges related to lease termination costs on undeveloped property
and a write-down of assets associated with excess property for sale. Excluding
these costs, the fiscal 2000 expense ratio would have been 10.2 percent.
Finance Income. For the past three years, pretax finance income, which
is recorded as a reduction to selling, general and administrative expenses, was
as follows:
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
----------------------------------------------------------------------------
Securitization income....................... $78.1 $51.5 $36.8
Payroll and fringe expenses................. 5.7 4.2 3.4
Other direct expenses....................... 5.9 4.5 3.4
----------------------------
Finance operation income.................... 66.5 42.8 30.0
Third-party financing fees.................. 15.7 11.5 9.8
----------------------------
Total finance income........................ $82.2 $54.3 $39.8
============================
Receivables generated by the CarMax finance operation are sold through
securitization transactions. CarMax continues to service these receivables in
exchange for a contractually specified servicing fee. For the year ended
February 28, 2002, serviced receivables averaged $1.37 billion compared with
$1.07 billion for the year ended February 28, 2001, and $755.9 million for the
year ended February 29, 2000.
For the CarMax Group, securitization income includes gains on sale of
receivables and other income related to servicing these receivables. For the
year ended February 28, 2002, CarMax recorded gains on sale of $56.4 million
compared with $35.4 million for the year ended February 28, 2001, and $17.5
million for the year ended February 29, 2000. The changes from year to year
result from an increase in loan origination volume driven by increased sales
each year and increases in yield on the serviced receivables. In recording these
gains, management estimates key assumptions such as finance charge income,
default rates, payment rates and discount rates appropriate for the type of
asset and risk. If these assumptions change, or the actual results differ from
the projected results, securitization income would be affected.
Direct expenses include collection expenses, rent and facility expenses
and loan processing costs. On a year to year basis, payroll, fringes and other
direct expenses increased proportionately to the average managed receivable
balance. For the CarMax Group, finance operation income does not include any
allocation of indirect costs or income. Examples of indirect costs not included
are corporate expenses such as human resources, administrative services,
marketing, information systems, accounting, legal, treasury and executive
payroll as well as retail store expenses.
Fees received from arranging customer automobile financing through
third parties were $15.7 million for the year ended February 28, 2002, $11.5
million for the year ended February 28, 2001, and $9.8 million for the year
ended February 29, 2000. The change on a year to year basis was a result of the
total increase in retail vehicle sales over the three-year period.
Interest Expense
Interest expense was less than 0.1 percent of total sales in fiscal
2002, 0.1 percent in fiscal 2001 and 0.2 percent in fiscal 2000. The fiscal 2002
decline in the interest expense ratio reflects a decline in total debt of the
Company and lower interest rates. Refer to the "Financing Activities" section
below for further information on changes in debt.
Page 26 of 130
Income Taxes
The effective income tax rate was 38.0 percent in fiscal 2002, fiscal
2001 and fiscal 2000.
Earnings from Continuing Operations
Earnings from continuing operations for Circuit City Stores, Inc. were
$218.8 million in fiscal 2002, compared with $160.8 million in fiscal 2001 and
$327.8 million in fiscal 2000. Increased earnings posted by both the Circuit
City and CarMax businesses drove the fiscal 2002 improvement. The decline in
fiscal 2001 reflects the lower earnings for the Circuit City business, partly
offset by the increased earnings achieved by the CarMax business.
In a public offering completed during the second quarter of fiscal
2002, the Company sold 9,516,800 shares of CarMax Group Common Stock that
previously had been reserved for the Circuit City Group or for issuance to
holders of Circuit City Group Common Stock. With the impact of the offering,
69.2 percent of the CarMax Group's earnings were attributed to the Circuit City
Group's reserved CarMax Group shares in fiscal 2002. In fiscal 2001, 74.6
percent of the CarMax Group's earnings were attributed to the Circuit City
Group's reserved CarMax Group shares, and in fiscal 2000, 77.1 percent of the
CarMax Group's earnings were attributed to the Circuit City Group's reserved
CarMax Group shares.
Circuit City Group
For the Circuit City business, earnings from continuing operations
before the income attributed to the reserved CarMax Group shares were $128.0
million, or 62 cents per Circuit City Group share, in fiscal 2002, compared with
$115.2 million, or 56 cents per Circuit City Group share, in fiscal 2001 and
$326.7 million, or $1.60 per Circuit City Group share, in fiscal 2000. Excluding
in fiscal 2002 the remodel and relocation expenses and lease termination costs
related to the appliance exit, and in fiscal 2001 the estimated sales disruption
during the seven to 10 days of partial remodeling, appliance exit costs,
appliance merchandise markdowns, remodel and relocation expenses and severance
costs related to the workforce reduction, earnings from continuing operations
before the income attributed to the reserved CarMax Group shares would have been
$146.2 million, or 71 cents per Circuit City Group share, in fiscal 2002 and
$205.1 million, or $1.00 per Circuit City Group share, in fiscal 2001.
The net earnings attributed to the Circuit City Group's reserved CarMax
Group shares were $62.8 million, or 30 cents per Circuit City Group share, in
fiscal 2002, compared with $34.0 million, or 17 cents per Circuit City Group
share, in fiscal 2001 and $862,000 in fiscal 2000.
Earnings from continuing operations attributed to the Circuit City
Group, including income attributed to the reserved CarMax Group shares, were
$190.8 million, or 92 cents per Circuit City Group share, in fiscal 2002; $149.2
million, or 73 cents per Circuit City Group share, in fiscal 2001; and $327.6
million, or $1.60 per Circuit City Group share, in fiscal 2000.
Page 27 of 130
Circuit City Group Diluted Earnings per Share from Continuing Operations
Fiscal 2002 2001 2000
---------------------------------------------------------------------------
Circuit City business....................... $ 0.71 $ 1.00 $1.60
Impact of appliance exit costs.............. (0.03) (0.09) -
Impact of appliance merchandise
markdowns(1)............................. - (0.08) -
Impact of partial remodel costs(2).......... - (0.09) -
Impact of estimated sales disruption........ - (0.03) -
Impact of remodel and relocation costs(2)... (0.06) (0.13) -
Impact of workforce reduction costs(2)...... - (0.02) -
Reserved CarMax Group shares................ 0.30 0.17 -
--------------------------
Circuit City Group.......................... $ 0.92 $ 0.73 $1.60
==========================
(1) Reflected as a reduction in gross profit margins.
(2) Reflected as an increase in selling, general and administrative expenses.
CarMax Group
For the CarMax business, net earnings were $90.8 million in fiscal
2002, $45.6 million in fiscal 2001 and $1.1 million in fiscal 2000. Excluding
the write-off of goodwill, net earnings would have been $51.0 million in fiscal
2001. Excluding lease termination costs and the write-down of assets, net
earnings would have been $4.1 million in fiscal 2000. Net earnings attributed to
the outstanding CarMax Group Common Stock were $28.0 million, or 82 cents per
share, in fiscal 2002; $11.6 million, or 43 cents per share, in fiscal 2001; and
$256,000, or 1 cent per share, in fiscal 2000. The net earnings attributed to
the outstanding CarMax Group Common Stock grew faster than total net earnings
and net earnings per outstanding CarMax Group share because of the impact of the
public offering of CarMax Group shares during the second quarter of fiscal 2002.
Loss from Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease
marketing of the Divx home video system and discontinue operations, but
existing, registered customers would be able to view discs during a two-year
phase-out period. The operating results of Divx and the loss on disposal of the
Divx business have been segregated from continuing operations and reported as
separate line items, after tax, on the Company's consolidated statement of
earnings for fiscal 2000.
In fiscal 2000, the loss from the discontinued Divx operations totaled
$16.2 million after an income tax benefit of $9.9 million. The loss on the
disposal of the Divx business totaled $114.0 million after an income tax benefit
of $69.9 million. The loss on the disposal included a provision for operating
losses to be incurred during the phase-out period. It 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.
As of February 28, 2002, entities comprising the discontinued Divx
operations have been dissolved. The remaining liabilities, totaling $18.5
million, have been assumed by the Company and are included in the consolidated
balance sheet.
Net Earnings
Net earnings for the Company were $218.8 million in fiscal 2002, $160.8
million in fiscal 2001 and $197.6 million in fiscal 2000.
Operations Outlook
Circuit City Group
We believe that increased consumer interest in products and services
such as big-screen televisions, including digital televisions, plasma
televisions and liquid-crystal display panels; multi-channel video programming
devices; digital imaging; wireless communications; and Broadband Internet access
will drive profitability in the consumer electronics business during this
decade. For that reason, we are focusing significant resources on store
remodeling, sales counselor training, customer service enhancements, marketing
programs and supply chain initiatives to take advantage of the growth
opportunities these products provide and thus improve the sales and
profitability of the Circuit City business.
Over the past two years, we have experimented with several remodel
designs and product category tests to expand the benefits of the new Circuit
City store design to the existing store base. In fiscal 2003, we plan to draw on
these remodel and product category tests to roll out a remodeled video
department and lighting upgrade to approximately 300 Circuit City Superstores,
spending an average of $325,000 to $350,000 per store. We believe that rolling
out this remodeled department will enable us to increase Circuit City's
Page 28 of 130
market share in the growing and highly profitable big-screen television category
and further solidify our position in the overall video category. The Consumer
Electronics Association projects that big-screen television sales will grow at a
double-digit rate in calendar 2002. The fiscal 2003 remodeling plan will allow
us to touch a large number of Circuit City Superstores in a manner that has
significant potential for incremental benefit, while minimizing the disruptive
impact of the remodeling process. We expect the remodeling activities will take
approximately two weeks to complete in each store. We will continue testing
design ideas for other departments in the Circuit City Superstores. We also plan
to relocate approximately 10 Circuit City Superstores in fiscal 2003. In fiscal
2003, we expect Circuit City expenditures for remodeling and relocations to
total approximately $130 million, of which we expect to capitalize approximately
$70 million and expense approximately $60 million, or 18 cents per Circuit City
Group share. We plan to continue improving the Circuit City store base in fiscal
2004 and fiscal 2005 by completing the remodel of these 300 stores and by
relocating additional stores to provide a shopping experience that we believe is
more consistent with the preferences of today's consumer.
With existing Circuit City initiatives, additional efforts to enhance
the business and a relatively stable economy, we believe Circuit City can
achieve comparable store sales growth in the mid-single digits for fiscal 2003.
We expect that categories where we expanded selections following the exit from
the appliance business and categories, such as big-screen televisions, that are
benefiting from digital product innovation, will contribute to this growth. We
plan to open approximately 10 Superstores in fiscal 2003. Given our presence in
virtually all of the nation's top metropolitan markets, new Superstores are
being added in one- or two-store markets or to increase our presence in existing
major markets. Because of the limited planned geographic expansion, we expect
total Circuit City sales growth to only slightly exceed comparable store sales
growth. We expect relatively stable Circuit City gross profit margins in fiscal
2003. We also expect a modest increase in the Circuit City expense ratio in
fiscal 2003, despite the anticipated increase in comparable store sales. Planned
increases in remodeling and relocation expenses, advertising and systems
enhancements are among the anticipated contributors to the higher expense ratio.
For the full year, we expect the fiscal 2003 profit contribution from Circuit
City's finance operation to be similar to the contribution in fiscal 2002.
We currently expect the Circuit City business will contribute 75 cents
per share to 85 cents per share to the earnings of the Circuit City Group in
fiscal 2003, before remodeling and relocation expenses. Including these
expenses, we expect the Circuit City business will contribute 57 cents per share
to 67 cents per share to the earnings of the Circuit City Group.
CarMax Group
Over the past two years, CarMax has demonstrated that its consumer
offer and business model can produce strong sales and earnings growth. Given its
solid financial performance, we believe CarMax is able to support its growth
independently.
In fiscal 2003, CarMax's geographic expansion will continue to focus on
entries into mid-sized markets and satellite store opportunities in existing
markets. We have identified more than 30 additional markets that could support a
standard superstore, the principal CarMax store size going forward. We also
believe that we can add approximately 10 satellite stores in CarMax's existing
markets. In fiscal 2003, CarMax plans to open four to six stores, approximately
one half of which are expected to be satellite stores.
We believe comparable store used-car unit sales growth, which drives
our profitability, will be in the low to mid-teens in the first half of fiscal
2003, moderating to high-single to low-double digits in the second half. Fiscal
2003 will be a year of transition for CarMax as it ramps up its growth pace.
Additional growth-related costs such as training, recruiting and employee
relocation for our new stores will moderate earnings growth. In addition, we
anticipate a reduction in yield spreads from the CarMax finance operation as
interest rates rise above the low levels experienced in fiscal 2002. Our
earnings expectations for CarMax also include preliminary estimates of expenses
expected to be incurred in the second half of fiscal 2003 if the planned
separation is approved. We expect the expense leverage improvement achieved from
total and comparable store sales growth to be substantially offset by these
three factors. As a result, we anticipate earnings per CarMax Group share of 95
cents to $1.00 for fiscal 2003, excluding the non-recurring costs of separation,
which are not tax-deductible and are estimated to be approximately $8 million,
or 8 cents per CarMax Group share.
We plan to open six to eight CarMax stores per year in fiscal 2004
through fiscal 2006, including openings in mid-sized markets and satellite
stores in existing markets.
Recent Accounting Pronouncements
In July 2000, the Financial Accounting Standards Board issued EITF 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, in the
first quarter of fiscal 2003, 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. On a pro forma basis, this
reclassification would have increased the fiscal 2002 Circuit City Stores, Inc.
gross profit margin by 12 basis points and the expense ratio by 10 basis points.
For fiscal 2001, this reclassification would have increased the gross profit
margin and the expense ratio by 20 basis
Page 29 of 130
points. For the Circuit City Group, this reclassification would have increased
the gross profit margin by 18 basis points and the expense ratio by 17 basis
points in fiscal 2002, and the gross profit margin by 29 basis points and the
expense ratio by 27 basis points in fiscal 2001. 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.
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
pronouncement. 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. For the
CarMax Group, goodwill totaled $20.1 million and covenants not to compete
totaled $1.5 million as of February 28, 2002. In fiscal 2002, goodwill
amortization totaled $1.8 million, and amortization of covenants not to compete
totaled $931,000. Covenants not to compete will continue to be amortized on a
straight-line basis over the life of the covenant, not to exceed five years.
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, as outlined in
the new pronouncement. 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 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 supersedes 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
Accounting Principles Board 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 in the first quarter of
fiscal 2003. The Company does not expect the adoption of SFAS No. 144 to have a
material impact on its financial position, results of operations or cash flows.
Page 30 of 130
Financial Condition
Liquidity and Capital Resources
Cash Flow Highlights
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
----------------------------------------------------------------------------
Net earnings from continuing operations..... $ 218.8 $ 160.8 $ 327.8
Depreciation and amortization............... $ 150.7 $ 153.1 $ 148.2
Provision for deferred income taxes......... $ 31.2 $ 19.8 $ 43.1
Cash provided by (used for)
working capital, net..................... $ 336.7 $(165.7) $ 122.4
Cash provided by operating activities....... $ 837.2 $ 167.1 $ 638.3
Purchases of property and equipment......... $(214.0) $(285.6) $ (222.3)
Proceeds from sales of property
and equipment, net....................... $ 187.4 $ 115.7 $ 100.2
Net decrease in short-term and
long-term debt........................... $(123.4) $(179.9) $ (7.7)
Proceeds from CarMax stock
offering, net............................ $ 139.5 - -
Cash Provided By Operations. Circuit City Stores generated net cash
from operating activities of $837.2 million in fiscal 2002, compared with $167.1
million in fiscal 2001 and $638.3 million in fiscal 2000. The fiscal 2002
improvement primarily resulted from working capital efficiencies and a $58.0
million increase in net earnings. Improved supply chain management in the
Circuit City business contributed to a $192.0 million reduction in working
capital used for inventories in fiscal 2002 compared with fiscal 2001. Increases
in accounts payable, accrued expenses and other current liabilities, and accrued
income taxes reduced working capital by an additional $401.0 million in fiscal
2002 compared with fiscal 2001. The increase in accounts payable primarily
reflects extended payment terms achieved through supply chain management in the
Circuit City business. The fiscal 2001 decline in cash provided by operating
activities was largely a function of lower net earnings for the Circuit City
business and an increase in working capital, partly offset by the increase in
earnings for the CarMax business.
Investing Activities. Net cash used in investing activities was $26.6
million in fiscal 2002, compared with $171.2 million in fiscal 2001 and $157.0
million in fiscal 2000. Capital expenditures were $214.0 million in fiscal 2002,
$285.6 million in fiscal 2001 and $222.3 million in fiscal 2000. Fiscal 2002
capital expenditures included spending for the construction of 11 new and eight
relocated Circuit City Superstores, $19.8 million of capitalized Circuit City
remodeling expenditures and the construction of two standard-sized CarMax
used-car superstores, one of which opened during the first quarter of fiscal
2003, and one satellite used-car superstore. Fiscal 2001 capital expenditures
included spending for the construction of 23 new and two relocated Circuit City
Superstores and $106.0 million of capitalized Circuit City remodeling
expenditures associated with full remodels of 26 Superstores, primarily in south
or central Florida, and partial remodels associated with the exit from the
appliance business. Fiscal 2000 capital expenditures included spending for the
construction of 34 new and four relocated Circuit City Superstores and four
CarMax used-car superstores.
Capital expenditures have been funded primarily through internally
generated funds, sale-leaseback transactions, landlord reimbursements and short-
and long-term debt. Net proceeds from sales of property and equipment, including
sale-leasebacks, totaled $187.4 million in fiscal 2002, $115.7 million in fiscal
2001 and $100.2 million in fiscal 2000. In August 2001, Circuit City completed a
sale-leaseback transaction for its Orlando, Fla., distribution center, from
which total proceeds of $19.5 million were received. In November 2001, we
completed a sale-leaseback transaction for Circuit City's Marion, Ill.,
distribution center, from which total proceeds of $29.0 million were received.
In August 2001, CarMax entered into a sale-leaseback transaction covering nine
superstore properties for an aggregate sale price of $102.4 million. This
transaction, which represented the first sale-leaseback entered into by CarMax
without a Circuit City Stores, Inc. guarantee, was structured at competitive
rates with an initial lease term of 15 years and two 10-year renewal options.
In fiscal 2003, we anticipate capital expenditures for the Circuit City
business of approximately $150 million. In fiscal 2003, the Circuit City
business plans to open approximately 10 Superstores, remodel the video
department and install lighting upgrades in approximately 300 Superstores and
relocate approximately 10 Superstores. We expect Circuit City will continue
incurring remodeling and relocation costs in fiscal years 2004 and 2005.
Page 31 of 130
In fiscal 2003, we anticipate capital expenditures for the CarMax
business of approximately $175 million. CarMax planned expenditures primarily
relate to new store construction, including furniture, fixtures and equipment
and land purchases, and leasehold improvements to existing properties. CarMax
expects to open four to six stores during fiscal 2003, approximately one half of
which will be satellite stores, and, assuming the business continues to meet our
expectations, 22 to 30 stores over the following four years. We expect the
initial cash investment per store to be in the range of $20 million to $27
million for a standard superstore and $10 million to $15 million for a satellite
store. If CarMax takes full advantage of building and land sale-leasebacks, then
we expect the net cash used to fund a new store will be $8 million to $12
million for a standard superstore and $5 million to $7 million for a satellite
superstore. As a new store matures, sales financed through CarMax's finance
operation will require additional use of capital in the form of a seller's
interest in the receivables or reserves. For a standard used-car superstore, we
would expect the cash investment for the seller's interest to range from $0.8
million to $1.5 million at the end of the first year of operation, growing to
$2.2 million to $3.4 million after five years of operation.
For the Company, we expect that available cash resources, CarMax's
anticipated credit agreement secured by vehicle inventory, sale-leaseback
transactions, landlord reimbursements and cash generated by operations will be
sufficient to fund capital expenditures for the foreseeable future.
Financing Activities. In December 2001, CarMax entered into an $8.5
million secured promissory note in conjunction with the purchase of land for new
store construction. This note, which is payable in August 2002, was included in
short-term debt as of February 28, 2002.
As scheduled, Circuit City Stores used existing working capital to
repay a $130 million term loan in fiscal 2002 and a $175 million term loan in
fiscal 2001. At February 28, 2002, a $100 million outstanding term loan due in
July 2002 was classified as a current liability. Although the Company has the
ability to refinance this debt, we intend to repay it using existing working
capital.
At February 28, 2002, the Company had cash and cash equivalents of
$1.25 billion and total outstanding debt of $126.4 million. Circuit City Stores
maintains a $150 million unsecured revolving credit facility that expires on
August 31, 2002. The Company does not anticipate renewing this facility. The
Company also maintains $195 million in committed seasonal lines of credit that
are renewed annually with various banks. At February 28, 2002, total balances of
$1.8 million were outstanding under these facilities.
We anticipate that during the first quarter of fiscal 2003, CarMax will
enter into a multi-year, $200 million credit agreement secured by vehicle
inventory. We anticipate that some of the proceeds from the agreement will be
used for the repayment of allocated debt; the payment on the separation date of
a one-time special dividend to Circuit City Stores, Inc., currently estimated to
be between $25 million and $35 million; the payment of transaction expenses
incurred in connection with the separation; and general corporate purposes.
Refer to "Contractual Obligations" for further discussion of the special
dividend payment.
Receivables generated by the Circuit City and CarMax finance operations
are funded through securitization transactions in which the finance operations
sell their receivables while retaining servicing rights. These securitization
transactions provide an efficient and economical means of funding credit card
and automobile loan receivables. For transfers of receivables that qualify as
sales under SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," we recognize gains and losses as a
component of the profits of Circuit City's or CarMax's finance operation.
On a daily basis, Circuit City's finance operation sells its
private-label credit card and MasterCard and VISA credit card, referred to as
bankcard, receivables to special purpose subsidiaries, which, in turn, transfer
the receivables to two separate securitization master trusts. The master trusts
periodically issue asset-backed securities in public offerings and private
transactions, and the proceeds are distributed through the special purpose
subsidiaries to Circuit City's finance operation. The special purpose
subsidiaries retain an undivided interest in the transferred receivables and
hold various subordinated asset-backed securities that serve as credit
enhancement for the asset-backed securities held by outside investors. Circuit
City's finance operation continues to service the transferred receivables for a
fee.
The private-label and bankcard master trusts each have issued multiple
series of asset-backed securities, referred to as term securities, having fixed
initial principal amounts. Investors in the term securities are entitled to
receive monthly interest payments and a single principal payment on a stated
maturity date. In addition, each master trust has issued a series of
asset-backed securities, referred to as variable funding securities, having a
variable principal amount. Investors in the variable funding securities are
generally entitled to receive monthly interest payments and have committed to
acquire additional undivided interests in the transferred receivables up to a
stated amount through a stated commitment termination date. The commitment under
the private-label variable funding series is currently scheduled to expire on
December 13, 2002, and the commitment under the bankcard variable funding series
is currently scheduled to expire on October 24, 2002. We expect that the
commitment termination dates of both variable funding series will be extended.
If certain events were to occur, principal
Page 32 of 130
payment dates for the term series would be accelerated, the variable funding
commitments would terminate and the variable funding investors would begin to
receive monthly principal payments until paid in full.
At February 28, 2002, the aggregate principal amount of securitized
credit card receivables totaled $1.31 billion under the private-label program
and $1.49 billion under the bankcard program. At February 28, 2002, the unused
capacity of the private-label variable funding program was $22.9 million and the
unused capacity of the bankcard variable funding program was $496.5 million. At
February 28, 2002, there were no provisions providing recourse to the Company
for credit losses on the receivables securitized through the private-label or
bankcard master trusts.
We have conducted tests of a co-branded Circuit City bankcard, which
offers more utility to the customer than the private-label card. We are
considering transitioning our private-label program to this card.
On a monthly basis, CarMax's finance operation sells its automobile
loan receivables to a special purpose subsidiary, which, in turn, transfers the
receivables to a group of third-party investors. The investors sell commercial
paper backed by the transferred receivables, and the proceeds are distributed
through the special purpose subsidiary to CarMax's finance operation. The
special purpose subsidiary retains a subordinated interest in the transferred
receivables. CarMax's finance operation continues to service the transferred
receivables for a fee. The investors are generally entitled to receive monthly
interest payments and have committed to acquire additional undivided interests
in the transferred receivables up to a stated amount through June 26, 2003. If
certain events were to occur, the commitment to acquire additional undivided
interests would terminate and the investors would begin to receive monthly
principal payments until paid in full. At February 28, 2002, the unused capacity
of this program was $211.0 million.
CarMax's finance operation periodically refinances its automobile loan
receivables through the public issuance of asset-backed securities. The finance
operation sells the receivables to be refinanced to a special purpose
subsidiary, which, in turn, transfers the purchased receivables to a
securitization trust. The securitization trust then issues asset-backed
securities secured by the transferred receivables in public offerings, and the
proceeds are distributed through the special purpose subsidiary to CarMax's
finance operation. CarMax continues to service the transferred receivables for a
fee. Asset-backed securities were issued totaling $644.0 million in October
1999, $655.4 million in January 2001 and $641.7 million in November 2001.
At February 28, 2002, the aggregate principal amount of securitized
automobile loan receivables totaled $1.54 billion. At February 28, 2002, there
were no provisions providing recourse to the Company for credit losses on the
securitized automobile loan receivables.
We anticipate that we will be able to expand or enter into new
securitization arrangements to meet future needs of both the Circuit City and
CarMax finance operations.
During the second quarter of fiscal 2002, Circuit City Stores, Inc.
completed the public offering of 9,516,800 shares of CarMax Group Common Stock.
The shares sold in the offering were shares of CarMax Group Common Stock that
previously had been reserved for the Circuit City Group or for issuance to
holders of Circuit City Group Common Stock. The net proceeds of $139.5 million
from the offering were allocated to the Circuit City Group to be used for
general purposes of the Circuit City business, including remodeling of Circuit
City Superstores.
Contractual Obligations (1)
2 to 3 4 to 5 After 5
(Amounts in millions) Total 1 Year Years Years Years
------------------------------------------------------------------------------------------
Contractual obligations:
Long-term debt.................... $ 104.5 $101.5 $ 2.6 $ 0.4 $ -
Promissory note................... 8.5 8.5 - - -
Capital lease obligations......... 11.6 0.6 1.3 1.7 8.0
Operating leases.................. 4,801.8 339.2 672.3 659.1 3,131.2
Lines of credit................... 1.8 1.8 - - -
Other contractual obligations..... 18.5 18.5 - - -
-------------------------------------------------
Total ............................... $4,946.7 $470.1 $676.2 $661.2 $3,139.2
=================================================
(1) Amounts are based on the capital structure of Circuit City Stores, Inc. as
of February 28, 2002. Future obligations depend upon the final outcome of the
proposed separation of CarMax.
CarMax currently operates 23 of its sales locations pursuant to various
leases under which Circuit City Stores, Inc. was the original tenant and primary
obligor. Circuit City Stores, Inc., and not CarMax, had originally entered into
these leases so that CarMax could take advantage of the favorable economic terms
available to us as a large retailer. We have assigned each of these leases to
CarMax. Despite the assignment and pursuant to the terms of the leases, we
remain contingently liable under the
Page 33 of 130
leases. For example, if CarMax were to fail to make lease payments under one or
more of the leases, we may be required to make those payments on CarMax's
behalf. In recognition of this ongoing contingent liability, CarMax has agreed
to make a one-time special dividend payment to Circuit City Stores, Inc. on the
separation date, assuming the separation is completed. We currently expect this
special dividend to be between $25 million and $35 million.
Capital Structure
Total assets at February 28, 2002, were $4.54 billion, up $668.1
million, or 17 percent, since February 28, 2001. An $805.4 million increase in
cash, partly offset by a $124.3 million decrease in inventory, was the primary
contributor to the increase in total assets.
During fiscal 2002, stockholders' equity increased 16 percent to $2.73
billion. Capitalization for the past five years is illustrated in the
"Capitalization" table that follows. The return on equity was 8.6 percent in
fiscal 2002, compared with 7.1 percent in fiscal 2001.
Historically, the Groups have relied on the cash or external debt of
Circuit City Stores, Inc. to provide working capital needed to fund net assets
not otherwise financed through sale-leasebacks or the securitization of
receivables. Most of the financial activities of each Group are managed by the
Company on a centralized basis and are dependent on the financial condition of
the Company or, in some cases, its separate businesses. These financial
activities have included the investment of surplus cash, issuance and repayment
of debt, securitization of receivables, sale-leasebacks of real estate and
inter-group loans.
In February 2002, Circuit City Stores, Inc. announced plans to separate
the CarMax business from the Circuit City business in a tax-free transaction in
which CarMax, Inc., presently a wholly owned subsidiary of Circuit City Stores,
Inc., would become an independent, separately traded public company. The
separation plan calls for Circuit City Stores, Inc. to redeem all outstanding
shares of CarMax Group Common Stock in exchange for shares of common stock of
CarMax, Inc. Simultaneously, shares of CarMax, Inc. common stock, representing
the shares of CarMax Group Common Stock reserved for the holders of Circuit City
Group Common Stock, would be distributed as a tax-free dividend to the holders
of Circuit City Group Common Stock.
Capitalization
Fiscal 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions) $ % $ % $ % $ % $ %
-----------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding
current installments...... $ 14.1 1% $ 116.1 5% $ 249.2 10% $ 426.6 17% $ 424.3 18%
Other long-term liabilities.. 149.6 5 107.1 4 157.8 6 149.7 6 171.5 7
Total stockholders' equity... 2,734.4 94 2,356.5 91 2,142.2 84 1,905.1 77 1,730.0 75
---------------------------------------------------------------------------------------------
Total capitalization......... $2,898.1 100% $2,579.7 100% $2,549.2 100% $2,481.4 100% $2,325.8 100%
=============================================================================================
Market Risk
Receivables Risk
The Company manages the market risk associated with the private-label
credit card and bankcard revolving loan portfolios of Circuit City's finance
operation and the automobile installment loan portfolio of CarMax's finance
operation. Portions of these portfolios have been securitized in transactions
accounted for as sales in accordance with SFAS No. 140 and, therefore, are not
presented on the Company's consolidated balance sheets.
Consumer Revolving Credit Receivables. The majority of accounts in the
private-label credit card and bankcard portfolios are charged interest at rates
indexed to the prime rate, adjustable on a monthly basis subject to certain
limitations. The balance of the accounts are charged interest at a fixed annual
percentage rate. As of February 28, 2002, and February 28, 2001, the total
outstanding principal amount of private-label credit card and bankcard
receivables had the following interest rate structure:
(Amounts in millions) 2002 2001
-------------------------------------------------------------
Indexed to prime rate................... $2,645 $2,596
Fixed APR............................... 202 203
-------------------
Total................................... $2,847 $2,799
==================
Psge 34 of 130
Financing for the private-label credit card and bankcard receivables is
achieved through asset securitization programs that, in turn, issue both private
and public market debt, principally at floating rates based on LIBOR and
commercial paper rates. Receivables held for sale are financed with working
capital. The total principal amount of receivables securitized or held for sale
at February 28, 2002, and February 28, 2001, was as follows:
(Amounts in millions) 2002 2001
------------------------------------------------------------
Floating-rate securitizations........... $2,798 $2,754
Held for sale........................... 49 45
-------------------
Total................................... $2,847 $2,799
==================
Automobile Installment Loan Receivables. At February 28, 2002, and
February 28, 2001, all loans in the portfolio of automobile loan receivables
were fixed-rate installment loans. Financing for these automobile loan
receivables is achieved through asset securitization programs that, in turn,
issue both fixed- and floating-rate securities. Interest rate exposure relating
to floating rate securitizations is managed through the use of interest rate
swaps. Receivables held for investment or sale are financed with working
capital.
The total principal amount of receivables securitized or held for
investment or sale as of February 28, 2002, and February 28, 2001, was as
follows:
(Amounts in millions) 2002 2001
-------------------------------------------------------------
Fixed-rate securitizations................ $1,122 $ 984
Floating-rate securitizations
synthetically altered to fixed......... 413 299
Floating-rate securitizations............. 1 1
Held for investment(1).................... 12 9
Held for sale............................. 2 3
------------------
Total..................................... $1,550 $1,296
==================
(1) Held by a bankruptcy-remote special purpose subsidiary.
Interest Rate Exposure. The Company is exposed to interest rate risk on
Circuit City's securitized credit card portfolio, especially when interest rates
move dramatically over a relatively short period of time. Market risk is the
exposure created by potential fluctuations in interest rates. We have mitigated
this risk through matched funding. However, our ability to increase the finance
charge yield of Circuit City's variable rate credit cards may be contractually
limited or limited at some point by competitive conditions. On behalf of Circuit
City, the Company enters into interest rate cap agreements to meet the
requirements of the credit card receivable securitization transactions. The
Company has entered into offsetting interest rate cap positions and, therefore,
does not anticipate significant market risk arising from interest rate caps.
Interest rate exposure relating to CarMax's securitized automobile loan
receivables represents a market risk exposure that we manage with matched
funding and interest rate swaps matched to projected payoffs. The Company does
not anticipate significant market risk from swaps because they are used on a
monthly basis to match funding costs to the use of the funding. Generally,
changes only in interest rates do not have a material impact on the Company's
results of operations.
Credit risk is the exposure to nonperformance of another party to an
agreement. Credit risk is mitigated by dealing with highly rated bank
counterparties. The market and credit risks associated with financial
derivatives are similar to those relating to other types of financial
instruments. Refer to Note 12 to the Company's consolidated financial statements
for a description of these items.
Forward-Looking Statements
The provisions of the Private Securities Litigation Reform Act of 1995
provide companies with a "safe harbor" when making forward-looking statements.
This "safe harbor" encourages companies to provide prospective information about
their companies without fear of litigation. The Company wishes to take advantage
of the "safe harbor" provisions of the Act. Company statements that are not
historical facts, including statements about management's expectations for
fiscal 2003 and beyond, are forward-looking statements and involve various risks
and uncertainties.
Page 35 of 130
Forward-looking statements are estimates and projections reflecting our
judgment and involve a number of risks and uncertainties that could cause actual
results to differ materially from those suggested by the forward-looking
statements. Although we believe that the estimates and projections reflected in
the forward-looking statements are reasonable, our expectations may prove to be
incorrect. Important factors that could cause actual results to differ
materially from estimates or projections contained in our forward-looking
statements include:
o Changes in the amount and degree of promotional intensity exerted by
current competitors and potential new competition from both retail
stores and alternative methods or channels of distribution such as
online and telephone shopping services and mail order.
o Changes in general U.S. or regional U.S. economic conditions including,
but not limited to, consumer credit availability, consumer credit
delinquency and default rates, interest rates, inflation, personal
discretionary spending levels and consumer sentiment about the economy
in general.
o The presence or absence of, or consumer acceptance of, new products or
product features in the merchandise categories we sell and changes in
our actual merchandise sales mix.
o Significant changes in retail prices for products sold by either of our
businesses.
o Lack of availability or access to sources of inventory for either of
our businesses.
o Inability on the part of either of our businesses to liquidate excess
inventory should excess inventory develop.
o Unanticipated adverse results from remodeling or relocating Circuit
City Superstores.
o The ability to attract and retain an effective management team in a
dynamic environment or changes in the cost or availability of a
suitable work force to manage and support our service-driven operating
strategies.
o Changes in the availability of securitization financing for credit card
and automobile installment loan receivables and the availability or
cost of capital expenditure and working capital financing, including
the availability of long-term financing to support development of our
businesses.
o Changes in production or distribution costs or cost of materials for
our advertising.
o Availability of appropriate real estate locations for expansion.
o The imposition of new restrictions or regulations regarding the sale of
products and/or services we sell, changes in tax rules and regulations
applicable to us or our competitors, or any failure to comply with such
laws or any adverse change in such laws.
o Adverse results in significant litigation matters.
The board of directors has authorized management to initiate a process
that would separate the CarMax business from the Circuit City business through a
tax-free transaction in which CarMax, Inc. would become an independent,
separately traded public company. CarMax, Inc. has filed a registration
statement related to this transaction with the SEC. The cautionary statements
listed above should be read in conjunction with the risk factors in the
registration statement and in the Company's other SEC filings.
We believe our forward-looking statements are reasonable; however,
undue reliance should not be placed on any forward-looking statements, which are
based on current expectations.
Common Stock
The common stock of Circuit City Stores, Inc. includes two series:
Circuit City Stores, Inc. - Circuit City Group Common Stock and Circuit City
Stores, Inc. - CarMax Group Common Stock. Both Group stocks are traded on the
New York Stock Exchange. The quarterly dividend data shown below applies to the
Circuit City Group Common Stock for the applicable periods. No dividend data is
shown for the CarMax Group Common Stock since it pays no dividends at this time.
Circuit City Group CarMax Group
--------------------------------------------------------- ---------------------------------
Market Price of Common Stock Dividends Market Price of Common Stock
------------------------------------ ---------------- ---------------------------------
Fiscal 2002 2001 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------
Quarter HIGH LOW HIGH LOW HIGH LOW HIGH LOW
-------------------------------------------------------------------------------------------------------------------
1st.............. $16.85 $10.34 $65.19 $37.25 $.0175 $.0175 $15.49 $ 4.70 $4.25 $1.56
2nd.............. $20.25 $14.50 $56.63 $21.00 $.0175 $.0175 $20.50 $11.50 $4.88 $2.63
3rd.............. $17.84 $ 9.55 $28.25 $11.56 $.0175 $.0175 $21.00 $ 9.20 $5.38 $3.38
4th.............. $31.40 $16.08 $19.90 $ 8.69 $.0175 $.0175 $29.02 $19.35 $5.50 $3.69
-------------------------------------------------------------------------------------------------
Total............ $.0700 $.0700
===============
Page 36 of 130
Circuit City Group
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The common stock of Circuit City Stores, Inc. consists of two common
stock series that are intended to reflect the performance of the Company's two
businesses. The Circuit City Group Common Stock is intended to reflect the
performance of the Circuit City stores and related operations and the shares of
CarMax Group Common Stock reserved for the Circuit City Group or for issuance to
holders of Circuit City Group Common Stock. The fiscal 2000 financial results
for the Company and the Circuit City Group also include the Company's investment
in Digital Video Express, which was discontinued. The CarMax Group Common Stock
is intended to reflect the performance of the CarMax stores and related
operations. The reserved CarMax Group shares are not outstanding CarMax Group
Common Stock. The net earnings attributed to the reserved CarMax Group shares
are included in the Circuit City Group's net earnings.
Excluding shares reserved for CarMax employee stock incentive plans,
the reserved CarMax Group shares represented 64.1 percent of the total
outstanding and reserved shares of CarMax Group Common Stock at February 28,
2002; 74.6 percent at February 28, 2001; and 74.7 percent at February 29, 2000.
The reserved CarMax Group shares at February 28, 2002, reflect the effect of the
public offering of CarMax Group Common Stock completed during the second quarter
of fiscal 2002. Refer to the "Earnings Attributed to the Reserved CarMax Group
Shares" and "Financing Activities" sections below for further discussion of the
public offering.
On February 22, 2002, Circuit City Stores, Inc. announced that its
board of directors had authorized management to initiate a process that would
separate the CarMax auto superstore business from the Circuit City consumer
electronics business through a tax-free transaction in which CarMax, Inc.,
presently a wholly owned subsidiary of Circuit City Stores, Inc., would become
an independent, separately traded public company. CarMax, Inc. holds
substantially all of the businesses, assets and liabilities of the CarMax Group.
The separation plan calls for Circuit City Stores, Inc. to redeem all
outstanding shares of CarMax Group Common Stock in exchange for shares of common
stock of CarMax, Inc. Simultaneously, shares of CarMax, Inc. common stock,
representing the shares of CarMax Group Common Stock reserved for the holders of
Circuit City Group Common Stock, would be distributed as a tax-free dividend to
the holders of Circuit City Group Common Stock.
In the proposed separation, the holders of CarMax Group Common Stock
would receive one share of CarMax, Inc. common stock for each share of stock
redeemed by the Company. We anticipate that the holders of Circuit City Group
Common Stock would receive a fraction of a share of CarMax, Inc. common stock
for each share of Circuit City Group Common Stock they hold. The exact fraction
would be determined on the record date for the distribution. The separation is
expected to be completed by late summer, subject to shareholder approval and
final approval from the board of directors. CarMax, Inc. has filed a
registration statement regarding this transaction with the Securities and
Exchange Commission. This registration statement contains pro forma financial
information that is intended to reflect the potential effects of the separation
of the two businesses.
Holders of Circuit City Group Common Stock and holders of CarMax Group
Common Stock are shareholders of the Company and as such are subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. The results of operations or financial
condition of one Group could affect the results of operations or financial
condition of the other Group. The discussion and analysis for the Circuit City
Group presented below should be read in conjunction with the discussion and
analysis presented for Circuit City Stores, Inc. and for the CarMax Group and in
conjunction with all the Company's SEC filings.
Critical Accounting Policies
In Management's Discussion and Analysis, we discuss the results of
operations and financial condition as reflected in the Circuit City Group
financial statements. Preparation of financial statements requires us to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
revenues and expenses and the disclosures of contingent assets and liabilities.
We use our historical experience and other relevant factors when developing our
estimates and assumptions. We continually evaluate these estimates and
assumptions. Note 2 to the Group financial statements includes a discussion of
our significant accounting policies. The accounting policies discussed below are
those we consider critical to an understanding of the Group financial statements
because their application places the most significant demands on our judgment.
Our financial results might have been different if different assumptions had
been used or other conditions had prevailed.
Calculation of the Value of Retained Interests in Securitization
Transactions
Circuit City securitizes credit card receivables. The fair value of
retained interests from securitization activities is based on the present value
of expected future cash flows. The present value is determined by using
management's projections of key factors, such as finance charge income, default
rates, payment rates, forward interest rate curves and discount rates
Page 37 of 130
appropriate for the type of asset and risk. These projections are derived from
historical experience, projected economic trends and anticipated interest rates.
Adjustments to one or more of these projections may have a material impact on
the fair value of the retained interests. These projections may be affected by
external factors, such as changes in the behavior patterns of our customers,
changes in the strength of the economy and developments in the interest rate
markets. Note 2(B) to the Group financial statements includes a discussion of
our accounting policies related to securitizations. Note 10 to the Group
financial statements includes a discussion of our credit card securitizations.
Calculation of the Liability for Lease Termination Costs
Circuit City accounts for lease termination costs in accordance with
Emerging Issues Task Force No. 88-10, "Costs Associated with Lease Modification
or Termination." Circuit City records a liability for remaining costs related to
leased properties that are no longer used for operating purposes, reduced by any
estimated sublease income. Inherent in the calculation are certain significant
management estimates including, among others, vacancy periods and future
sublease revenues. Fluctuations in the economy and in marketplace demand for
commercial properties can result in material changes in the liability for lease
termination costs. Note 2(G) to the Group financial statements includes a
discussion of our accounting policies related to leased properties that are no
longer used for operating purposes.
Results Of Operations
Net Sales and Operating Revenues
Total sales for the Circuit City Group decreased 8 percent in fiscal
2002 to $9.59 billion. In fiscal 2001, total sales decreased 1 percent to $10.46
billion from $10.60 billion in fiscal 2000.
Percent Sales Change From Prior Year
Fiscal Total Comparable(1)
-----------------------------------------------------------------
2002...................................... (8)% (10)%
2001...................................... (1)% (4)%
2000...................................... 13 % 8 %
1999...................................... 17 % 8 %
1998...................................... 12 % (1)%
(1) Circuit City Stores are included in comparable store sales after the store
has been open for a full year.
The fiscal 2002 total sales decline primarily reflects a 10 percent
decline in comparable store sales, partly offset by the net addition of 10
Superstores. In fiscal 2002, we opened 11 Superstores in existing markets,
closed one Superstore and relocated eight Superstores. We also closed 15
mall-based Express stores. Excluding the major appliance category, from which we
completed our exit in November 2000, comparable store sales declined 4 percent
in fiscal 2002.
Fiscal 2002 was marked by significant variation in sales performance
between the first half and the second half of the year. As expected, the sales
slowdown experienced in the latter part of fiscal 2001 continued in the first
half of fiscal 2002, with comparable store sales declining 23 percent. The
slowing economy, continued industry-wide weakness in personal desktop computer
sales, declining average retail prices for many products and the absence of the
major appliance business all contributed to lower first half sales. The sales
declines moderated in the third quarter, and in the fourth quarter comparable
store sales grew 6 percent in part because of the lessening impact of the exit
from the appliance business and the seasonal upturn in categories, such as video
game hardware, software and accessories; DVD software; PC software; and digital
cameras, all of which were added or expanded following our exit from the
appliance category. Throughout fiscal 2002, new technologies, better-featured
consumer electronics and the new and expanded product selections produced solid
comparable store sales growth. We believe our second half sales also benefited
from new marketing, merchandising and customer service initiatives implemented
earlier in the year. Inventory shortages and limited selections in some product
categories following the strong holiday period limited sales growth in the last
two months of the fiscal year.
The fiscal 2001 total sales decline reflects a 4 percent decline in
comparable store sales, partly offset by the net addition of 23 Superstores. In
July 2000, spurred by a declining sales pace, expected increases in competition
and the results of a product profitability analysis that indicated major
appliances produced below-average profits, we announced plans to exit the major
appliance business. We completed the exit and associated remerchandising of the
appliance selling space in November 2000. Throughout fiscal 2001, we experienced
significant variability in the comparable store sales pace, and sales softened
substantially in the last two months of the fiscal year. We believe the
variability reflected the slower consumer spending experienced by most retailers
during the second half of the year, some disruption caused by the partial
remodeling to remerchandise the appliance space, significant declines in average
retail prices and industry-wide declines in desktop personal computer sales by
year-end. Excluding the appliance category from fiscal 2001 and fiscal 2000
sales, comparable store sales rose 3 percent in fiscal 2001.
Page 38 of 130
In fiscal 2000 and fiscal 1999, Circuit City benefited from a period of
renewed industry growth and product introductions. Industry growth was augmented
by geographic expansion, with the net addition of 34 Superstores in fiscal 2000
and 37 Superstores in fiscal 1999. In fiscal 1998, a lack of significant
consumer electronics product introductions resulted in weak industry sales, and
so, geographic expansion was the primary contributor to our sales growth, with
the net addition of 57 Superstores.
Percent of Merchandise Sales By Category
Fiscal 2002 2001 2000 1999 1998
--------------------------------------------------------------------
Video....................... 39% 35% 32% 31% 31%
Audio....................... 15 16 16 17 18
Information Technology...... 34 35 33 32 30
Entertainment............... 12 7 5 5 6
Appliances.................. - 7 14 15 15
--------------------------------------
Total....................... 100% 100% 100% 100% 100%
======================================
In most states, Circuit City sells extended warranty programs on behalf
of unrelated third parties who are the primary obligors. Under these third-party
warranty programs, we have no contractual liability to the customer. In the
three states where third-party warranty sales are not permitted, Circuit City
sells an extended warranty for which we are the primary obligor. Gross dollar
sales from all extended warranty programs were 5.1 percent of total sales of the
Circuit City business in fiscal 2002 and fiscal 2001 and 5.4 percent in fiscal
2000. Total extended warranty revenue, which is reported in total sales, was 3.9
percent of sales in fiscal 2002, 4.0 percent in fiscal 2001 and 4.4 percent in
fiscal 2000. The gross profit margins on products sold with extended warranties
are higher than the gross profit margins on products sold without extended
warranties. The decline in extended warranty sales as a percent of total sales
since fiscal 2000 reflects the increased selection of products, such as
entertainment software, for which extended warranties are not available.
Third-party extended warranty revenue was 4.0 percent of total sales in fiscal
2002, 3.9 percent in fiscal 2001 and 4.1 percent in fiscal 2000.
Superstore Sales Per Total Square Foot
Fiscal
-------------------------------------------------------------
2002................................................... $478
2001................................................... $528
2000................................................... $555
1999................................................... $514
1998................................................... $478
At the end of fiscal 2002, total space for all Circuit City Superstores
equaled 20,046,725 square feet and selling space equaled 11,755,124 square feet.
At the end of fiscal 2001, total space equaled 19,706,588 square feet and
selling space equaled 11,469,092 square feet. The decreases in sales per total
square foot in fiscal 2002 and fiscal 2001 reflect the declines in comparable
store sales in those years. The improvements in fiscal 1999 and fiscal 2000 were
driven by comparable store sales growth in those years.
Store Mix
Retail Units at Year-End
Fiscal 2002 2001 2000 1999 1998
-------------------------------------------------------------
Superstores............. 604 594 571 537 500
Circuit City Express.... 20 35 45 48 52
Electronics-only........ - - - 2 4
------------------------------------
Total................... 624 629 616 587 556
====================================
Impact Of Inflation. Inflation has not been a significant contributor
to results. Average retail prices have declined in many of Circuit City's
product categories during the past three years. Although product introductions
could help reverse this trend in selected areas, we expect no significant
short-term change overall. Because we purchase substantially all products sold
in Circuit City stores in U.S. dollars, prices are not directly impacted by the
value of the dollar in relation to foreign currencies.
Page 39 of 130
Cost of Sales, Buying and Warehousing
The gross profit margin was 24.3 percent in fiscal 2002, 23.6 percent
in fiscal 2001 and 24.7 percent in fiscal 2000. The fiscal 2001 gross profit
margin was reduced by costs of $28.3 million and merchandise markdowns of $28.0
million associated with the exit from the appliance business. The appliance exit
costs included lease terminations, employee severance, fixed-asset impairment
and other related costs. The fiscal 2002 gross profit margin was reduced by
additional lease termination costs of $10.0 million related to the exit from the
appliance business. In the fourth quarter of fiscal year 2002, we increased our
liability for lease termination costs related to the appliance exit because of
the weakening in the economy and in marketplace demand for commercial properties
during the year. Excluding the appliance exit costs and the appliance
merchandise markdowns, the gross profit margin would have been 24.4 percent in
fiscal 2002 and 24.1 percent in fiscal 2001.
The improvement in the gross profit margin in fiscal 2002 reflected
solid sales growth in new and better-featured products, which generally carry
higher-than-average gross profit margins, and the reduction in personal computer
sales, which carry lower-than-average gross profit margins. In fiscal 2001, the
decline in the gross profit margin reflected significantly lower appliance gross
profit margins prior to the announced plans to exit that business and a
merchandise mix that included a high percentage of traditional products that
carry lower gross profit margins. The decline was partly offset by lower
personal computer sales and continued double-digit sales growth in new
technologies and in higher margin categories where selection was expanded as
part of the exit from the appliance business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 22.1 percent of sales
in fiscal 2002, compared with 21.7 percent in fiscal 2001 and 19.6 percent in
fiscal 2000. Interest income is recorded as a reduction to selling, general and
administrative expenses.
The fiscal 2002 expenses included $19.3 million for store remodeling
and relocation. In fiscal 2002, we continued to conduct a number of remodeling
and remerchandising tests to determine how we can efficiently and effectively
upgrade our Superstore base. During the year, we fully remodeled 24 Superstores,
including 10 stores in the Chicago, Ill., market and two stores in Virginia, and
completed a less costly remodel in 12 stores in the Washington, D.C., and
Baltimore, Md., markets. We also relocated eight Superstores during fiscal 2002.
In addition, we tested individual department remodels and display changes in a
smaller set of stores. The fiscal 2001 expenses included $41.9 million in
remodeling costs, $30.0 million in partial remodeling costs associated with the
exit from the appliance business and $5.0 million in severance costs related to
a workforce reduction. Excluding these costs and the estimated fiscal 2001 sales
disruption during the seven to 10 days of partial remodeling for each store, the
expense ratio would have been 21.9 percent in fiscal 2002 and 20.9 percent in
fiscal 2001.
The fiscal 2002 rise in the expense ratio reflects the 8 percent
decline in total sales. However, selling, general and administrative expenses
declined by $92.5 million during this period, exclusive of the remodeling,
relocation and severance costs, reflecting cost control and productivity
initiatives, including more efficient advertising expenditures. Advertising
expense was 3.8 percent of sales in fiscal 2002, 4.0 percent in fiscal 2001 and
3.7 percent in fiscal 2000. An increased contribution from the finance operation
also reduced net selling, general and administrative expenses in fiscal 2002.
Increased expenses and the decline in sales produced the expense ratio
rise in fiscal 2001. In addition to the remodeling and severance costs
previously noted, fiscal 2001 selling, general and administrative costs included
a higher level of advertising costs than in the prior fiscal year.
Finance Operation. For the past three years, pretax finance operation
income, which is recorded as a reduction to selling, general and administrative
expenses, was as follows:
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
--------------------------------------------------------------------------
Securitization income.................. $226.5 $198.8 $242.2
Payroll and fringe expenses............ 41.6 43.0 46.8
Other direct expenses.................. 78.7 79.0 94.0
------------------------------
Finance operation income............... $106.2 $ 76.8 $101.4
==============================
Receivables generated by the Circuit City finance operation are sold
through securitization transactions. Circuit City continues to service the
securitized receivables for a fee. For the year ended February 28, 2002,
serviced receivables averaged $2.65 billion compared to $2.72 billion for the
year ended February 28, 2001. Included in securitization income is the gain on
the sale of these receivables and other income related to servicing these
receivables. Future finance income from securitized credit card receivables that
exceeds the sum of the contractually specified investor returns and servicing
fees (interest-only strips) is carried at fair value and amounted to $131.9
million at February 28, 2002, and $131.0 million at February 28, 2001. The
change in the interest-only strips for securitized transactions was a $0.9
million increase for fiscal 2002 and a $5.7 million decrease for fiscal 2001.
Page 40 of 130
The key assumptions and estimates in determining the fair value of
interest-only strips include management's projections of key factors, such as
finance charge income, default rates, payment rates, forward interest rate
curves and discount rates appropriate for the type of asset and risk. Management
reviews the assumptions and estimates used in determining the fair value of the
interest-only strips on a quarterly basis. If these assumptions change or the
actual results differ from the projected results, securitization income would be
affected. The decrease for the year ended February 28, 2001 was primarily the
result of an increase in the default assumption. During months of increasing
interest rates, the securitization trusts experience reduced spreads between
interest received and interest paid due to the time lag between Federal Reserve
actions and when the rate increases can be passed on and collected from credit
card holders. This is the case when interest rate ceilings are not in effect for
cardholders. The reverse is true during periods of decreasing rates.
The reduction in securitization income from fiscal 2000 to fiscal 2001
was the result of a decrease in the fair value of the interest-only strips of
$5.7 million for fiscal 2001 compared with a $10.0 million increase for fiscal
2000, and an increase in interest costs of the securitization trusts. From
fiscal 2001 to fiscal 2002, the increase in securitization income was the result
of a reduction in interest costs, which was partially offset by an increase in
defaults.
From fiscal 2000 to fiscal 2001 other direct expenses declined by $15.0
million, largely as a result of implementing new collection strategies that
allowed the finance operation to reduce payroll costs, at the same time,
significantly reducing reliance on third party collection agencies. Payroll
expenses generally vary with the size of the serviced portfolio, and decreased
only slightly in fiscal 2002 and in fiscal 2001. For the Circuit City Group, the
finance operation income does not include any allocation of indirect costs or
income. Examples of indirect costs not included are corporate expenses such as
human resources, administrative services, marketing, information systems,
accounting, legal, treasury, and executive payroll as well as retail store
expenses. Other direct expenses, which did not change significantly in fiscal
2002 from fiscal 2001, include third party data processing, rent, credit
promotion expenses, VISA and MasterCard fees, and other operating expenses.
Interest Expense
Interest expense was less than 0.1 percent of sales in fiscal 2002 and
was 0.1 percent in both fiscal 2001 and fiscal 2000. Interest expense primarily
was incurred on allocated debt used to fund new stores, relocations, remodeling
and working capital, including inventory. The fiscal 2002 decline in the
interest expense ratio reflects a reduction in allocated debt levels and lower
interest rates. The reduction in allocated debt reflects a decline in total debt
of the Company during fiscal 2002. Refer to the "Financing Activities" section
below for further information on changes in debt.
Income Taxes
The effective income tax rate was 38.0 percent in fiscal 2002, fiscal
2001 and fiscal 2000.
Earnings from Continuing Operations Before Income Attributed to the
Reserved CarMax Group Shares
Earnings from continuing operations before the income attributed to the
reserved CarMax Group shares were $128.0 million in fiscal 2002, compared with
$115.2 million in fiscal 2001 and $326.7 million in fiscal 2000. Excluding in
fiscal 2002 the remodel and relocation expenses and lease termination costs
related to the appliance exit, and in fiscal 2001 the estimated sales disruption
during the seven to 10 days of partial remodeling, appliance exit costs,
appliance merchandise markdowns, remodel and relocation expenses and severance
costs related to the workforce reduction, earnings from continuing operations
before the income attributed to the reserved CarMax Group shares would have been
$146.2 million in fiscal 2002 and $205.1 million in fiscal 2001.
Earnings Attributed to the Reserved CarMax Group Shares
The net earnings attributed to the reserved CarMax Group shares were
$62.8 million in fiscal 2002, compared with $34.0 million in fiscal 2001 and
$862,000 in fiscal 2000.
In a public offering completed during the second quarter of fiscal
2002, the Company sold 9,516,800 shares of CarMax Group Common Stock that
previously had been reserved for the Circuit City Group or for issuance to
holders of Circuit City Group Common Stock. With the impact of the offering,
69.2 percent of the CarMax Group's earnings were attributed to the Circuit City
Group's reserved CarMax Group shares in fiscal 2002. In fiscal 2001, 74.6
percent of the CarMax Group's earnings were attributed to the Circuit City
Group's reserved CarMax Group shares, and in fiscal 2000, 77.1 percent of the
CarMax Group's earnings were attributed to the Circuit City Group's reserved
CarMax Group shares.
Earnings from Continuing Operations
Earnings from continuing operations attributed to the Circuit City
Group, including income attributed to the reserved CarMax Group shares, were
$190.8 million in fiscal 2002, $149.2 million in fiscal 2001 and $327.6 million
in fiscal 2000.
Page 41 of 130
Loss from Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease
marketing of the Divx home video system and discontinue operations, but
existing, registered customers would be able to view discs during a two-year
phase-out period. The operating results of Divx and the loss on disposal of the
Divx business have been segregated from continuing operations and reported as
separate line items, after tax, on the Group statement of earnings for fiscal
2000.
In fiscal 2000, the loss from the discontinued Divx operations totaled
$16.2 million after an income tax benefit of $9.9 million. The loss on the
disposal of the Divx business totaled $114.0 million after an income tax benefit
of $69.9 million. The loss on the disposal included a provision for operating
losses to be incurred during the phase-out period. It 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.
As of February 28, 2002, entities comprising the discontinued Divx
operations have been dissolved. The remaining liabilities, totaling $18.5
million, have been assumed by the Company and are included in the Group balance
sheet.
Net Earnings
Net earnings attributed to the Circuit City Group Common Stock were
$190.8 million in fiscal 2002, $149.2 million in fiscal 2001 and $197.3 million
in fiscal 2000.
Operations Outlook
We believe that increased consumer interest in products and services
such as big-screen televisions, including digital televisions, plasma
televisions and liquid-crystal display panels; multi-channel video programming
devices; digital imaging; wireless communications; and Broadband Internet access
will drive profitability in the consumer electronics business during this
decade. For that reason, we are focusing significant resources on store
remodeling, sales counselor training, customer service enhancements, marketing
programs and supply chain initiatives to take advantage of the growth
opportunities these products provide and thus improve our sales and
profitability.
Over the past two years, we have experimented with several remodel
designs and product category tests to expand the benefits of our new Circuit
City store design to the existing store base. In fiscal 2003, we plan to draw on
these remodel and product category tests to roll out a remodeled video
department and lighting upgrade to approximately 300 Superstores, spending an
average of $325,000 to $350,000 per store. We believe that rolling out this
remodeled department will enable us to increase market share in the growing and
highly profitable big-screen television category and further solidify our
position in the overall video category. The Consumer Electronics Association
projects that big-screen television sales will grow at a double-digit rate in
calendar 2002. The fiscal 2003 remodeling plan will allow us to touch a large
number of Superstores in a manner that has significant potential for incremental
benefit, while minimizing the disruptive impact of the remodeling process. We
expect the remodeling activities will take approximately two weeks to complete
in each store. We will continue testing design ideas for other departments. We
also plan to relocate approximately 10 Superstores in fiscal 2003. In fiscal
2003, we expect expenditures for remodeling and relocations to total
approximately $130 million, of which we expect to capitalize approximately $70
million and expense approximately $60 million. We plan to continue improving the
Circuit City store base in fiscal 2004 and fiscal 2005 by completing the remodel
of these 300 stores and by relocating additional stores to provide a shopping
experience that we believe is more consistent with the preferences of today's
consumer.
With our existing initiatives, additional efforts to enhance the
business and a relatively stable economy, we believe we can achieve comparable
store sales growth in the mid-single digits for fiscal 2003. We expect that
categories where we expanded selections following the exit from the appliance
business and categories, such as big-screen televisions, that are benefiting
from digital product innovation, will contribute to this growth. We plan to open
approximately 10 Superstores in fiscal 2003. Given our presence in virtually all
of the nation's top metropolitan markets, new Superstores are being added in
one- or two-store markets or to increase our presence in existing major markets.
Because of the limited planned geographic expansion, we expect total sales
growth to only slightly exceed comparable store sales growth. We expect
relatively stable gross profit margins in fiscal 2003. We also expect a modest
increase in the expense ratio in fiscal 2003, despite the anticipated increase
in comparable store sales. Planned increases in remodeling and relocation
expenses, advertising and systems enhancements are among the anticipated
contributors to the higher expense ratio. For the full year, we expect the
fiscal 2003 profit contribution from Circuit City's finance operation to be
similar to the contribution in fiscal 2002. Refer to the "Circuit City Stores,
Inc. Management's Discussion and Analysis of Results of Operations and Financial
Condition" for the estimated contribution of the Circuit City business earnings
attributed to the Circuit City Group Common Stock in fiscal 2003.
Recent Accounting Pronouncements
Refer to the "Circuit City Stores, Inc. Management's Discussion and
Analysis of Results of Operations and Financial Condition" for a review of
recent accounting pronouncements.
Page 42 of 130
Financial Condition
Liquidity and Capital Resources
Cash Flow Highlights
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
---------------------------------------------------------------------------
Net earnings from continuing
operations before income attributed
to the reserved CarMax shares.......... $ 128.0 $ 115.2 $ 326.7
Depreciation and amortization............. $ 134.4 $ 126.3 $ 132.9
Provision for deferred income taxes....... $ 28.0 $ 11.0 $ 41.8
Cash provided by (used for) working
capital, net........................... $ 407.6 $ (102.0) $ 168.0
Cash provided by operating activities..... $ 794.6 $ 149.2 $ 661.8
Purchases of property and equipment....... $(172.6) $ (274.7) $(176.9)
Proceeds from sales of property
and equipment, net..................... $ 88.5 $ 100.2 $ 74.8
Net decrease in allocated short-term
and long-term debt..................... $ (19.6) $ (157.6) $ (76.6)
Allocated proceeds from CarMax stock
offering, net.......................... $ 139.5 - -
Cash Provided by Operations. Circuit City generated net cash from
operating activities of $794.6 million in fiscal 2002, compared with $149.2
million in fiscal 2001 and $661.8 million in fiscal 2000. The fiscal 2002
improvement primarily resulted from working capital efficiencies. Improved
supply chain management contributed to a $181.2 million reduction in working
capital used for inventories in fiscal 2002 compared with fiscal 2001. Increases
in accounts payable, accrued expenses and other current liabilities, and accrued
income taxes reduced working capital by an additional $385.5 million in fiscal
2002 compared with fiscal 2001. The increase in accounts payable primarily
reflects extended payment terms achieved through supply chain management. The
fiscal 2001 decline in cash provided by operating activities was largely a
function of lower net earnings and an increase in working capital.
Investing Activities. Net cash used in investing activities was $84.1
million in fiscal 2002, compared with $174.5 million in fiscal 2001 and $102.1
million in fiscal 2000. The Circuit City Group's capital expenditures were
$172.6 million in fiscal 2002, $274.7 million in fiscal 2001 and $176.9 million
in fiscal 2000. Fiscal 2002 capital expenditures included spending for the
construction of 11 new and eight relocated Circuit City Superstores and $19.8
million of capitalized remodeling expenditures. Fiscal 2001 capital expenditures
included spending for the construction of 23 new and two relocated Circuit City
Superstores and $106.0 million of capitalized remodeling expenditures associated
with full remodels of 26 Superstores, primarily in south and central Florida,
and partial remodels associated with the exit from the appliance business.
Fiscal 2000 capital expenditures included spending for the construction of 34
new and four relocated Circuit City Superstores.
Capital expenditures have been funded primarily through internally
generated funds, sale-leaseback transactions, landlord reimbursements and
allocated short- and long-term debt. Net proceeds from sales of property and
equipment, including sale-leasebacks, totaled $88.5 million in fiscal 2002,
$100.2 million in fiscal 2001 and $74.8 million in fiscal 2000. In August 2001,
we completed a sale-leaseback transaction for the Orlando, Fla., distribution
center, from which total proceeds of $19.5 million were received. In November
2001, we completed a sale-leaseback transaction for the Marion, Ill.,
distribution center, from which total proceeds of $29.0 million were received.
In fiscal 2003, we anticipate capital expenditures for the Circuit City
business of approximately $150 million. In fiscal 2003, we plan to open
approximately 10 Superstores, remodel the video department and install lighting
upgrades in approximately 300 Superstores and relocate approximately 10
Superstores. We expect to continue incurring remodeling and relocation costs in
fiscal years 2004 and 2005.
We expect that available cash resources, sale-leaseback transactions,
landlord reimbursements and cash generated by operations will be sufficient to
fund capital expenditures of the Circuit City business for the foreseeable
future.
Financing Activities. Most financial activities, including the
investment of surplus cash and the issuance and repayment of short-term and
long-term debt, are managed by the Company on a centralized basis. The Company
allocates debt to the CarMax Group based on usage of funds. Debt that is
specific only to the Circuit City business or the CarMax business is allocated
in its entirety to that business. For shared funds obtained from bank debt,
pooled debt, CarMax's portion is determined by applying to CarMax's intercompany
debt due to the Company the percentages that short-term bank debt, long-term
bank debt
Page 43 of 130
and the current portion of long-term bank debt are of the total pooled debt. The
remainder of any debt is then applied to the Circuit City business. This pooled
debt bears interest at a rate based on the average pooled debt balance. Expenses
related to increases in pooled debt are reflected in the weighted average
interest rate of the pooled debt.
As scheduled, the Company used existing working capital to repay a $130
million term loan in fiscal 2002 and a $175 million term loan in fiscal 2001. At
February 28, 2002, a $100 million outstanding term loan due in July 2002 was
classified as a current liability. Although the Company has the ability to
refinance this debt, we intend to repay it using existing working capital.
Payment of corporate pooled debt does not necessarily result in a reduction of
the Circuit City Group allocated debt.
At February 28, 2002, the Company allocated cash and cash equivalents
of $1.25 billion and debt of $37.9 million to the Circuit City Group. Circuit
City Stores maintains a $150 million unsecured revolving credit facility that
expires on August 31, 2002. The Company does not anticipate renewing this
facility. The Company also maintains $195 million in committed seasonal lines of
credit that are renewed annually with various banks. At February 28, 2002, total
balances of $1.8 million were outstanding under these facilities.
Receivables generated by the Circuit City finance operation are funded
through securitization transactions in which the finance operation sells its
receivables while retaining servicing rights. These securitization transactions
provide an efficient and economical means of funding credit card receivables.
For transfers of receivables that qualify as sales under Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," we recognize gains and
losses as a component of the profits of Circuit City's finance operation.
On a daily basis, Circuit City's finance operation sells its
private-label credit card and MasterCard and VISA credit card, referred to as
bankcard, receivables to special purpose subsidiaries, which, in turn, transfer
the receivables to two separate securitization master trusts. The master trusts
periodically issue asset-backed securities in public offerings and private
transactions, and the proceeds are distributed through the special purpose
subsidiaries to Circuit City's finance operation. The special purpose
subsidiaries retain an undivided interest in the transferred receivables and
hold various subordinated asset-backed securities that serve as credit
enhancement for the asset-backed securities held by outside investors. Circuit
City's finance operation continues to service the transferred receivables for a
fee.
The private-label and bankcard master trusts each have issued multiple
series of asset-backed securities, referred to as term securities, having fixed
initial principal amounts. Investors in the term securities are entitled to
receive monthly interest payments and a single principal payment on a stated
maturity date. In addition, each master trust has issued a series of
asset-backed securities, referred to as variable funding securities, having a
variable principal amount. Investors in the variable funding securities are
generally entitled to receive monthly interest payments and have committed to
acquire additional undivided interests in the transferred receivables up to a
stated amount through a stated commitment termination date. The commitment under
the private-label variable funding series is currently scheduled to expire on
December 13, 2002, and the commitment under the bankcard variable funding series
is currently scheduled to expire on October 24, 2002. We expect that the
commitment termination dates of both variable funding series will be extended.
If certain early amortization events were to occur, principal payment dates for
the term series would be accelerated, the variable funding commitments would
terminate and the variable funding investors would begin to receive monthly
principal payments until paid in full.
At February 28, 2002, the aggregate principal amount of securitized
credit card receivables totaled $1.31 billion under the private-label program
and $1.49 billion under the bankcard program. At February 28, 2002, the unused
capacity of the private-label variable funding program was $22.9 million and the
unused capacity of the bankcard variable funding program was $496.5 million. At
February 28, 2002, there were no provisions providing recourse to the Company
for credit losses on the receivables securitized through the private-label or
bankcard master trusts. We anticipate that we will be able to expand or enter
into new securitization arrangements to meet future needs of the finance
operation.
We have conducted tests of a co-branded Circuit City bankcard, which
offers more utility to the consumer than the private-label card. We are
considering transitioning our private-label program to this card.
During the second quarter of fiscal 2002, Circuit City Stores, Inc.
completed the public offering of 9,516,800 shares of CarMax Group Common Stock.
The shares sold in the offering were shares of CarMax Group Common Stock that
previously had been reserved for the Circuit City Group or for issuance to
holders of Circuit City Group Common Stock. The net proceeds of $139.5 million
from the offering were allocated to the Circuit City Group to be used for
general purposes of the Circuit City business, including remodeling of Circuit
City Superstores.
Page 44 of 130
Contractual Obligations(1)
2 to 3 4 to 5 After 5
(Amounts in millions) Total 1 Year Years Years Years
------------------------------------------------------------------------------
Allocated contractual
obligations:
Long-term debt.......... $ 25.9 $ 22.9 $ 2.6 $ 0.4 $ -
Capital lease
obligations.......... 11.6 0.6 1.3 1.7 8.0
Operating leases........ 4,078.8 296.1 585.6 574.4 2,622.7
Lines of credit......... 0.4 0.4 - - -
Other contractual
obligations.......... 18.5 18.5 - - -
------------------------------------------------
Total...................... $4,135.2 $338.5 $589.5 $576.5 $2,630.7
================================================
(1) Amounts are based on the capital structure of Circuit City Stores, Inc. as
of February 28, 2002. Future obligations depend upon the final outcome of the
proposed separation of CarMax.
CarMax currently operates 23 of its sales locations pursuant to various
leases under which Circuit City Stores, Inc. was the original tenant and primary
obligor. Circuit City Stores, Inc., and not CarMax, had originally entered into
these leases so that CarMax could take advantage of the favorable economic terms
available to the Company as a large retailer. The Company has assigned each of
these leases to CarMax. Despite the assignment and pursuant to the terms of the
leases, the Company remains contingently liable under the leases. For example,
if CarMax were to fail to make lease payments under one or more of the leases,
the Company may be required to make those payments on CarMax's behalf. In
recognition of this ongoing contingent liability, CarMax has agreed to make a
one-time special dividend payment to Circuit City Stores, Inc. on the separation
date, assuming the separation is completed. We currently expect this special
dividend to be between $25 million and $35 million.
Market Risk
Receivables Risk
The Company manages the market risk associated with the private-label
credit card and bankcard revolving loan portfolios of Circuit City's finance
operation. Portions of these portfolios have been securitized in transactions
accounted for as sales in accordance with SFAS No. 140 and, therefore, are not
presented on the Group balance sheets.
Consumer Revolving Credit Receivables. The majority of accounts in the
private-label credit card and bankcard portfolios are charged interest at rates
indexed to the prime rate, adjustable on a monthly basis subject to certain
limitations. The balance of the accounts are charged interest at a fixed annual
percentage rate. As of February 28, 2002, and February 28, 2001, the total
outstanding principal amount of private-label credit card and bankcard
receivables had the following interest rate structure:
(Amounts in millions) 2002 2001
-------------------------------------------------------------
Indexed to prime rate.................. $2,645 $2,596
Fixed APR.............................. 202 203
-------------------
Total.................................. $2,847 $2,799
===================
Financing for the private-label credit card and bankcard receivables is
achieved through asset securitization programs that, in turn, issue both private
and public market debt, principally at floating rates based on LIBOR and
commercial paper rates. Receivables held for sale are financed with working
capital. The total principal amount of receivables securitized or held for sale
at February 28, 2002, and February 28, 2001, was as follows:
(Amounts in millions) 2002 2001
-------------------------------------------------------------
Floating-rate securitizations.......... $2,798 $2,754
Held for sale.......................... 49 45
-------------------
Total.................................. $2,847 $2,799
==================
Page 45 of 130
Interest Rate Exposure. Circuit City is exposed to interest rate risk
on its securitized credit card portfolio, especially when interest rates move
dramatically over a relatively short period of time. Market risk is the exposure
created by potential fluctuations in interest rates. We have mitigated this risk
through matched funding. However, our ability to increase the finance charge
yield of our variable rate credit cards may be contractually limited or limited
at some point by competitive conditions. On behalf of Circuit City, the Company
enters into interest rate cap agreements to meet the requirements of the credit
card receivable securitization transactions. The Company has entered into
offsetting interest rate cap positions and, therefore, does not anticipate
significant market risk arising from interest rate caps. Generally, changes only
in interest rates do not have a material impact on the Group results of
operations.
Credit risk is the exposure to nonperformance of another party to an
agreement. Credit risk is mitigated by dealing with highly rated bank
counterparties. The market and credit risks associated with financed derivatives
are similar to those relating to other types of financial instruments. Refer to
Note 11 to the Group financial statements for a description of these items.
Forward-Looking Statements
Company statements that are not historical facts, including statements
about management's expectations for fiscal year 2003 and beyond, are
forward-looking statements and involve various risks and uncertainties. Refer to
the "Circuit City Stores, Inc. Management's Discussion and Analysis of Results
of Operations and Financial Condition" for a review of important factors that
could cause actual results to differ materially from estimates or projections
contained in our forward-looking statements.
Page 46 of 130
CarMax Group
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The common stock of Circuit City Stores, Inc. consists of two common
stock series that are intended to reflect the performance of the Company's two
businesses. The CarMax Group Common Stock is intended to reflect the performance
of the CarMax stores and related operations. The Circuit City Group Common Stock
is intended to reflect the performance of the Circuit City stores and related
operations and the shares of CarMax Group Common Stock reserved for the Circuit
City Group or for issuance to holders of Circuit City Group Common Stock. The
reserved CarMax Group shares are not outstanding CarMax Group Common Stock.
Excluding shares reserved for CarMax employee stock incentive plans,
the reserved CarMax Group shares represented 64.1 percent of the total
outstanding and reserved shares of CarMax Group Common Stock at February 28,
2002; 74.6 percent at February 28, 2001; and 74.7 percent at February 29, 2000.
The reserved CarMax Group shares at February 28, 2002, reflect the effect of the
public offering of CarMax Group Common Stock completed during the second quarter
of fiscal 2002. Refer to the "Net Earnings" section below for further discussion
of the public offering.
On February 22, 2002, Circuit City Stores, Inc. announced that its
board of directors had authorized management to initiate a process that would
separate the CarMax auto superstore business from the Circuit City consumer
electronics business through a tax-free transaction in which CarMax, Inc.,
presently a wholly owned subsidiary of Circuit City Stores, Inc., would become
an independent, separately traded public company. CarMax, Inc. holds
substantially all of the businesses, assets and liabilities of the CarMax Group.
The separation plan calls for Circuit City Stores, Inc. to redeem all
outstanding shares of CarMax Group Common Stock in exchange for shares of common
stock of CarMax, Inc. Simultaneously, shares of CarMax, Inc. common stock,
representing the shares of CarMax Group Common Stock reserved for the holders of
Circuit City Group Common Stock, would be distributed as a tax-free dividend to
the holders of Circuit City Group Common Stock.
In the proposed separation, the holders of CarMax Group Common Stock
would receive one share of CarMax, Inc. common stock for each share of stock
redeemed by the Company. We anticipate that the holders of Circuit City Group
Common Stock would receive a fraction of a share of CarMax, Inc. common stock
for each share of Circuit City Group Common Stock they hold. The exact fraction
would be determined on the record date for the distribution. The separation is
expected to be completed by late summer, subject to shareholder approval and
final approval from the board of directors. CarMax, Inc. has filed a
registration statement regarding this transaction with the Securities and
Exchange Commission. This registration statement contains pro forma financial
information that is intended to reflect the potential effects of the separation
of the two businesses.
Holders of CarMax Group Common Stock and holders of Circuit City Group
Common Stock are shareholders of the Company and as such are subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. The results of operations or financial
condition of one Group could affect the results of operations or financial
condition of the other Group. The discussion and analysis for the CarMax Group
presented below should be read in conjunction with the discussion and analysis
presented for Circuit City Stores, Inc. and for the Circuit City Group and in
conjunction with all the Company's SEC filings.
Critical Accounting Policies
In Management's Discussion and Analysis, we discuss the results of
operations and financial condition as reflected in the CarMax Group financial
statements. Preparation of financial statements requires us to make estimates
and assumptions affecting the reported amounts of assets, liabilities, revenues
and expenses and the disclosures of contingent assets and liabilities. We use
our historical experience and other relevant factors when developing our
estimates and assumptions. We continually evaluate these estimates and
assumptions. Note 2 to the Group financial statements includes a discussion of
significant accounting policies. The accounting policy discussed below is one we
consider critical to an understanding of the Group financial statements because
its application places the most significant demands on our judgment. Our
financial results might have been different if different assumptions had been
used or other conditions had prevailed.
Calculation of the Value of Retained Interests in Securitization
Transactions
CarMax securitizes automobile loan receivables. The fair value of
retained interests from securitization activities is based on the present value
of expected future cash flows. The present value is determined by using
management's projections of key factors, such as finance charge income, default
rates, payment rates and discount rates appropriate for the type of asset and
risk. These projections are derived from historical experience, projected
economic trends and anticipated interest rates. Adjustments to one or more of
these projections may have a material impact on the fair value of the retained
interests. These projections may be affected by external factors, such as
changes in the behavior patterns of CarMax customers, changes in the strength of
the economy and developments in the interest rate markets. Note 2(A) to the
Group financial statements includes a
Page 47 of 130
discussion of our accounting policies related to securitizations. Note 10 to the
Group financial statements includes a discussion of automobile loan
securitizations.
Results of Operations
Certain prior year amounts have been reclassified to conform to the
current presentation. Wholesale sales have been reclassified and reported in net
sales and operating revenues for all periods presented. In previous periods,
wholesale sales were recorded as a reduction to total cost of sales. Note 2(O)
to the Group financial statements contains further discussion of the
reclassifications.
Net Sales and Operating Revenues
Total sales for the CarMax Group increased 28 percent in fiscal 2002 to
$3.52 billion. In fiscal 2001, total sales increased 25 percent to $2.75 billion
from $2.19 billion in fiscal 2000.
Retail Vehicle Sales. Retail vehicle sales for the CarMax Group
increased 28 percent in fiscal 2002 to $3.06 billion. In fiscal 2001, retail
vehicle sales increased 23 percent to $2.39 billion from $1.93 billion in fiscal
2000. In fiscal 2002, used vehicle sales increased 29 percent to $2.50 billion.
In fiscal 2001, used vehicle sales increased 26 percent to $1.93 billion from
$1.53 billion in fiscal 2000. New vehicle sales in fiscal 2002 rose 23 percent
to $559.9 million. In fiscal 2001, new vehicle sales were $456.9 million, up 14
percent over fiscal 2000 sales of $401.2 million. CarMax stores are included in
comparable store retail sales after the store has been open for a full year.
Comparable store vehicle dollar and unit sales for the years ended February 28,
2002 and 2001 and February 29, 2000 were as follows:
Percent Sales Change From Prior Year
Fiscal Total Comparable
-------------------------------------------------------------
2002...................................... 28% 28 %
2001...................................... 25% 17 %
2000...................................... 37% 2 %
1999...................................... 69% (2)%
1998...................................... 50% 6 %
Comparable Store Sales Change
Fiscal 2002 2001 2000
-------------------------------------------------------------
Vehicle dollars:
Used vehicles.............. 30% 19% (4)%
New vehicles............... 24% 9% 50 %
Total......................... 28% 17% 2 %
Vehicle units:
Used vehicles.............. 24% 13% (8)%
New vehicles............... 21% 9% 49 %
Total......................... 23% 12% (4)%
Average Retail Selling Prices
Fiscal 2002 2001 2000
-------------------------------------------------------------
Used vehicles................. $15,100 $14,400 $13,700
New vehicles.................. $23,100 $22,600 $22,500
Blended average............... $16,200 $15,500 $14,900
Page 48 of 130
Retail Vehicle Sales Mix
Fiscal 2002 2001 2000
-----------------------------------------------------------
Vehicle dollars:
Used vehicles.............. 82% 81% 79%
New vehicles............... 18 19 21
---------------------------
Total......................... 100% 100% 100%
===========================
Vehicle units:
Used vehicles.............. 87% 87% 86%
New vehicles............... 13 13 14
---------------------------
Total......................... 100% 100% 100%
===========================
The fiscal 2002 used and new retail vehicle sales growth primarily
resulted from a 28 percent increase in the comparable store vehicle dollar sales
of the CarMax business. We opened two CarMax used-car superstores in fiscal 2002
during the last month of the fiscal year, and so they were not significant
contributors to sales growth in fiscal 2002. The growth in comparable store
vehicle dollar sales reflects increased store traffic that, combined with better
in-store execution, resulted in comparable store unit sales growth for both used
and new cars. We believe that the higher traffic levels were driven by the
effectiveness of our marketing programs, carmax.com and word-of-mouth customer
referrals. In addition, traffic was bolstered in October, November and December
by cross-shopping from zero-percent financing incentive programs introduced by
new car manufacturers to counteract an industry-wide slowdown in new-car sales.
New-car manufacturers returned to more conventional sales and financing
incentives in January 2002. Increased average retail prices resulting from a
higher mix of later-model used cars, luxury vehicles and sport utility vehicles
and higher new-car average retail prices also contributed to the sales growth.
In late February 2002, CarMax opened one standard-sized used-car
superstore and one satellite used-car superstore. During fiscal 2002, CarMax
also relinquished the franchise rights for one stand-alone new-car franchise and
one new-car franchise that had been integrated with a used-car superstore and
sold one new-car stand-alone franchise and one new-car franchise that had been
integrated with a used-car superstore. Although new-car stores that are
integrated or co-located with used-car superstores have performed at or above
expectations, the three remaining stand-alone new-car stores are still
performing below expectations. We intend to integrate or co-locate these stores
with used-car superstores. We expect this integration or co-location to occur
within the next fiscal year for the store located in Orlando, Fla., and we
expect to co-locate the two remaining new-car stores, which are in Los Angeles,
Calif., with one used-car superstore within the next two fiscal years.
The fiscal 2001 used and new retail vehicle sales increase reflects a
17 percent increase in the comparable store vehicle dollar sales of the CarMax
business, driven by higher-than-anticipated used-car sales, and the net addition
of two used-car superstores, two prototype satellite stores and six new-car
franchises since the end of fiscal 1999. The new stores and four of the
franchises moved into the comparable store sales base throughout fiscal 2001. In
fiscal 2001, CarMax also added two new-car franchises, integrating them with
existing used-car superstores. We believe CarMax's fiscal 2001 sales performance
primarily reflects the improved execution of the CarMax offer at individual
stores, increased consumer awareness and use of carmax.com and the exit of
CarMax's primary used-car superstore competitor late in fiscal 2000. We believe
this competitor's exit from five multi-store markets helped eliminate consumer
confusion over the two offers. CarMax's used-car comparable store vehicle dollar
and unit sales growth has remained strong in all these CarMax markets since this
competitor's exit from the used-car superstore business.
Geographic expansion of CarMax used-car superstores and the addition of
new-car franchises generated the retail sales growth in the first half of fiscal
2000 and, along with comparable store sales growth for the last two quarters and
for the fiscal year, contributed to retail sales growth for the full year.
During fiscal 2000, we opened two CarMax used-car superstores, two prototype
satellite used-car superstores, five stand-alone new-car stores and one new-car
franchise that was integrated with a used-car superstore. CarMax also converted
one existing store into a satellite operation and relocated one new-car
franchise next to a used-car superstore. In the second half of fiscal 2000,
CarMax limited its geographic expansion to focus on building sales and
profitability in existing markets.
Page 49 of 130
Retail Stores
Retail Stores at Year-End
Fiscal 2002 2001 2000
-------------------------------------------------------------
Mega superstores (1).................. 13 13 13
Standard superstores (2).............. 17 16 16
Prototype satellite superstores....... 5 4 4
Co-located new-car stores (3)......... 2 2 2
Stand-alone new-car stores............ 3 5 5
------------------
Total................................. 40 40 40
==================
(1) Formerly "C" and "B" stores; 70,000 to 100,000 square feet.
(2) Formerly "A" stores; 40,000 to 60,000 square feet.
(3) Formerly included as "A" and "C" stores.
New-Car Franchises
New-Car Franchises at Year-End
Fiscal 2002 2001 2000
-----------------------------------------------------------------
Integrated/co-located new-car franchises.. 15 17 15
Stand-alone new-car franchises............ 3 5 5
--------------------
Total..................................... 18 22 20
====================
Wholesale Vehicle Sales. Total wholesale vehicle sales for the CarMax
Group were $325.6 million in fiscal 2002, $253.5 million in fiscal 2001 and
$181.2 million in fiscal 2000. The increase in fiscal 2002 was primarily due to
an increase in customer traffic. The increase in fiscal 2001 was attributable to
an increase in customer traffic and an increase in the average wholesale price
per vehicle.
Other Sales and Revenues. Other sales and revenues which include
extended warranty revenues, service department sales and processing fees
collected from consumers for the purchase of their vehicles at a CarMax retail
location were $135.4 million in fiscal 2002, $108.3 million in fiscal 2001 and
$76.8 million in fiscal 2000.
CarMax sells extended warranties on behalf of unrelated third parties
who are the primary obligors. Under these third-party warranty programs, we have
no contractual liability to the customer. Extended warranty revenue was $55.3
million in fiscal 2002, $45.0 million in fiscal 2001 and $33.5 million in fiscal
2000. The increase in extended warranty revenues over the three year period was
due to increased vehicle sales. In addition to increased vehicle sales, the
increase in fiscal 2001 was the result of increased warranty penetration. Used
vehicles achieve a higher warranty penetration rate than new vehicles.
Service sales were $55.9 million in fiscal 2002, $44.8 million in
fiscal 2001 and $32.8 million in fiscal 2000. The increase in fiscal 2002
relates to an overall increase in retail vehicle sales while the increase in
fiscal 2001 service sales was due to an overall increase in retail vehicle sales
as well as an increased focus on retail service sales.
Processing fees were $24.2 million in fiscal 2002, $18.5 million in
fiscal 2001 and $10.5 million in fiscal 2000. Consumers are assessed this fee
when selling a vehicle to a CarMax retail location after the appraisal process.
The increase in fiscal 2002 was the result of increased traffic, increased
consumer response to CarMax's vehicle purchase program and an increase in the
fee amount. The increase in fiscal 2001 was directly attributable to a full year
of processing fees after the mid-year introduction of the fee in fiscal 2000 and
increased traffic and consumer response.
Impact Of Inflation. Inflation has not been a significant contributor
to results. For the CarMax business, profitability is based on achieving
specific gross profit dollars per vehicle rather than on average retail prices.
Because the wholesale market generally adjusts to reflect retail price trends,
we believe that if the stores meet inventory turn objectives, then changes in
average retail prices will have only a short-term impact on the gross margin and
thus profitability.
Cost of Sales
Total gross profit margin was 11.5 percent in fiscal 2002, 12.0 percent
in fiscal 2001 and 11.0 percent in fiscal 2000.
Retail Vehicle Gross Profit Margin. The gross profit margin for retail
vehicle sales was 9.7 percent in fiscal 2002, 10.2 percent in fiscal 2001 and
9.8 percent in fiscal 2000. Used vehicle gross margins were 10.9 percent in
fiscal 2002, 11.4 percent in fiscal 2001 and 11.1 percent in fiscal 2000. New
vehicle gross margins for this same period were 4.5 percent, 5.1 percent and 4.7
percent, respectively. Although we achieved our specific used vehicle gross
profit dollar targets per vehicle, increased average retail prices resulting
from a higher mix of later-model used cars, luxury vehicles and sport utility
vehicles generated the decline in gross profit as a percentage of sales in
fiscal 2002. Used vehicle gross profit dollars are similar across makes and
Page 50 of 130
models. Consequently, the gross profit on a higher-priced used vehicle is a
lower percentage of the retail selling price than on a more modestly priced
vehicle. In fiscal 2002, the new vehicle gross margin decrease was attributable
to increases in average retail prices along with a more competitive marketplace.
In fiscal 2001, strong inventory management throughout the year, especially
during the second half when the model-year transition occurs in the new-car
industry, contributed to a higher gross margin on used and new vehicles.
Wholesale Vehicle Gross Profit Margin. The gross profit margin for
wholesale vehicle sales was 5.6 percent in fiscal 2002, 6.5 percent in fiscal
2001 and 3.3 percent in fiscal 2000. The gross profit margin was relatively
stable from fiscal 2001 to fiscal 2002. The increase in gross profit margin in
fiscal 2001 was due to an increase in the average gross profit margin dollars
per vehicle and to additional auction fees charged to purchasers of wholesale
vehicles.
Other Gross Profit Margin. Gross margin for other sales and revenues
was 64.6 percent in both fiscal 2002 and 2001 and 59.2 percent in fiscal 2000.
The increase in fiscal 2001 resulted from the addition of processing fees and an
increased focus on retail service.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 7.2 percent of total
sales in fiscal 2002, 8.9 percent in fiscal 2001 and 10.4 percent in fiscal
2000. Interest income is recorded as a reduction to selling, general and
administrative expenses.
The improvement in the fiscal 2002 expense ratio reflects significant
expense leverage generated by strong comparable store sales growth and continued
expense management, particularly of non-store expenses, the benefit of which
more than offset higher second half expenses related to renewed geographic
expansion. The decline in the fiscal 2001 expense ratio reflects leverage from
strong comparable store sales growth, more efficient advertising expenditures
and overall improvements in store productivity, including those achieved through
the hub-and-satellite operating strategy that we adopted in multi-store markets.
Advertising expense was 1.3 percent of total sales in fiscal 2002, 1.6 percent
in fiscal 2001 and 2.2 percent in fiscal 2000.
In fiscal 2001, the improvement in the expense ratio was partly offset
by an $8.7 million write-off of goodwill associated with two underperforming
stand-alone new-car franchises. Excluding these costs, the fiscal 2001 expense
ratio would have been 8.6 percent. The fiscal 2000 expense ratio reflects $4.8
million in charges related to lease termination costs on undeveloped property
and a write-down of assets associated with excess property for sale. Excluding
these costs, the fiscal 2000 expense ratio would have been 10.2 percent.
Finance Income. For the past three years, pretax finance income, which
is recorded as a reduction to selling, general and administrative expenses, was
as follows:
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
------------------------------------------------------------------------------
Securitization income....................... $78.1 $51.5 $36.8
Payroll and fringe expenses................. 5.7 4.2 3.4
Other direct expenses....................... 5.9 4.5 3.4
-----------------------------
Finance operation income.................... 66.5 42.8 30.0
Third-party financing fees.................. 15.7 11.5 9.8
-----------------------------
Total finance income........................ $82.2 $54.3 $39.8
============================
Receivables generated by the CarMax finance operation are sold through
securitization transactions. CarMax continues to service these receivables in
exchange for a contractually specified servicing fee. For the year ended
February 28, 2002, serviced receivables averaged $1.37 billion compared with
$1.07 billion for the year ended February 28, 2001, and $755.9 million for the
year ended February 29, 2000.
Securitization income includes gains on sale of receivables and other
income related to servicing these receivables. For the year ended February 28,
2002, CarMax recorded gains on sale of $56.4 million, compared with $35.4
million for the year ended February 28, 2001, and $17.5 million for the year
ended February 29, 2000. The changes from year to year result from an increase
in loan origination volume driven by increased sales each year and increases in
yield on the serviced receivables. In recording these gains, management
estimates key assumptions such as finance charge income, default rates, payment
rates and discount rates appropriate for the type of asset and risk. If these
assumptions change, or the actual results differ from the projected results,
securitization income would be affected.
Direct expenses include collection expenses, rent and facility expenses
and loan processing costs. On a year to year basis, payroll, fringes and other
direct expenses increased proportionately to the average managed receivable
balance. Finance operation income does not include any allocation of indirect
costs or income. Examples of indirect costs not included are
Page 51 of 130
corporate expenses such as human resources, administrative services, marketing,
information systems, accounting, legal, treasury and executive payroll as well
as retail store expenses.
Fees received from arranging customer automobile financing through
third parties were $15.7 million for the year ended February 28, 2002, $11.5
million for the year ended February 28, 2001, and $9.8 million for the year
ended February 29, 2000. The change on a year to year basis was a result of the
total increase in retail vehicle sales over the three-year period.
Interest Expense
Interest expense was 0.1 percent of total sales in fiscal 2002, 0.4
percent in fiscal 2001 and 0.5 percent in fiscal 2000. In fiscal 2002, interest
expense primarily was incurred on allocated debt used to fund new store growth
and working capital, including inventory. In fiscal 2001 and 2000, interest
expense primarily was incurred on allocated debt used to fund working capital,
including inventory, and franchise acquisitions. The fiscal 2002 decline in the
interest expense ratio reflects a reduction in allocated debt levels and lower
interest rates. The reduction in allocated debt reflects a decline in total debt
of the Company during fiscal 2002. Refer to the "Financing Activities" section
below for further information on changes in debt.
Earnings Before Income Taxes
Earnings before income taxes were $146.5 million in fiscal 2002,
compared with $73.5 million in fiscal 2001 and $1.8 million in fiscal 2000.
Excluding the write-off of goodwill, earnings before income taxes would have
been $82.2 million in fiscal 2001. Excluding lease termination costs and the
write-down of assets, earnings before income taxes would have been $6.6 million
in fiscal 2000.
Income Taxes
The effective income tax rate was 38.0 percent in fiscal 2002, fiscal
2001 and fiscal 2000.
Net Earnings
Net earnings were $90.8 million in fiscal 2002, $45.6 million in fiscal
2001 and $1.1 million in fiscal 2000. Excluding the write-off of goodwill, net
earnings would have been $51.0 million in fiscal 2001. Excluding lease
termination costs and the write-down of assets, net earnings would have been
$4.1 million in fiscal 2000. Net earnings attributed to the outstanding CarMax
Group Common Stock were $28.0 million in fiscal 2002, $11.6 million in fiscal
2001 and $256,000 in fiscal 2000.
In a public offering completed during the second quarter of fiscal
2002, the Company sold 9,516,800 shares of CarMax Group Common Stock that
previously had been reserved for the Circuit City Group or for issuance to
holders of Circuit City Group Common Stock. With the impact of the offering,
69.2 percent of the CarMax Group's earnings were attributed to the Circuit City
Group's reserved CarMax Group shares in fiscal 2002. In fiscal 2001, 74.6
percent of the CarMax Group's earnings were attributed to the Circuit City
Group's reserved CarMax Group shares, and in fiscal 2000, 77.1 percent of the
CarMax Group's earnings were attributed to the Circuit City Group's reserved
CarMax Group shares. The net proceeds of $139.5 million from the offering were
allocated to the Circuit City Group to be used for general purposes of the
Circuit City business, including remodeling of Circuit City Superstores.
Operations Outlook
Over the past two years, CarMax has demonstrated that its consumer
offer and business model can produce strong sales and earnings growth. Given its
solid financial performance, we believe CarMax is able to support its growth
independently.
In fiscal 2003, CarMax's geographic expansion will continue to focus on
entries into mid-sized markets and satellite store opportunities in existing
markets. We have identified more than 30 additional markets that could support a
standard superstore, the principal CarMax store size going forward. We also
believe that we can add approximately 10 satellite stores in our existing
markets. In fiscal 2003, CarMax plans to open four to six stores, approximately
one half of which are expected to be satellite stores.
We believe comparable store used-car unit sales growth, which drives
our profitability, will be in the low- to mid-teens in the first half of fiscal
2003, moderating to high-single to low-double digits in the second half. Fiscal
2003 will be a year of transition for CarMax as it ramps up its growth pace.
Additional growth-related costs such as training, recruiting and employee
relocation for our new stores will moderate earnings growth. In addition, we
anticipate a reduction in yield spreads from the CarMax finance operation as
interest rates rise above the low levels experienced in fiscal 2002. Our
earnings expectations for CarMax also include preliminary estimates of expenses
expected to be incurred in the second half of fiscal 2003 if the planned
separation is approved. We expect the expense leverage improvement achieved from
total and comparable store sales growth to be substantially offset by these
three factors. Refer to the "Circuit City Stores, Inc. Management's Discussion
and Analysis of Results of Operations and Financial Condition" for the estimated
contribution of the CarMax business earnings attributed to the outstanding
CarMax Group Common Stock in fiscal 2003.
Page 52 of 130
We plan to open six to eight stores per year in fiscal 2004 through
fiscal 2006, including openings in mid-sized markets and satellite stores in
existing markets.
Recent Accounting Pronouncements
Refer to the "Circuit City Stores, Inc. Management's Discussion and
Analysis of Results of Operations and Financial Condition" for a review of
recent accounting pronouncements.
Financial Condition
Liquidity and Capital Resources
Cash Flow Highlights
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
-----------------------------------------------------------------------------
Net earnings................................ $ 90.8 $ 45.6 $ 1.1
Depreciation and amortization............... $ 16.3 $ 18.1 $ 15.2
Provision for deferred income taxes......... $ 3.2 $ 8.8 $ 1.2
Cash used for working capital, net.......... $ (71.0) $(63.7) $(49.0)
Cash provided by (used in)
operating activities..................... $ 42.6 $ 18.0 $(23.6)
Purchases of property and equipment......... $ (41.4) $(10.8) $(45.4)
Proceeds from sales of property
and equipment, net....................... $ 99.0 $ 15.5 $ 25.3
Net (decrease) increase in allocated
short-term and long-term debt............ $(103.7) $(22.2) $ 68.8
Cash Provided by or Used in Operations. CarMax generated net cash from
operating activities of $42.6 million in fiscal 2002 and $18.0 million in fiscal
2001. Net cash used in operating activities was $23.6 million in fiscal 2000.
The fiscal 2002 improvement primarily resulted from a $45.2 million increase in
net earnings, partly offset by an increase in accounts receivable, which
resulted from increased sales generating increased automobile loans and
increased yield spreads from the finance operation. The fiscal 2001 increase
reflects a $44.4 million increase in net earnings, partly offset by an increase
in working capital.
Investing Activities. Net cash provided by investing activities was
$57.5 million in fiscal 2002 and $3.3 million in fiscal 2001. Net cash used in
investing activities was $54.9 million in fiscal 2000. CarMax's capital
expenditures were $41.4 million in fiscal 2002, $10.8 million in fiscal 2001 and
$45.4 million in fiscal 2000. Fiscal 2002 capital expenditures included spending
for the construction of two standard-sized used-car superstores, one of which
opened during the first quarter of fiscal 2003, and one satellite used-car
superstore. In fiscal 2001, capital expenditures were related to equipment
purchases. Fiscal 2000 capital expenditures included spending for the
construction of four used-car superstores.
Capital expenditures have been funded primarily through sale-leaseback
transactions, allocated short- and long-term debt and internally generated
funds. Net proceeds from sales of property and equipment, including
sale-leasebacks, totaled $99.0 million in fiscal 2002, $15.5 million in fiscal
2001 and $25.3 million in fiscal 2000. In August 2001, CarMax entered into a
sale-leaseback transaction covering nine superstore properties for an aggregate
sale price of $102.4 million. This transaction, which represented the first
sale-leaseback entered into by CarMax without a Circuit City Stores, Inc.
guarantee, was structured at competitive rates with an initial lease term of 15
years and two 10-year renewal options.
In fiscal 2003, we anticipate capital expenditures for the CarMax
business of approximately $175 million. Planned expenditures primarily relate to
new store construction, including furniture, fixtures and equipment and land
purchases, and leasehold improvements to existing properties. CarMax expects to
open four to six stores during fiscal 2003, approximately one half of which will
be satellite stores, and, assuming the business continues to meet expectations,
22 to 30 stores over the following four years. We expect the initial cash
investment per store to be in the range of $20 million to $27 million for a
standard superstore and $10 million to $15 million for a satellite store. If
CarMax takes full advantage of building and land sale-leasebacks, then we expect
the net cash used to fund a new store will be $8 million to $12 million for a
standard superstore and $5 million to $7 million for a satellite superstore. As
a new store matures, sales financed through CarMax's finance operation will
require additional use of capital in the form of a seller's interest in the
receivables or reserves. For a standard used-car superstore, we would expect the
cash investment for the seller's interest to range from $0.8 million to $1.5
million at the end of the first year of operation, growing to $2.2 million to
$3.4 million after five years of operation.
Page 53 of 130
We expect that proceeds from an anticipated credit agreement secured by
vehicle inventory, sale-leaseback transactions and cash generated by operations
will be sufficient to fund capital expenditures for the foreseeable future.
Financing Activities. Most financial activities, including the
investment of surplus cash and the issuance and repayment of short-term and
long-term debt, are managed by the Company on a centralized basis. The Company
allocates debt to the CarMax Group based on usage of funds. Debt that is
specific only to the CarMax business or the Circuit City business is allocated
in its entirety to that business. For shared funds obtained from bank debt,
pooled debt, the CarMax Group's portion is determined by applying to the CarMax
Group's intercompany debt due to the Company the percentages that short-term
bank debt, long-term bank debt and the current portion of long-term bank debt
are of the total pooled debt. The remainder of any debt is then applied to the
Circuit City business. This pooled debt bears interest at a rate based on the
average pooled debt balance. Expenses related to increases in pooled debt are
reflected in the weighted average interest rate of the pooled debt.
In December 2001, CarMax entered into an $8.5 million secured
promissory note in conjunction with the purchase of land for new store
construction. This note, which is payable in August 2002, was included in
short-term debt as of February 28, 2002.
As scheduled, the Company used existing working capital to repay a $130
million term loan in fiscal 2002 and a $175 million term loan in fiscal 2001. At
February 28, 2002, a $100 million outstanding term loan due in July 2002 was
classified as a current liability. Although the Company has the ability to
refinance this debt, we intend to repay it using existing working capital.
Payment of corporate pooled debt does not necessarily result in a reduction of
the CarMax Group's allocated debt.
At February 28, 2002, the Company allocated cash of $3.3 million and
debt of $88.4 million to the CarMax Group. Circuit City Stores maintains a $150
million unsecured revolving credit facility that expires on August 31, 2002. The
Company does not anticipate renewing this facility. The Company also maintains
$195 million in committed seasonal lines of credit that are renewed annually
with various banks. At February 28, 2002, total balances of $1.8 million were
outstanding under these facilities.
We anticipate that during the first quarter of fiscal 2003, CarMax will
enter into a multi-year, $200 million credit agreement secured by vehicle
inventory. We anticipate that some of the proceeds from the agreement will be
used for the repayment of allocated debt; the payment on the separation date of
a one-time special dividend to Circuit City Stores, Inc., currently estimated to
be between $25 million and $35 million; the payment of transaction expenses
incurred in connection with the separation; and general corporate purposes.
Refer to "Contractual Obligations" for further discussion of the special
dividend payment.
Receivables generated by the CarMax finance operation are funded
through securitization transactions in which the finance operation sells its
receivables while retaining servicing rights. These securitization transactions
provide an efficient and economical means of funding automobile loan
receivables. For transfers of receivables that qualify as sales under Statement
of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," we recognize
gains and losses as a component of the profits of its finance operation.
On a monthly basis, CarMax's finance operation sells its automobile
loan receivables to a special purpose subsidiary, which, in turn, transfers the
receivables to a group of third-party investors. The investors sell commercial
paper backed by the transferred receivables, and the proceeds are distributed
through the special purpose subsidiary to CarMax's finance operation. The
special purpose subsidiary retains a subordinated interest in the transferred
receivables. CarMax's finance operation continues to service the transferred
receivables for a fee. The investors are generally entitled to receive monthly
interest payments and have committed to acquire additional undivided interests
in the transferred receivables up to a stated amount through June 26, 2003. If
certain events were to occur, the commitment to acquire additional undivided
interests would terminate and the investors would begin to receive monthly
principal payments until paid in full. At February 28, 2002, the unused capacity
of this program was $211.0 million.
CarMax's finance operation periodically refinances its automobile loan
receivables through the public issuance of asset-backed securities. The finance
operation sells the receivables to be refinanced to a special purpose
subsidiary, which, in turn, transfers the purchased receivables to a
securitization trust. The securitization trust then issues asset-backed
securities secured by the transferred receivables in public offerings, and the
proceeds are distributed through the special purpose subsidiary to CarMax's
finance operation. CarMax continues to service the transferred receivables for a
fee. Asset-backed securities were issued totaling $644.0 million in October
1999, $655.4 million in January 2001 and $641.7 million in November 2001.
At February 28, 2002, the aggregate principal amount of securitized
automobile loan receivables totaled $1.54 billion. At February 28, 2002, there
were no provisions providing recourse to the Company for credit losses on the
securitized automobile loan receivables. CarMax anticipates that it will be able
to expand or enter into new securitization arrangements to meet the future needs
of the automobile loan finance operation.
Page 54 of 130
Contractual Obligations (1)
2 to 3 4 to 5 After 5
(Amounts in millions) Total 1 Year Years Years Years
------------------------------------------------------------------------------
Allocated contractual
obligations:
Long-term debt.......... $ 78.6 $ 78.6 $ - $ - $ -
Promissory note......... 8.5 8.5 - - -
Operating leases........ 723.0 43.1 86.7 84.7 508.5
Lines of credit......... 1.4 1.4 - - -
-----------------------------------------------
Total ..................... $811.5 $131.6 $86.7 $84.7 $508.5
===============================================
(1) Amounts are based on the capital structure of Circuit City Stores, Inc. as
of February 28, 2002. Future obligations depend upon the final outcome of the
proposed separation of CarMax.
CarMax currently operates 23 of its sales locations pursuant to various
leases under which Circuit City Stores, Inc. was the original tenant and primary
obligor. Circuit City Stores, Inc. and not CarMax, had originally entered into
these leases so that CarMax could take advantage of the favorable economic terms
available to the Company as a large retailer. The Company has assigned each of
these leases to CarMax. Despite the assignment and pursuant to the terms of the
leases, the Company remains contingently liable under the leases. For example,
if CarMax were to fail to make lease payments under one or more of the leases,
the Company may be required to make those payments on CarMax's behalf. In
recognition of this ongoing contingent liability, CarMax has agreed to make a
one-time special dividend payment to Circuit City Stores, Inc. on the separation
date, assuming the separation is completed. CarMax currently expects this
special dividend to be between $25 million and $35 million.
Market Risk
Receivables Risk
The Company manages the market risk associated with the automobile
installment loan portfolio of CarMax's finance operation. A portion of this
portfolio has been securitized in transactions accounted for as sales in
accordance with SFAS No. 140 and, therefore, is not presented on the Group
balance sheets.
Automobile Installment Loan Receivables. At February 28, 2002, and
February 28, 2001, all loans in the portfolio of automobile loan receivables
were fixed-rate installment loans. Financing for these automobile loan
receivables is achieved through asset securitization programs that, in turn,
issue both fixed- and floating-rate securities. Interest rate exposure relating
to floating rate securitizations is managed through the use of interest rate
swaps. Receivables held for investment or sale are financed with working
capital.
The total principal amount of receivables securitized or held for
investment or sale as of February 28, 2002, and February 28, 2001, was as
follows:
(Amounts in millions) 2002 2001
-------------------------------------------------------------
Fixed-rate securitizations.............. $1,122 $ 984
Floating-rate securitizations
synthetically altered to fixed....... 413 299
Floating-rate securitizations........... 1 1
Held for investment (1)................. 12 9
Held for sale........................... 2 3
------------------
Total................................... $1,550 $1,296
==================
(1) Held by a bankruptcy-remote special purpose subsidiary.
Interest Rate Exposure. Interest rate exposure relating to the
securitized automobile loan receivables represents a market risk exposure that
we manage with matched funding and interest rate swaps matched to projected
payoffs. The Company does not anticipate significant market risk from swaps
because they are used on a monthly basis to match funding costs to the use of
the funding. Market risk is the exposure created by potential fluctuations in
interest rates. Generally, changes only in interest rates do not have a material
impact on the Group's results of operations.
Credit risk is the exposure to nonperformance of another party to an
agreement. Credit risk is mitigated by dealing with highly rated bank
counterparties. The market and credit risk associated with financial derivatives
are similar to those relating to other types of financial instruments. Refer to
Note 11 to the Group financial statements for a description of these items.
Page 55 of 130
Forward-Looking Statements
Company statements that are not historical facts, including statements
about management's expectations for fiscal year 2003 and beyond, are
forward-looking statements and involve various risks and uncertainties. Refer to
the "Circuit City Stores, Inc. Management's Discussion and Analysis of Results
of Operations and Financial Condition" for a review of important factors that
could cause actual results to differ materially from estimates or projections
contained in our forward-looking statements.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
For information concerning the Company's disclosures about market risk,
refer to the sub-heading "Market Risk" on pages 34 for Circuit City Stores,
Inc., page 45 for the Circuit City Group and page 55 for the CarMax Group.
Page 56 of 130
Item 8. Financial Statements and Supplementary Data.
Circuit City Stores, Inc.
Consolidated Statements Of Earnings
Years Ended February 28 or 29
(Amounts in thousands except per share data) 2002 % 2001 % 2000 %
------------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues.................... $13,107,871 100.0 $13,205,087 100.0 $12,790,795 100.0
Cost of sales, buying and warehousing............... 10,366,196 79.1 10,381,439 78.6 9,928,238 77.6
Appliance exit costs [NOTE 14]...................... 10,000 0.1 28,326 0.2 - -
-----------------------------------------------------------------------
Gross profit..................................... 2,731,675 20.8 2,795,322 21.2 2,862,557 22.4
-----------------------------------------------------------------------
Selling, general and administrative expenses (net of
finance income of $188,421 as of February 28, 2002;
$131,050 as of February 28, 2001; and $141,183 as
of February 29, 2000) [NOTE 10]................. 2,372,941 18.1 2,514,912 19.0 2,309,593 18.1
Appliance exit costs [NOTE 14]...................... - - 1,670 - - -
Interest expense [NOTE 4]........................... 5,839 - 19,383 0.2 24,206 0.2
-----------------------------------------------------------------------
Total expenses................................... 2,378,780 18.1 2,535,965 19.2 2,333,799 18.3
-----------------------------------------------------------------------
Earnings from continuing operations before
income taxes.................................... 352,895 2.7 259,357 2.0 528,758 4.1
Provision for income taxes [NOTE 5]................. 134,100 1.0 98,555 0.8 200,928 1.6
-----------------------------------------------------------------------
Earnings from continuing operations.............. 218,795 1.7 160,802 1.2 327,830 2.5
-----------------------------------------------------------------------
Discontinued operations [NOTE 15]:
Loss from discontinued operations of Divx,
less income tax benefit....................... - - - - (16,215) (0.1)
Loss on disposal of Divx, less income
tax benefit................................... - - - - (114,025) (0.9)
-----------------------------------------------------------------------
Loss from discontinued operations................... - - - - (130,240) (1.0)
-----------------------------------------------------------------------
Net earnings........................................ $ 218,795 1.7 $ 160,802 1.2 $ 197,590 1.5
=======================================================================
Net earnings (loss) attributed to [NOTES 1 AND 2]:
Circuit City Group Common Stock:
Continuing operations......................... $ 190,799 $ 149,247 $ 327,574
Discontinued operations....................... - - (130,240)
CarMax Group Common Stock........................ 27,996 11,555 256
----------- ----------- -----------
$ 218,795 $ 160,802 $ 197,590
=========== =========== ===========
Weighted average common shares [NOTES 2 AND 7]:
Circuit City Group basic........................ 205,501 203,774 201,345
=========== =========== ===========
Circuit City Group diluted...................... 207,095 205,830 204,321
=========== =========== ===========
CarMax Group basic.............................. 32,140 25,554 23,778
=========== =========== ===========
CarMax Group diluted............................ 34,122 26,980 25,788
=========== =========== ===========
Net earnings (loss) per share attributed to [NOTES 1, 2 AND 7]:
Circuit City Group basic:
Continuing operations......................... $ 0.93 $ 0.73 $ 1.63
Discontinued operations....................... - - (0.65)
----------- ----------- -----------
Net earnings.................................. $ 0.93 $ 0.73 $ 0.98
=========== =========== ===========
Circuit City Group diluted:
Continuing operations......................... $ 0.92 $ 0.73 $ 1.60
Discontinued operations....................... - - (0.64)
----------- ----------- -----------
Net earnings.................................. $ 0.92 $ 0.73 $ 0.96
=========== =========== ===========
CarMax Group basic.................................. $ 0.87 $ 0.45 $ 0.01
=========== =========== ===========
CarMax Group diluted................................ $ 0.82 $ 0.43 $ 0.01
=========== =========== ===========
See accompanying notes to consolidated financial statements.
Page 57 of 130
CIRCUIT CITY STORES, INC.
CONSOLIDATED BALANCE SHEETS
At February 28
(Amounts in thousands except share data) 2002 2001
---------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents [NOTE 2].................................................. $1,251,532 $ 446,131
Net accounts receivable............................................................. 211,403 265,515
Retained interests in securitized receivables [NOTE 11]............................. 515,138 320,246
Inventory........................................................................... 1,633,327 1,757,664
Prepaid expenses and other current assets........................................... 41,311 57,623
--------------------------------
TOTAL CURRENT ASSETS................................................................ 3,652,711 2,847,179
Property and equipment, net [NOTES 3 AND 4]......................................... 853,778 988,947
Other assets........................................................................ 32,897 35,207
--------------------------------
TOTAL ASSETS........................................................................ $4,539,386 $3,871,333
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTES 4 AND 9].............................. $ 102,073 $ 132,388
Accounts payable.................................................................... 1,106,679 902,560
Short-term debt [NOTE 4]............................................................ 10,237 1,200
Accrued expenses and other current liabilities...................................... 183,336 162,972
Accrued income taxes................................................................ 100,696 -
Deferred income taxes [NOTE 5]...................................................... 138,306 92,479
--------------------------------
TOTAL CURRENT LIABILITIES........................................................... 1,641,327 1,291,599
Long-term debt, excluding current installments [NOTES 4 AND 9]...................... 14,064 116,137
Deferred revenue and other liabilities.............................................. 149,269 92,165
Deferred income taxes [NOTE 5]...................................................... 288 14,949
--------------------------------
TOTAL LIABILITIES................................................................... 1,804,948 1,514,850
--------------------------------
STOCKHOLDERS' EQUITY [NOTES 1 AND 6]:
Circuit City Group Common Stock, $0.50 par value; 350,000,000 shares authorized;
208,823,000 shares issued and outstanding (207,020,000 in 2001).................. 104,411 103,510
CarMax Group Common Stock, $0.50 par value; 175,000,000 shares authorized;
36,851,000 shares issued and outstanding (25,639,000 in 2001).................... 18,426 12,820
Capital in excess of par value...................................................... 810,047 642,838
Retained earnings................................................................... 1,801,554 1,597,315
--------------------------------
TOTAL STOCKHOLDERS' EQUITY.......................................................... 2,734,438 2,356,483
--------------------------------
Commitments and contingent liabilities [NOTES 1, 8, 9, 13 , 14 AND 15]
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $4,539,386 $3,871,333
================================
See accompanying notes to consolidated financial statements.
Page 58 of 130
CIRCUIT CITY STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings............................................................ $ 218,795 $ 160,802 $ 197,590
Adjustments to reconcile net earnings to net cash provided
by operating activities of continuing operations:
Loss from discontinued operations [NOTE 15].......................... - - 16,215
Loss on disposal of discontinued operations [NOTE 15]................ - - 114,025
Depreciation and amortization........................................ 150,711 153,090 148,164
Unearned compensation amortization of restricted stock............... 15,678 11,365 12,096
Loss on disposition of property and equipment........................ 13,735 4,674 17
Provision for deferred income taxes.................................. 31,166 19,765 43,053
Changes in operating assets and liabilities, net of effects
from business acquisitions:
(Increase) decrease in net accounts receivable and retained
interests in securitized receivables............................ (140,766) 7,541 (18,922)
Decrease (increase) in inventory.................................. 124,337 (67,655) (184,507)
Decrease (increase) in prepaid expenses and other current assets.. 16,312 (41,426) 81,316
(Increase) decrease in other assets............................... (720) 1,012 240
Increase (decrease) in accounts payable, accrued expenses and
other current liabilities and accrued income taxes.............. 336,774 (64,193) 244,559
Increase (decrease) in deferred revenue and other liabilities..... 71,186 (17,855) (15,565)
--------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS............................................. 837,208 167,120 638,281
--------------------------------------------
INVESTING ACTIVITIES:
Cash used in business acquisitions...................................... - (1,325) (34,849)
Purchases of property and equipment..................................... (213,997) (285,556) (222,268)
Proceeds from sales of property and equipment, net...................... 187,426 115,695 100,151
--------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES
OF CONTINUING OPERATIONS............................................. (26,571) (171,186) (156,966)
--------------------------------------------
FINANCING ACTIVITIES:
Proceeds from (payments on) short-term debt, net........................ 9,037 (1,805) (5,011)
Principal payments on long-term debt [NOTE 4]........................... (132,388) (178,060) (2,707)
Issuances of Circuit City Group Common Stock, net....................... 17,920 26,912 6,942
Issuances of CarMax Group Common Stock, net............................. (1,958) (263) 1,914
Proceeds from CarMax Group Common Stock offering, net [NOTE 1].......... 139,546 - -
Dividends paid on Circuit City Group Common Stock....................... (14,556) (14,346) (14,207)
--------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
OF CONTINUING OPERATIONS............................................. 17,601 (167,562) (13,069)
--------------------------------------------
CASH USED IN DISCONTINUED OPERATIONS [NOTE 15]............................. (22,837) (26,174) (90,193)
--------------------------------------------
Increase (decrease) in cash and cash equivalents........................... 805,401 (197,802) 378,053
Cash and cash equivalents at beginning of year............................. 446,131 643,933 265,880
--------------------------------------------
Cash and cash equivalents at end of year................................... $1,251,532 $ 446,131 $ 643,933
============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID (RECEIVED)
DURING THE YEAR FOR:
Interest................................................................ $ 8,929 $ 25,336 $ 34,389
Income taxes............................................................ $ (42,575) $ 117,366 $ 14,908
See accompanying notes to consolidated financial statements.
Page 59 of 130
CIRCUIT CITY STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Shares Outstanding Common Stock Capital In
Circuit City CarMax Circuit City CarMax Excess of Retained
(Amounts in thousands except per share data) Group Group Group Group Par Value Earnings Total
------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1999.......................... 100,820 23,116 $ 50,410 $11,558 $575,686 $1,267,476 $1,905,130
Effect of two-for-one stock split.............. 100,820 - 50,410 - (50,410) - -
Net earnings................................... - - - - - 197,590 197,590
Exercise of common stock options [NOTE 6]...... 2,864 2,027 1,432 1,014 34,232 - 36,678
Shares issued under employee
stock purchase plans [NOTE 6]............... 502 506 251 253 21,547 - 22,051
Shares issued under the stock
incentive plans [NOTE 6].................... 346 30 173 15 13,996 - 14,184
Tax benefit from stock issued.................. - - - - 32,459 - 32,459
Shares cancelled upon reacquisition by Company. (1,484) (65) (742) (33) (52,173) - (52,948)
Unearned compensation-restricted stock......... - - - - 1,237 - 1,237
Cash dividends-Circuit City Group Common
Stock ($0.07 per share)..................... - - - - - (14,207) (14,207)
---------------------------------------------------------------------------
BALANCE AT FEBRUARY 29, 2000...................... 203,868 25,614 101,934 12,807 576,574 1,450,859 2,142,174
Net earnings................................... - - - - - 160,802 160,802
Exercise of common stock options [NOTE 6]...... 1,526 56 763 28 35,391 - 36,182
Shares issued under employee
stock purchase plans [NOTE 6]............... 862 - 431 - 16,119 - 16,550
Shares issued under the stock
incentive plans [NOTE 6].................... 1,486 - 743 - 31,912 - 32,655
Tax benefit from stock issued.................. - - - - 29,839 - 29,839
Shares cancelled upon reacquisition by Company. (722) (31) (361) (15) (32,774) - (33,150)
Unearned compensation-restricted stock......... - - - - (14,223) - (14,223)
Cash dividends-Circuit City Group Common
Stock ($0.07 per share)..................... - - - - - (14,346) (14,346)
---------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 2001...................... 207,020 25,639 103,510 12,820 642,838 1,597,315 2,356,483
Net earnings................................... - - - - - 218,795 218,795
Sale of CarMax Group Common Stock [NOTE 1]..... - 9,517 - 4,758 134,788 - 139,546
Exercise of common stock options [NOTE 6]...... 541 1,941 270 971 9,669 - 10,910
Shares issued under employee
stock purchase plans [NOTE 6]............... 867 - 434 - 11,627 - 12,061
Shares issued under the stock
incentive plans [NOTE 6].................... 1,068 2 534 1 13,605 - 14,140
Tax benefit from stock issued.................. - - - - 2,530 - 2,530
Shares cancelled upon reacquisition by Company. (673) (248) (337) (124) (17,995) - (18,456)
Unearned compensation-restricted stock......... - - - - 12,985 - 12,985
Cash dividends-Circuit City Group Common
Stock ($0.07 per share)..................... - - - - - (14,556) (14,556)
---------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 2002...................... 208,823 36,851 $104,411 $18,426 $810,047 $1,801,554 $2,734,438
============================================================================
See accompanying notes to consolidated financial statements.
Page 60 of 130
CIRCUIT CITY STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The common stock of Circuit City Stores, Inc. consists of two common
stock series that are intended to reflect the performance of the Company's two
businesses. The Circuit City Group Common Stock is intended to reflect the
performance of the Circuit City stores and related operations and the shares of
CarMax Group Common Stock reserved for the Circuit City Group or for issuance to
holders of Circuit City Group Common Stock. The CarMax Group Common Stock is
intended to reflect the performance of the CarMax stores and related operations.
The reserved CarMax Group shares are not outstanding CarMax Group Common Stock.
Therefore, net earnings attributed to the reserved CarMax Group shares are
included in the net earnings and earnings per share attributed to the Circuit
City Group Common Stock and not in the earnings per share attributed to the
CarMax Group Common Stock.
During the second quarter of fiscal 2002, Circuit City Stores completed
the public offering of 9,516,800 shares of CarMax Group Common Stock. The shares
sold in the offering were shares of CarMax Group Common Stock that previously
had been reserved for the Circuit City Group or for issuance to holders of
Circuit City Group Common Stock. The net proceeds of $139.5 million from the
offering were allocated to the Circuit City Group to be used for general
purposes of the Circuit City business, including remodeling of Circuit City
Superstores. As of February 28, 2002, 65,923,200 shares of CarMax Group Common
Stock were reserved for the Circuit City Group or for issuance to holders of
Circuit City Group Common Stock.
Excluding shares reserved for CarMax employee stock incentive plans,
the reserved CarMax Group shares represented 64.1 percent of the total
outstanding and reserved shares of CarMax Group Common Stock at February 28,
2002; 74.6 percent at February 28, 2001; and 74.7 percent at February 29, 2000.
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.
On February 22, 2002, Circuit City Stores, Inc. announced that its
board of directors had authorized management to initiate a process that would
separate the CarMax auto superstore business from the Circuit City consumer
electronics business through a tax-free transaction in which CarMax, Inc.,
presently a wholly owned subsidiary of Circuit City Stores, Inc., would become
an independent, separately traded public company. CarMax, Inc. holds
substantially all of the businesses, assets and liabilities of the CarMax Group.
The separation plan calls for Circuit City Stores, Inc. to redeem the
outstanding shares of CarMax Group Common Stock in exchange for shares of common
stock of CarMax, Inc. Simultaneously, shares of CarMax, Inc. common stock,
representing the shares of CarMax Group Common Stock reserved for the holders of
Circuit City Group Common Stock, would be distributed as a tax-free dividend to
the holders of Circuit City Group Common Stock.
In the proposed separation, the holders of CarMax Group Common Stock
would receive one share of CarMax, Inc. common stock for each share of CarMax
Group Common Stock redeemed by the Company. Management anticipates that the
holders of Circuit City Group Common Stock would receive a fraction of a share
of CarMax, Inc. common stock for each share of Circuit City Group Common Stock
they hold. The exact fraction would be determined on the record date for the
distribution. The separation is expected to be completed by late summer, subject
to shareholder approval and final approval from the board of directors.
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 Common Stock and holders of
CarMax Group Common Stock are shareholders of the Company and as such are
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
Circuit City Group Common Stock nor shares of CarMax Group Common 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 Common
Stock or CarMax Group Common Stock will reduce funds legally available for
dividends on, or repurchases of, both stocks. Accordingly, the Company's
consolidated financial statements included herein should be read in conjunction
with the financial statements of each Group and the Company's SEC filings.
The financial statements of the Company reflect each Group's business
as well as the allocation of the Company's assets, liabilities, expenses and
cash flows between the Groups in accordance with the policies adopted by the
board of directors. These policies may be modified or rescinded, or new policies
may be adopted, at the sole discretion of the board of directors, although the
board of directors has no present plans to do so. These management and
allocation policies include the following:
Page 61 of 130
(A) Financial Activities:
Most financial activities are managed by the Company on a centralized
basis. Such financial activities include the investment of surplus cash and the
issuance and repayment of short-term and long-term debt. Debt of the Company is
either allocated between the Groups (pooled debt) or is allocated in its
entirety to one Group. The pooled debt bears interest at a rate based on the
average pooled debt balance. Expenses related to increases in pooled debt are
reflected in the weighted average interest rate of such pooled debt.
(B) Corporate General and Administrative Costs:
Corporate general and administrative costs and other shared services
generally have been allocated to the Groups based upon utilization of such
services by each Group. Where determinations based on utilization alone have
been impractical, other methods and criteria are used that management believes
are equitable and provide a reasonable estimate of the costs attributable to
each Group.
(C) Income Taxes:
The Groups are included in the consolidated federal income tax return
and in certain state tax returns filed by the Company. Accordingly, the
financial statement provision and the related tax payments or refunds are
reflected in each Group's financial statements in accordance with the Company's
tax allocation policy for the Groups. In general, this policy provides that the
consolidated tax provision and related tax payments or refunds are allocated
between the Groups based principally upon the financial income, taxable income,
credits and other amounts directly related to each Group. Tax benefits that
cannot be used by the Group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the Group that generated such benefits.
2. Summary of Significant Accounting Policies
(A) Principles Of Consolidation:
The consolidated financial statements include the accounts of the
Circuit City Group and the CarMax Group, which combined comprise all accounts of
the Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
(B) Cash and Cash Equivalents:
Cash equivalents of $1.22 billion at February 28, 2002, and $408.8
million at February 28, 2001, consist of highly liquid debt securities with
original maturities of three months or less.
(C) Securitizations:
The Company enters into securitization transactions, which allow for
the sale of credit card and automobile loan receivables to qualified special
purpose entities which, in turn, issue asset-backed securities to third-party
investors. On April 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which replaced SFAS No.
125 and applies prospectively to all securitization transactions occurring after
March 31, 2001. Adoption of SFAS No. 140 did not have a material impact on the
financial position, results of operations or cash flows of the Company.
Transfers of financial assets that qualify as sales under SFAS No. 140 are
accounted for as off-balance sheet securitizations. The Company may retain
interest-only strips, one or more subordinated tranches, residual interests in a
securitization trust, servicing rights and a cash reserve account, all of which
are retained interests in the securitized receivables. These retained interests
are carried at fair value as determined by the present value of expected future
cash flows using management's projections of key factors, such as finance charge
income, default rates, payment rates, forward interest rate curves and discount
rates appropriate for the type of asset and risk. The changes in fair value of
retained interests are included in earnings.
(D) Fair Value of Financial Instruments:
The carrying value of the Company's cash and cash equivalents, credit
card, automobile loan and other receivables, accounts payable, short-term
borrowings and long-term debt approximates fair value. The Company's retained
interests in securitized receivables and derivative financial instruments are
recorded on the consolidated balance sheets at fair value.
Page 62 of 130
(E) Inventory:
Circuit City inventory is comprised of finished goods held for sale and
is stated at the lower of cost or market. CarMax inventory is comprised
primarily of vehicles held for sale or for reconditioning and is stated at the
lower of cost or market. Cost is determined by the average cost method for
Circuit City's inventory and by specific identification for CarMax's vehicle
inventory. Parts and labor used to recondition vehicles, as well as
transportation and other incremental expenses associated with acquiring and
reconditioning vehicles, are included in CarMax's inventory.
(F) Property and Equipment:
Property and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are calculated using the
straight-line method over the assets' estimated useful lives. Property held
under capital lease is stated at the lower of the present value of the minimum
lease payments at the inception of the lease or market value and is amortized on
a straight-line basis over the lease term or the estimated useful life of the
asset, whichever is shorter.
(G) Computer Software Costs:
External direct costs of materials and services used in the development
of internal-use software and payroll and payroll-related costs for employees
directly involved in the development of internal-use software are capitalized.
Amounts capitalized are amortized on a straight-line basis over a period of
three to five years.
(H) Impairment of Long-Lived Assets:
The Company reviews long-lived assets for impairment when circumstances
indicate the carrying amount of an asset may not be recoverable. Impairment is
recognized to the extent the sum of undiscounted estimated future cash flows
expected to result from the use of the asset is less than the carrying value.
When the Company closes a location, the estimated unrecoverable costs are
charged to selling, general and administrative expenses. Such costs include the
estimated loss on the sale of land and buildings, the book value of abandoned
fixtures, equipment and leasehold improvements and a provision for the present
value of future lease obligations, less estimated sublease income.
(I) Store Opening Expenses:
Costs relating to store openings, including organization and
pre-opening costs, are expensed as incurred.
(J) Income Taxes:
Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for income tax purposes, measured by
applying currently enacted tax laws. The Company recognizes deferred tax assets
if it is more likely than not that a benefit will be realized.
(K) Revenue Recognition:
The Company recognizes revenue when the earnings process is complete,
generally at either the time of sale to a customer or upon delivery to a
customer. Circuit City sells extended warranty contracts on behalf of unrelated
third parties. The contracts extend beyond the normal manufacturer's warranty
period, usually with terms (including the manufacturer's warranty period) from
12 to 60 months. Because third parties are the primary obligors under these
contracts, commission revenue for the unrelated third-party extended warranty
plans is recognized at the time of sale.
CarMax also sells extended warranties on behalf of unrelated third
parties. These warranties usually have terms of coverage from 12 to 72 months.
Because third parties are the primary obligors under these warranties,
commission revenue is recognized at the time of sale, net of a provision for
estimated customer returns of the warranties.
(L) Deferred Revenue:
Circuit City sells its own extended warranty contracts that extend
beyond the normal manufacturer's warranty period, usually with terms (including
the manufacturer's warranty period) from 12 to 60 months. As Circuit City is the
primary obligor on its own contracts, all revenue from the sale of these
contracts is deferred and amortized on a straight-line basis over the life of
the contracts. Incremental direct costs related to the sale of contracts are
deferred and charged to expense in proportion to the revenue recognized.
(M) Selling, General and Administrative Expenses:
Profits generated by the Company's finance operations, fees received
for arranging customer automobile financing through third parties and interest
income are recorded as reductions to selling, general and administrative
expenses.
Page 63 of 130
(N) Advertising Expenses:
All advertising costs are expensed as incurred.
(O) Net Earnings (Loss) Per Share:
Basic net earnings (loss) per share attributed to Circuit City Group
Common Stock is computed by dividing net earnings (loss) attributed to Circuit
City Group Common Stock, including earnings attributed to the reserved CarMax
Group shares, by the weighted average number of shares of Circuit City Group
Common Stock outstanding. Diluted net earnings (loss) per share attributed to
Circuit City Group Common Stock is computed by dividing net earnings (loss)
attributed to Circuit City Group Common Stock, including earnings attributed to
the reserved CarMax Group shares, by the sum of the weighted average number of
shares of Circuit City Group Common Stock outstanding and dilutive potential
Circuit City Group Common Stock.
Basic net earnings per share attributed to CarMax Group Common Stock is
computed by dividing net earnings attributed to the outstanding CarMax Group
Common Stock by the weighted average number of shares of CarMax Group Common
Stock outstanding. Diluted net earnings per share attributed to CarMax Group
Common Stock is computed by dividing net earnings attributed to the outstanding
CarMax Group Common Stock by the sum of the weighted average number of shares of
CarMax Group Common Stock outstanding and dilutive potential CarMax Group Common
Stock.
(P) Stock-Based Compensation:
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to
Employees," and provides the pro forma disclosures required by SFAS No. 123,
"Accounting for Stock-Based Compensation."
(Q) Derivative Financial Instruments:
In connection with securitization activities, the Company enters into
interest rate swap agreements to manage exposure to interest rates and to more
closely match funding costs to the use of funding. The Company also enters into
interest rate cap agreements to meet the requirements of the credit card
receivable securitization transactions. The Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, on
March 1, 2001. SFAS No. 133 requires the Company to recognize all derivative
instruments as either assets or liabilities on the balance sheets at fair value.
The adoption of SFAS No. 133 did not have a material impact on the financial
position, results of operations or cash flows of the Company. The changes in
fair value of derivative instruments are included in earnings.
(R) Risks and Uncertainties:
Circuit City is a leading national retailer of brand-name consumer
electronics, personal computers and entertainment software. The diversity of
Circuit City's products, customers, suppliers and geographic operations reduces
the risk that a severe impact will occur in the near term as a result of changes
in its customer base, competition, sources of supply or markets. It is unlikely
that any one event would have a severe impact on the Company's operating
results.
CarMax is a used- and new-car retail business. The diversity of
CarMax's customers and suppliers reduces the risk that a severe impact will
occur in the near term as a result of changes in its customer base, competition
or sources of supply. However, because of CarMax's limited overall size,
management cannot assure that unanticipated events will not have a negative
impact on the Company.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
(S) Reclassifications:
Certain prior year amounts have been reclassified to conform to the
current presentation. CarMax's wholesale sales have been reclassified and
reported in net sales and operating revenues for all periods presented including
the quarterly financial data disclosed in Note 18. In previous periods,
wholesale sales were recorded as a reduction to cost of sales. The
reclassification of wholesale sales to sales increased sales and cost of sales
by $325.5 million in fiscal 2002, $253.4 million in fiscal 2001 and $181.2
million in fiscal 2000. An additional reclassification between sales and cost of
sales made to conform to the current presentation decreased sales by $9.1
million in fiscal 2002, $7.4 million in fiscal 2001 and $4.8 million in fiscal
2000.
Page 64 of 130
3. Property and Equipment
Property and equipment, at cost, at February 28 is summarized as
follows:
(Amounts in thousands) 2002 2001
----------------------------------------------------------------------
Land and buildings (20 to 25 years)......... $ 70,283 $ 178,042
Land held for sale.......................... 11,521 30,730
Land held for development................... 8,021 4,285
Construction in progress.................... 79,851 58,659
Furniture, fixtures and equipment
(3 to 8 years)........................... 871,291 874,367
Leasehold improvements
(10 to 15 years)......................... 680,701 619,782
Capital leases, primarily buildings
(20 years)............................... 12,406 12,471
------------------------
1,734,074 1,778,336
Less accumulated depreciation and
amortization............................. 880,296 789,389
------------------------
Property and equipment, net................. $ 853,778 $ 988,947
========================
Land held for development is land owned for future sites that are
scheduled to open more than one year beyond the fiscal year reported.
4. Debt
Long-term debt at February 28 is summarized as follows:
(Amounts in thousands) 2002 2001
----------------------------------------------------------------------
Term loans................................... $100,000 $230,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest
ranging from 3.1% to 6.7%................. 3,717 4,400
Obligations under capital leases [NOTE 9].... 11,594 12,049
Note payable................................. 826 2,076
----------------------
Total long-term debt......................... 116,137 248,525
Less current installments.................... 102,073 132,388
----------------------
Long-term debt, excluding current
installments.............................. $ 14,064 $116,137
======================
In July 1994, the Company entered into a seven-year, $100,000,000
unsecured bank term loan. The loan was restructured in August 1996 as a
six-year, $100,000,000 unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 2002, the interest rate on the term loan was 2.25 percent. This
term loan is due in July 2002 and was classified as a current liability at
February 28, 2002. Although the Company has the ability to refinance this loan,
it intends to repay the debt using existing working capital.
In June 1996, the Company entered into a five-year, $130,000,000
unsecured bank term loan. Principal was due in full at maturity with interest
payable periodically at LIBOR plus 0.35 percent. As scheduled, the Company used
existing working capital to repay this term loan in June 2001.
The Company maintains a multi-year, $150,000,000 unsecured revolving
credit agreement with four banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.18 percent per
annum. The agreement was entered into as of August 31, 1996, and expires on
August 31, 2002. No amounts were outstanding under the revolving credit
agreement at February 28, 2002 or 2001, and the Company does not plan to renew
this agreement.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$5,144,000 at February 28, 2002, and $6,243,000 at February 28, 2001.
In November 1998, CarMax entered into a four-year, $5,000,000 unsecured
promissory note. A portion of the principal amount is due annually with interest
payable periodically at 8.25 percent. The outstanding balance at February 28,
2002, was $826,000 and was included in current installments of long-term debt.
In December 2001, CarMax entered into an $8,450,000 secured promissory
note in conjunction with the purchase of land for new store construction. This
note is due in August 2002 and was classified as short-term debt at February 28,
2002.
Page 65 of 130
The scheduled aggregate annual principal payments on the Company's
long-term obligations for the next five fiscal years are as follows: 2003 -
$102,073,000; 2004 - $1,410,000; 2005 - $2,521,000; 2006 - $1,083,000; 2007-
$1,010,000.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 2002 and 2001.
Short-term debt of the Company is funded through committed lines of
credit and informal credit arrangements, as well as the revolving credit
agreement. Other information regarding short-term financing and committed lines
of credit is as follows:
Years Ended February 28
(Amounts in thousands) 2002 2001
------------------------------------------------------------------------
Average short-term financing outstanding..... $ 2,256 $ 56,065
Maximum short-term financing outstanding..... $ 6,594 $363,199
Aggregate committed lines of credit.......... $195,000 $360,000
The weighted average interest rate on the outstanding short-term debt
was 4.4 percent during fiscal 2002, 6.8 percent during fiscal 2001 and 5.6
percent during fiscal 2000.
The Company capitalizes interest in connection with the construction of
certain facilities and software developed or obtained for internal use.
Capitalized interest totaled $1,807,000 in fiscal 2002, $2,121,000 in fiscal
2001 and $3,420,000 in fiscal 2000.
5. Income Taxes
The Company files a consolidated federal income tax return. The
components of the provision for income taxes on earnings from continuing
operations are as follows:
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
--------------------------------------------------------------------------------
Current:
Federal.................................. $ 86,243 $69,832 $140,119
State.................................... 16,691 10,167 17,756
-------------------------------
102,934 79,999 157,875
-------------------------------
Deferred:
Federal.................................. 30,231 17,999 41,762
State.................................... 935 557 1,291
-------------------------------
31,166 18,556 43,053
-------------------------------
Provision for income taxes.................. $ 134,100 $98,555 $200,928
===============================
The effective income tax rate differed from the federal statutory
income tax rate as follows:
Years Ended February 28 or 29
2002 2001 2000
------------------------------------------------------------------------------
Federal statutory income tax rate........... 35% 35% 35%
State and local income taxes,
net of federal benefit................... 3 3 3
-----------------------------
Effective income tax rate................... 38% 38% 38%
=============================
Page 66 of 130
In accordance with SFAS No. 109, the tax effects of temporary
differences that give rise to a significant portion of the deferred tax assets
and liabilities at February 28 are as follows:
(Amounts in thousands) 2002 2001
----------------------------------------------------------------------
Deferred tax assets:
Accrued expenses.......................... $ 68,018 $ 48,126
Other..................................... 8,826 7,546
----------------------
Total gross deferred tax assets........ 76,844 55,672
----------------------
Deferred tax liabilities:
Deferred revenue.......................... 75,079 32,825
Depreciation and amortization............. 39,738 46,338
Securitized receivables................... 59,342 51,519
Inventory................................ 26,595 16,376
Prepaid expenses.......................... 11,582 12,417
Other..................................... 3,102 3,625
----------------------
Total gross deferred tax liabilities... 215,438 163,100
----------------------
Net deferred tax liability................... $138,594 $107,428
======================
Based on the Company's historical and current pretax earnings,
management believes the amount of gross deferred tax assets will more likely
than not be realized through future taxable income; therefore, no valuation
allowance is necessary.
6. Common Stock and Stock-Based Incentive Plans
(A) Voting Rights:
The holders of both series of common stock and any series of preferred
stock outstanding and entitled to vote together with the holders of common stock
will vote together as a single voting group on all matters on which common
shareholders generally are entitled to vote other than a matter on which the
common stock or either series thereof or any series of preferred stock would be
entitled to vote as a separate voting group. On all matters on which both series
of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Group Common Stock shall have one vote and
(ii) each outstanding share of CarMax Group Common Stock shall have a number of
votes based on the weighted average ratio of the market value of a share of
CarMax Group Common Stock to a share of Circuit City Group Common Stock. If
shares of only one series of common stock are outstanding, each share of that
series shall be entitled to one vote. If either series of common stock is
entitled to vote as a separate voting group with respect to any matter, each
share of that series shall, for purposes of such vote, be entitled to one vote
on such matter.
(B) Shareholder Rights Plan:
In conjunction with the Company's Shareholder Rights Plan as amended
and restated, preferred stock purchase rights were distributed as a dividend at
the rate of one right for each share of Circuit City Group Common Stock and
CarMax Group Common Stock. The rights are exercisable only upon the attainment
of, or the commencement of a tender offer to attain, a specified ownership
interest in the Company by a person or group. When exercisable, each Circuit
City Group right would entitle the holder to buy one eight-hundredth of a share
of Cumulative Participating Preferred Stock, Series E, $20 par value, at an
exercise price of $125 per share, subject to adjustment. Each CarMax Group
right, when exercisable, would entitle the holder to buy one four-hundredth of a
share of Cumulative Participating Preferred Stock, Series F, $20 par value, at
an exercise price of $100 per share, subject to adjustment. A total of 1,000,000
shares of such preferred stock, which have preferential dividend and liquidation
rights, have been designated. No such shares are outstanding. In the event that
an acquiring person or group acquires the specified ownership percentage of the
Company's common stock (except pursuant to a cash tender offer for all
outstanding shares determined to be fair by the board of directors) or engages
in certain transactions with the Company after the rights become exercisable,
each right will be converted into a right to purchase, for half the current
market price at that time, shares of the related Group stock valued at two times
the exercise price. The Company also has 1,000,000 shares of undesignated
preferred stock authorized of which no shares are outstanding.
(C) Restricted Stock:
The Company has issued restricted stock under the provisions of the
1994 Stock Incentive Plan whereby management and key employees are granted
restricted shares of Circuit City Group Common Stock or CarMax Group Common
Stock. Shares are awarded in the name of the employee, who has all the rights of
a shareholder, subject to certain restrictions or forfeitures. Restrictions on
the awards generally expire three to seven years from the date of grant. Total
restricted stock awards of 1,063,366 shares of Circuit City Group Common Stock
and 2,100 shares of CarMax Group Common Stock were granted to eligible employees
in fiscal 2002. In fiscal 2001, 1,483,358 restricted shares of Circuit City
Group Common Stock were granted, including approximately 1,047,000 shares
granted as a one-for-one replacement for cancelled options that were
Page 67 of 130
originally granted on June 13, 2000. Options held by senior management were
excluded from this replacement grant. Approximately 782,000 shares of the
replacement grant vest two-and-one-half years from the date of grant, and the
remaining 265,000 shares vest four to five years from the grant date with
accelerated vesting if certain performance factors are met. The market value at
the date of grant of all shares granted has been recorded as unearned
compensation and is a component of stockholders' equity. Unearned compensation
is expensed over the restriction periods. In fiscal 2002, a total of $15,678,100
was charged to operations ($11,364,700 in fiscal 2001 and $12,095,900 in fiscal
2000). As of February 28, 2002, 2,317,348 restricted shares of Circuit City
Group Common Stock and 27,100 restricted shares of CarMax Group Common Stock
were outstanding.
(D) Stock Incentive Plans:
Under the Company's stock incentive plans, nonqualified stock options
may be granted to management, key employees and outside directors to purchase
shares of Circuit City Group Common Stock or CarMax Group Common Stock. The
exercise price for nonqualified options is equal to, or greater than, the market
value at the date of grant. Options generally are exercisable over a period from
one to 10 years from the date of grant. The Company has authorized 29,765,000
shares of Circuit City Group Common Stock and 9,750,000 shares of CarMax Group
Common Stock to be issued as either options or restricted stock grants. At
February 28, 2002, 7,736,657 shares of Circuit City Group Common Stock and
1,150,779 shares of CarMax Group Common Stock were available for issuance of
options or restricted stock grants. The number of shares available for issuance
at February 28, 2001, was 12,053,254 for the Circuit City Group and 2,615,227
for the CarMax Group.
(E) Employee Stock Purchase Plans:
The Company has employee stock purchase plans for all employees meeting
certain eligibility criteria. Under the Circuit City Group plan and the CarMax
Group plan, eligible employees may, subject to certain limitations, purchase
shares of Circuit City Group Common Stock or CarMax Group Common Stock. For each
$1.00 contributed by employees under the plans, the Company matches $0.15.
Purchases are limited to 10 percent of an employee's eligible compensation, up
to a maximum of $7,500 per year. The Company has authorized 15,500,000 shares of
Circuit City Group Common Stock and 2,000,000 shares of CarMax Group Common
Stock for purchase under the plans. At February 28, 2002, a total of 1,635,207
shares remained available under the Circuit City Group plan and 397,717 shares
remained available under the CarMax Group plan. During fiscal 2002, 866,524
shares of Circuit City Group Common Stock were issued to or purchased on the
open market on behalf of employees (862,315 shares in fiscal 2001 and 501,984
shares in fiscal 2000), and 183,902 shares of CarMax Group Common Stock were
issued to or purchased on the open market on behalf of employees (477,094 in
fiscal 2001 and 580,000 in fiscal 2000). The average price per share of Circuit
City Group Common Stock purchased under the plan was $17.59 in fiscal 2002,
$29.93 in fiscal 2001 and $41.70 in fiscal 2000. The average price per share of
CarMax Group Common Stock purchased under the plan was $17.13 in fiscal 2002,
$4.18 in fiscal 2001 and $3.68 in fiscal 2000. The Company match totaled
$2,251,500 in fiscal 2002, $2,766,500 in fiscal 2001 and $2,903,800 in fiscal
2000.
(F) 401(k) Plan:
Effective August 1, 1999, the Company began sponsoring a 401(k) Plan
for all employees meeting certain eligibility criteria. Under the Plan, eligible
employees can contribute up to 15 percent of their salaries, and the Company
matches a portion of those employee contributions. The Company's expense for
this plan was $4,349,000 in fiscal 2002, $4,682,000 in fiscal 2001 and
$2,475,000 in fiscal 2000.
Page 68 of 130
TABLE 1 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
Outstanding at beginning of year........ 8,720 $28.59 7,380 $25.07 8,894 $18.25
Granted................................. 4,423 12.80 4,280 34.80 1,564 40.75
Exercised............................... (541) 15.45 (1,526) 23.64 (2,864) 12.65
Cancelled............................... (611) 23.96 (1,414) 34.25 (214) 22.06
------ ------ -----
Outstanding at end of year.............. 11,991 $23.60 8,720 $28.60 7,380 $25.07
====== ====== =====
Options exercisable at end of year. 4,346 $25.33 3,158 $21.86 1,258 $13.89
====== ====== =====
CarMax Group:
Outstanding at beginning of year........ 4,107 $ 3.16 3,324 $ 3.87 4,380 $ 1.77
Granted................................. 1,659 4.94 1,281 1.70 1,132 5.89
Exercised............................... (1,941) 1.32 (56) 0.22 (2,027) 0.22
Cancelled............................... (194) 5.95 (442) 4.67 (161) 6.94
------ ------ -----
Outstanding at end of year.............. 3,631 $ 4.81 4,107 $ 3.16 3,324 $ 3.87
====== ====== =====
Options exercisable at end of year...... 821 $ 6.85 1,943 $ 2.94 1,203 $ 2.54
====== ====== =====
TABLE 2 Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
$ 9.94 to 12.45.......................... 3,896 6.9 $12.41 96 $11.32
13.25 to 17.93.......................... 1,634 3.8 15.13 1,067 15.43
18.00 to 27.95.......................... 1,243 3.0 20.18 1,037 19.86
29.50................................... 1,000 0.1 29.50 1,000 29.50
30.48 to 43.03 ......................... 4,218 5.7 36.82 1,146 37.03
------- ------
Total .................................... 11,991 5.1 $23.60 4,346 $25.33
======= ======
CarMax Group:
$ 1.63................................... 962 5.0 $ 1.63 193 $ 1.63
3.22 to 4.89.......................... 1,648 5.9 4.82 25 3.66
6.06 to 9.06.......................... 794 4.2 6.37 387 6.51
9.19 to 14.00.......................... 141 2.9 11.09 136 11.02
15.00 to 22.47.......................... 86 2.5 15.42 80 15.08
------- ------
Total .................................... 3,631 5.1 $ 4.81 821 $ 6.85
======= ======
The Company's stock option activity is summarized in Table 1 above.
Table 2 above summarizes information about stock options outstanding as of
February 28, 2002.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the net earnings
and net earnings per share attributed to the Circuit City Group and the net
earnings and net earnings per share attributed to the CarMax Group would have
changed to the pro forma amounts indicated in the following table on the
following page. In accordance with the transition provisions of SFAS No. 123,
the pro forma amounts reflect options with grant dates subsequent to March 1,
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented because compensation cost is reflected over the options'
vesting periods and compensation cost of options granted prior to March 1, 1995,
is not considered. The pro forma effect on fiscal year 2002 may not be
representative of the pro forma effects on net earnings for future years.
Page 69 of 130
(Amounts in thousands Years Ended February 28 or 29
except per share data) 2002 2001 2000
----------------------------------------------------------------------------------
Circuit City Group:
Earnings from continuing operations:
As reported.............................. $190,799 $149,247 $327,574
Pro forma................................ 174,654 136,957 319,337
Net earnings:
As reported.............................. $190,799 $149,247 $197,334
Pro forma................................ 174,654 136,957 189,097
Earnings per share from continuing operations:
Basic - as reported...................... $ 0.93 $ 0.73 $ 1.63
Basic - pro forma........................ 0.85 0.67 1.59
Diluted - as reported.................... $ 0.92 $ 0.73 $ 1.60
Diluted - pro forma...................... 0.84 0.67 1.56
Net earnings per share:
Basic - as reported...................... $ 0.93 $ 0.73 $ 0.98
Basic - pro forma........................ 0.85 0.67 0.94
Diluted - as reported.................... $ 0.92 $ 0.73 $ 0.96
Diluted - pro forma...................... 0.84 0.67 0.93
CarMax Group:
Net earnings:
As reported.............................. $ 27,996 $ 11,555 $ 256
Pro forma................................ 27,522 11,345 75
Net earnings per share:
Basic - as reported...................... $ 0.87 $ 0.45 $ 0.01
Basic - pro forma........................ 0.86 0.44 0.00
Diluted - as reported.................... $ 0.82 $ 0.43 $ 0.01
Diluted - pro forma...................... 0.81 0.42 0.00
For the purpose of computing the pro forma amounts indicated on the
previous page, the fair value of each option on the date of grant is estimated
using the Black-Scholes option-pricing model. The weighted average assumptions
used in the model were as follows:
2002 2001 2000
----------------------------------------------------------------------------
Circuit City Group:
Expected dividend yield...................... 0.6% 0.2% 0.2%
Expected stock volatility.................... 62% 49% 38%
Risk-free interest rates..................... 5% 6% 6%
Expected lives (in years).................... 5 5 5
CarMax Group:
Expected dividend yield...................... - - -
Expected stock volatility.................... 79% 71% 62%
Risk-free interest rates..................... 5% 7% 6%
Expected lives (in years).................... 4 4 4
Using these assumptions in the Black-Scholes model, the weighted
average fair value of options granted for the Circuit City Group was $7 per
share in fiscal 2002, $17 per share in fiscal 2001 and $17 per share in fiscal
2000; and for the CarMax Group, $3 per share in fiscal 2002, $1 per share in
fiscal 2001 and $3 per share in fiscal 2000.
Page 70 of 130
7. Earnings Per Share
Reconciliations of the numerator and denominator of basic and diluted
earnings per share are presented below.
(Amounts in thousands Years Ended February 28 or 29
except per share data) 2002 2001 2000
--------------------------------------------------------------------------------
Circuit City Group:
Weighted average common shares............ 205,501 203,774 201,345
Dilutive potential common shares:
Options................................ 773 885 2,145
Restricted stock....................... 821 1,171 831
----------------------------------
Weighted average common shares
and dilutive potential common shares... 207,095 205,830 204,321
==================================
Earnings from continuing operations
available to common shareholders....... $190,799 $149,247 $327,574
==================================
Basic earnings per share
from continuing operations............. $ 0.93 $ 0.73 $ 1.63
==================================
Diluted earnings per share
from continuing operations............. $ 0.92 $ 0.73 $ 1.60
==================================
CarMax Group:
Weighted average common shares............ 32,140 25,554 23,778
Dilutive potential common shares:
Options................................ 1,949 1,332 1,814
Restricted stock....................... 33 94 196
----------------------------------
Weighted average common shares
and dilutive potential common shares... 34,122 26,980 25,788
==================================
Net earnings available to common
shareholders........................... $ 27,996 $ 11,555 $ 256
==================================
Basic net earnings per share.............. $ 0.87 $ 0.45 $ 0.01
==================================
Diluted net earnings per share............ $ 0.82 $ 0.43 $ 0.01
==================================
Certain options were outstanding and not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares. Options to purchase
5,253,600 shares of Circuit City Group Common Stock with exercise prices ranging
from $26.15 to $43.03 per share were outstanding and not included in the
calculation at the end of fiscal 2002; 8,469,700 shares with exercise prices
ranging from $14.75 to $47.53 per share at the end of fiscal 2001; and 2,900
shares with exercise prices ranging from $43.03 to $47.53 per share at the end
of fiscal 2000. All options to purchase shares of CarMax Group Common Stock were
included in the calculation at the end of fiscal 2002; options to purchase
1,357,200 shares with exercise prices ranging from $6.06 to $16.31 per share
were not included at the end of fiscal 2001; and 1,685,400 shares with exercise
prices ranging from $3.90 to $16.31 per share were not included at the end of
the fiscal 2000.
8. Pension Plans
The Company has a noncontributory defined benefit pension plan covering
the majority of full-time employees who are at least age 21 and have completed
one year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 160,000 shares of
Circuit City Group Common Stock at February 28, 2002 and 2001. Company
contributions were $8,883,000 in fiscal 2002, $15,733,000 in fiscal 2001 and
$12,123,000 in fiscal 2000.
The following tables set forth the pension plan's financial status and
amounts recognized in the consolidated balance sheets as of February 28:
(Amounts in thousands) 2002 2001
----------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year...... $155,749 $113,780
Service cost................................. 16,673 14,142
Interest cost................................ 11,621 9,045
Actuarial loss............................... 5,606 21,776
Benefits paid................................ (5,651) (2,994)
----------------------
Benefit obligation at end of year............ $183,998 $155,749
======================
Page 71 of 130
Change in plan assets:
Fair value of plan assets at beginning
of year.................................... $134,425 $132,353
Actual return on plan assets................. (7,618) (10,667)
Employer contributions....................... 8,883 15,733
Benefits paid................................ (5,651) (2,994)
----------------------
Fair value of plan assets at end of year..... $130,039 $134,425
======================
Reconciliation of funded status:
Funded status................................ $(53,958) $(21,324)
Unrecognized actuarial loss.................. 42,933 16,961
Unrecognized transitional asset.............. - (202)
Unrecognized prior service benefit........... (142) (285)
----------------------
Net amount recognized........................ $(11,167) $ (4,850)
======================
The components of net pension expense were as follows:
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
------------------------------------------------------------------------------
Service cost............................ $16,673 $14,142 $ 14,678
Interest cost........................... 11,621 9,045 7,557
Expected return on plan assets.......... (12,951) (11,197) (9,078)
Amortization of prior service cost...... (143) (142) (134)
Amortization of transitional asset...... (202) (202) (202)
Recognized actuarial loss (gain)........ 202 (183) 87
----------------------------------
Net pension expense..................... $15,200 $11,463 $ 12,908
==================================
Assumptions used in the accounting for the pension plan were:
Years Ended February 28 or 29
2002 2001 2000
------------------------------------------------------------------------------
Weighted average discount rate.............. 7.25% 7.50% 8.00%
Rate of increase in compensation levels:
Circuit City Group....................... 6.00% 6.00% 6.00%
CarMax Group............................. 7.00% 6.00% 6.00%
Expected rate of return on plan assets...... 9.00% 9.00% 9.00%
The Company also has an unfunded nonqualified plan that restores
retirement benefits for certain senior executives who are affected by Internal
Revenue Code limitations on benefits provided under the Company's pension plan.
The projected benefit obligation under this plan was $18.0 million at February
28, 2002, and $12.8 million at February 28, 2001.
9. Lease Commitments
The Company conducts a substantial portion of its business in leased
premises. The Company's lease obligations are based upon contractual minimum
rates.
Rental expense and sublease income for all operating leases are
summarized as follows:
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
----------------------------------------------------------------------------
Minimum rentals...................... $370,239 $352,315 $334,240
Rentals based on sales volume........ 292 1,229 1,327
Sublease income...................... (17,914) (15,333) (16,425)
-------------------------------------
Net rental expense................... $352,617 $338,211 $319,142
=====================================
The Company computes rent based on a percentage of sales volumes in
excess of defined amounts in certain store locations. Most of the Company's
other leases are fixed-dollar rental commitments, with many containing rent
escalations based on the Consumer Price Index. Most of the leases provide that
the Company pay taxes, maintenance, insurance and operating expenses applicable
to the premises.
The initial term of most real property leases will expire within the
next 20 years; however, most of the leases have options providing for renewal
periods of five to 25 years at terms similar to the initial terms.
Page 72 of 130
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Company, as of February 28, 2002, were:
Operating Operating
(Amounts in thousands) Capital Lease Sublease
Fiscal Leases Commitments Income
-------------------------------------------------------------------------------
2003.................................... $ 1,726 $ 339,193 $ (17,868)
2004.................................... 1,768 337,017 (15,656)
2005.................................... 1,798 335,248 (13,601)
2006.................................... 1,807 332,626 (11,925)
2007.................................... 1,853 326,480 (9,439)
After 2007.............................. 11,006 3,131,207 (33,374)
-----------------------------------
Total minimum lease payments............ 19,958 $4,801,771 $(101,863)
========================
Less amounts representing interest...... (8,364)
-------
Present value of net minimum capital
lease payments [NOTE 4].............. $11,594
=======
In fiscal 2002, the Company entered into sale-leaseback transactions
with unrelated parties at an aggregate selling price of $150,888,000
($61,526,000 in fiscal 2001 and $36,795,000 in fiscal 2000). Gains or losses on
sale-leaseback transactions are deferred and amortized over the term of the
leases. The Company does not have continuing involvement under sale-leaseback
transactions.
Non-appliance-related lease termination costs were $25.8 million in
fiscal 2002, of which $13.7 million was related to current year relocations;
$1.1 million in fiscal 2001; and $9.2 million in fiscal 2000.
10. Supplemental Financial Statement Information
(A) Advertising Expense:
Advertising expense from continuing operations, which is included in
selling, general and administrative expenses in the accompanying consolidated
statements of earnings, amounted to $409,281,000 (3.1 percent of net sales and
operating revenues) in fiscal 2002, $467,786,000 (3.5 percent of net sales and
operating revenues) in fiscal 2001 and $438,781,000 (3.4 percent of net sales
and operating revenues) in fiscal 2000.
(B) Finance Income:
For the past three years, pretax finance operation income, which is
recorded as a reduction to selling, general and administrative expenses, was as
follows:
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
------------------------------------------------------------------------------
Circuit City Group:
Securitization income............... $226.5 $198.8 $242.2
Payroll and fringe expenses......... 41.6 43.0 46.8
Other direct expenses............... 78.7 79.0 94.0
------------------------------
Finance operation income............ 106.2 76.8 101.4
------------------------------
CarMax Group:
Securitization income............... 78.1 51.5 36.8
Payroll and fringe expenses......... 5.7 4.2 3.4
Other direct expenses............... 5.9 4.5 3.4
------------------------------
Finance operation income............ 66.5 42.8 30.0
Third-party financing fees.......... 15.7 11.5 9.8
------------------------------
Total finance income................ 82.2 54.3 39.8
------------------------------
Circuit City Stores, Inc.:
Consolidated finance income......... $188.4 $131.1 $141.2
==============================
For both the Circuit City Group and the CarMax Group, the finance
operation income does not include any allocation of indirect costs or income.
The Company presents this information on a direct basis to avoid making
arbitrary decisions regarding the periodic indirect benefit or costs that could
be attributed to this operation. Examples of indirect costs not included
Page 73 of 130
are corporate expenses such as human resources, administrative services,
marketing, information systems, accounting, legal, treasury and executive
payroll as well as retail store expenses.
11. Securitizations
(A) Credit Card Securitizations:
Circuit City's finance operation enters into securitization
transactions to finance its consumer revolving credit card receivables. In
accordance with the isolation provisions of SFAS No. 140, special purpose
subsidiaries were created in December 2001 for the sole purpose of facilitating
these securitization transactions. Credit card receivables are sold to special
purpose subsidiaries, which, in turn, transfer these receivables to
securitization master trusts. Private-label credit card receivables are
securitized through one master trust and MasterCard and VISA credit card
(referred to as bankcard) receivables are securitized through a separate master
trust. Each master trust periodically issues securities backed by the
receivables in that master trust. For transfers of receivables that qualify as
sales, Circuit City recognizes gains or losses as a component of the finance
operation's profits, which are recorded as reductions to selling, general and
administrative expenses. In these securitizations, Circuit City's finance
operation continues to service the securitized receivables for a fee and the
special purpose subsidiaries retain an undivided interest in the transferred
receivables and hold various subordinated asset-backed securities that serve as
credit enhancements for the asset-backed securities held by outside investors.
Neither the private-label master trust agreement nor the bankcard master trust
agreement provides for recourse to the Company for credit losses on the
securitized receivables. Under certain of these securitization programs, Circuit
City must meet financial covenants relating to minimum tangible net worth,
minimum delinquency rates and minimum coverage of rent and interest expense.
Circuit City was in compliance with these covenants at February 28, 2002 and
2001.
The total principal amount of credit card receivables managed was $2.85
billion at February 28, 2002, and $2.80 billion at February 28, 2001. Of these
totals, the principal amount of receivables securitized was $2.80 billion at
February 28, 2002, and $2.75 billion at February 28, 2001, and the principal
amount of receivables held for sale was $49.2 million at the end of fiscal 2002
and $45.1 million at the end of fiscal 2001. At February 28, 2002, the unused
capacity of the private label variable funding program was $22.9 million and the
unused capacity of the bankcard variable funding program was $496.5 million. The
aggregate amount of receivables that were 31 days or more delinquent was $198.4
million at February 28, 2002, and $192.3 million at February 28, 2001. The
principal amount of losses net of recoveries totaled $262.8 million for the year
ended February 28, 2002, and $229.9 million for the year ended February 28,
2001.
Circuit City receives annual servicing fees approximating 2 percent of
the outstanding principal balance of the credit card receivables and retains the
rights to future cash flows available after the investors in the asset-backed
securities 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 receivables.
Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from and paid to
the securitization trusts:
Years Ended February 28
(Amounts in thousands) 2002 2001
-------------------------------------------------------------------------------
Proceeds from new securitizations.................. $1,193,300 $1,092,500
Proceeds from collections reinvested
in previous credit card securitizations........ $1,591,085 $1,730,511
Servicing fees received............................ $ 51,777 $ 52,044
Other cash flows received on retained interests*... $ 195,375 $ 173,775
*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, Circuit City
estimates future cash flows using management's projections of key factors, such
as finance charge income, default rates, payment rates, forward interest rate
curves and discount rates appropriate for the type of asset and risk. Circuit
City 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 securitized credit card receivables that
exceeds the contractually specified investor returns and servicing fees
(interest-only strips) is carried at fair value; amounted to $131.9 million at
February 28, 2002, and $131.0 million at February 28, 2001. Gains of $167.8
million on sales of credit card receivables were recorded in fiscal 2002; gains
of $176.2 million on sales of credit card receivables were recorded in fiscal
2001.
Page 74 of 130
The fair value of retained interests at February 28, 2002, was $394.5
million, with a weighted-average life ranging from 0.2 years to 1.8 years. The
fair value of retained interests at February 28, 2001, was $246.1 million with a
weighted average life ranging from 0.4 years to 3 years. The following table
shows the key economic assumptions used in measuring the fair value of retained
interests at February 28, 2002, 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
February 28, 2002, 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 Value of 10% Value of 20%
(Dollar amounts in thousands) Used Adverse Change Adverse Change
-------------------------------------------------------------------------------------
Monthly payment rate........... 6.8%-10.4% $ 8,426 $ 15,629
Annual default rate............ 7.9%-17.1% $ 23,315 $ 46,363
Annual discount rate........... 8.0%-15.0% $ 2,742 $ 5,454
(B) Automobile Loan Securitizations:
CarMax has asset securitization programs to finance the automobile loan
receivables generated by its finance operation. CarMax's finance operation sells
its automobile loan receivables to a special purpose subsidiary, which, in turn,
transfers those receivables to a group of third-party investors. For transfers
of receivables that qualify as sales, CarMax recognizes gains or losses as a
component of the finance operation's profits, which are recorded as reductions
to selling, general and administrative expenses. A special purpose subsidiary
retains a subordinated interest in the transferred receivables. CarMax's finance
operation continues to service securitized receivables for a fee. CarMax's
finance operation refinanced $641.7 million of automobile loan receivables
through the public issuance of asset-backed securities in fiscal 2002 and $655.4
million in fiscal 2001. The automobile loan securitization agreements do not
provide for recourse to the Company for credit losses on the securitized
receivables. Under certain of these securitization programs, CarMax must meet
financial covenants relating to minimum tangible net worth, minimum delinquency
rates and minimum coverage of rent and interest expense. CarMax was in
compliance with these covenants at February 28, 2002 and 2001.
At February 28, 2002, the total principal amount of automobile loan
receivables managed was $1.55 billion. Of that total, the principal amount of
automobile loan receivables securitized was $1.54 billion and the principal
amount of automobile loan receivables held for sale or investment was $13.9
million. At February 28, 2002, the unused capacity of the automobile loan
variable funding program was $211.0 million. The aggregate principal amount of
automobile loans that were 31 days or more delinquent was $22.3 million at
February 28, 2002. The principal amount of losses net of recoveries totaled
$13.2 million for the year ended February 28, 2002, and $7.2 million for the
year ended February 28, 2001.
CarMax receives annual servicing fees approximating 1 percent of the
outstanding principal balance of the securitized automobile loan receivables and
retains the rights to future cash flows available after the investors in the
asset-backed securities 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 securitized
receivables. Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from and paid to
the securitization trusts:
Years Ended February 28
(Amounts in thousands) 2002 2001
---------------------------------------------------------------------------
Proceeds from new securitizations................. $752,516 $619,525
Proceeds from collections reinvested
in previous automobile loan securitizations... $452,329 $313,827
Servicing fees received........................... $ 13,787 $ 10,474
Other cash flows received on retained interests*.. $ 68,153 $ 39,265
*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, CarMax estimates
future cash flows using management's projections of key factors, such as finance
charge income, default rates, payment rates and discount rates appropriate for
the type of assets and risk. CarMax 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 75 of 130
Future finance income from securitized automobile loan receivables that
exceeds the contractually specified investor returns and servicing fees
(interest-only strips) is carried at fair value; amounted to $74.3 million at
February 28, 2002; and $42.0 million at February 28, 2001. Gains of $56.4
million on sales of automobile loan receivables were recorded in fiscal 2002,
gains of $35.4 million on sales of automobile loan receivables were recorded in
fiscal 2001.
The fair value of retained interests at February 28, 2002, was $120.7
million, with a weighted-average life of 1.6 years. The fair value of retained
interests at February 28, 2001, was $74.1 million with a weighted average life
ranging from 1.5 years to 1.8 years. The following table shows the key economic
assumptions used in measuring the fair value of retained interests at February
28, 2002, 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 February 28, 2002, 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 Value of 10% Value of 20%
(Dollar amounts in thousands) Used Adverse Change Adverse Change
-------------------------------------------------------------------------------
Prepayment speed................ 1.5%-1.6% $ 3,646 $ 7,354
Annual default rate............. 1.0%-1.2% $ 2,074 $ 4,148
Annual discount rate............ 12.0% $ 1,464 $ 2,896
12. Financial Derivatives
On behalf of Circuit City, the Company enters into interest rate cap
agreements to meet the requirements of the credit card receivable securitization
transactions. The total notional amount of interest rate caps outstanding was
$654.9 million at February 28, 2002, and $839.4 million at February 28, 2001.
Purchased interest rate caps were included in net accounts receivable and had a
fair value of $2.4 million as of February 28, 2002, and $6.5 million as of
February 28, 2001. Written interest rate caps were included in accounts payable
and had a fair value of $2.4 million as of February 28, 2002, and $6.5 million
as of February 28, 2001.
On behalf of CarMax, the Company enters into amortizing swaps relating
to automobile loan receivable securitizations to convert variable-rate financing
costs to fixed-rate obligations to better match funding costs to the receivables
being securitized. The Company entered into twelve 40-month amortizing interest
rate swaps with notional amounts totaling approximately $854.0 million in fiscal
2002, nine 40-month amortizing swaps with notional amounts totaling
approximately $735.0 million in fiscal 2001 and four 40-month amortizing swaps
with notional amounts totaling approximately $344.0 million in fiscal 2000. The
remaining total notional amount of all swaps related to the automobile loan
receivable securitizations was approximately $413.3 million at February 28,
2002, and $299.3 million at February 28, 2001. At February 28, 2002, the fair
value of these swaps totaled a net liability of $841,000 and were included in
accounts payable.
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 on a monthly basis 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.
13. Contingent Liabilities
In the normal course of business, the Company is involved in various
legal proceedings. Based upon the Company's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the Company's
financial position, liquidity or results of operations.
14. 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. The Company maintains control over Circuit City's
in-home major appliance repair business, although repairs are subcontracted to
an unrelated third party.
Page 76 of 130
To exit the appliance business, the Company 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 marketing the remaining properties to be
subleased.
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 was paid to
employees on a biweekly schedule based on years of service, cash payments lagged
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 $30.0 million. In the fourth quarter of fiscal 2002, the Company
recorded additional lease termination costs of $10.0 million to reflect the
current rental market for these leased properties. These expenses are reported
separately on the fiscal 2002 and 2001 statements of earnings. The appliance
exit cost liability is included in the accrued expenses and other current
liabilities line item on the consolidated balance sheet. The appliance exit cost
accrual activity is presented in Table 3.
TABLE 3
------------------------------------------------------------------------------------------------------------------------------
Total Fiscal 2001 Fiscal 2002 Fiscal 2002
Original Payments Liability at Adjustments Payments Liability at
Exit or February 28, to Exit Cost or February 28,
(Amounts in millions) Cost Write-Downs 2001 Accrual Write-Downs 2002
------------------------------------------------------------------------------------------------------------------------------
Lease termination costs............. $17.8 $ 1.8 $16.0 $ 10.0 $ 6.3 $19.7
Fixed asset write-downs, net........ 5.0 5.0 - - - -
Employee termination benefits....... 4.4 2.2 2.2 - 2.2 -
Other .............................. 2.8 2.8 - - - -
----------------------------------------------------------------------------------------
Appliance exit costs................ $30.0 $ 11.8 $18.2 $ 10.0 $ 8.5 $19.7
========================================================================================
15. Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations. Discontinued
operations have been segregated on the consolidated statements of cash flows;
however, Divx is not segregated on the consolidated balance sheets.
For fiscal 2002 and 2001, the discontinued Divx operations had no
impact on the net earnings of Circuit City Stores, Inc. In fiscal 2000, the loss
from the discontinued Divx operations totaled $16.2 million after an income tax
benefit of $9.9 million and the loss on the disposal of the Divx business
totaled $114.0 million after an income tax benefit of $69.9 million. The loss on
the disposal included a provision for operating losses to be incurred during the
phase-out period. It 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.
As of February 28, 2002, entities comprising the Divx operations have
been dissolved and the related net liabilities have been assumed by the Company.
Net liabilities reflected in the accompanying consolidated balance sheets as of
February 28 were as follows:
(Amounts in thousands) 2002 2001
------------------------------------------------------------------------
Current assets............................... $ - $ 8
Other assets................................. - 324
Current liabilities.......................... (18,457) (27,522)
Other liabilities............................ - (14,082)
------------------------
Net liabilities of discontinued operations... $ (18,457) $(41,272)
========================
16. 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, in the first quarter of fiscal 2003, 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. On
a pro forma basis, this reclassification would have increased the fiscal 2002
Circuit City Stores, Inc. gross profit margin by 11 basis points and the expense
ratio by 10 basis points. For fiscal 2001, this reclassification would have
increased the gross profit margin by 20 basis
Page 77 of 130
points and the expense ratio by 18 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.
In June 2001, the FASB issued SFAS 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 pronouncement. 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. For the CarMax Group, goodwill totaled $20.1
million and covenants not to compete totaled $1.5 million as of February 28,
2002. In fiscal 2002, goodwill amortization was $1.8 million and amortization of
covenants not to compete was $931,000. Covenants not to compete will continue to
be amortized on a straight-line basis over the life of the covenant not to
exceed five years. 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, as outlined in the new pronouncement. 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 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 supersedes 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
in the first quarter of fiscal 2003. The Company does not expect the adoption of
SFAS No. 144 to have a material impact on its financial position, results of
operations or cash flows.
17. 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 its finance operation. This segment is engaged in the business of
selling brand-name consumer electronics, personal computers and entertainment
software. CarMax refers to the used- and new-car retail locations bearing the
CarMax name and to all related operations, such as its finance operation.
Financial information for these segments for fiscal 2002, 2001 and 2000 are
shown in Table 4.
Page 78 of 130
TABLE 4
--------------------------------------------------------------------------------------------
(Amounts in thousands) Total
2002 Circuit City CarMax Segments
--------------------------------------------------------------------------------------------
Revenues from external customers.......... $ 9,589,803 $3,518,608 $13,107,871
Interest expense.......................... 881 4,958 5,839
Depreciation and amortization............. 134,371 16,340 150,711
Earnings from continuing operations
before income taxes.............. 206,439 146,456 352,895
Provision for income taxes................ 78,446 55,654 134,100
Earnings from continuing operations....... 127,993 90,802 218,795
Total assets.............................. $ 3,821,811 $ 720,222 $ 4,539,386
2001
Revenues from external customers.......... $10,458,037 $2,747,050 $13,205,087
Interest expense.......................... 7,273 12,110 19,383
Depreciation and amortization............. 126,297 26,793 153,090
Earnings from continuing operations
before income taxes.............. 185,875 73,482 259,357
Provision for income taxes................ 70,637 27,918 98,555
Earnings from continuing operations....... 115,238 45,564 160,802
Total assets.............................. $ 3,160,048 $ 710,953 $ 3,871,001
2000
Revenues from external customers.......... $10,599,406 $2,191,389 $12,790,795
Interest expense.......................... 13,844 10,362 24,206
Depreciation and amortization............. 132,923 15,241 148,164
Earnings from continuing operations
before income taxes.............. 526,955 1,803 528,758
Provision for income taxes................ 200,243 685 200,928
Earnings from continuing operations....... 326,712 1,118 327,830
Total assets.............................. $ 3,278,728 $ 675,495 $ 3,954,223
Earnings from continuing operations and total assets for Circuit City on this
table exclude: (1) the reserved CarMax Group shares and (2) the discontinued
Divx operations as discussed in Note 15.
Page 79 of 130
18. Quarterly Financial Data (Unaudited)
(Amounts in thousands First Quarter Second Quarter Third Quarter Fourth Quarter Year
except per share data) 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
Net sales and
operating
revenues....... $2,760,654 $3,132,500 $2,975,463 $3,244,304 $3,128,715 $2,946,583 $4,243,039 $3,881,700 $13,107,871 $13,205,087
---------------------------------------------------------------------------------------------------------------
Gross profit..... $ 566,353 $ 683,262 $ 605,070 $ 673,465 $ 642,177 $ 582,128 $ 918,075 $856,467 $ 2,731,675 $ 2,795,322
---------------------------------------------------------------------------------------------------------------
Net earnings(loss)
attributed to:
Circuit City
Group Common
Stock........ $ 10,135 $ 57,123 $ 6,822 $ 55,341 $ 21,134 $ (64,407)$ 152,708 $101,190 $ 190,799 $ 149,247
---------------------------------------------------------------------------------------------------------------
CarMax Group
Common Stock. $ 6,832 $ 3,535 $ 8,028 $ 4,126 $ 6,554 $ 1,920 $ 6,582 $ 1,974 $ 27,996 $ 11,555
---------------------------------------------------------------------------------------------------------------
Net earnings (loss)
per share
attributed to:
Circuit City Group
Common Stock:
Basic...... $ 0.05 $ 0.28 $ 0.03 $ 0.27 $ 0.10 $ (0.32)$ 0.74 $ 0.50 $ 0.93 $ 0.73
---------------------------------------------------------------------------------------------------------------
Diluted.... $ 0.05 $ 0.28 $ 0.03 $ 0.27 $ 0.10 $ (0.32)$ 0.73 $ 0.49 $ 0.92 $ 0.73
---------------------------------------------------------------------------------------------------------------
CarMax Group
Common Stock:
Basic...... $ 0.26 $ 0.14 $ 0.27 $ 0.16 $ 0.18 $ 0.08 $ 0.18 $ 0.08 $ 0.87 $ 0.45
---------------------------------------------------------------------------------------------------------------
Diluted.... $ 0.25 $ 0.13 $ 0.25 $ 0.15 $ 0.17 $ 0.07 $ 0.17 $ 0.07 $ 0.82 $ 0.43
---------------------------------------------------------------------------------------------------------------
Net sales and operating revenues as presented reflect certain
reclassifications to conform to current presentation. CarMax's wholesale sales
were reclassified from cost of sales to sales as discussed in Note 2(S). Total
wholesale reclassifications increased sales in the first through fourth quarters
of fiscal 2002 by $84.5 million, $90.0 million, $76.7 million and $74.3 million,
respectively. The fiscal 2001 total wholesale reclassifications increased sales
$59.4 million, $66.5 million, $61.1 million and $66.4 million by quarter,
respectively. The additional reclassification between sales and cost of sales
decreased sales in the first through fourth quarters of fiscal 2002 by $2.3
million, $2.5 million, $2.2 million and $2.1 million, respectively. The fiscal
2001 net sales decreased $1.8 million, $2.0 million, $1.8 million and $1.8
million by quarter, respectively, based on the additional reclassification. The
annual impact of all reclassifications from cost of sales to sales was an
increase of $316.4 million in fiscal 2002 and $246.0 million in fiscal 2001.
Page 80 of 130
Independent Auditors' Report
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Circuit City
Stores, Inc. and subsidiaries as of February 28, 2002 and 2001, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the fiscal years in the three-year period ended February 28, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Circuit City Stores,
Inc. and subsidiaries as of February 28, 2002 and 2001, and the results of their
operations and their cash flows for each of the fiscal years in the three-year
period ended February 28, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Richmond, Virginia
April 2, 2002
Page 81 of 130
CIRCUIT CITY GROUP
STATEMENTS OF EARNINGS
Years Ended February 28 or 29
(Amounts in thousands) 2002 % 2001 % 2000 %
--------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES.................. $9,589,803 100.0 $10,458,037 100.0 $10,599,406 100.0
Cost of sales, buying and warehousing............. 7,251,831 75.6 7,964,148 76.1 7,977,214 75.3
Appliance exit costs [NOTE 13].................... 10,000 0.1 28,326 0.3 - -
--------------------------------------------------------------------
GROSS PROFIT...................................... 2,327,972 24.3 2,465,563 23.6 2,622,192 24.7
--------------------------------------------------------------------
Selling, general and administrative expenses
(net of finance income of $106,230 as of
February 28, 2002; $76,800 as of February 28,
2001; and $101,383 as of February 29, 2000)
[NOTES 1 AND 9]............................... 2,120,652 22.1 2,270,745 21.7 2,081,393 19.6
Appliance exit costs [NOTE 13].................... - - 1,670 - - -
Interest expense [NOTES 1 AND 4].................. 881 - 7,273 0.1 13,844 0.1
--------------------------------------------------------------------
TOTAL EXPENSES.................................... 2,121,533 22.1 2,279,688 21.8 2,095,237 19.7
--------------------------------------------------------------------
Earnings from continuing operations before
income attributed to the reserved
CarMax Group shares........................... 206,439 2.1 185,875 1.8 526,955 5.0
Provision for income taxes [NOTES 1 AND 5]........ 78,446 0.8 70,637 0.7 200,243 1.9
--------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME ATTRIBUTED TO THE
RESERVED CARMAX GROUP SHARES................... 127,993 1.3 115,238 1.1 326,712 3.1
Net earnings attributed to the reserved
CarMax Group shares [NOTES 1 AND 2]........... 62,806 0.7 34,009 0.3 862 -
--------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS............... 190,799 2.0 149,247 1.4 327,574 3.1
--------------------------------------------------------------------
Discontinued operations [NOTE 14]:
Loss from discontinued operations of Divx,
less income tax benefit..................... - - - - (16,215) (0.1)
Loss on disposal of Divx, less income
tax benefit................................. - - - - (114,025) (1.1)
--------------------------------------------------------------------
Loss from discontinued operations................. - - - - (130,240) (1.2)
--------------------------------------------------------------------
Net Earnings...................................... $ 190,799 2.0 $ 149,247 1.4 $ 197,334 1.9
====================================================================
See accompanying notes to Group financial statements.
Page 82 of 130
CIRCUIT CITY GROUP
BALANCE SHEETS
At February 28
(Amounts in thousands) 2002 2001
----------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents [NOTE 2].............................................. $1,248,246 $ 437,329
Net accounts receivable......................................................... 158,818 204,989
Retained interests in securitized receivables [NOTE 10]......................... 394,455 246,110
Merchandise inventory........................................................... 1,234,243 1,410,527
Prepaid expenses and other current assets....................................... 39,246 55,317
---------------------------
TOTAL CURRENT ASSETS............................................................ 3,075,008 2,354,272
Property and equipment, net [NOTES 3 AND 4]..................................... 732,802 796,789
Deferred income taxes........................................................... 2,647 -
Reserved CarMax Group shares [NOTE 2]........................................... 311,386 292,179
Other assets.................................................................... 11,354 9,319
---------------------------
TOTAL ASSETS.................................................................... $4,133,197 $3,452,559
===========================
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Current installments of allocated long-term debt [NOTES 1, 4 AND 8]............. $ 23,465 $ 24,237
Accounts payable................................................................ 1,019,519 820,077
Allocated short-term debt [NOTES 1 AND 4]....................................... 397 213
Accrued expenses and other current liabilities.................................. 157,561 146,818
Accrued income taxes............................................................ 100,696 -
Deferred income taxes [NOTES 1 AND 5]........................................... 116,297 74,317
---------------------------
TOTAL CURRENT LIABILITIES....................................................... 1,417,935 1,065,662
Allocated long-term debt, excluding current installments [NOTES 1, 4 AND 8]..... 14,064 33,080
Deferred revenue and other liabilities.......................................... 140,853 85,329
Deferred income taxes [NOTES 1 AND 5]........................................... - 11,329
---------------------------
TOTAL LIABILITIES............................................................... 1,572,852 1,195,400
GROUP EQUITY.................................................................... 2,560,345 2,257,159
---------------------------
Commitments and contingent liabilities [NOTES 1, 7, 8, 12, 13 AND 14]
TOTAL LIABILITIES AND GROUP EQUITY.............................................. $4,133,197 $3,452,559
===========================
See accompanying notes to Group financial statements.
Page 83 of 130
CIRCUIT CITY GROUP
STATEMENTS OF CASH FLOWS
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings............................................................ $ 190,799 $ 149,247 $ 197,334
Adjustments to reconcile net earnings to net cash provided by
operating activities of continuing operations:
Loss from discontinued operations [NOTE 14].......................... - - 16,215
Loss on disposal of discontinued operations [NOTE 14]................ - - 114,025
Net earnings attributed to the reserved CarMax Group
shares............................................................ (62,806) (34,009) (862)
Depreciation and amortization........................................ 134,371 126,297 132,923
Unearned compensation amortization of restricted stock............... 15,578 11,211 11,649
Loss (gain) on sales of property and equipment....................... 13,735 4,259 (418)
Provision for deferred income taxes.................................. 28,004 11,007 41,828
Changes in operating assets and liabilities:
(Increase) decrease in net accounts receivable and retained
interests in securitized receivables............................ (102,160) 12,950 12,967
Decrease (increase) in merchandise inventory...................... 176,284 (4,910) (144,598)
Decrease (increase) in prepaid expenses and other current assets.. 16,071 (41,964) 83,540
(Increase) decrease in other assets............................... (2,359) 588 (1,015)
Increase (decrease) in accounts payable, accrued expenses and
other current liabilities and accrued income taxes.............. 317,444 (68,074) 216,043
Increase (decrease) in deferred revenue and other liabilities..... 69,606 (17,442) (17,799)
--------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS............................................. 794,567 149,160 661,832
--------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (172,580) (274,722) (176,873)
Proceeds from sales of property and equipment, net...................... 88,461 100,189 74,811
--------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES
OF CONTINUING OPERATIONS............................................. (84,119) (174,533) (102,062)
--------------------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in allocated short-term debt, net................... 184 (1,240) (1,958)
Decrease in allocated long-term debt, net............................... (19,788) (156,402) (74,603)
Issuances of Circuit City Group Common Stock, net....................... 17,920 26,912 6,942
Allocated proceeds from CarMax Group Common Stock offering, net [NOTE 1] 139,546 - -
Dividends paid.......................................................... (14,556) (14,346) (14,207)
--------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
OF CONTINUING OPERATIONS............................................. 123,306 (145,076) (83,826)
--------------------------------------------
CASH USED IN DISCONTINUED OPERATIONS [NOTE 14]............................. (22,837) (26,174) (90,193)
--------------------------------------------
Increase (decrease) in cash and cash equivalents........................... 810,917 (196,623) 385,751
Cash and cash equivalents at beginning of year............................. 437,329 633,952 248,201
--------------------------------------------
Cash and cash equivalents at end of year................................... $1,248,246 $ 437,329 $ 633,952
============================================
See accompanying notes to Group financial statements.
Page 84 of 130
CIRCUIT CITY GROUP
STATEMENTS OF GROUP EQUITY
(Amounts in thousands)
-------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1999............................................................ $1,825,473
Net earnings..................................................................... 197,334
Equity issuances, net............................................................ 50,205
Cash dividends................................................................... (14,207)
Reserved CarMax Group shares adjustment [notes 1 and 2].......................... (4,085)
----------
BALANCE AT FEBRUARY 29, 2000........................................................ 2,054,720
Net earnings..................................................................... 149,247
Equity issuances, net............................................................ 66,903
Cash dividends................................................................... (14,346)
Reserved CarMax Group shares adjustment [notes 1 and 2].......................... 635
----------
BALANCE AT FEBRUARY 28, 2001........................................................ 2,257,159
Net earnings..................................................................... 190,799
Equity issuances, net............................................................ 30,994
Cash dividends................................................................... (14,556)
Allocated proceeds from CarMax Group Common Stock offering, net [NOTE 1]......... 139,546
Reserved CarMax Group shares adjustment [notes 1 and 2].......................... (43,597)
----------
BALANCE AT FEBRUARY 28, 2002........................................................ $2,560,345
==========
See accompanying notes to Group financial statements.
Page 85 of 130
NOTES TO CIRCUIT CITY GROUP FINANCIAL STATEMENTS
1. Basis of Presentation.
The common stock of Circuit City Stores, Inc. consists of two common
stock series that are intended to reflect the performance of the Company's two
businesses. The Circuit City Group Common Stock is intended to reflect the
performance of the Circuit City stores and related operations and the shares of
CarMax Group Common Stock reserved for the Circuit City Group or for issuance to
holders of Circuit City Group Common Stock. The CarMax Group Common Stock is
intended to reflect the performance of the CarMax stores and related operations.
During the second quarter of fiscal 2002, Circuit City Stores completed
the public offering of 9,516,800 shares of CarMax Group Common Stock. The shares
sold in the offering were shares of CarMax Group Common Stock that previously
had been reserved for the Circuit City Group or for issuance to holders of
Circuit City Group Common Stock. The net proceeds of $139.5 million from the
offering were allocated to the Circuit City Group to be used for general
purposes of the Circuit City business, including remodeling of Circuit City
Superstores.
Excluding shares reserved for CarMax employee stock incentive plans,
the reserved CarMax Group shares represented 64.1 percent of the total
outstanding and reserved shares of CarMax Group Common Stock at February 28,
2002; 74.6 percent at February 28, 2001; and 74.7 percent at February 29, 2000.
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.
On February 22, 2002, Circuit City Stores, Inc. announced that its
board of directors had authorized management to initiate a process that would
separate the CarMax auto superstore business from the Circuit City consumer
electronics business through a tax-free transaction in which CarMax, Inc.,
presently a wholly owned subsidiary of Circuit City Stores, Inc., would become
an independent, separately traded public company. CarMax, Inc. holds
substantially all of the businesses, assets and liabilities of the CarMax Group.
The separation plan calls for Circuit City Stores, Inc. to redeem the
outstanding shares of CarMax Group Common Stock in exchange for shares of common
stock of CarMax, Inc. Simultaneously, shares of CarMax, Inc. common stock,
representing the shares of CarMax Group Common Stock reserved for the holders of
Circuit City Group Common Stock, would be distributed as a tax-free dividend to
the holders of Circuit City Group Common Stock.
In the proposed separation, the holders of CarMax Group Common Stock
would receive one share of CarMax, Inc. common stock for each share of CarMax
Group Common Stock redeemed by the Company. Management anticipates that the
holders of Circuit City Group Common Stock would receive a fraction of a share
of CarMax, Inc. common stock for each share of Circuit City Group Common Stock
they hold. The exact fraction would be determined on the record date for the
distribution. The separation is expected to be completed by late summer, subject
to shareholder approval and final approval from the board of directors.
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 Common Stock and holders of
CarMax Group Common Stock are shareholders of the Company and as such are
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
Circuit City Group Common Stock nor shares of CarMax Group Common 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 Common
Stock or CarMax Group Common Stock will reduce funds legally available for
dividends on, or repurchases of, both stocks. Accordingly, the Circuit City
Group financial statements included herein should be read in conjunction with
the Company's consolidated financial statements, the CarMax Group financial
statements and the Company's SEC filings.
The Circuit City Group financial statements reflect the application of
the management and allocation policies adopted by the board of directors. These
policies may be modified or rescinded, or new policies may be adopted, at the
sole discretion of the board of directors, although the board of directors has
no present plans to do so. These management and allocation policies include the
following:
(A) Financial Activities:
Most financial activities are managed by the Company on a centralized
basis. Such financial activities include the investment of surplus cash and the
issuance and repayment of short-term and long-term debt. Allocated invested
surplus cash of the Circuit City Group consists of (i) Company cash equivalents,
if any, that have been allocated in their entirety to the Circuit City Group and
(ii) a portion of the Company's cash equivalents, if any, that are allocated
between the Groups. Allocated debt
Page 86 of 130
of the Circuit City Group consists of (i) Company debt, if any, that has been
allocated in its entirety to the Circuit City Group and (ii) a portion of the
Company's pooled debt, which is debt allocated between the Groups. The pooled
debt bears interest at a rate based on the average pooled debt balance. Expenses
related to increases in pooled debt are reflected in the weighted average
interest rate of such pooled debt.
(B) Corporate General and Administrative Costs:
Corporate general and administrative costs and other shared services
generally have been allocated to the Circuit City Group based upon utilization
of such services by the Group. Where determinations based on utilization alone
have been impractical, other methods and criteria are used that management
believes are equitable and provide a reasonable estimate of the costs
attributable to the Group.
(C) Income Taxes:
The Circuit City Group is included in the consolidated federal income
tax return and certain state tax returns filed by the Company. Accordingly, the
financial statement provision and the related tax payments or refunds are
reflected in each Group's financial statements in accordance with the Company's
tax allocation policy for the Groups. In general, this policy provides that the
consolidated tax provision and related tax payments or refunds are allocated
between the Groups based principally upon the financial income, taxable income,
credits and other amounts directly related to each Group. Tax benefits that
cannot be used by the Group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the Group that generated such benefits. As
a result, the allocated Group amounts of taxes payable or refundable are not
necessarily comparable to those that would have resulted if the Groups had filed
separate tax returns.
2. Summary Of Significant Accounting Policies
(A) Cash and Cash Equivalents:
Cash equivalents of $1.22 billion at February 28, 2002, and $408.8
million at February 28, 2001, consist of highly liquid debt securities with
original maturities of three months or less.
(B) Securitizations:
Circuit City enters into securitization transactions, which allow for
the sale of credit card receivables to qualified special purpose entities,
which, in turn, issue asset-backed securities to third-party investors. On April
1, 2001, Circuit City adopted Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which replaced SFAS No. 125 and applies
prospectively to all securitization transactions occurring after March 31, 2001.
Adoption of SFAS No. 140 did not have a material impact on the financial
position, results of operations or cash flows of the Group. Transfers of
financial assets that qualify as sales under SFAS No. 140 are accounted for as
off-balance sheet securitizations. Circuit City may retain interest-only strips,
one or more subordinated tranches, residual interests in a securitization trust,
servicing rights and a cash reserve account, all of which are retained interests
in the securitized receivables. These retained interests are carried at fair
value as determined by the present value of expected future cash flows using
management's projections of key factors, such as finance charge income, default
rates, payment rates, forward interest rate curves and discount rates
appropriate for the type of asset and risk. The changes in fair value of
retained interests are included in earnings.
(C) Fair Value of Financial Instruments:
The carrying value of Circuit City's cash and cash equivalents, credit
card and other receivables, accounts payable, short-term borrowings and
long-term debt approximates fair value. Circuit City's retained interests in
securitized receivables and derivative financial instruments are recorded on the
Group balance sheets at fair value.
(D) Merchandise Inventory:
Inventory is comprised of finished goods held for sale and is stated at
the lower of cost or market. Cost is determined by the average cost method.
(E) Property and Equipment:
Property and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are calculated using the
straight-line method over the assets' estimated useful lives. Property held
under capital lease is stated at the lower of the present value of the minimum
lease payments at the inception of the lease or market value and is amortized on
a straight-line basis over the lease term or the estimated useful life of the
asset, whichever is shorter.
Page 87 of 130
(F) Computer Software Costs:
External direct costs of materials and services used in the development
of internal-use software and payroll and payroll-related costs for employees
directly involved in the development of internal-use software are capitalized.
Amounts capitalized are amortized on a straight-line basis over a period of
three to five years.
(G) Impairment Of Long-Lived Assets:
Circuit City reviews long-lived assets for impairment when
circumstances indicate the carrying amount of an asset may not be recoverable.
Impairment is recognized to the extent the sum of undiscounted estimated future
cash flows expected to result from the use of the asset is less than the
carrying value. When Circuit City closes a location, the estimated unrecoverable
costs are charged to selling, general and administrative expenses. Such costs
include the estimated loss on the sale of land and buildings, the book value of
abandoned fixtures, equipment and leasehold improvements and a provision for the
present value of future lease obligations, less estimated sublease income.
(H) Store Opening Expenses:
Costs relating to store openings, including organization and
pre-opening costs, are expensed as incurred.
(I) Income Taxes:
Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for income tax purposes, measured by
applying currently enacted tax laws. A deferred tax asset is recognized if it is
more likely than not that a benefit will be realized.
(J) Revenue Recognition:
Circuit City recognizes revenue when the earnings process is complete,
generally at either the time of sale to a customer or upon delivery to a
customer. Circuit City sells extended warranty contracts on behalf of unrelated
third parties. The contracts extend beyond the normal manufacturer's warranty
period, usually with terms (including the manufacturer's warranty period) from
12 to 60 months. Because third parties are the primary obligors under these
contracts, commission revenue for the unrelated third-party extended warranty
plans is recognized at the time of sale.
(K) Deferred Revenue:
Circuit City sells its own extended warranty contracts that extend
beyond the normal manufacturer's warranty period, usually with terms (including
the manufacturer's warranty period) from 12 to 60 months. As Circuit City is the
primary obligor on its own contracts, all revenue from the sale of these
contracts is deferred and amortized on a straight-line basis over the life of
the contracts. Incremental direct costs related to the sale of contracts are
deferred and charged to expense in proportion to the revenue recognized.
(L) Reserved CarMax Group Shares:
For purposes of the Circuit City Group financial statements, the
Circuit City Group accounts for the reserved CarMax Group shares in a manner
similar to the equity method of accounting. Accordingly, the interest
represented by the reserved CarMax Group shares in the Company's equity value
that is attributed to the CarMax Group is reflected as "Reserved CarMax Group
shares" on the Circuit City Group balance sheets. Similarly, the net earnings of
the CarMax Group attributed to the reserved CarMax Group shares are reflected as
"Net earnings attributed to the reserved CarMax Group shares" on the Circuit
City Group statements of earnings. All amounts corresponding to the reserved
CarMax Group shares in these Group financial statements represent the Circuit
City Group's proportional interest in the business, assets and liabilities and
income and expenses of the CarMax Group.
The carrying value of the reserved CarMax Group shares has been
adjusted proportionally for the net earnings of the CarMax Group. In addition,
in the event of any dividend or other distribution on CarMax Group Common Stock,
an amount that is proportionate to the aggregate amount paid in respect to
shares of CarMax Group Common Stock would be transferred to the Circuit City
Group from the CarMax Group with respect to its proportional interest and would
reduce the related book value.
(M) Selling, General and Administrative Expenses:
Profits generated by the finance operation and interest income are
recorded as reductions to selling, general and administrative expenses.
(N) Advertising Expenses:
All advertising costs are expensed as incurred.
Page 88 of 130
(O) Stock-Based Compensation:
Circuit City accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and provides the pro forma disclosures required by SFAS No. 123,
"Accounting for Stock-Based Compensation."
(P) Derivative Financial Instruments:
On behalf of Circuit City, the Company enters into interest rate cap
agreements to meet the requirements of the credit card receivable securitization
transactions. The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, on March 1, 2001. SFAS No. 133
requires the Company to recognize all derivative instruments as either assets or
liabilities on the balance sheets at fair value. The adoption of SFAS No. 133
did not have a material impact on the financial position, results of operations
or cash flows of the Group. The changes in fair value of derivative instruments
are included in earnings.
(Q) Risks and Uncertainties:
Circuit City is a leading national retailer of brand-name consumer
electronics, personal computers and entertainment software. The diversity of
Circuit City's products, customers, suppliers and geographic operations reduces
the risk that a severe impact will occur in the near term as a result of changes
in its customer base, competition, sources of supply or markets. It is unlikely
that any one event would have a severe impact on the Circuit City Group's
operating results.
Currently and unless and until the proposed separation of CarMax occurs
(see Note 1), the Circuit City Group also is subject to risks and uncertainties
related to the CarMax Group because of the reserved CarMax Group shares. CarMax
is a used- and new-car retail business. The diversity of CarMax's customers and
suppliers reduces the risk that a severe impact will occur in the near term as a
result of changes in its customer base, competition or sources of supply.
However, because of CarMax's limited overall size, management cannot assure that
unanticipated events will not have a negative impact on Circuit City.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
(R) Reclassifications:
Certain prior year amounts have been reclassified to conform to
classifications adopted in fiscal 2002.
3. Property and Equipment
Property and equipment, at cost, at February 28 is summarized as
follows:
(Amounts in thousands) 2002 2001
----------------------------------------------------------------------
Land and buildings (20 to 25 years)......... $ 66,841 $ 76,660
Land held for sale.......................... 2,759 2,759
Construction in progress.................... 15,729 44,335
Furniture, fixtures and equipment
(3 to 8 years)........................... 801,856 809,501
Leasehold improvements
(10 to 15 years)......................... 663,420 598,586
Capital leases, primarily buildings
(20 years)............................... 12,406 12,471
------------------------
1,563,011 1,544,312
Less accumulated depreciation and
amortization............................. 830,209 747,523
------------------------
Property and equipment, net................. $ 732,802 $ 796,789
========================
Page 89 of 130
4. Debt
Long-term debt of the Company at February 28 is summarized as follows:
(Amounts in thousands) 2002 2001
------------------------------------------------------------------------
Term loans..................................... $100,000 $ 230,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest
ranging from 3.1% to 6.7%................... 3,717 4,400
Obligations under capital leases [Note 8]...... 11,594 12,049
Note payable................................... 826 2,076
----------------------
Total long-term debt........................... 116,137 248,525
Less current installments...................... 102,073 132,388
----------------------
Long-term debt, excluding current
installments................................ 14,064 116,137
======================
Portion of long-term debt, excluding current
installments, allocated to the
Circuit City Group.......................... $ 14,064 $ 33,080
======================
Portion of current installments of long-term
debt allocated to the Circuit City Group... $ 23,465 $ 24,237
======================
In July 1994, the Company entered into a seven-year, $100,000,000
unsecured bank term loan. The loan was restructured in August 1996 as a
six-year, $100,000,000 unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 2002, the interest rate on the term loan was 2.25 percent. This
term loan is due in July 2002 and was classified as a current liability at
February 28, 2002. Although the Company has the ability to refinance this loan,
it intends to repay the debt using existing working capital.
In June 1996, the Company entered into a five-year, $130,000,000
unsecured bank term loan. Principal was due in full at maturity with interest
payable periodically at LIBOR plus 0.35 percent. As scheduled, the Company used
existing working capital to repay this term loan in June 2001.
The Company maintains a multi-year, $150,000,000 unsecured revolving
credit agreement with four banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.18 percent per
annum. The agreement was entered into as of August 31, 1996, and expires on
August 31, 2002. No amounts were outstanding under the revolving credit
agreement at February 28, 2002 or 2001, and the Company does not plan to renew
upon expiration.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$5,144,000 at February 28, 2002, and $6,243,000 at February 28, 2001.
The scheduled aggregate annual principal payments on the Company's
long-term obligations for the next five fiscal years are as follows: 2003 -
$102,073,000; 2004 - $1,410,000; 2005 - $2,521,000; 2006 - $1,083,000; 2007-
$1,010,000.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 2002 and 2001.
Short-term debt of the Company is funded through committed lines of
credit and informal credit arrangements, as well as the revolving credit
agreement. Other information regarding short-term financing and committed lines
of credit is as follows:
Years Ended February 28
(Amounts in thousands) 2002 2001
-----------------------------------------------------------------------
Average short-term financing outstanding..... $ 2,256 $ 56,065
Maximum short-term financing outstanding..... $ 6,594 $ 363,199
Aggregate committed lines of credit.......... $195,000 $ 360,000
The weighted average interest rate on the outstanding short-term debt
was 4.4 percent during fiscal 2002, 6.8 percent during fiscal 2001 and 5.6
percent during fiscal 2000.
Interest expense allocated by the Company to Circuit City, excluding
interest capitalized, was $881,000 in fiscal 2002, $7,273,000 in fiscal 2001 and
$13,844,000 in fiscal 2000. Circuit City capitalizes interest in connection with
the construction of certain facilities and software developed or obtained for
internal use. Capitalized interest totaled $1,277,000 in fiscal 2002, $2,121,000
in fiscal 2001 and $2,166,000 in fiscal 2000.
Page 90 of 130
5. Income Taxes
The components of the provision for income taxes on earnings from
continuing operations before income attributed to the reserved CarMax Group
shares are as follows:
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
-----------------------------------------------------------------------------
Current:
Federal............................ $ 38,854 $ 52,846 $141,514
State.............................. 11,588 7,993 16,901
-----------------------------------
50,442 60,839 158,415
-----------------------------------
Deferred:
Federal............................ 27,164 9,505 40,572
State.............................. 840 293 1,256
-----------------------------------
28,004 9,798 41,828
-----------------------------------
Provision for income taxes............. $ 78,446 $ 70,637 $200,243
====================================
The effective income tax rate differed from the federal statutory
income tax rate as follows:
Years Ended February 28 or 29
2002 2001 2000
-----------------------------------------------------------------------------
Federal statutory income tax rate........ 35% 35% 35%
State and local income taxes,
net of federal benefit................ 3 3 3
--------------------------------
Effective income tax rate................ 38% 38% 38%
===============================
In accordance with SFAS No. 109, the tax effects of temporary
differences that give rise to a significant portion of the deferred tax assets
and liabilities at February 28 are as follows:
(Amounts in thousands) 2002 2001
----------------------------------------------------------------------
Deferred tax assets:
Accrued expenses....................... $ 61,299 $ 42,953
Other.................................. 8,639 7,311
-------------------------
Total gross deferred tax assets...... 69,938 50,264
-------------------------
Deferred tax liabilities:
Deferred revenue....................... 75,079 32,825
Depreciation and amortization.......... 36,123 42,488
Securitized receivables................ 36,749 36,257
Inventory.............................. 22,338 9,927
Prepaid expenses....................... 10,197 10,788
Other.................................. 3,102 3,625
-------------------------
Total gross deferred tax liabilities. 183,588 135,910
-------------------------
Net deferred tax liability................. $113,650 $ 85,646
=========================
Based on Circuit City's historical and current pretax earnings,
management believes the amount of gross deferred tax assets will more likely
than not be realized through future taxable income; therefore, no valuation
allowance is necessary.
6. Common Stock and Stock Incentive Plans
(A) Voting Rights:
The holders of both series of common stock and any series of preferred
stock outstanding and entitled to vote together with the holders of common stock
will vote together as a single voting group on all matters on which common
shareholders generally are entitled to vote other than a matter on which the
common stock or either series thereof or any series of preferred stock would be
entitled to vote as a separate voting group. On all matters on which both series
of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Group Common Stock shall have one vote and
(ii) each outstanding share of CarMax Group Common Stock shall have a number of
votes based on the weighted average ratio of the market value of a share of
CarMax Group Common Stock to a share of Circuit City Group Common Stock. If
shares of only one series of common stock are outstanding, each share of that
series shall be entitled to one vote. If either series of common stock is
entitled to vote as a separate voting group with respect to any matter, each
share of that series shall, for purposes of such vote, be entitled to one vote
on such matter.
Page 91 of 130
(B) Shareholder Rights Plan:
In conjunction with the Company's Shareholder Rights Plan as amended
and restated, preferred stock purchase rights were distributed as a dividend at
the rate of one right for each share of Circuit City Group Common Stock. The
rights are exercisable only upon the attainment of, or the commencement of a
tender offer to attain, a specified ownership interest in the Company by a
person or group. When exercisable, each Circuit City Group right would entitle
the holder to buy one eight-hundredth of a share of Cumulative Participating
Preferred Stock, Series E, $20 par value, at an exercise price of $125 per
share, subject to adjustment. A total of 500,000 shares of such preferred stock,
which have preferential dividend and liquidation rights, have been designated.
No such shares are outstanding. In the event that an acquiring person or group
acquires the specified ownership percentage of the Company's common stock
(except pursuant to a cash tender offer for all outstanding shares determined to
be fair by the board of directors) or engages in certain transactions with the
Company after the rights become exercisable, each right will be converted into a
right to purchase, for half the current market price at that time, shares of the
related Group stock valued at two times the exercise price. The Company also has
1,000,000 shares of undesignated preferred stock authorized of which no shares
are outstanding and an additional 500,000 shares of preferred stock designated
as Series F, which are related to similar rights held by CarMax Group
shareholders.
(C) Restricted Stock:
The Company has issued restricted stock under the provisions of the
1994 Stock Incentive Plan whereby management and key employees are granted
restricted shares of Circuit City Group Common Stock. Shares are awarded in the
name of the employee, who has all the rights of a shareholder, subject to
certain restrictions or forfeitures. Restrictions on the awards generally expire
three to seven years from the date of grant. Total restricted stock awards of
1,063,366 shares of Circuit City Group Common Stock were granted to eligible
employees in fiscal 2002. In fiscal 2001, 1,483,358 restricted shares of Circuit
City Group Common Stock were granted, including approximately 1,047,000 shares
granted as a one-for-one replacement for cancelled options that were originally
granted on June 13, 2000. Options held by senior management were excluded from
this replacement grant. Approximately 782,000 of the replacement grant shares
vest two-and-one-half years from the date of grant, and the remaining 265,000
shares vest four to five years from the grant date with accelerated vesting if
certain performance factors are met. The market value at the date of grant of
all shares granted has been recorded as unearned compensation and is a component
of Group equity. Unearned compensation is expensed over the restriction periods.
In fiscal 2002, a total of $15,578,400 was charged to operations ($11,211,200 in
fiscal 2001 and $11,648,700 in fiscal 2000). As of February 28, 2002, 2,317,348
restricted shares of Circuit City Group Common Stock were outstanding.
(D) Stock Incentive Plans:
Under the Company's stock incentive plans, nonqualified stock options
may be granted to management, key employees and outside directors to purchase
shares of Circuit City Group Common Stock. The exercise price for nonqualified
options is equal to, or greater than, the market value at the date of grant.
Options generally are exercisable over a period from one to 10 years from the
date of grant. The Company has authorized 29,765,050 shares of Circuit City
Group Common Stock to be issued as either options or restricted stock grants. At
February 28, 2002, 7,736,657 shares of Circuit City Group Common Stock were
available for issuance of options or restricted stock grants and 12,053,254
shares were available at February 28, 2001.
(E) Employee Stock Purchase Plan:
The Company has employee stock purchase plans for all employees meeting
certain eligibility criteria. Under the Circuit City Group plan, eligible
employees may, subject to certain limitations, purchase shares of Circuit City
Group Common Stock. For each $1.00 contributed by employees under the plan, the
Company matches $0.15. Purchases are limited to 10 percent of an employee's
eligible compensation, up to a maximum of $7,500 per year. The Company has
authorized 15,500,000 shares of Circuit City Group Common Stock for purchase
under the plan. At February 28, 2002, a total of 1,635,207 shares remained
available under the Circuit City Group plan. During fiscal 2002, 866,524 shares
were issued to or purchased on the open market on behalf of employees (862,315
shares in fiscal 2001 and 501,984 shares in fiscal 2000). The average price per
share purchased under the plan was $17.59 in fiscal 2002, $29.93 in fiscal 2001
and $41.70 in fiscal 2000. The Company match for the Circuit City Group totaled
$1,866,700 in fiscal 2002, $2,519,500 in fiscal 2001 and $2,682,300 in fiscal
2000.
(F) 401(k) Plan:
Effective August 1, 1999, the Company began sponsoring a 401(k) Plan
for all employees meeting certain eligibility criteria. Under the Plan, eligible
employees can contribute up to 15 percent of their salaries, and the Company
matches a portion of those employee contributions. The Company's expense for
this plan for Circuit City associates was $3,464,000 in fiscal 2002, $3,996,000
in fiscal 2001 and $2,158,000 in fiscal 2000.
Page 92 of 130
The Circuit City Group's stock option activity is summarized in Table
1. Table 2 summarizes information about stock options outstanding as of February
28, 2002.
Circuit City applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the net earnings
attributed to the Circuit City Group would have changed to the pro forma amounts
indicated in the following table. In accordance with the transition provisions
of SFAS No. 123, the pro forma amounts reflect options with grant dates
subsequent to March 1, 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net earnings amounts presented because compensation cost is reflected
over the options' vesting periods and compensation cost of options granted prior
to March 1, 1995, is not considered. The pro forma effect on fiscal year 2002
may not be representative of the pro forma effects on net earnings for future
years.
TABLE 1 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year........ 8,720 $28.59 7,380 $25.07 8,894 $18.25
Granted................................. 4,423 12.80 4,280 34.80 1,564 40.75
Exercised............................... (541) 15.45 (1,526) 23.64 (2,864) 12.65
Cancelled............................... (611) 23.96 (1,414) 34.25 (214) 22.06
------ ------ -----
Outstanding at end of year.............. 11,991 $23.60 8,720 $28.60 7,380 $25.07
====== ====== =====
Options exercisable at end of year...... 4,346 $25.33 3,158 $21.86 1,258 $13.89
====== ====== =====
TABLE 2 Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------------------------------------------------------------------------------------------------------------------------
$ 9.94 to 12.45.......................... 3,896 6.9 $12.41 96 $11.32
13.25 to 17.93.......................... 1,634 3.8 15.13 1,067 15.43
18.00 to 27.95.......................... 1,243 3.0 20.18 1,037 19.86
29.50................................... 1,000 0.1 29.50 1,000 29.50
30.48 to 43.03 ......................... 4,218 5.7 36.82 1,146 37.03
------- ------
Total .................................... 11,991 5.1 $23.60 4,346 $25.33
======= ======
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
------------------------------------------------------------------------------
Earnings from continuing operations:
As reported.......................... $190,799 $149,247 $327,574
Pro forma............................ 174,654 136,957 319,337
Net earnings:
As reported.......................... $190,799 $149,247 $197,334
Pro forma............................ 174,654 136,957 189,097
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant was estimated using the
Black-Scholes option-pricing model. The weighted average assumptions used in the
model were as follows:
2002 2001 2000
----------------------------------------------------------------------------
Expected dividend yield..................... 0.6% 0.2% 0.2%
Expected stock volatility................... 62% 49% 38%
Risk-free interest rates.................... 5% 6% 6%
Expected lives (in years)................... 5 5 5
Using these assumptions in the Black-Scholes model, the weighted
average fair value of options granted for the Circuit City Group was $7 per
share in fiscal 2002, $17 per share in fiscal 2001 and $17 per share in fiscal
2000.
Page 93 of 130
7. Pension Plans
The Company has a noncontributory defined benefit pension plan covering
the majority of full-time employees who are at least age 21 and have completed
one year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 160,000 shares of
Circuit City Group Common Stock at February 28, 2002 and 2001. Eligible
employees of Circuit City participate in the Company's plan. Pension costs for
these employees have been allocated to the Circuit City Group based on its
proportionate share of the projected benefit obligation. Company contributions
allocated to the Circuit City Group were $7,579,000 in fiscal 2002, $14,103,000
in fiscal 2001 and $11,498,000 in fiscal 2000.
The following tables set forth the Circuit City Group's share of the
pension plan's financial status and amounts recognized in the balance sheets as
of February 28:
(Amounts in thousands) 2002 2001
----------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year...... $147,912 $109,337
Service cost................................. 14,124 12,617
Interest cost................................ 11,033 8,690
Actuarial loss............................... 1,604 20,262
Benefits paid................................ (5,543) (2,994)
----------------------
Benefit obligation at end of year............ $169,130 $147,912
======================
Change in plan assets:
Fair value of plan assets at beginning
of year................................... $130,351 $129,638
Actual return on plan assets................. (7,356) (10,396)
Employer contributions....................... 7,579 14,103
Benefits paid................................ (5,543) (2,994)
----------------------
Fair value of plan assets at end of year..... $125,031 $130,351
======================
Reconciliation of funded status:
Funded status................................ $(44,098) $(17,561)
Unrecognized actuarial loss.................. 35,409 13,922
Unrecognized transitional asset.............. - (199)
Unrecognized prior service benefit........... (140) (281)
----------------------
Net amount recognized........................ $ (8,829) $ (4,119)
======================
The components of net pension expense were as follows:
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
------------------------------------------------------------------------------
Service cost............................. $ 14,124 $ 12,617 $13,428
Interest cost............................ 11,033 8,690 7,384
Expected return on plan assets........... (12,527) (10,914) (8,919)
Amortization of prior service cost....... (141) (140) (132)
Amortization of transitional asset....... (199) (199) (199)
Recognized actuarial (gain) loss......... (1) (274) 10
-----------------------------------
Net pension expense...................... $ 12,289 $ 9,780 $11,572
===================================
Assumptions used in the accounting for the pension plan were:
Years Ended February 28 or 29
2002 2001 2000
------------------------------------------------------------------------------
Weighted average discount rate.............. 7.25% 7.50% 8.00%
Rate of increase in compensation levels..... 6.00% 6.00% 6.00%
Expected rate of return on plan assets...... 9.00% 9.00% 9.00%
The Company also has an unfunded nonqualified plan that restores
retirement benefits for certain senior executives who are affected by Internal
Revenue Code limitations on benefits provided under the Company's pension plan.
The projected benefit obligation allocated to Circuit City under this plan was
$16.4 million at February 28, 2002, and $12.2 million at February 28, 2001.
Page 94 of 130
8. Lease Commitments
The Circuit City Group conducts a substantial portion of its business
in leased premises. The Circuit City Group's lease obligations are based upon
contractual minimum rates.
Rental expense and sublease income for all operating leases are
summarized as follows:
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
--------------------------------------------------------------------------
Minimum rentals..................... $328,877 $316,258 $299,534
Rentals based on sales volume....... 292 1,229 1,327
Sublease income..................... (17,842) (15,242) (16,425)
-----------------------------------
Net rental expense.................. $311,327 $302,245 $284,436
===================================
The Circuit City Group computes rent based on a percentage of sales
volumes in excess of defined amounts in certain store locations. Most of the
Circuit City Group's other leases are fixed-dollar rental commitments, with many
containing rent escalations based on the Consumer Price Index. Most of these
leases provide that the Circuit City Group pay taxes, maintenance, insurance and
operating expenses applicable to the premises.
The initial term of most real property leases will expire within the
next 20 years; however, most of the leases have options providing for renewal
periods of five to 25 years at terms similar to the initial terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Circuit City Group, as of February 28, 2002,
were
Operating Operating
(Amounts in thousands) Capital Lease Sublease
Fiscal Leases Commitments Income
-----------------------------------------------------------------------------
2003.................................... $ 1,726 $ 296,116 $ (17,868)
2004.................................... 1,768 293,653 (15,656)
2005.................................... 1,798 291,916 (13,601)
2006.................................... 1,807 289,889 (11,925)
2007.................................... 1,853 284,489 (9,439)
After 2007.............................. 11,006 2,622,691 (33,374)
-----------------------------------
Total minimum lease payments............ 19,958 $4,078,754 $(101,863)
========================
Less amounts representing interest...... (8,364)
-------
Present value of net minimum capital
lease payments [Note 4].............. $11,594
=======
In fiscal 2002, the Company entered into sale-leaseback transactions
with unrelated parties on behalf of the Circuit City Group at an aggregate
selling price of $48,500,000 ($61,526,000 in fiscal 2001 and $24,295,000 in
fiscal 2000). Gains or losses on sale-leaseback transactions are deferred and
amortized over the term of the leases. Neither the Company nor the Circuit City
Group has continuing involvement under the sale-leaseback transactions.
Non-appliance-related lease termination costs were $25.8 million in
fiscal 2002, of which $13.7 million was related to current year relocations;
$1.1 million in fiscal 2001; and $9.2 million in fiscal 2000.
9. Supplemental Financial Statement Information
(A) Advertising Expense:
Advertising expense from continuing operations, which is included in
selling, general and administrative expenses in the accompanying statements of
earnings, amounted to $362,026,000 (3.8 percent of net sales and operating
revenues) in fiscal 2002, $422,874,000 (4.0 percent of net sales and operating
revenues) in fiscal 2001 and $390,144,000 (3.7 percent of net sales and
operating revenues) in fiscal 2000.
Page 95 of 130
(B)Finance Income:
For the past three years, pretax finance operation income, which is
recorded as a reduction to selling, general and administrative expenses, was as
follows:
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
-------------------------------------------------------------------------
Securitization income................... $226.5 $198.8 $242.2
Payroll and fringe expenses............. 41.6 43.0 46.8
Other direct expenses................... 78.7 79.0 94.0
-----------------------------
Finance operation income................ $106.2 $ 76.8 $101.4
=============================
For the Circuit City Group, finance operation income does not include
any allocation of indirect costs or income. The Company presents this
information on a direct basis to avoid making arbitrary decisions regarding the
periodic indirect benefit or costs that could be attributed to this operation.
Examples of indirect costs not included are corporate expenses such as human
resources, administrative services, marketing, information systems, accounting,
legal, treasury and executive payroll as well as retail store expenses.
10. Securitizations
Circuit City's finance operation enters into securitization
transactions to finance its consumer revolving credit card receivables. In
accordance with the isolation provisions of SFAS No. 140, special purpose
subsidiaries were created in December 2001 for the sole purpose of facilitating
these securitization transactions. Credit card receivables are sold to special
purpose subsidiaries, which, in turn, transfer these receivables to
securitization master trusts. Private-label credit card receivables are
securitized through one master trust and MasterCard and VISA credit card
(referred to as bankcard) receivables are securitized through a separate master
trust. Each master trust periodically issues securities backed by the
receivables in that master trust. For transfers of receivables that qualify as
sales, Circuit City recognizes gains or losses as a component of the finance
operation's profits, which are recorded as reductions to selling, general and
administrative expenses. In these securitizations, Circuit City's finance
operation continues to service the securitized receivables for a fee and the
special purpose subsidiaries retain an undivided interest in the transferred
receivables and hold various subordinated asset-backed securities that serve as
credit enhancements for the asset-backed securities held by outside investors.
Neither the private-label master trust agreement nor the bankcard master trust
agreement provides for recourse to the Company for credit losses on the
securitized receivables. Under certain of these securitization programs, Circuit
City must meet financial covenants relating to minimum tangible net worth,
minimum delinquency rates and minimum coverage of rent and interest expense.
Circuit City was in compliance with these covenants at February 28, 2002 and
2001.
The total principal amount of credit card receivables managed was $2.85
billion at February 28, 2002, and $2.80 billion at February 28, 2001. Of these
totals, the principal amount of receivables securitized was $2.80 billion at
February 28, 2002, and $2.75 billion at February 28, 2001, and the principal
amount of receivables held for sale was $49.2 million at the end of fiscal 2002
and $45.1 million at the end of fiscal 2001. At February 28, 2002, the unused
capacity of the private label variable funding program was $22.9 million and the
unused capacity of the bankcard variable funding program was $496.5 million. The
aggregate amount of receivables that were 31 days or more delinquent was $198.4
million at February 28, 2002, and $192.3 million at February 28, 2001. The
principal amount of losses net of recoveries totaled $262.8 million for the year
ended February 28, 2002, and $229.9 million for the year ended February 28,
2001.
Circuit City receives annual servicing fees approximating 2 percent of
the outstanding principal balance of the credit card receivables and retains the
rights to future cash flows available after the investors in the asset-backed
securities 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 receivables.
Accordingly, no servicing asset or liability has been recorded.
Page 96 of 130
The table below summarizes certain cash flows received from and paid to
the securitization trusts:
Years Ended February 28
(Amounts in thousands) 2002 2001
-------------------------------------------------------------------------------
Proceeds from new securitizations................... $1,193,300 $1,092,500
Proceeds from collections reinvested
in previous credit card securitizations......... $1,591,085 $1,730,511
Servicing fees received............................. $ 51,777 $ 52,044
Other cash flows received on retained interests*.... $ 195,375 $ 173,775
*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, Circuit City
estimates future cash flows using management's projections of key factors, such
as finance charge income, default rates, payment rates, forward interest rate
curves and discount rates appropriate for the type of asset and risk. Circuit
City 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 securitized credit card receivables that
exceeds the contractually specified investor returns and servicing fees
(interest-only strips) is carried at fair value, amounted to $131.9 million at
February 28, 2002 and $131.0 million at February 28, 2001. Gains of $167.8
million on sales of credit card receivables were recorded in fiscal 2002; gains
of $176.2 million on sales of credit card receivables were recorded in fiscal
2001.
The fair value of retained interests at February 28, 2002, was $394.5
million, with a weighted-average life ranging from 0.2 years to 1.8 years. The
fair value of retained interests at February 28, 2001, was $246.1 million with a
weighted average life ranging from 0.4 years to 3 years. The following table
shows the key economic assumptions used in measuring the fair value of retained
interests at February 28, 2002, 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
February 28, 2002, 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 Value of 10% Value of 20%
(Dollar amounts in thousands) Used Adverse Change Adverse Change
--------------------------------------------------------------------------------
Monthly payment rate.......... 6.8%-10.4% $ 8,426 $ 15,629
Annual default rate........... 7.9%-17.1% $ 23,315 $ 46,363
Annual discount rate.......... 8.0%-15.0% $ 2,742 $ 5,454
11. Financial Derivatives
On behalf of Circuit City, the Company enters into interest rate cap
agreements to meet the requirements of the credit card receivable securitization
transactions. The total notional amount of interest rate caps outstanding was
$654.9 million at February 28, 2002, and $839.4 million at February 28, 2001.
Purchased interest rate caps are included in net accounts receivable and had a
fair value of $2.4 million as of February 28, 2002, and $6.5 million as of
February 28, 2001. Written interest rate caps were included in accounts payable
and had a fair value of $2.4 million as of February 28, 2002, and $6.5 million
at February 28, 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.
12. Contingent Liabilities
In the normal course of business, Circuit City is involved in various
legal proceedings. Based upon the evaluation of the information presently
available, management believes that the ultimate resolution of any such
proceedings will not have a material adverse effect on the Circuit City Group's
financial position, liquidity or results of operations.
Page 97 of 130
13. 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. The Company maintains control over Circuit City's
in-home major appliance repair business, although repairs are subcontracted to
an unrelated third party.
To exit the appliance business, the Company 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 marketing the remaining properties to be
subleased.
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 was paid to
employees on a biweekly schedule based on years of service, cash payments lagged
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 $30.0 million. In the fourth quarter of fiscal 2002, the Company
recorded additional lease termination costs of $10.0 million to reflect the
current rental market for these leased properties. These expenses are reported
separately on the fiscal 2002 and 2001 statements of earnings. The appliance
exit cost liability is included in the accrued expenses and other current
liabilities line item on the Group balance sheet.
The appliance exit cost accrual activity is presented in Table 3.
TABLE 3
-----------------------------------------------------------------------------------------------------------------------------
Total Fiscal 2001 Fiscal 2002 Fiscal 2002
Original Payments Liability at Adjustments Payments Liability at
Exit or February 28, to Exit Cost or February 28,
(Amounts in millions) Cost Write-Downs 2001 Accrual Write-Downs 2002
-----------------------------------------------------------------------------------------------------------------------------
Lease termination costs............. $17.8 $ 1.8 $16.0 $ 10.0 $ 6.3 $19.7
Fixed asset write-downs, net........ 5.0 5.0 - - - -
Employee termination benefits....... 4.4 2.2 2.2 - 2.2 -
Other .............................. 2.8 2.8 - - - -
---------------------------------------------------------------------------------------
Appliance exit costs................ $30.0 $ 11.8 $ 18.2 $ 10.0 $ 8.5 $19.7
=======================================================================================
14. Discontinued Operations
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations. Discontinued
operations have been segregated on the consolidated statements of cash flows.
However, Divx is not segregated on the consolidated balance sheets.
For fiscal 2002 and 2001, the discontinued Divx operations had no
impact on the net earnings of Circuit City Stores, Inc. In fiscal 2000, the loss
from the discontinued Divx operations totaled $16.2 million after an income tax
benefit of $9.9 million and the loss on the disposal of the Divx business
totaled $114.0 million after an income tax benefit of $69.9 million. The loss on
the disposal included a provision for operating losses to be incurred during the
phase-out period. It 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.
As of February 28, 2002, entities comprising the Divx operations have
been dissolved and the net liabilities have been assumed by the Company. Net
liabilities reflected in the accompanying Group balance sheets as of February 28
were as follows:
(Amounts in thousands) 2002 2001
---------------------------------------------------------------------------
Current assets............................... $ - $ 8
Other assets................................. - 324
Current liabilities.......................... (18,457) (27,522)
Other liabilities............................ - (14,082)
-----------------------
Net liabilities of discontinued operations... $(18,457) $(41,272)
=======================
Page 98 of 130
15. 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, in the first quarter of fiscal 2003, 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. On
a pro forma basis, this reclassification would have increased the fiscal 2002
Circuit City Group gross profit margin by 18 basis points and the expense ratio
by 17 basis points. For fiscal 2001, the reclassification would have increased
the gross profit by 29 basis points and the expense ratio by 27 basis points.
The Company does not expect the adoption of EITF No. 00-14 to have a material
impact on the Group's financial position, results of operations or cash flows.
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 supersedes 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
in the first quarter of fiscal 2003. The Company does not expect the adoption of
SFAS No. 144 to have a material impact on the Group's financial position,
results of operations or cash flows.
16. Quarterly Financial Data (Unaudited)
(Amounts in First Quarter Second Quarter Third Quarter Fourth Quarter Year
thousands) 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
Net sales and
operating
revenues...... $1,881,654 $2,449,110 $2,036,552 $2,506,220 $2,279,908 $2,325,576 $3,391,689 $3,177,131 $9,589,803 $10,458,037
--------------------------------------------------------------------------------------------------------------
Gross profit..... $ 462,393 $ 597,800 $ 496,544 $ 582,916 $ 551,151 $ 510,449 $ 817,884 $ 774,398 $2,327,972 $ 2,465,563
--------------------------------------------------------------------------------------------------------------
Earnings (loss)
before income
attributed to
the reserved
CarMax Group
shares......... $ (9,605)$ 46,714 $ (12,541)$ 43,196 $ 9,245 $ (70,055)$ 140,894 $ 95,383 $ 127,993 $ 115,238
--------------------------------------------------------------------------------------------------------------
Net earnings
(loss)......... $ 10,135 $ 57,123 $ 6,822 $ 55,341 $ 21,134 $ (64,407)$ 152,708 $ 101,190 $ 190,799 $ 149,247
--------------------------------------------------------------------------------------------------------------
Page 99 of 130
Independent Auditors' Report
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the Circuit City Group (as
defined in Note 1) as of February 28, 2002 and 2001, and the related statements
of earnings, group equity and cash flows for each of the fiscal years in the
three-year period ended February 28, 2002. These financial statements are the
responsibility of Circuit City Stores, Inc.'s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As more fully discussed in Note 1, the financial statements of the Circuit City
Group should be read in conjunction with the consolidated financial statements
of Circuit City Stores, Inc. and subsidiaries and the financial statements of
the CarMax Group.
The Circuit City Group has accounted for its interest in the CarMax Group in a
manner similar to the equity method of accounting. Accounting principles
generally accepted in the United States of America require that the CarMax Group
be consolidated with the Circuit City Group.
In our opinion, except for the effects of not consolidating the Circuit City
Group and the CarMax Group as discussed in the preceding paragraph, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Circuit City Group as of February 28, 2002 and
2001, and the results of its operations and its cash flows for each of the
fiscal years in the three-year period ended February 28, 2002, in conformity
with accounting principles generally accepted in the United States of America.
KPMG LLP
Richmond, Virginia
April 2, 2002
Page 100 of 130
CARMAX GROUP
STATEMENTS OF EARNINGS
Years Ended February 28 or 29
(Amounts in thousands) 2002 % 2001 % 2000 %
----------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES................... $3,518,068 100.0 $2,747,050 100.0 $2,191,389 100.0
Cost of sales...................................... 3,114,365 88.5 2,417,291 88.0 1,951,024 89.0
----------------------------------------------------------------------
GROSS PROFIT....................................... 403,703 11.5 329,759 12.0 240,365 11.0
----------------------------------------------------------------------
Selling, general and administrative expenses ( net of
finance income of $82,191 as of February 28, 2002;
$54,250 as of February 28, 2001; and $39,800 as of
February 29, 2000) [NOTES 1 AND 9]................. 252,289 7.2 244,167 8.9 228,200 10.4
Interest expense [notes 1 and 4]................... 4,958 0.1 12,110 0.4 10,362 0.5
----------------------------------------------------------------------
TOTAL EXPENSES..................................... 257,247 7.3 256,277 9.3 238,562 10.9
----------------------------------------------------------------------
Earnings before income taxes....................... 146,456 4.2 73,482 2.7 1,803 0.1
Provision for income taxes [NOTES 1 AND 5]......... 55,654 1.6 27,918 1.0 685 -
---------------------------------------------------------------------
NET EARNINGS....................................... $ 90,802 2.6 $ 45,564 1.7 $ 1,118 0.1
======================================================================
Net earnings attributed to [NOTE 1]:
Circuit City Group Common Stock................. $ 62,806 $ 34,009 $ 862
CarMax Group Common Stock....................... 27,996 11,555 256
---------- ---------- ----------
$ 90,802 $ 45,564 $ 1,118
========== ========== ==========
See accompanying notes to Group financial statements.
Page 101 of 130
CARMAX GROUP
BALANCE SHEETS
At February 28
(Amounts in thousands) 2002 2001
---------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash [NOTE 2].......................................................................... $ 3,286 $ 8,802
Net accounts receivable................................................................ 52,585 60,526
Retained interests in securitized receivables [NOTE 10]................................ 120,683 74,136
Inventory.............................................................................. 399,084 347,137
Prepaid expenses and other current assets.............................................. 2,065 2,306
------------------------------
TOTAL CURRENT ASSETS................................................................... 577,703 492,907
Property and equipment, net [NOTES 3 AND 4]............................................ 120,976 192,158
Other assets........................................................................... 21,543 25,888
------------------------------
TOTAL ASSETS........................................................................... $720,222 $710,953
==============================
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Current installments of allocated long-term debt [NOTES 1 AND 4]....................... $ 78,608 $108,151
Accounts payable....................................................................... 87,160 82,483
Allocated short-term debt [NOTES 1 AND 4].............................................. 9,840 987
Accrued expenses and other current liabilities......................................... 25,775 16,154
Deferred income taxes [NOTES 1 AND 5].................................................. 22,009 18,162
------------------------------
TOTAL CURRENT LIABILITIES.............................................................. 223,392 225,937
Allocated long-term debt, excluding current installments [NOTES 1 AND 4]............... - 83,057
Deferred revenue and other liabilities................................................. 8,416 6,836
Deferred income taxes [NOTES 1 AND 5].................................................. 2,935 3,620
------------------------------
TOTAL LIABILITIES...................................................................... 234,743 319,450
GROUP EQUITY........................................................................... 485,479 391,503
------------------------------
Commitments and contingent liabilities [NOTES 1, 7, 8, AND 12]
TOTAL LIABILITIES AND GROUP EQUITY..................................................... $720,222 $710,953
==============================
See accompanying notes to Group financial statements.
Page 102 of 130
CARMAX GROUP
STATEMENTS OF CASH FLOWS
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings............................................................ $ 90,802 $ 45,564 $ 1,118
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................ 16,340 18,116 15,241
Unearned compensation amortization of restricted stock............... 100 154 447
Write-down of assets and lease termination costs [NOTE 9]........... - 8,677 4,755
Loss (gain) on disposition of property and equipment................. - 415 (820)
Provision for deferred income taxes.................................. 3,162 8,758 1,225
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Increase in net accounts receivable and retained interests in
securitized receivables......................................... (38,606) (5,409) (31,889)
Increase in inventory............................................. (51,947) (62,745) (39,909)
Decrease (increase) in prepaid expenses and other current assets.. 241 538 (2,224)
Decrease in other assets.......................................... 1,639 424 1,255
Increase in accounts payable, accrued expenses and
other current liabilities....................................... 19,330 3,881 25,016
Increase (decrease) in deferred revenue and other liabilities..... 1,580 (413) 2,234
--------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..................... 42,641 17,960 (23,551)
--------------------------------------------
INVESTING ACTIVITIES:
Cash used in business acquisitions...................................... - (1,325) (34,849)
Purchases of property and equipment..................................... (41,417) (10,834) (45,395)
Proceeds from sales of property and equipment, net...................... 98,965 15,506 25,340
--------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES..................... 57,548 3,347 (54,904)
--------------------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in allocated short-term debt, net................... 8,853 (565) (3,053)
(Decrease) increase in allocated long-term debt, net.................... (112,600) (21,658) 71,896
Equity issuances, net................................................... (1,958) (263) 1,914
--------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES..................... (105,705) (22,486) 70,757
--------------------------------------------
Decrease in cash and cash equivalents...................................... (5,516) (1,179) (7,698)
Cash and cash equivalents at beginning of year............................. 8,802 9,981 17,679
--------------------------------------------
Cash and cash equivalents at end of year................................... $ 3,286 $ 8,802 $ 9,981
============================================
See accompanying notes to Group financial statements.
Page 103 of 130
CARMAX GROUP
STATEMENTS OF GROUP EQUITY
(Amounts in thousands)
BALANCE AT MARCH 1, 1999....................................................................................... $ 340,415
Net earnings................................................................................................ 1,118
Equity issuances, net....................................................................................... 3,456
---------
BALANCE AT FEBRUARY 29, 2000................................................................................... 344,989
Net earnings................................................................................................ 45,564
Equity issuances, net....................................................................................... 950
---------
BALANCE AT FEBRUARY 28, 2001................................................................................... 391,503
Net earnings................................................................................................ 90,802
Equity issuances, net....................................................................................... 3,174
---------
BALANCE AT FEBRUARY 28, 2002................................................................................... $ 485,479
=========
See accompanying notes to Group financial statements.
Page 104 of 130
NOTES TO CARMAX GROUP FINANCIAL STATEMENTS
1. Basis of Presentation
The common stock of Circuit City Stores, Inc. consists of two common
stock series that are intended to reflect the performance of the Company's two
businesses. The CarMax Group Common Stock is intended to track the performance
of CarMax stores and related operations. The Circuit City Group Common Stock is
intended to track the performance of the Circuit City stores and related
operations and the shares of CarMax Group Common Stock reserved for the Circuit
City Group or for issuance to holders of Circuit City Group Common Stock.
During the second quarter of fiscal 2002, Circuit City Stores completed
the public offering of 9,516,800 shares of CarMax Group Common Stock. The shares
sold in the offering were shares of CarMax Group Common Stock that previously
had been reserved for the Circuit City Group or for issuance to holders of
Circuit City Group Common Stock. The net proceeds of $139.5 million from the
offering were allocated to the Circuit City Group to be used for general
purposes of the Circuit City business, including remodeling of Circuit City
Superstores.
Excluding shares reserved for CarMax employee stock incentive plans,
the reserved CarMax Group shares represented 64.1 percent of the total
outstanding and reserved shares of CarMax Group Common Stock at February 28,
2002, 74.6 percent at February 28, 2001, and 74.7 percent at February 29, 2000.
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.
On February 22, 2002, Circuit City Stores, Inc. announced that its
board of directors had authorized management to initiate a process that would
separate the CarMax auto superstore business from the Circuit City consumer
electronics business through a tax-free transaction in which CarMax, Inc.,
presently a wholly owned subsidiary of Circuit City Stores, Inc., would become
an independent, separately traded public company. The separation plan calls for
Circuit City Stores, Inc. to redeem the outstanding shares of CarMax Group
Common Stock in exchange for shares of common stock of CarMax, Inc., which holds
substantially all of the businesses, assets and liabilities of the CarMax Group.
Simultaneously, shares of CarMax, Inc. common stock, representing the shares of
CarMax Group Common Stock reserved for the holders of Circuit City Group Common
Stock, would be distributed as a tax-free dividend to the holders of Circuit
City Group Common Stock.
In the proposed separation, the holders of CarMax Group Common Stock
would receive one share of CarMax, Inc. common stock for each share of CarMax
Group Common Stock redeemed by the Company. Management anticipates that the
holders of Circuit City Group Common Stock would receive a fraction of a share
of CarMax, Inc. common stock for each share of Circuit City Group Common Stock
they hold. The exact fraction would be determined on the record date for the
distribution. The separation is expected to be completed by late summer, subject
to shareholder approval and final approval from the board of directors.
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 Common Stock and holders of
Circuit City Group Common Stock are shareholders of the Company and as such are
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 Common Stock nor shares of Circuit City Group Common 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
Common Stock or CarMax Group Common Stock will reduce funds legally available
for dividends on, or repurchases of, both stocks. Accordingly, the CarMax Group
financial statements included herein should be read in conjunction with the
Company's consolidated financial statements, the Circuit City Group financial
statements and the Company's SEC filings.
The CarMax Group financial statements reflect the application of the
management and allocation policies adopted by the board of directors. These
policies may be modified or rescinded, or new policies may be adopted, at the
sole discretion of the board of directors, although the board of directors has
no present plans to do so. These management and allocation policies include the
following:
(A) Financial Activities:
Most financial activities are managed by the Company on a centralized
basis. Such financial activities include the investment of surplus cash and the
issuance and repayment of short-term and long-term debt. Allocated invested
surplus cash of the CarMax Group consists of (i) Company cash equivalents, if
any, that have been allocated in their entirety to the CarMax Group and (ii) a
portion of the Company's cash equivalents, if any, that are allocated between
the Groups. The Company
Page 105 of 130
allocates debt to the CarMax Group based on usage of funds. Debt that is
specific only to the CarMax business or the Circuit City business is allocated
in its entirety to that business. For shared funds obtained from bank debt
(pooled debt), CarMax's portion is determined by applying to CarMax's
intercompany debt due to the Company the percentages that short-term bank debt,
long-term bank debt and the current portion of long-term bank debt are of the
total pooled debt. The remainder of any debt is then applied to the Circuit City
business. The pooled debt bears interest at a rate based on the average pooled
debt balance. Expenses related to increases in pooled debt are reflected in the
weighted average interest rate of such pooled debt.
(B) Corporate General and Administrative Costs:
Corporate general and administrative costs and other shared services
generally have been allocated to the CarMax Group based upon utilization of such
services by the Group. Where determinations based on utilization alone have been
impractical, other methods and criteria are used that management believes are
equitable and provide a reasonable estimate of the costs attributable to the
Group. Costs allocated to the CarMax Group totaled approximately $3.2 million
for fiscal 2002, $4.0 million for fiscal 2001 and $5.6 million for fiscal 2000.
(C) Income Taxes:
The CarMax Group is included in the consolidated federal income tax
return and in certain state tax returns filed by the Company. Accordingly, the
financial statement provision and the related tax payments or refunds are
reflected in each Group's financial statements in accordance with the Company's
tax allocation policy for the Groups. In general, this policy provides that the
consolidated tax provision and related tax payments or refunds are allocated
between the Groups based principally upon the financial income, taxable income,
credits and other amounts directly related to each Group. Tax benefits that
cannot be used by the Group, but can be utilized on a consolidated basis, are
allocated to the Group that generated such benefits. As a result, the allocated
Group amounts of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the Groups had filed separate tax returns.
2. Summary of Significant Accounting Policies
(A) Securitizations:
CarMax enters into securitization transactions, which allow for the
sale of automobile loan receivables to qualified special purpose entities,
which, in turn, issue asset-backed securities to third-party investors. On April
1, 2001, CarMax adopted Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which replaced SFAS No. 125 and applies prospectively to all
securitization transactions occurring after March 31, 2001. Adoption of SFAS No.
140 did not have a material impact on the financial position, results of
operations or cash flows of the Group. Transfers of financial assets that
qualify as sales under SFAS No. 140 are accounted for as off-balance sheet
securitizations. CarMax may retain interest-only strips, one or more
subordinated tranches, residual interests in a securitization trust, servicing
rights and a cash reserve account, all of which are retained interests in the
securitized receivables. These retained interests are carried at fair value as
determined by the present value of expected future cash flows using management's
projections of key factors, such as finance charge income, default rates,
payment rates and discount rates appropriate for the type of asset and risk. The
changes in fair value of retained interests are included in earnings.
(B) Fair Value Of Financial Instruments:
The carrying value of CarMax's cash, automobile loan and other
receivables, accounts payable, short-term borrowings and long-term debt
approximates fair value. CarMax's retained interests in securitized receivables
and derivative financial instruments are recorded on the Group balance sheets at
fair value.
(C) Inventory:
Inventory is comprised primarily of vehicles held for sale or for
reconditioning and is stated at the lower of cost or market. Vehicle inventory
cost is determined by specific identification. Parts and labor used to
recondition vehicles, as well as transportation and other incremental expenses
associated with acquiring and reconditioning vehicles, are included in
inventory. Certain manufacturer incentives and rebates for new-car inventory,
including holdbacks, are recognized as a reduction to new-car inventory when
CarMax purchases the vehicles.
(D) Property and Equipment:
Property and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are calculated using the
straight-line method over the assets' estimated useful lives.
(E) Computer Software Costs:
External direct costs of materials and services used in the development
of internal-use software and payroll and payroll-related costs for employees
directly involved in the development of internal-use software are capitalized.
Amounts capitalized are amortized on a straight-line basis over a period of
three to five years.
Page 106 of 130
(F) Impairment Of Long-Lived Assets:
CarMax reviews long-lived assets for impairment when circumstances
indicate the carrying amount of an asset may not be recoverable. Impairment is
recognized to the extent the sum of undiscounted estimated future cash flows
expected to result from the use of the asset is less than the carrying value.
(G) Store Opening Expenses:
Costs relating to store openings, including organization and
pre-opening costs, are expensed as incurred.
(H) Income Taxes:
Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for income tax purposes, measured by
applying currently enacted tax laws. A deferred tax asset is recognized if it is
more likely than not that a benefit will be realized.
(I) Revenue Recognition:
CarMax recognizes revenue when the earnings process is complete,
generally at either the time of sale to a customer or upon delivery to a
customer. CarMax sells extended warranties on behalf of unrelated third parties.
These warranties usually have terms of coverage from 12 to 72 months. Because
third parties are the primary obligors under these warranties, commission
revenue is recognized at the time of sale, net of a provision for estimated
customer returns of the warranties.
(J) Selling, General and Administrative Expenses:
Profits generated by the finance operation, fees received for arranging
customer automobile financing through third parties and interest income are
recorded as reductions to selling, general and administrative expenses.
(K) Advertising Expenses:
All advertising costs are expensed as incurred.
(L) Stock-Based Compensation:
CarMax accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to
Employees," and provides the pro forma disclosures required by SFAS No. 123,
"Accounting for Stock-Based Compensation."
(M) Derivative Financial Instruments:
On behalf of CarMax and in connection with securitization activities,
the Company enters into interest rate swap agreements to manage exposure to
interest rates and to more closely match funding costs to the use of funding.
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended, on March 1, 2001. SFAS No. 133 requires the
Company to recognize all derivative instruments as either assets or liabilities
on the balance sheets at fair value. The adoption of SFAS No. 133 did not have a
material impact on the financial position, results of operations or cash flows
of the Group. The changes in fair value of derivative instruments are included
in earnings.
(N) Risks and Uncertainties:
CarMax is a used- and new-car retail business. The diversity of
CarMax's customers and suppliers reduces the risk that a severe impact will
occur in the near term as a result of changes in its customer base, competition
or sources of supply. However, because of CarMax's limited overall size,
management cannot assure that unanticipated events will not have a negative
impact on CarMax.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
(O) Reclassifications:
Certain prior year amounts have been reclassified to conform to the
current presentation. Wholesale sales have been reclassified and reported in net
sales and operating revenues for all periods presented including the quarterly
financial data disclosed in Note 14. In previous periods, wholesale sales were
recorded as a reduction to cost of sales. The reclassification of wholesale
sales to sales increased sales and cost of sales by $325.5 million in fiscal
2002, $253.4 million in fiscal 2001 and $181.2 million in fiscal 2000. An
additional reclassification between sales and cost of sales made to conform to
the current presentation decreased sales by $9.1 million in fiscal 2002, $7.4
million in fiscal 2001 and $4.8 million in fiscal 2000.
Page 107 of 130
3. Property and Equipment
Property and equipment, at cost, at February 28 is summarized as follows:
(Amounts in thousands) 2002 2001
-----------------------------------------------------------------
Land and buildings (20 to 25 years)..... $ 3,442 $ 101,382
Land held for sale...................... 8,762 27,971
Land held for development............... 8,021 4,285
Construction in progress................ 64,122 14,324
Furniture, fixtures and equipment
(3 to 8 years)....................... 69,435 64,866
Leasehold improvements (10 to 15 years). 17,281 21,196
----------------------
171,063 234,024
Less accumulated depreciation........... 50,087 41,866
----------------------
Property and equipment, net............. $120,976 $ 192,158
======================
Land held for development is land owned for future sites that are
scheduled to open more than one year beyond the fiscal year reported.
4. Debt
As discussed in Note 1, the CarMax Group is allocated debt from the
Company. At February 28, 2002, the Group was allocated $9.8 million of
short-term debt and $78.6 million of long-term debt. At February 28, 2001, the
Group was allocated $1.0 million of short-term debt and $191.2 million of
long-term debt. Long-term debt of the Company at February 28 is summarized as
follows:
(Amounts in thousands) 2002 2001
-------------------------------------------------------------------------
Term loans...................................... $100,000 $ 230,000
Industrial Development Revenue Bonds due
through 2006 at various prime-based
rates of interest ranging from 3.1% to 6.7%.. 3,717 4,400
Obligations under capital leases................ 11,594 12,049
Note payable.................................... 826 2,076
----------------------
Total long-term debt............................ 116,137 248,525
Less current installments....................... 102,073 132,388
----------------------
Long-term debt, excluding current
installments................................. $ 14,064 $ 116,137
======================
Portion of long-term debt, excluding current
installments, allocated to the CarMax Group.. $ - $ 83,057
======================
Portion of current installments of long-term
debt allocated to the CarMax Group........... $ 78,608 $ 108,151
======================
In July 1994, the Company entered into a seven-year, $100,000,000
unsecured bank term loan. The loan was restructured in August 1996 as a
six-year, $100,000,000 unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 2002, the interest rate on the term loan was 2.25 percent. This
term loan is due in July 2002 and was classified as a current liability at
February 28, 2002. Although the Company has the ability to refinance this loan,
it intends to repay the debt using existing working capital.
In June 1996, the Company entered into a five-year, $130,000,000
unsecured bank term loan. Principal was due in full at maturity with interest
payable periodically at LIBOR plus 0.35 percent. As scheduled, the Company used
existing working capital to repay this term loan in June 2001.
The Company maintains a multi-year, $150,000,000 unsecured revolving
credit agreement with four banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.18 percent per
annum. The agreement was entered into as of August 31, 1996, and expires on
August 31, 2002. No amounts were outstanding under the revolving credit
agreement at February 28, 2002 or 2001, and the Company does not plan to renew
this agreement.
In November 1998, CarMax entered into a four-year, $5,000,000 unsecured
promissory note. A portion of the principal amount is due annually with interest
payable periodically at 8.25 percent. The outstanding balance at February 28,
2002, was $826,000 and was included in current installments of long-term debt.
Page 108 of 130
In December 2001, CarMax entered into an $8,450,000 secured promissory
note in conjunction with the purchase of land for new store construction. This
note is due in August 2002 and was classified as short-term debt at February 28,
2002.
The scheduled aggregate annual principal payments on the Company's
long-term obligations for the next five fiscal years are as follows:
2003--$102,073,000; 2004--$1,410,000; 2005--$2,521,000; 2006--$1,083,000;
2007--$1,010,000.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 2002 and 2001.
Short-term debt of the Company is funded through committed lines of
credit and informal credit arrangements, as well as the revolving credit
agreement. Other information regarding short-term financing and committed lines
of credit is as follows:
Years Ended February 28
(Amounts in thousands) 2002 2001
-----------------------------------------------------------------------
Average short-term financing outstanding..... $ 2,256 $ 56,065
Maximum short-term financing outstanding..... $ 6,594 $ 363,199
Aggregate committed lines of credit.......... $195,000 $ 360,000
The weighted average interest rate on the outstanding short-term debt
was 4.4 percent during fiscal 2002, 6.8 percent during fiscal 2001 and 5.6
percent during fiscal 2000.
Interest expense allocated by the Company to CarMax, excluding interest
capitalized, was $4,958,000 in fiscal 2002, $12,110,000 in fiscal 2001 and
$10,362,000 in fiscal 2000. CarMax capitalizes interest in connection with the
construction of certain facilities. Capitalized interest totaled $530,000 in
fiscal 2002. No interest was capitalized in fiscal 2001. Capitalized interest
totaled $1,254,000 in fiscal 2000.
5. Income Taxes
The components of the provision for income taxes on net earnings are as
follows:
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
-----------------------------------------------------------------------------
Current:
Federal............................. $47,389 $16,986 $(1,395)
State............................... 5,103 2,174 855
----------------------------------
52,492 19,160 (540)
----------------------------------
Deferred:
Federal............................. 3,067 8,494 1,190
State............................... 95 264 35
----------------------------------
3,162 8,758 1,225
----------------------------------
Provision for income taxes............. $55,654 $27,918 $ 685
==================================
The effective income tax rate differed from the federal statutory
income tax rate as follows:
Years Ended February 28 or 29
2002 2001 2000
---------------------------------------------------------------------------
Federal statutory income tax rate....... 35% 35% 35%
State and local income taxes,
net of federal benefit............... 3 3 3
------------------------------
Effective income tax rate............... 38% 38% 38%
==============================
Page 109 of 130
In accordance with SFAS No. 109, the tax effects of temporary
differences that give rise to a significant portion of the deferred tax assets
and liabilities at February 28 are as follows:
(Amounts in thousands) 2002 2001
-------------------------------------------------------------------
Deferred tax assets:
Accrued expenses........................ $ 6,719 $ 5,173
Other................................... 187 235
--------------------
Total gross deferred tax assets...... 6,906 5,408
--------------------
Deferred tax liabilities:
Depreciation and amortization........... 3,615 3,850
Securitized receivables................. 22,593 15,262
Inventory............................... 4,257 6,449
Prepaid expenses........................ 1,385 1,629
--------------------
Total gross deferred tax liabilities. 31,850 27,190
--------------------
Net deferred tax liability................. $24,944 $21,782
====================
Based on CarMax's historical and current pretax earnings, management
believes the amount of gross deferred tax assets will more likely than not be
realized through future taxable income; therefore, no valuation allowance is
necessary.
6. Common Stock and Stock-Based Incentive Plans
(A) Voting Rights:
The holders of both series of common stock and any series of preferred
stock outstanding and entitled to vote together with the holders of common stock
will vote together as a single voting group on all matters on which common
shareholders generally are entitled to vote other than a matter on which the
common stock or either series thereof or any series of preferred stock would be
entitled to vote as a separate voting group. On all matters on which both series
of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Group Common Stock shall have one vote and
(ii) each outstanding share of CarMax Group Common Stock shall have a number of
votes based on the weighted average ratio of the market value of a share of
CarMax Group Common Stock to a share of Circuit City Group Common Stock. If
shares of only one series of common stock are outstanding, each share of that
series shall be entitled to one vote. If either series of common stock is
entitled to vote as a separate voting group with respect to any matter, each
share of that series shall, for purposes of such vote, be entitled to one vote
on such matter.
(B) Shareholder Rights Plan:
In conjunction with the Company's Shareholder Rights Plan as amended
and restated, preferred stock purchase rights were distributed as a dividend at
the rate of one right for each share of CarMax Group Common Stock. The rights
are exercisable only upon the attainment of, or the commencement of a tender
offer to attain, a specified ownership interest in the Company by a person or
group. When exercisable, each CarMax Group right would entitle the holder to buy
one four-hundredth of a share of Cumulative Participating Preferred Stock,
Series F, $20 par value, at an exercise price of $100 per share, subject to
adjustment. A total of 500,000 shares of such preferred stock, which have
preferential dividend and liquidation rights, have been designated. No such
shares are outstanding. In the event that an acquiring person or group acquires
the specified ownership percentage of the Company's common stock (except
pursuant to a cash tender offer for all outstanding shares determined to be fair
by the board of directors) or engages in certain transactions with the Company
after the rights become exercisable, each right will be converted into a right
to purchase, for half the current market price at that time, shares of the
related Group stock valued at two times the exercise price. The Company also has
1,000,000 shares of undesignated preferred stock authorized of which no shares
are outstanding and an additional 500,000 shares of preferred stock designated
as Series E, which are related to similar rights held by Circuit City Group
shareholders.
(C) Restricted Stock:
The Company has issued restricted stock under the provisions of the
1994 Stock Incentive Plan whereby management and key employees are granted
restricted shares of CarMax Group Common Stock. Shares are awarded in the name
of the employee, who has all the rights of a shareholder, subject to certain
restrictions or forfeitures. Restrictions on the awards generally expire three
to four years from the date of grant. Total restricted stock awards of 2,100
shares of CarMax Group Common Stock were granted to eligible employees in fiscal
2002. The market value at the date of grant of all shares granted has been
recorded as unearned compensation and is a component of Group equity. Unearned
compensation is expensed over the restriction periods. In fiscal 2002, a total
of $99,700 was charged to operations ($153,500 in fiscal 2001 and $447,200 in
fiscal 2000). As of February 28, 2002, 27,100 restricted shares of CarMax Group
Common Stock were outstanding.
Page 110 of 130
(D) Stock Incentive Plans:
Under the Company's stock incentive plans, nonqualified stock options
may be granted to management, key employees and outside directors to purchase
shares of CarMax Group Common Stock. The exercise price for nonqualified options
is equal to, or greater than, the market value at the date of grant. Options
generally are exercisable over a period from one to 10 years from the date of
grant. The Company has authorized 9,750,000 shares of CarMax Group Common Stock
to be issued as either options or restricted stock grants. Shares of CarMax
Group Common Stock available for issuance of options or restricted stock grants
totaled 1,150,779 at February 28, 2002, and 2,615,227 at February 28, 2001.
(E) Employee Stock Purchase Plan:
The Company has employee stock purchase plans for all employees meeting
certain eligibility criteria. Under the CarMax Group plan, eligible employees
may, subject to certain limitations, purchase shares of CarMax Group Common
Stock. For each $1.00 contributed by employees under the plan, the Company
matches $0.15. Purchases are limited to 10 percent of an employee's eligible
compensation, up to a maximum of $7,500 per year. The Company has authorized
2,000,000 shares of CarMax Group Common Stock for purchase under the plan. At
February 28, 2002, a total of 397,717 shares remained available under the CarMax
Group plan. During fiscal 2002, 183,902 shares were issued to or purchased on
the open market on behalf of employees (477,094 in fiscal 2001 and 580,000 in
fiscal 2000). The average price per share purchased under the plan was $17.13 in
fiscal 2002, $4.18 in fiscal 2001 and $3.68 in fiscal 2000. The Company match
for the CarMax Group totaled $384,800 in fiscal 2002, $247,000 in fiscal 2001
and $221,500 in fiscal 2000.
(F) 401(k) Plan:
Effective August 1, 1999, the Company began sponsoring a 401(k) Plan
for all employees meeting certain eligibility criteria. Under the Plan, eligible
employees can contribute up to 15 percent of their salaries, and the Company
matches a portion of those associate contributions. The Company's expense for
this plan for CarMax associates was $885,000 in fiscal 2002, $686,000 in fiscal
2001 and $317,000 in fiscal 2000.
TABLE 1 2002 2001 2000
-------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year........ 4,107 $ 3.16 3,324 $3.87 4,380 $ 1.77
Granted................................. 1,659 4.94 1,281 1.70 1,132 5.89
Exercised............................... (1,941) 1.32 (56) 0.22 (2,027) 0.22
Cancelled............................... (194) 5.95 (442) 4.67 (161) 6.94
------ ------ ------
Outstanding at end of year.............. 3,631 $ 4.81 4,107 $3.16 3,324 $ 3.87
====== ====== ======
Options exercisable at end of year...... 821 $ 6.85 1,943 $2.94 1,203 $ 2.54
====== ====== ======
TABLE 2 Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------------------------------
Weighted Average
(Shares in thousands) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-----------------------------------------------------------------------------------------------------------------------------
$ 1.63................................ 962 5.0 $ 1.63 193 $ 1.63
3.22 to 4.89....................... 1,648 5.9 4.82 25 3.66
6.06 to 9.06....................... 794 4.2 6.37 387 6.51
9.19 to 14.00....................... 141 2.9 11.09 136 11.02
15.00 to 22.47....................... 86 2.5 15.42 80 15.08
----- ------
Total ................................. 3,631 5.1 $ 4.81 821 $ 6.85
===== ======
The CarMax Group's stock option activity is summarized in Table 1
above. Table 2 above summarizes information about stock options outstanding as
of February 28, 2002.
CarMax applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the net earnings
attributed to the CarMax Group would have changed to the pro forma amounts
indicated in the following table. In accordance with the transition provisions
of SFAS No. 123, the pro forma amounts reflect options with grant dates
subsequent to March 1, 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net earnings amounts presented below because compensation cost is
reflected over the options' vesting periods and compensation cost of options
granted prior to March 1, 1995, is not considered. The pro forma effect on
fiscal year 2002 may not be representative of the pro forma effects on net
earnings for future years.
Page 111 of 130
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
----------------------------------------------------------------------------
Net earnings:
As reported....................... $27,996 $ 11,555 $ 256
Pro forma......................... 27,522 11,345 75
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant was estimated using the
Black-Scholes option-pricing model. The weighted average assumptions used in the
model were as follows:
2002 2001 2000
-----------------------------------------------------------------------
Expected dividend yield................. - - -
Expected stock volatility............... 79% 71% 62%
Risk-free interest rates................ 5% 7% 6%
Expected lives (in years)............... 4 4 4
Using these assumptions in the Black-Scholes model, the weighted
average fair value of options granted for the CarMax Group was $3 per share in
fiscal 2002, $1 per share in fiscal 2001 and $3 per share in fiscal 2000.
7. Pension Plans
The Company has a noncontributory defined benefit pension plan covering
the majority of full-time employees who are at least age 21 and have completed
one year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 160,000 shares of
Circuit City Group Common Stock at February 28, 2002 and 2001. Eligible
employees of CarMax participate in the Company's plan. Pension costs for these
employees have been allocated to CarMax based on its proportionate share of the
projected benefit obligation. Company contributions allocated to the CarMax
Group were $1,304,000 in fiscal 2002, $1,630,000 in fiscal 2001 and $625,000 in
fiscal 2000.
The following tables set forth the CarMax Group's share of the pension
plan's financial status and amounts recognized in the balance sheets as of
February 28:
(Amounts in thousands) 2002 2001
-------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year...... $ 7,837 $ 4,443
Service cost................................. 2,549 1,525
Interest cost................................ 588 355
Actuarial loss............................... 4,002 1,514
Benefits paid................................ (108) -
------------------------
Benefit obligation at end of year............ $14,868 $ 7,837
========================
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,074 $ 2,715
Actual return on plan assets................. (262) (271)
Employer contributions....................... 1,304 1,630
Benefits paid................................ (108) -
------------------------
Fair value of plan assets at end of year..... $ 5,008 $ 4,074
========================
Reconciliation of funded status:
Funded status................................ $(9,860) $(3,763)
Unrecognized actuarial loss ................. 7,524 3,039
Unrecognized transitional asset.............. - (3)
Unrecognized prior service benefit........... (2) (4)
------------------------
Net amount recognized........................ $(2,338) $ (731)
========================
Page 112 of 130
The components of net pension expense were as follows:
Years Ended February 28 or 29
(Amounts in thousands) 2002 2001 2000
------------------------------------------------------------------------------
Service cost................................ $2,549 $1,525 $1,250
Interest cost............................... 588 355 173
Expected return on plan assets.............. (424) (283) (159)
Amortization of prior service cost.......... (2) (2) (2)
Amortization of transitional asset.......... (3) (3) (3)
Recognized actuarial loss................... 203 91 77
-------------------------------
Net pension expense......................... $2,911 $1,683 $1,336
===============================
Assumptions used in the accounting for the pension plan were:
Years Ended February 28 or 29
2002 2001 2000
--------------------------------------------------------------------------------
Weighted average discount rate.............. 7.25% 7.50% 8.00%
Rate of increase in compensation levels..... 7.00% 6.00% 6.00%
Expected rate of return on plan assets...... 9.00% 9.00% 9.00%
The Company also has an unfunded nonqualified plan that restores
retirement benefits for certain senior executives who are affected by Internal
Revenue Code limitations on benefits provided under the Company's pension plan.
The projected benefit obligation allocated to the CarMax Group under this plan
was $1.6 million at February 28, 2002 and $600,000 at February 28, 2001.
8. Lease Commitments
CarMax conducts a substantial portion of its business in leased
premises. CarMax's lease obligations are based upon contractual minimum rates.
Twenty-three of CarMax's sales locations are currently operated under leases
originally entered into by the Company. Although each of these leases has been
assigned to a subsidiary of CarMax, the Company remains contingently liable
under the leases.
Rental expense for all operating leases was $41,362,000 in fiscal 2002,
$36,057,000 in fiscal 2001 and $34,706,000 in fiscal 2000. Most leases provide
that CarMax pay taxes, maintenance, insurance and operating expenses applicable
to the premises. The initial term of most real property leases will expire
within the next 20 years; however, most of the leases have options providing for
renewal periods of 10 to 20 years at terms similar to the initial terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by CarMax, as of February 28, 2002, were:
Operating
(Amounts in thousands) Lease
Fiscal Commitments
-----------------------------------------------------
2003.................................... $ 43,077
2004.................................... 43,364
2005.................................... 43,332
2006.................................... 42,737
2007.................................... 41,991
After 2007.............................. 508,516
---------
Total minimum lease payments............ $ 723,017
=========
In August 2001, CarMax entered into a sale-leaseback transaction with
unrelated parties covering nine superstore properties. This transaction, which
represented the first sale-leaseback entered into by CarMax without a Circuit
City Stores Inc. guarantee, was structured at competitive rates with an initial
lease term of 15 years and two 10-year renewal options. In conjunction with this
sale-leaseback transaction, CarMax must meet financial covenants relating to
minimum tangible net worth and minimum coverage of rent expense. CarMax was in
compliance with all such covenants at February 28, 2002. The aggregate selling
price of sale-leaseback transactions was $102,388,000 in fiscal 2002 and
$12,500,000 in fiscal 2000. In fiscal 2001, the Company did not enter into any
sale-leaseback transactions. Gains or losses on sale-leaseback transactions are
deferred and amortized over the term of the leases. Neither the Company nor
CarMax has continuing involvement under sale-leaseback transactions.
Page 113 of 130
9. Supplemental Financial Statement Information
(A) Advertising Expense:
Advertising expense, which is included in selling, general and
administrative expenses in the accompanying statements of earnings, amounted to
$47,255,000 (1.3 percent of net sales and operating revenues) in fiscal 2002,
$44,912,000 (1.6 percent of net sales and operating revenues) in fiscal 2001 and
$48,637,000 (2.2 percent of net sales and operating revenues) in fiscal 2000.
(B) Write-Down of Assets and Lease Termination Costs:
In the fourth quarter of fiscal 2001, CarMax recorded $8.7 million for
the write-off of goodwill associated with two underperforming stand-alone
new-car franchises. In the fourth quarter of fiscal 2000, CarMax recorded $4.8
million in charges related to lease termination costs on undeveloped property
and a write-down of assets associated with excess property for sale. The loss
related to operating leases was calculated based on expected lease termination
costs and costs associated with subleasing the property.
(C) Finance Income:
For the past three years, pretax finance income, which is recorded as a
reduction to selling, general and administrative expenses, was as follows:
Years Ended February 28 or 29
(Amounts in millions) 2002 2001 2000
------------------------------------------------------------------------------
Securitization income....................... $ 78.1 $ 51.5 $ 36.8
Payroll and fringe expenses................. 5.7 4.2 3.4
Other direct expenses....................... 5.9 4.5 3.4
-------------------------------
Finance operation income.................... 66.5 42.8 30.0
Third-party financing fees.................. 15.7 11.5 9.8
-------------------------------
Total finance income........................ $ 82.2 $ 54.3 $ 39.8
===============================
For CarMax, finance operation income does not include any allocation of
indirect costs or income. CarMax presents this information on a direct basis to
avoid making arbitrary decisions regarding the periodic indirect benefit or
costs that could be attributed to this operation. Examples of indirect costs not
included are corporate expenses such as human resources, administrative
services, marketing, information systems, accounting, legal, treasury and
executive payroll as well as retail store expenses.
10. Securitizations
CarMax has asset securitization programs to finance the automobile loan
receivables generated by its finance operation. CarMax's finance operation sells
its automobile loan receivables to a special purpose subsidiary, which, in turn,
transfers those receivables to a group of third-party investors. For transfers
of receivables that qualify as sales, CarMax recognizes gains or losses as a
component of the finance operation's profits, which are recorded as reductions
to selling, general and administrative expenses. A special purpose subsidiary
retains a subordinated interest in the transferred receivables. CarMax's finance
operation continues to service securitized receivables for a fee. CarMax's
finance operation refinanced $641.7 million of automobile loan receivables
through the public issuance of asset-backed securities in fiscal 2002 and $655.4
million in fiscal 2001. The automobile loan securitization agreements do not
provide for recourse to the Company for credit losses on the securitized
receivables. Under certain of these securitization programs, CarMax must meet
financial covenants relating to minimum tangible net worth, minimum delinquency
rates and minimum coverage of rent and interest expense. CarMax was in
compliance with these covenants at February 28, 2002 and 2001.
At February 28, 2002, the total principal amount of automobile loan
receivables managed was $1.55 billion. Of that total, the principal amount of
automobile loan receivables securitized was $1.54 billion and the principal
amount of automobile loan receivables held for sale or investment was $13.9
million. At February 28, 2002, the unused capacity of the automobile loan
variable funding program was $211.0 million. The aggregate principal amount of
automobile loans that were 31 days or more delinquent was $22.3 million at
February 28, 2002. The principal amount of losses net of recoveries totaled
$13.2 million for the year ended February 28, 2002, and $7.2 million for the
year ended February 28, 2001.
CarMax receives annual servicing fees approximating 1 percent of the
outstanding principal balance of the securitized automobile loan receivables and
retains the rights to future cash flows available after the investors in the
asset-backed securities 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 securitized
receivables. Accordingly, no servicing asset or liability has been recorded.
Page 114 of 130
The table below summarizes certain cash flows received from and paid to
securitization trusts:
Years Ended February 28
(Amounts in thousands) 2002 2001
-------------------------------------------------------------------------------
Proceeds from new securitizations................... $ 752,516 $ 619,525
Proceeds from collections reinvested
in previous automobile loan securitizations..... $ 452,329 $ 313,827
Servicing fees received............................. $ 13,787 $ 10,474
Other cash flows received on retained interests*.... $ 68,153 $ 39,265
*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, CarMax estimates
future cash flows using management's projections of key factors, such as finance
charge income, default rates, payment rates and discount rates appropriate for
the type of asset and risk. CarMax 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 securitized automobile loan receivables that
exceeds the contractually specified investor returns and servicing fees
(interest-only strips) is carried at fair value; amounted to $74.3 million at
February 28, 2002, and $42.0 million at February 28, 2001. Gains of $56.4
million on sales of automobile loan receivables were recorded in fiscal 2002;
gains of $35.4 million on sales of automobile loan receivables were recorded in
fiscal 2001.
The fair value of retained interests at February 28, 2002, was $120.7
million, with a weighted-average life of 1.6 years. The fair value of retained
interests at February 28, 2001, was $74.1 million with a weighted-average life
ranging from 1.5 years to 1.8 years. The following table shows the key economic
assumptions used in measuring the fair value of retained interests at February
28, 2002, 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 February 28, 2002, 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 Value of 10% Value of 20%
(Dollar amounts in thousands) Used Adverse Change Adverse Change
------------------------------------------------------------------------------
Prepayment speed.............. 1.5%-1.6% $ 3,646 $ 7,354
Annual default rate........... 1.0%-1.2% $ 2,074 $ 4,148
Annual discount rate.......... 12.0% $ 1,464 $ 2,896
11. Financial Derivatives
On behalf of CarMax, the Company enters into amortizing swaps relating
to automobile loan receivable securitizations to convert variable-rate financing
costs to fixed-rate obligations to better match funding costs to the receivables
being securitized. The Company entered into twelve 40-month amortizing interest
rate swaps with notional amounts totaling approximately $854.0 million in fiscal
2002, nine 40-month amortizing swaps with notional amounts totaling
approximately $735.0 million in fiscal 2001 and four 40-month amortizing swaps
with notional amounts totaling approximately $344.0 million in fiscal 2000. The
remaining total notional amount of all swaps related to the automobile loan
receivable securitizations was approximately $413.3 million at February 28,
2002, and $299.3 million at February 28, 2001. At February 28, 2002, the fair
value of these swaps totaled a net liability of $841,000 and were included in
accounts payable.
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. The Company
does not anticipate significant market risk from swaps because they are used on
a monthly basis 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.
12. Contingent Liabilities
In the normal course of business, CarMax is involved in various legal
proceedings. Based upon CarMax's evaluation of the information presently
available, management believes that the ultimate resolution of any such
proceedings will not have a material adverse effect on the CarMax Group's
financial position, liquidity or results of operations.
Page 115 of 130
13. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS 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
pronouncement. 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. For the
CarMax Group, goodwill totaled $20.1 million and covenants not to compete
totaled $1.5 million as of February 28, 2002. In fiscal 2002, goodwill
amortization was $1.8 million and amortization of covenants not to compete was
$931,000. Covenants not to compete will continue to be amortized on a
straight-line basis over the life of the covenant, not to exceed five years.
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 Group. During fiscal 2003, the Company will
perform the first of the required impairment tests of goodwill, as outlined in
the new pronouncement. 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 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 supersedes 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
in the first quarter of fiscal 2003. The Company does not expect the adoption of
SFAS No. 144 to have a material impact on the Group's financial position,
results of operations or cash flows.
14. Quarterly Financial Data (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter Year
(Amounts in thousands) 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
Net sales and operating
revenues.............. $879,000 $683,390 $938,911 $738,084 $848,807 $621,007 $851,350 $704,569 $3,518,068 $2,747,050
------------------------------------------------------------------------------------------------------
Gross profit............. $103,960 $ 85,462 $108,526 $ 90,549 $ 91,026 $ 71,679 $100,191 $ 82,069 $ 403,703 $ 329,759
------------------------------------------------------------------------------------------------------
Net earnings............. $ 26,572 $ 13,944 $ 27,391 $ 16,271 $ 18,443 $ 7,568 $ 18,396 $ 7,781 $ 90,802 $ 45,564
------------------------------------------------------------------------------------------------------
Net earnings attributed
to CarMax Group
Common Stock.......... $ 6,832 $ 3,535 $ 8,028 $ 4,126 $ 6,554 $ 1,920 $ 6,582 $ 1,974 $ 27,996 $ 11,555
------------------------------------------------------------------------------------------------------
Net sales and operating revenues as presented reflect certain
reclassifications to conform to current presentation. Wholesale sales were
reclassified from cost of sales to sales as discussed in Note 2(O). Total
wholesale reclassifications increased sales in the first through fourth quarters
of fiscal 2002 by $84.5 million, $90.0 million, $76.7 million and $74.3 million,
respectively. The fiscal 2001 total wholesale reclassifications increased sales
$59.4 million, $66.5 million, $61.1 million and $66.4 million by quarter,
respectively. The additional reclassification between sales and cost of sales
decreased sales in the first through fourth quarters of fiscal 2002 by $2.3
million, $2.5 million, $2.2 million and $2.1 million, respectively. The fiscal
2001 net sales decreased $1.8 million, $2.0 million, $1.8 million and $1.8
million by quarter, respectively, based on the additional reclassification. The
annual impact of all reclassifications from cost of sales to sales was an
increase of $316.4 million in fiscal 2002 and $246.0 million in fiscal 2001.
Page 116 of 130
Independent Auditors' Report
The Board of Directors and Stockholders
of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the CarMax Group (as defined
in Note 1) as of February 28, 2002 and 2001, and the related statements of
earnings, group equity and cash flows for each of the fiscal years in the
three-year period ended February 28, 2002. These financial statements are the
responsibility of Circuit City Stores, Inc.'s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As more fully disclosed in Note 1, the financial statements of the CarMax Group
should be read in conjunction with the consolidated financial statements of
Circuit City Stores, Inc. and subsidiaries and the financial statements of the
Circuit City Group.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the CarMax Group as of February
28, 2002 and 2001, and the results of its operations and its cash flows for each
of the fiscal years in the three-year period ended February 28, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Richmond, Virginia
April 2, 2002
Page 117 of 130
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
With the exception of the information incorporated by reference from
the Company's Proxy Statement in Items 10, 11 and 12 of Part III of this Form
10-K/A Report, the Company's Proxy Statement dated May 10, 2002, is not to be
deemed filed as a part of this Report.
Item 10. Directors and Executive Officers of the Company.
The information concerning the Company's directors required by this
Item is incorporated by reference to the section entitled "Item One - Election
of Directors" appearing on pages 3 through 5 of the Company's Proxy Statement
dated May 10, 2002.
The information concerning the Company's executive officers required by
this Item is incorporated by reference to the section in Part I hereof entitled
"Executive Officers of the Company" appearing on pages 14 through 16.
The information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934 required by this Item is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" appearing on page 19 of the Company's Proxy Statement dated May 10,
2002.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the sections entitled "Compensation of Executive Officers" appearing on pages 11
through 18 of the Company's Proxy Statement dated May 10, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to
the section entitled "Beneficial Ownership of Securities" appearing on pages 6
through 8 of the Company's Proxy Statement dated May 10, 2002.
Item 13. Certain Relationships and Related Transactions.
None.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statement Schedules. The following financial statement
schedules of Circuit City Stores, Inc., Circuit City Group and
CarMax Group for the fiscal years ended February 28 or 29, 2002,
2001 and 2000, are filed as part of this Report and should be
read in conjunction with the Financial Statements of Circuit City
Stores, Inc., Circuit City Group and CarMax Group.
II Valuation and Qualifying Accounts and Reserves, Circuit City Stores, Inc. S-1
II Valuation and Qualifying Accounts and Reserves, Circuit City Group S-1
II Valuation and Qualifying Accounts and Reserves, CarMax Group S-1
Page 118 of 130
Independent Auditors' Report on Circuit City Stores, Inc. Financial Statement Schedule S-2
Independent Auditors' Report on Circuit City Group Financial Statement Schedule S-2
Independent Auditors' Report on CarMax Group Financial Statement Schedule S-2
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
2. Exhibits. The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedules
are filed as part of, or incorporated by reference into, this
Report.
(b) Reports on Form 8-K.
The Company filed a Form 8-K on February 22, 2002, announcing the
Company's plans to split-off its CarMax auto Superstore business.
Page 119 of 130
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CIRCUIT CITY STORES, INC.
(Registrant)
By: /s/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
September 6, 2002
Page 120 of 130
CERTIFICATIONS
I, W. Alan McCollough, certify that:
1. I have reviewed this annual report on Form 10-K/A of Circuit City
Stores,Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 6, 2002
/s/ W. Alan McCollough
------------------------
W. Alan McCollough
Chairman, President and
Chief Executive Officer
Page 121 of 130
CERTIFICATIONS
I, Michael T. Chalifoux, certify that:
1. I have reviewed this annual report on Form 10-K/A of Circuit City Stores,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 6, 2002
/s/ Michael T. Chalifoux
------------------------------
Michael T. Chalifoux
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
Page 122 of 130
S-1
Schedule II
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
Balance at Charged Charge-offs Balance at
Beginning to less End of
Description of Year Income Recoveries Year
Circuit City Stores, Inc.:
Year ended February 29, 2000:
Allowance for doubtful accounts $ 16,282 $ 7,758 $ (5,727) $ 18,313
======== ======= ========= =========
Year ended February 28, 2001:
Allowance for doubtful accounts $ 18,313 $ 8,878 $ (18,219) $ 8,972
======== ======= ========= =========
Year ended February 28, 2002:
Allowance for doubtful accounts $ 8,972 $ 5,552 $ (9,777) $ 4,747
======== ======= ========= =========
Circuit City Group:
Year ended February 29, 2000:
Allowance for doubtful accounts $ 11,069 $ 4,324 $ (2,898) $ 12,495
======== ======= ========= =========
Year ended February 28, 2001:
Allowance for doubtful accounts $ 12,495 $ 5,171 $ (15,598) $ 2,068
======== ======= ========= =========
Year ended February 28, 2002:
Allowance for doubtful accounts $ 2,068 $ 3,485 $ (4,893) $ 660
======== ======= ========= =========
CarMax Group:
Year ended February 29, 2000:
Allowance for doubtful accounts $ 5,213 $ 3,434 $ (2,829) $ 5,818
======== ======= ========= =========
Year ended February 28, 2001:
Allowance for doubtful accounts $ 5,818 $ 3,707 $ (2,621) $ 6,904
======== ======= ========= =========
Year ended February 28, 2002:
Allowance for doubtful accounts $ 6,904 $ 2,067 $ (4,884) $ 4,087
======== ======= ========= =========
Certain prior year amounts have been changed to conform to current year
presentation.
Page 123 of 130
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 2, 2002, we reported on the consolidated balance sheets of
Circuit City Stores, Inc. and subsidiaries (the Company) as of February 28, 2002
and 2001, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the fiscal years in the three-year period
ended February 28, 2002, as contained herein. In connection with our audits of
the aforementioned consolidated financial statements, we also have audited the
related Circuit City Stores, Inc. financial statement schedule as listed in Item
14(a)1 of this Form 10-K/A. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/KPMG LLP
Richmond, Virginia
April 2, 2002
Page 124 of 130
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 2, 2002, we reported on the balance sheets of the Circuit
City Group as of February 28, 2002 and 2001, and the related statements of
earnings, group equity and cash flows for each of the fiscal years in the
three-year period ended February 28, 2002, as contained herein. Our report dated
April 2, 2002 includes a qualification related to the effects of not
consolidating the CarMax Group with the Circuit City Group as required by
accounting principles generally accepted in the United States of America. In
connection with our audits of the aforementioned financial statements, we also
have audited the related Circuit City Group financial statement schedule as
listed in Item 14(a)1 of this Form 10-K/A. This financial statement schedule is
the responsibility of Circuit City Stores, Inc.'s management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, except for the effects of not consolidating the CarMax Group
with the Circuit City Group as discussed in the preceding paragraph, such
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
/s/KPMG LLP
Richmond, Virginia
April 2, 2002
Page 125 of 130
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 2, 2002, we reported on the balance sheets of the CarMax
Group as of February 28, 2002 and 2001, and the related statements of
operations, group equity and cash flows for each of the fiscal years in the
three-year period ended February 28, 2002, herein. In connection with our audits
of the aforementioned financial statements, we also have audited the related
CarMax Group financial statement schedule as listed in Item 14(a)1 of this Form
10-K/A. This financial statement schedule is the responsibility of Circuit City
Stores, Inc.'s management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/KPMG LLP
Richmond, Virginia
April 2, 2002
Page 126 of 130
Circuit City Stores, Inc.
Annual Report on Form 10-K
INDEX TO EXHIBITS
(3) Articles of Incorporation and Bylaws
(a) Amended and Restated Articles of Incorporation of the
Company, effective February 3, 1997, filed as Exhibit
3(i)(a) to the Company's Amended Quarterly Report on
Form 10-Q/A for the quarter ended May 31, 1999 (File
No. 1-5767), are expressly incorporated herein by
this reference.
(b) Articles of Amendment to the Company's Amended and
Restated Articles of Incorporation, effective April
28, 1998, filed as Exhibit 3(i)(b) to the Company's
Amended Quarterly Report on Form 10-Q/A for the
quarter ended May 31, 1999 (File No. 1-5767), are
expressly incorporated herein by this reference.
(c) Articles of Amendment to the Company's Amended and
Restated Articles of Incorporation, effective June
22, 1999, filed as Exhibit 3(i)(c) to the Company's
Amended Quarterly Report on Form 10-Q/A for the
quarter ended May 31, 1999 (File No. 1-5767), are
expressly incorporated herein by this reference.
(d) Bylaws of the Company, as amended and restated
December 20, 2001, filed as Exhibit 3(ii) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 2001 (File No. 1-5767),
are expressly incorporated herein by this reference.
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Second Amended and Restated Rights Agreement dated as
of July 10, 2001, between the Company and Wells Fargo
Bank Minnesota, N.A. (Formerly Named Norwest Bank
Minnesota, N.A.), dated as of July 20, 2001, filed as
Exhibit 1 to the Company's Form 8-A/A filed on July
20, 2001 (File No. 1-5767), is expressly incorporated
herein by this reference.
(b) $100,000,000 term loan agreement dated July 28, 1994,
between the Company, The Long-Term Credit Bank of
Japan, Limited, as agent, and the banks named
therein. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
(c) First Amendment to Term Loan Agreement dated October
24, 1995, to the $100,000,000 term loan agreement
dated July 28, 1994, between the Company, The
Long-Term Credit Bank of Japan, Limited, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(d) Second Amendment to Term Loan Agreement dated August
21, 1996, to the $100,000,000 term loan agreement
dated July 28, 1994, between the Company, The
Long-Term Credit Bank of Japan, Limited, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
Page 127 of 130
(e) Third Amendment to Term Loan Agreement dated
September 23, 1999, to the $100,000,000 term loan
agreement dated July 28, 1994, between the Company,
General Electric Capital Corporation, as successor
agent, and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(f) Fourth Amendment to Term Loan Agreement dated
December 15, 2000, to the $100,000,000 term loan
agreement dated July 28, 1994, between the Company,
General Electric Capital Corporation, as successor
agent, and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K. In lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to Commission upon request.
(g) $150,000,000 Credit Agreement dated August 31, 1996,
between the Company, Crestar Bank, as agent, and the
banks named therein. Pursuant to Item 601(b)(4)(iii)
of Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
(h) First Amendment to Credit Agreement dated May 1,
1998, to the $150,000,000 Credit Agreement dated
August 31, 1996, between the Company, Crestar Bank,
as agent, and the banks named therein. Pursuant to
Item 601(b)(4)(iii) of Regulation S-K, in lieu of
filing a copy of such agreement, the Company agrees
to furnish a copy of such agreement to the Commission
upon request.
(i) Second Amendment to Credit Agreement dated September
1, 1999, to the $150,000,000 Credit Agreement dated
August 31, 1996, between the Company, Crestar Bank,
as agent, and the banks named therein. Pursuant to
Item 601(b)(4)(iii) of Regulation S-K, in lieu of
filing a copy of such agreement, the Company agrees
to furnish a copy of such agreement to the Commission
upon request.
(j) Third Amendment to Credit Agreement dated December
15, 2000, to the $150,000,000 Credit Agreement dated
August 31, 1996, between the Company SunTrust, as
successor agent, and the banks named therein.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in
lieu of filing a copy of such agreement, the Company
agrees to furnish a copy of such agreement to the
Commission upon request.
(10) Material Contracts*
(a) The Company's 2000 Non-Employee Directors Stock
Incentive Plan, filed as Appendix A to the Company's
Definitive Proxy Statement dated May 10, 2000, for
the Annual Meeting of Shareholders held on June 13,
2000 (File No. 1-5767), is expressly incorporated
herein by this reference.
(b) Amendments effective June 15, 2001, to Company's 2000
Non-Employee Directors Stock Incentive Plan, filed as
Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 2001 (File No.
1-5767), is expressly incorporated herein by this
reference.
(c) The Company's Amended and Restated 1989 Non-Employee
Directors Stock Option Plan, filed as Exhibit A to
the Company's Definitive Proxy Statement dated May 9,
1997, for the Annual Meeting of Shareholders held on
June 17, 1997 (File No. 1-5767), is expressly
incorporated herein by this reference.
(d) Amendments adopted June 17, 1997, to the Company's
Amended and Restated 1989 Non-Employee Directors
Stock Option Plan filed as Exhibit 10(ii) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1997 (File No. 1-5767), is
expressly incorporated herein by this reference.
Page 128 of 130
(e) The Company's 1994 Stock Incentive Plan, as amended
as of January 24, 1997, filed as Annex III to the
Company's Definitive Proxy Statement dated December
24, 1996, for a Special Meeting of Shareholders held
on January 24, 1997 (File No. 1-5767), is expressly
incorporated herein by this reference.
(f) Amendments effective June 13, 2000, to the Company's
1994 Stock Incentive Plan as amended, filed as
Exhibit 10 to the Company's Quarterly Report on form
10-Q for the quarter ended May 31, 2000 (File No.
1-5767), is expressly incorporated herein by this
reference.
(g) Amendment effective June 15, 1999, to the Company's
1994 Stock Incentive Plan, as amended, filed as
Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1999 (File No.
1-5767), is expressly incorporated herein by this
reference.
(h) Letter agreement and non-compete agreement dated
January 30, 1996, (revised February 12, 1996),
between the Company and Alan L. Wurtzel filed as
Exhibit 10(g) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1995
(File No. 1-5767), is expressly incorporated herein
by this reference.
(i) Employment agreement between the Company and Richard
L. Sharp dated October 17, 1986, and amendment dated
August 1, 1989, to the employment agreement, filed as
Exhibit 10(m) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1993
(File No. 1-5767), is expressly incorporated herein
by this reference.
(j) Employment agreement between the Company and John W.
Froman dated June 27, 1990, filed as Exhibit 10(i) to
the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 2001 (File No.
1-5767), is expressly incorporated herein by this
reference.
(k) Employment agreement between the Company and William
A. Ligon dated April 25, 1995, filed as Exhibit 10(j)
to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 2001 (File No.
1-5767), is expressly incorporated herein by this
reference.
(l) Employment agreement dated May 25, 1989, between the
Company and Michael T. Chalifoux, filed as Exhibit
10(x) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1991 (File No.
1-5767), is expressly incorporated herein by this
reference.
(m) Employment agreement dated April 24, 1995, between
the Company and W. Alan McCollough filed as Exhibit
10(l) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1995 (File No.
1-5767), is expressly incorporated herein by this
reference.
(n) The Company's Annual Performance-Based Bonus Plan, as
amended as of January 24, 1997, filed as Annex IV to
the Company's Definitive Proxy Statement dated
December 24, 1996, for a Special Meeting of
Shareholders held on January 24, 1997 (File No.
1-5767), is expressly incorporated herein by this
reference.
(o) The Company's Non-Employee Directors Deferred
Compensation Plan, filed as Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended August 31, 2000 (File No. 1-5767), is
expressly incorporated herein by this reference.
(p) Program for deferral of director compensation
implemented October 1995 filed as Exhibit 10(i) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 1995 (File No. 1-5767), is
expressly incorporated herein by this reference.
(q) Benefit Restoration Plan, effective February 28,
1999, filed as Exhibit 10(m) to the Company's Annual
Report on Form 10-K for the fiscal year ended
February 28, 1999 (File 1-5767), is expressly
incorporated herein by this reference.
Page 129 of 130
(21) Subsidiaries of the Company
Subsidiaries of the Company, filed as Exhibit 21 to the Company's
Annual Report on Form 10-K for the fiscal year ended February 28, 2002
(File No. 1-5767), is expressly incorporated herein by this reference.
(23) Consents of Experts and Counsel
Consent of KPMG LLP
(24) Powers of Attorney
Powers of Attorney, filed as Exhibit 23 to the Company's Annual Report
on Form 10-K for the fiscal year ended February 28, 2002 (File No.
1-5767), is expressly incorporated herein by this reference.
(99) Additional Exhibits
Risk Factors, filed as Exhibit 99 to the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 2002 (File No.
1-5767), is expressly incorporated herein by this reference.
*All contracts listed under Exhibit 10 are management contracts, compensatory
plans or arrangements of the Company required to be filed as an exhibit.
Page 130 of 130