UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended November 30, 2003
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 number: 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, Virginia 23233
(Address of principal executive offices) (Zip Code)
(804) 527- 4000
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No ___
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 2003
Common Stock, par value $0.50 210,552,901
A Table of Contents is included on Page 2 and an Exhibit Index is included on
Page 29.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations -
Three Months and Nine Months Ended November 30, 2003 and 2002 3
Consolidated Balance Sheets -
November 30, 2003 and February 28, 2003 4
Consolidated Statements of Cash Flows -
Nine Months Ended November 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
EXHIBIT INDEX 29
Page 2 of 29
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended Nine Months Ended
November 30 November 30
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales and operating revenues $2,407,424 $2,421,687 $6,496,444 $6,761,134
Cost of sales, buying and warehousing 1,872,600 1,873,573 5,025,935 5,173,782
---------- ---------- ---------- ----------
Gross profit 534,824 548,114 1,470,509 1,587,352
Finance income 5,631 2,267 22,418 25,451
Selling, general and administrative expenses 576,721 592,105 1,622,662 1,699,614
Interest expense 169 168 1,479 718
---------- ---------- ---------- ----------
Loss from continuing operations
before income taxes (36,435) (41,892) (131,214) (87,529)
Income tax benefit (12,362) (15,766) (47,893) (32,584)
---------- ---------- ---------- ----------
Net loss from continuing operations (24,073) (26,126) (83,321) (54,945)
Net earnings (loss) from discontinued operations 25,546 8,350 (83,375) 85,680
---------- ---------- ---------- ----------
Net earnings (loss) $ 1,473 $ (17,776) $ (166,696) $ 30,735
========== ========== ========== ==========
Net (loss) earnings from:
Continuing operations $ (24,073) $ (26,126) $ (83,321) $ (54,945)
========== ========== ========== ==========
Discontinued operations attributed to:
Circuit City common stock $ 25,546 $ 7,066 $ (83,375) $ 62,464
========== ========== ========== ==========
CarMax Group common stock $ - $ 1,284 $ - $ 23,216
========== ========== ========== ==========
Weighted average common shares:
Circuit City:
Basic 206,441 207,454 206,148 207,121
========== ========== ========== ==========
Diluted 206,441 207,454 206,148 207,121
========== ========== ========== ==========
CarMax Group:
Basic - 37,084 - 37,023
========== ========== ========== ==========
Diluted - 38,577 - 38,701
========== ========== ========== ==========
Net (loss) earnings per share:
Basic:
Continuing operations $ (0.12) $ (0.13) $ (0.40) $ (0.27)
Discontinued operations attributed to
Circuit City common stock 0.12 0.03 (0.40) 0.30
---------- ---------- ---------- ----------
$ 0.01 $ (0.09) $ (0.81) $ 0.04
========== ========== ========== ==========
Discontinued operations attributed to
CarMax Group common stock $ - $ 0.03 $ - $ 0.63
========== ========== ========== ==========
Diluted:
Continuing operations $ (0.12) $ (0.13) $ (0.40) $ (0.27)
Discontinued operations attributed to
Circuit City common stock 0.12 0.03 (0.40) 0.30
---------- ---------- ---------- ----------
$ 0.01 $ (0.09) $ (0.81) $ 0.04
========== ========== ========== ==========
Discontinued operations attributed to
CarMax Group common stock $ - $ 0.03 $ - $ 0.60
========== ========== ========== ==========
Cash dividends paid per share on
Circuit City common stock $ 0.0175 $ 0.0175 $ 0.0525 $ 0.0525
========== ========== ============ ==========
See accompanying notes to consolidated financial statements.
Page 3 of 29
Circuit City Stores, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands except share data)
Nov. 30, 2003 Feb. 28, 2003
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 455,343 $ 884,670
Accounts receivable, net of allowance for doubtful accounts
of $623 and $1,075 173,684 140,385
Retained interests in securitized receivables 337,873 239,141
Merchandise inventory 2,651,078 1,409,736
Prepaid expenses and other current assets 84,945 33,165
Assets of discontinued operations 11,512 395,813
---------- ----------
Total current assets 3,714,435 3,102,910
Property and equipment, net 631,560 649,593
Deferred income taxes 30,573 22,362
Other assets 29,809 24,252
---------- ----------
TOTAL ASSETS $4,406,377 $3,799,117
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,793,866 $ 963,701
Accrued expenses and other current liabilities 129,766 128,776
Accrued income taxes - 44,453
Deferred income taxes 87,691 141,729
Current installments of long-term debt 1,253 1,410
Liabilities of discontinued operations 7,417 -
---------- ----------
Total current liabilities 2,019,993 1,280,069
Long-term debt, excluding current installments 22,987 11,254
Accrued straight-line rent 102,116 97,427
Other liabilities 89,461 68,792
---------- ----------
TOTAL LIABILITIES 2,234,557 1,457,542
---------- ----------
Stockholders' equity:
Common stock, $0.50 par value;
525,000,000 shares authorized; 210,508,802 shares
issued and outstanding at November 30, 2003
(209,954,840 at February 28, 2003) 105,254 104,977
Capital in excess of par value 856,716 849,083
Retained earnings 1,209,850 1,387,515
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,171,820 2,341,575
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,406,377 $3,799,117
========== ==========
See accompanying notes to consolidated financial statements.
Page 4 of 29
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Nine Months Ended
November 30
2003 2002
------------ -----------
Operating Activities:
Net (loss) earnings $ (166,696) $ 30,735
Adjustments to reconcile net (loss) earnings to net cash used in operating
activities of continuing operations:
Net loss (earnings) from discontinued operations 83,375 (85,680)
Depreciation and amortization 143,078 113,396
Amortization of restricted stock awards 11,312 14,354
Loss on dispositions of property and equipment 549 6,303
Provision for deferred income taxes (62,249) 14,320
Changes in operating assets and liabilities:
Increase in accounts receivable, net (33,299) (39,797)
Increase in retained interests in securitized receivables (98,732) (74,882)
Increase in merchandise inventory (1,241,342) (1,140,617)
Increase in prepaid expenses and other current assets (51,780) (30,648)
(Increase) decrease in other assets (5,557) 4,072
Increase in accounts payable 830,165 556,243
Decrease in accrued expenses and other current liabilities
and accrued income taxes (41,052) (96,482)
Increase in accrued straight-line rent and other liabilities 25,358 15,488
------------ -----------
Net cash used in operating activities of continuing operations (606,870) (713,195)
------------ -----------
Investing Activities:
- --------------------
Purchases of property and equipment (134,251) (111,148)
Proceeds from sales of property and equipment, net 21,257 31,094
------------ -----------
Net cash used in investing activities of continuing operations (112,994) (80,054)
------------ -----------
Financing Activities:
- --------------------
Proceeds from short-term debt, net - 57,603
Principal payments on long-term debt (1,024) (24,543)
Repurchase and retirement of common stock (13,941) -
Issuances of Circuit City common stock, net 9,610 9,715
Issuances of CarMax Group common stock, net - 298
Dividends paid (10,968) (11,003)
------------ -----------
Net cash (used in) provided by financing activities of
continuing operations (16,323) 32,070
------------ -----------
Cash provided by (used in) discontinued operations -
bankcard operation 306,860 (60,246)
Cash used in discontinued operations - CarMax - (21,218)
Cash used in discontinued operations - Divx - (10,500)
------------ -----------
Decrease in cash and cash equivalents (429,327) (810,707)
Cash and cash equivalents at beginning of year 884,670 1,248,246
------------ -----------
Cash and cash equivalents at end of period $ 455,343 $ 437,539
============ ===========
Supplemental disclosures of cash flow information:
Non-cash operating, investing and financing activities:
Asset aquired from variable interest entity $ 12,600 $ -
Liabilities assumed from variable interest entity $ 12,600 $ -
Reduction of liability related to the discontinued Divx operation $ 1,483 $ -
See accompanying notes to consolidated financial statements.
Page 5 of 29
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
From February 7, 1997, to October 1, 2002, the common stock of Circuit City
Stores, Inc. consisted of two common stock series that were intended to
reflect the performance of the company's two businesses. The Circuit City
Group common stock was intended to reflect the performance of the Circuit
City consumer electronics 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 was intended to reflect the performance of the CarMax auto
superstores and related operations.
Effective October 1, 2002, the CarMax auto superstore business was
separated from the Circuit City consumer electronics business through a
tax-free transaction in which CarMax, Inc., formerly a wholly owned
subsidiary of Circuit City Stores, Inc., became an independent, separately
traded public company. Following the separation, the Circuit City Group
common stock was renamed Circuit City common stock. CarMax results are
presented as results from discontinued operations. See Note 3 for
additional discussion of the separation.
On November 18, 2003, the company completed the sale of its bankcard
operation, which included Visa and MasterCard credit card receivables and
related cash reserves. Results from the bankcard operation have been
classified as discontinued operations. See Note 3 for additional discussion
concerning the sale of the bankcard operation.
Certain prior year amounts have been reclassified to conform to the current
presentation.
Due to the seasonal nature of the company's business, interim results are
not necessarily indicative of results for the entire fiscal year. The
company's consolidated financial statements included in this report should
be read in conjunction with the notes to the audited financial statements
incorporated by reference in the company's fiscal 2003 Annual Report on
Form 10-K.
2. Accounting Policies
The consolidated financial statements of the company conform to accounting
principles generally accepted in the United States of America. The interim
period financial statements are unaudited; however, in the opinion of
management, all adjustments, which consist only of normal, recurring
adjustments, necessary for a fair presentation of the interim consolidated
financial statements have been included. The February 28, 2003, balance
sheet data was derived from the audited consolidated financial statements
incorporated by reference in the company's fiscal 2003 Annual Report on
Form 10-K.
3. Discontinued Operations
Cash flows related to discontinued operations have been segregated on the
consolidated statements of cash flows.
(A) Bankcard business:
On November 18, 2003, the company completed the sale of its bankcard
operation to FleetBoston Financial. Results from the bankcard operation
have been classified as discontinued operations. The sale agreement
includes a transition services agreement under which the company's finance
operation will continue to service the bankcard accounts until final
conversion, which is expected to occur in the company's first fiscal
quarter ending May 31, 2004. FleetBoston Financial is reimbursing the
company for operating costs incurred during the transition period. Employee
severance costs will be incurred ratably
Page 6 of 29
from the time at which these costs are eligible for accrual through the
final conversion date. The company has not incurred any severance costs as
of November 30, 2003. The company expects to incur lease termination costs
in next fiscal year's first quarter.
The company anticipates that the sale will result in an after-tax loss of
approximately $82 million, including $75 million of adjustments to the
carrying value of the company's retained interest in the bankcard portfolio
and approximately $7 million of other costs, including employee severance
and lease termination. In the second quarter ended August 31, 2003, the
company recognized an after-tax loss of $95 million to reflect the
then-estimated net proceeds from the sale. To reflect the actual sale
proceeds, the company recorded a reduction of $19.4 million in the expected
after-tax loss in the quarter ended November 30, 2003.
Including the $19.4 million reduction in the expected after-tax loss, the
after-tax earnings from the discontinued bankcard operation totaled $24.0
million for the quarter ended November 30, 2003, and $4.8 million in the
same period last fiscal year. For the nine months ended November 30, 2003,
the after-tax loss from the discontinued bankcard operation totaled $84.9
million. For the nine months ended November 30, 2002, the after-tax
earnings from the discontinued bankcard operation totaled $21.2 million.
These results also include bankcard-related income generated by a
subsidiary that provides reinsurance and indemnification related to credit
protection products sold by the finance operation. For the third quarter,
the subsidiary's after-tax earnings related to the discontinued bankcard
operation were approximately $800,000 this fiscal year and approximately
$900,000 last fiscal year. For the nine months, the subsidiary's
discontinued after-tax earnings were approximately $2.2 million this fiscal
year and approximately $2.4 million last fiscal year.
The assets and liabilities of the discontinued bankcard operation reflected
on the consolidated balance sheets at November 30, 2003, and February 28,
2003, were comprised of the following:
(Amounts in millions) November 30 February 28
Accounts receivable............................................................. $11.5 $ 74.7
Retained interests in securitized receivables................................... - 321.1
----- ------
Total assets of discontinued bankcard operation................................. $11.5 $395.8
===== ======
Accrued expenses and other current liabilities.................................. $ 7.4 $ -
----- ------
Total liabilities of discontinued bankcard operation............................ $ 7.4 $ -
===== ======
(B) CarMax:
On September 10, 2002, the company's shareholders approved the separation
of the CarMax Group from Circuit City Stores, Inc. and the company's board
of directors authorized the redemption of the company's CarMax Group common
stock and the distribution of CarMax, Inc. common stock to effect the
separation. On October 1, 2002, the separation was effective and CarMax,
Inc. became an independent, separately traded public company. Each
outstanding share of CarMax Group common stock was redeemed in exchange for
one share of CarMax, Inc. common stock. In addition, each holder of Circuit
City Group common stock received as a tax-free distribution 0.313879 of a
share of CarMax, Inc. common stock for each share of Circuit City Group
common stock owned as of September 16, 2002, the record date for the
distribution. CarMax results are presented as results from discontinued
operations. The company recorded no gain or loss as a result of the
separation.
With the separation, CarMax paid a special dividend of $28.4 million to
Circuit City Stores, Inc. in recognition of the company's continuing
contingent liability for leases related to 23 CarMax locations. At November
30, 2003, the future minimum fixed lease obligations on these 23 leases
totaled approximately $459.2 million.
In connection with the separation, the company and CarMax entered into a
transition services agreement, under which the company provides CarMax
services, including human resources, administrative services,
Page 7 of 29
special technical services, payroll processing, benefits administration,
payroll tax services, computer center support and telecommunication
services, with initial terms ranging from six to 24 months and varying
renewal options. Under the agreement, CarMax pays the company the allocable
portion of all direct and indirect costs of providing these services plus
10 percent. Including the 10 percent markup, the company billed CarMax
$944,000 during the third quarter of fiscal 2004 and $6.5 million during
the nine months ended November 30, 2003, for services provided under the
agreement. A tax allocation agreement, which generally provides that
pre-separation taxes attributable to the business of each party will be
borne solely by that party, also was executed upon the separation.
For the three months ended November 30, 2002, net earnings from the
discontinued CarMax operations were $3.6 million, representing CarMax
results for the one month prior to the separation date. For the nine months
ended November 30, 2002, net earnings from the discontinued CarMax
operations were $64.5 million.
(C) Divx:
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations. In this
fiscal year's third quarter, the company reduced the provision for
commitments under licensing agreements by $2.3 million, reducing accrued
expenses and other current liabilities related to the former Divx
operations to $5.6 million on the consolidated balance sheet at November
30, 2003. The reduction contributed $1.5 million after-tax to net earnings
(loss) from discontinued operations for the three- and nine-month periods
ended November 30, 2003. At February 28, 2003, current liabilities of $8.0
million related to the former Divx operations were reflected on the
consolidated balance sheet. Payments of $10.5 million were made during the
first nine months of fiscal 2003 and are reflected on the consolidated
statement of cash flows for the nine months ended November 30, 2002. For
the three- and nine-month periods ended November 30, 2002, the discontinued
Divx operations had no impact on the company's results of operations.
4. Finance Income
Finance income includes the results from the company's private-label and
co-branded Visa credit card operation. The company completed the sale of
its bankcard operation on November 18, 2003. Results from the bankcard
operation have been classified as discontinued operations and, therefore,
are not included in finance income.
For the three- and nine-month periods ended November 30, 2003 and 2002, the
components of pretax finance income were as follows:
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2003 2002 2003 2002
----------------------------------------------------------- --------------------- ----------------------
Securitization income...................................... $25.3 $20.6 $83.0 $80.6
Less: Payroll and fringe benefit expenses.................. 7.0 7.8 22.6 23.0
Other direct expenses.............................. 12.7 10.5 38.0 32.1
---------------------- ----------------------
Finance income............................................. $ 5.6 $ 2.3 $22.4 $25.5
====================== ======================
Securitization income primarily is comprised of the gain on the sale of
receivables generated by the company's finance operation, income from
retained interests in the receivables and income related to servicing the
receivables, as well as the impact of increases or decreases in the fair
value of the retained interests. Finance income does not include any
allocation of indirect costs or income. The company presents information on
the performance of its finance operation on a direct basis to avoid making
arbitrary decisions regarding the periodic indirect benefits 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.
Page 8 of 29
5. Stock-Based Compensation
The company accounts for stock options granted to employees and directors
using the intrinsic value method of accounting in accordance with
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to
Employees," and related interpretations. As the exercise price of all
options granted was equal to the market price of the underlying common
stock on the grant date, no stock-based compensation cost has been
recognized. The following table summarizes the pro forma effect on net
earnings (loss) and net (loss) earnings per share if the company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
The pro forma effect on the three- and nine-month periods ended November
30, 2003 and 2002, may not be representative of the pro forma effects on
net earnings (loss) and net (loss) earnings per share for future quarters.
Three Months Ended Nine Months Ended
(Amounts in thousands November 30 November 30
except per share data) 2003 2002 2003 2002
----------------------------------------------------------- ----------------------- -------------------------
Net loss from continuing operations:
As reported............................................. $(24,073) $(26,126) $ (83,321) $(54,945)
Less: fair value impact of employee
stock compensation costs............................. 3,982 4,592 12,135 14,015
----------------------- ------------------------
Pro forma............................................... $(28,055) $(30,718) $ (95,456) $(68,960)
======================= =========================
Net (loss) earnings attributed to Circuit City common stock:
Continuing operations, as reported...................... $(24,073) $(26,126) $ (83,321) $(54,945)
Discontinued operations, as reported.................... 25,546 7,066 (83,375) 62,464
Less: fair value impact of employee
stock compensation costs............................. 3,982 4,592 12,135 14,015
----------------------- --------------------------
Pro forma............................................... $ (2,509) $(23,652) $(178,831) $ (6,496)
======================= =========================
Net loss per share from continuing operations:
Basic - as reported..................................... $ (0.12) $ (0.13) $ (0.40) $ (0.27)
Basic - pro forma ...................................... (0.14) (0.15) (0.46) (0.33)
Diluted - as reported .................................. (0.12) (0.13) (0.40) (0.27)
Diluted - pro forma .................................... (0.14) (0.15) (0.46) (0.33)
Net earnings (loss) per share attributed to Circuit City common stock:
Basic - as reported..................................... $ 0.01 $ (0.09) $ (0.81) $ 0.04
Basic - pro forma....................................... (0.01) (0.11) (0.87) (0.03)
Diluted - as reported .................................. 0.01 (0.09) (0.81) 0.04
Diluted - pro forma..................................... (0.01) (0.11) (0.87) (0.03)
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:
Three Months Ended Nine Months Ended
November 30 November 30
2003 2002 2003 2002
--------------------- -------------------------
Expected dividend yield.......................... 1.1% 0.3% 1.1% 0.3%
Expected stock volatility........................ 75.8% 69.8% 75.8% 69.8%
Risk-free interest rates......................... 2.4% 4.7% 2.5% 4.7%
Expected lives (in years)........................ 4.7 4.6 4.6 4.6
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted was $4 per option for the three- and
nine-month periods ended November 30, 2003. For the three- and
Page 9 of 29
nine-month periods ended November 30, 2002, the weighted average fair value
of options granted was $13 per option.
6. Income Taxes
The effective income tax rate applicable to results from continuing
operations was 33.9 percent for the three months ended November 30, 2003,
and 36.5 percent for the nine months ended November 30, 2003, compared with
37.6 percent for the three months ended November 30, 2002, and 37.2 percent
for the nine months ended November 30, 2002. The decreases are attributed
to lower state and local income taxes.
7. Net (Loss) Earnings per Share
The company reported a loss from continuing operations for the three- and
nine-month periods ended November 30, 2003 and 2002. The diluted net loss
per share is the same as the basic net loss per share for those periods
because including any potentially dilutive securities would be antidilutive
to the net loss per share from continuing operations.
For the three- and nine-month periods ended November 30, 2003, no options
or restricted stock were included in the computation of diluted net loss
per share because the company reported a loss from continuing operations.
Options to purchase 18.6 million shares of Circuit City common stock with
exercise prices ranging from $5.61 to $27.21 and restricted stock amounting
to 3.6 million shares were outstanding at November 30, 2003. For the three-
and nine-month periods ended November 30, 2002, no options or restricted
stock were included in the computation of diluted net loss per share
because the company reported a loss from continuing operations. Options to
purchase 17.8 million shares of Circuit City common stock with exercise
prices ranging from $6.63 to $27.21 per share and restricted stock
amounting to 3.0 million shares were outstanding at November 30, 2002.
Basic net earnings per share from discontinued operations attributed to
CarMax Group common stock is computed by dividing net earnings from
discontinued operations attributed to CarMax Group common stock by the
weighted average number of shares of CarMax Group common stock outstanding.
Diluted net earnings per share from discontinued operations attributed to
CarMax Group common stock is computed by dividing net earnings from
discontinued operations attributed to CarMax Group common stock by the sum
of the weighted average number of shares of CarMax Group common stock
outstanding and the dilutive potential CarMax Group common stock. CarMax
became an independent, separately traded public company on October 1, 2002.
CarMax results are presented as results from discontinued operations.
Reconciliations of the numerator and denominator of the basic and diluted
net earnings per share calculations for the CarMax Group are presented
below.
(Amounts in thousands Three Months Ended Nine Months Ended
except per share data) November 30, 2002 November 30, 2002
----------------------------------------------------------- --------------------- -------------------
Weighted average common shares............................. 37,084 37,023
Dilutive potential common shares:
Options................................................. 1,492 1,668
Restricted stock........................................ 1 10
------- -------
Weighted average common shares and
dilutive potential common shares........................ 38,577 38,701
======= =======
Net earnings available to common shareholders.............. $ 1,284 $23,216
Basic net earnings per share............................... $ 0.03 $ 0.63
Diluted net earnings per share............................. $ 0.03 $ 0.60
Page 10 of 29
8. Restricted Cash
Cash and cash equivalents held by the company's regulated subsidiaries and
not available for general corporate purposes were $118.1 million at
November 30, 2003, and $48.8 million at February 28, 2003. Restricted cash
is related to liquidity and settlement obligations between the finance
operation and the company, and were affected at November 30, 2003, by both
seasonal trends and the end of a quarter occurring on Thanskgiving weekend.
9. Common Stock Repurchased
In January 2003, the company's board of directors authorized the repurchase
of up to $200 million of common stock. The company did not repurchase any
shares of common stock during the third quarter. As of November 30, 2003,
the company had repurchased and retired approximately 2.7 million shares of
common stock at a cost of $13.9 million. Based on the market value of the
common stock at November 30, 2003, the remaining $186.1 million authorized
would allow the company to repurchase up to approximately 7 percent of the
210.5 million shares then outstanding.
10. Securitizations
The company enters into securitization transactions to finance
private-label and co-branded Visa credit card receivables, collectively
referred to as private-label receivables, originated by its finance
operation. The company uses a special purpose subsidiary to facilitate
these securitization transactions in accordance with the isolation
provisions of SFAS No. 140. The finance operation sells the private-label
receivables to the special purpose subsidiary, which, in turn, sells these
receivables to the securitization master trust. At the time of these sales,
the company recognizes gains or losses as a component of finance income.
See Note 4 for additional discussion of finance income.
The master trust periodically issues securities backed by the private-label
receivables. The master trust has issued multiple series of term
asset-backed securities having fixed initial principal amounts and multiple
series of variable funding asset-backed securities each having a variable
principal amount. Investors in the variable funding asset-backed securities
are generally entitled to receive monthly interest payments and have
committed to acquire additional variable funding interests up to a stated
amount until a stated commitment termination date. The securitization
agreements do not provide for recourse to the company for credit losses on
the securitized receivables. However, the fair value of the company's
retained interests in securitized receivables will be directly affected by
credit losses on those securitized receivables. The finance operation
continues to service the securitized receivables for a fee.
Circuit City retains the rights to receive the excess of the finance
charges and fees generated by the securitized private-label receivables
over the interest paid to investors, servicing costs and credit losses. The
company also holds various subordinated asset-backed securities, which
serve as credit enhancement for the asset-backed securities held by
third-party investors.
The private-label securitization agreement requires that the aggregate
outstanding principal balance of the securitized receivables exceeds a
specified amount and that the yield on the securitized receivables exceeds
specified rates. In addition, the variable funding securitization
agreements require that the company meet financial tests relating to
minimum tangible net worth, current ratio and debt-to-capital ratio and
that the securitized receivables meet specified performance levels relating
to delinquency rates, default rates and principal payment rates. If these
financial tests or performance levels are not met, or if certain other
events occur, it would constitute an early amortization event, in which
case the 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. The company and the securitized receivables were in compliance with
these financial tests and performance levels at November 30, 2003.
Page 11 of 29
The finance operation receives annual servicing fees approximating 2
percent of the outstanding principal balance of the securitized
receivables. The servicing fees specified in the securitization agreements
adequately compensate the finance operation for servicing the securitized
receivables. Accordingly, no servicing asset or liability has been
recorded.
At November 30 At February 28
(Dollar amounts in millions) 2003 2003
------------------------------------------------------------------------------- --------------- ---------------
Total principal amount of credit card receivables managed...................... $1,758.9 $1,636.1
Principal amount of receivables securitized.................................... $1,636.3 $1,592.2
Principal amount of receivables held for sale.................................. $ 122.6 $ 43.9
Unused capacity of the private-label variable funding program.................. $ 47.9 $ 29.5
Aggregate receivables 31 days or more delinquent............................... $ 103.3 $ 72.1
Aggregate receivables 31 days or more delinquent as a percent
of total principal amount of credit card receivables managed................ 5.9% 4.4%
The principal amount of defaults net of recoveries was $30.0 million for
the three-month period ended November 30, 2003, and $19.4 million for the
three-month period ended November 30, 2002. For the three months ended
November 30, 2003, serviced receivables averaged $1,629.1 million, compared
with $1,366.3 million for the same period last fiscal year. The principal
amount of defaults net of recoveries as an annualized percent of average
serviced receivables was 7.4 percent for the three-month period ended
November 30, 2003, and 5.7 percent for the three-month period ended
November 30, 2002.
The principal amount of defaults net of recoveries was $77.7 million for
the nine-month period ended November 30, 2003, and $53.6 million for the
nine-month period ended November 30, 2002. For the nine months ended
November 30, 2003, serviced receivables averaged $1,585.8 million, compared
with $1,317.3 million for the same period last fiscal year. The principal
amount of defaults net of recoveries as an annualized percent of average
serviced receivables was 6.5 percent for the nine-month period ended
November 30, 2003, and 5.4 percent for the nine-month period ended November
30, 2002.
During the third quarter of this fiscal year, the company replaced a
maturing term securitization with a variable funding program. No new
securitization transactions were completed during the second and third
quarters of fiscal 2004. The company completed a $500 million private-label
credit card receivable securitization transaction during the first quarter
of fiscal 2004 to replace maturing term securitizations. The company
renewed its private-label variable funding program, which the company also
refers to as a warehouse conduit, during the first quarter of fiscal 2004.
The company completed a $300 million private-label credit card receivable
securitization transaction during the first quarter of fiscal 2003 to
replace maturing term securitizations.
The following table summarizes cash flows received from and paid to the
securitization trust.
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2003 2002 2003 2002
----------------------------------------------------------- ------------------------ ------------------------
Proceeds from new securitizations.......................... $ 92.6 $191.0* $ 180.7 $613.0*
Proceeds from collections reinvested
in previous credit card securitizations................ $551.6 $304.1* $1,422.3 $724.4*
Servicing fees received.................................... $ 7.7 $ 6.3 $ 22.8 $ 17.7
Other cash flows received on
retained interests**................................... $ 31.7 $ 8.3 $ 93.6 $ 54.3
*To be consistent with the fiscal 2004 presentation, the fiscal 2003
amounts reflect changes in the presentation of securitization cash flows.
**This amount represents cash flows received from retained interests other
than servicing fees, including cash flows from the interest-only strip and
cash above the minimum required level held in cash collateral accounts.
Page 12 of 29
In accordance with the allocated carrying value method as prescribed by
SFAS No. 140, gains on sales of receivables sold to the securitization
trusts were $13.1 million for the quarter ended November 30, 2003, and
$19.3 million for the quarter ended November 30, 2002. Gains on sales of
receivables sold to the securitization trusts were $35.0 million for the
nine months ended November 30, 2003, and $52.4 million for the nine months
ended November 30, 2002.
The sum of the excess cash flows expected from receivables that are sold to
the securitization trust is referred to as an interest-only strip and is
carried at fair value based on estimates of these future cash flows. When
determining the fair value of the interest-only strip, the company
estimates future cash flows using estimates of key assumptions such as
finance charge income; charge-offs, net of recoveries; payment rates; and
discount rates appropriate for the type of asset and risk. Expected future
cash flows also are based upon the market's expectation about future
movements in interest rates as reflected in forward interest rate curves.
Retained interests in securitized private-label receivables are comprised
of the following components.
(Amounts in millions) At November 30, 2003 At February 28, 2003
------------------------------------------------------ -------------------- --------------------
Interest-only strip................................... $ 92.6 $ 79.1
Subordinated securities............................... 245.3 160.0
------- ------
Retained interests in securitized
private-label receivables.......................... $337.9 $239.1
======= ======
At November 30, 2003, the weighted-average life of the retained interests
in securitized receivables ranged from 0.2 years to 1.6 years. At February
28, 2003, the weighted-average life of the retained interests in
securitized receivables ranged from 0.5 years to 2.2 years.
The following tables present the key economic assumptions used in measuring
the fair value of private-label retained interests at November 30, 2003,
and February 28, 2003, 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 valuation assumptions at November
30, 2003, and February 28, 2003, are based on portfolio performance and
market conditions. The discount rates are used to calculate the fair value
of the subordinated asset-backed securities and the interest-only strip.
The subordinated asset-backed securities were valued primarily using a
discount rate of 9 percent. The interest-only strip was valued with a 15
percent discount rate. The default rates used in valuing the interest-only
strip are forecasted for future months and represent a loss curve
associated with a static pool of receivables. The ranges provided in the
tables below reflect the high and low months on the loss curve. The
weighted average default rates are weighted by the relative receivable
balance for each month and incorporate an adjustment for net present value.
These sensitivities are hypothetical and should be used with caution. In
the following tables, the effect of a variation in a particular assumption
on the fair value of the private-label retained interests is calculated
without changing any other assumption; in actual circumstances, changes in
one factor may result in changes in another, which might magnify or
counteract the sensitivities.
Page 13 of 29
At November 30, 2003
Impact on Fair Impact on Fair
Assumptions Weighted-Average Value of 10% Value of 20%
(Dollar amounts in millions) Used Assumptions Adverse Change Adverse Change
---------------------------------- -------------------------------------------------------------------------------------
Monthly payment rate.............. 11.3% 11.3% $4.1 $ 8.3
Annual default rate............... 8.6%-15.6% 10.0% $8.6 $17.1
Annual discount rate.............. 9.1%-15.0% 10.7% $3.1 $ 6.1
At February 28, 2003
Impact on Fair Impact on Fair
Assumptions Weighted-Average Value of 10% Value of 20%
(Dollar amounts in millions) Used Assumptions Adverse Change Adverse Change
---------------------------------- -------------------------------------------------------------------------------------
Monthly payment rate.............. 10.9% 10.9% $6.1 $10.7
Annual default rate............... 7.1%-12.9% 8.9% $7.1 $14.2
Annual discount rate.............. 8.3%-15.0% 10.7% $1.6 $ 3.2
11. Financial Derivatives
The company enters into interest rate cap agreements in connection with its
private-label receivable securitization transactions. During the first nine
months of fiscal 2004, the company did not purchase or sell any interest
rate caps. The total notional amount of interest rate caps outstanding was
$280.5 million at November 30, 2003, and $512.9 million at February 28,
2003. The reduction in the total notional amount of interest rate caps
outstanding was due to the termination of two interest rate caps upon the
repayment in the third quarter of a private-label term securitization
transaction. Interest rate caps purchased by the company are included in
net accounts receivable on the consolidated balance sheets and had a fair
value of $3.9 million at November 30, 2003, and $4.2 million at February
28, 2003. Interest rate caps written by the company are included in
accounts payable on the consolidated balance sheets and had a fair value of
$3.9 million at November 30, 2003, and $4.2 million at February 28, 2003.
The market and credit risks associated with the company's 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 its 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. Recent Accounting Pronouncements
Effective in the third quarter of fiscal 2004, the company adopted Emerging
Issues Task Force Issue No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables," which addresses when and how an arrangement
involving multiple deliverables should be divided into separate units of
accounting, as well as how consideration under the arrangement should be
measured and allocated to the separate units of accounting in the
arrangement. The adoption of EITF No. 00-21 did not have a material impact
on the company's financial position, results of operations or cash flows.
Effective September 1, 2003, the company adopted FASB Interpretation No.
46, "Consolidation of Variable Interest Entities," which addresses how to
identify variable interest entities and provides guidance as to how a
company may assess its interests in a variable interest entity for purposes
of deciding whether consolidation of that entity is required. With the
adoption of this standard, the company recorded $12.6 million to long-term
debt on the consolidated balance sheet. The adoption of FIN No. 46 did not
have a material impact on the company's financial position, results of
operations or cash flows.
Page 14 of 29
13. Segment Information
Due to changes in the company's management reporting structure that
occurred during the first quarter of fiscal 2004, the company identified
its retail operation and its finance operation as reportable segments in
accordance with the provisions of SFAS No. 131, "Segment Reporting." These
segments are identified and managed by the company based on the company's
management reporting structure and on the nature of the products and
services offered by each segment. The retail operation segment is primarily
engaged in the business of selling brand-name consumer electronics,
personal computers and entertainment software. The finance operation issues
and services private-label credit cards, including a co-branded Visa credit
card. The finance operation is conducted through the company's wholly owned
subsidiary First North American National Bank, which is a limited-purpose
credit card bank. FNANB sells its credit card receivables to a consolidated
special purpose subsidiary wholly owned by the company, which, in turn,
sells these receivables to a securitization master trust that is an
off-balance-sheet qualifying special purpose entity. See Note 4 and Note 10
for additional discussion of finance income and the finance operation.
The company's finance operation segment is evaluated by management on a
pretax basis. The company includes substantially all depreciation and
amortization and interest expense within the retail operation segment. The
accounting policies of the segments are the same as those set forth in Note
2 to the company's audited consolidated financial statements incorporated
by reference in the company's fiscal 2003 Annual Report on Form 10-K.
Revenue by reportable segment and the reconciliation to the consolidated
statements of operations were as follows:
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2003 2002 2003 2002
---------------------------------------------------------- ------------------------- ------------------------
Retail operation.......................................... $2,407.4 $2,421.7 $6,496.4 $6,761.1
Finance operation......................................... 25.3 20.6 83.0 80.6
------------------------- ------------------------
Total revenue............................................. 2,432.7 2,442.3 6,579.4 6,841.7
Less: finance operation revenue not included
in net sales and operating revenues*................. 25.3 20.6 83.0 80.6
------------------------- ------------------------
Net sales and operating revenues ......................... $2,407.4 $2,421.7 $6,496.4 $6,761.1
========================= ========================
*Finance operation revenue is included in finance income, which is reported
separately from net sales and operating revenues on the statements of
operations.
Loss from continuing operations before income taxes by reportable segment
and the reconciliation to the consolidated statements of operations were as
follows:
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2003 2002 2003 2002
---------------------------------------------------------- ---------------------- ----------------------
Retail operation*......................................... $(42.0) $(44.2) $(153.6) $(113.0)
Finance operation......................................... 5.6 2.3 22.4 25.5
--------------------- -----------------------
Loss from continuing operations before income
taxes................................................. $(36.4) $(41.9) $(131.2) $ (87.5)
===================== ======================
*All corporate expenses are included in the retail operation.
Total assets by reportable segment and the reconciliation to the
consolidated balance sheets were as follows:
At November 30 At February 28
(Amounts in millions) 2003 2003
--------------------------------------------------------- --------------- --------------
Retail operation......................................... $3,760.7 $2,980.2
Finance operation........................................ 634.2 423.1
Discontinued operations.................................. 11.5 395.8
-------- --------
Total assets............................................. $4,406.4 $3,799.1
======== ========
Page 15 of 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From February 7, 1997, to October 1, 2002, the common stock of Circuit City
Stores, Inc. consisted of two common stock series that were intended to reflect
the performance of the company's two businesses. The Circuit City Group common
stock was intended to reflect the performance of the Circuit City consumer
electronics 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 was intended to reflect
the performance of the CarMax auto superstores and related operations.
Effective October 1, 2002, the CarMax auto superstore business was separated
from the Circuit City consumer electronics business through a tax-free
transaction in which CarMax, Inc., formerly a wholly owned subsidiary of Circuit
City Stores, Inc., became an independent, separately traded public company.
Following the separation, the Circuit City Group common stock was renamed
Circuit City common stock. CarMax results are presented as results from
discontinued operations. See Note 3 to the consolidated financial statements in
this report for additional discussion of the separation.
On November 18, 2003, we completed the sale of our bankcard operation, which
included Visa and MasterCard credit card receivables and related cash reserves.
Results from the bankcard operation have been classified as discontinued
operations. See Note 3 to the consolidated financial statements in this report
for additional discussion concerning the sale of the bankcard operation.
CRITICAL ACCOUNTING POLICIES
See the discussion of critical accounting policies under Management's Discussion
and Analysis of Results of Operations and Financial Condition incorporated by
reference in our fiscal 2003 Annual Report on Form 10-K. These policies relate
to the calculation of the value of retained interests in securitization
transactions, the calculation of the liability for lease termination costs,
accounting for pension liabilities and accounting for cash consideration
received from vendors.
RESULTS OF OPERATIONS
Our operations, in common with other retailers in general, are subject to
seasonal influences. Historically, we have realized more of our net sales and
net earnings in the fourth quarter, which includes the majority of the holiday
selling season, than in any other fiscal quarter. The net earnings of any
quarter are seasonally disproportionate to net sales since administrative and
certain operating expenses remain relatively constant during the year.
Therefore, quarterly results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
Net Sales and Operating Revenues
Total sales for the third quarter of fiscal 2004 decreased 1 percent to $2.41
billion from $2.42 billion in last fiscal year's third quarter. Comparable store
merchandise sales decreased 1 percent for the third quarter of fiscal 2004.
Total sales for the first nine months of fiscal 2004 decreased 4 percent to
$6.50 billion from $6.76 billion for the first nine months of last fiscal year.
Comparable store merchandise sales decreased 5 percent for the first nine months
of fiscal 2004. A store is included in comparable store merchandise sales after
the store has been open for a full year. Relocated stores are included
immediately in the comparable store base.
Comparable store merchandise sales increased 4 percent in November. During the
quarter, we experienced strong sales growth in entertainment software, including
movies and music; new video technologies, including digital televisions and
thin-panel LCD and plasma displays; portable DVD players; digital satellite
systems; digital imaging and portable digital audio. We believe the improving
pace throughout the quarter reflected
Page 16 of 29
industry trends as well as consumer reaction to our new store design, new
merchandise displays and advertising program. These results include strong
growth in Web-originated sales during the quarter.
The percent of merchandise sales represented by each major product category for
the three- and nine-month periods ended November 30, 2003 and 2002 was as
follows:
Three Months Ended Nine Months Ended
November 30 November 30
2003 2002 2003 2002
------------------------ -----------------------
Video..................................................... 42% 40% 40% 39%
Audio..................................................... 13 15 14 15
Information technology.................................... 31 33 33 34
Entertainment............................................. 14 12 13 12
---------------------- -----------------------
Total..................................................... 100% 100% 100% 100%
====================== =======================
We sell extended warranty programs on behalf of unrelated third parties that are
the primary obligors. Under these third-party warranty programs, we have no
contractual liability to the customer. The total extended warranty revenue
included in total sales was $75.4 million, or 3.1 percent of sales, in the third
quarter of fiscal 2004, compared with $90.0 million, or 3.7 percent of sales, in
last fiscal year's third quarter. The total extended warranty revenue included
in total sales was $225.6 million, or 3.5 percent of sales, for the first nine
months of fiscal 2004, compared with $261.9 million, or 3.9 percent of sales, in
the first nine months of last fiscal year. The decrease is due in part to
declines in average retail prices, which tend to result in consumers purchasing
warranty contracts on fewer products. We believe that expanded availability of
self-service products and greater use over last year of less experienced,
part-time, seasonal sales associates who were added for the holiday selling
season also contributed to the decrease in extended warranty sales.
The following table provides the numbers of our retail units:
Nov. 30, 2003 Feb. 28, 2003 Nov. 30, 2002
------------- ------------- -------------
Superstores....................................... 618 611 611
Mall-based stores................................. 5 15 17
--- --- ---
Total............................................. 623 626 628
=== === ===
We expect to open eight Superstores and relocate 16 Superstores to 18
Superstores in the current fiscal year. In the third quarter of fiscal 2004, we
opened six Superstores, relocated six Superstores, and closed eight mall-based
stores. For the first nine months of fiscal 2004, we opened seven Superstores,
relocated 10 Superstores, fully remodeled four Superstores and closed 10
mall-based stores.
The following table provides the numbers of our fiscal 2004 new, relocated and
fully remodeled Superstores.
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 2004
Actual Actual Actual Estimated Estimated
- -------------------------------------- --------------- ------------------- --------------- ------------------ -------------
New Superstores....................... - 1 6 1 8
Relocated Superstores................. 3 1 6 6 - 8 16 - 18
Fully remodeled Superstores........... 1 3 - - 4
--------------- ------------------- --------------- ------------------ -------------
Total................................. 4 5 12 7 - 9 28 - 30
=============== =================== =============== ================== =============
Cost of Sales, Buying and Warehousing
The gross profit margin was 22.2 percent of sales in the third quarter of fiscal
2004, compared with 22.6 percent in the same period last fiscal year. For the
first nine months of fiscal 2004, the gross profit margin was 22.6 percent of
sales, compared with 23.5 percent for the same period last fiscal year. The
lower gross profit margin primarily reflects the reduction in extended warranty
sales, which carry above average gross profit margins.
Page 17 of 29
Finance Income
Our finance operation is conducted through our wholly owned subsidiary First
North American National Bank, which is a limited-purpose credit card bank. FNANB
sells its private-label and co-branded Visa credit card receivables to a
consolidated special purpose subsidiary wholly owned by the company, which, in
turn, sells these receivables to a securitization master trust that is an
off-balance-sheet qualifying special purpose entity. We collectively refer to
the private-label and the co-branded Visa credit card programs as the
private-label program. We completed the sale of our bankcard operation,
comprised of our MasterCard and Visa credit card programs, on November 18, 2003.
Results from the bankcard operation have been classified as discontinued
operations and, therefore, are not included in finance income. See Note 3 to the
consolidated financial statements in this report for additional discussion
concerning the sale of our bankcard operation.
At November 30, 2003, approximately 64 percent of the total principal amount of
private-label receivables outstanding had been originated under the co-branded
Visa credit card program. At February 28, 2003, approximately 47 percent of the
total principal amount of private-label receivables outstanding had been
originated under the co-branded Visa credit card program.
Securitizations are accounted for as sales in accordance with Statement of
Financial Accounting Standards No. 140, and securitization income is recognized
at the time the receivables are securitized. Gains or losses on sales of
receivables primarily reflect the difference between the carrying amount of the
receivables sold and the sum of the cash proceeds received and the fair value of
the retained interests in the securitized receivables. When receivables are
sold, we receive cash, retain subordinated securities and retain rights to
receive the excess cash flows, referred to as interest-only strips, that the
receivables are expected to produce during their life. The excess cash flows
represent the excess of the finance charges and fees generated by the
securitized receivables over the related interest paid to investors, servicing
costs and credit losses. We continue to service the securitized receivables for
a fee. Serviced private-label receivables averaged $1.63 billion for the three
months ended November 30, 2003, compared with $1.37 billion for the same period
last fiscal year. For the nine months ended November 30, 2003, serviced
private-label receivables averaged $1.59 billion, compared with $1.32 billion
for the nine months ended November 30, 2002.
The finance operation produced pretax income of $5.6 million in this year's
third quarter, compared with pretax income of $2.3 million in the same period
last fiscal year. The increase in finance income reflects increased yield as
zero-percent financing promotions began to expire and increased use of the
co-branded Visa credit card, partly offset by increases in charge-offs and
operating expenses. For the nine months ended November 30, 2003, finance income
decreased to $22.4 million this fiscal year from $25.5 million in the same
period last fiscal year. Finance income was reduced by increases in charge-offs,
operating expenses and discounting costs related to securitization transactions
completed in the first quarter of this fiscal year, partly offset by the third
quarter yield increases.
The fair value of the interest-only strip for the private-label receivables
totaled $92.6 million at November 30, 2003, and $79.1 million at February 28,
2003. The increase in the fair value of the interest-only strip was primarily
due to an increase in the amount of receivables in the master trust that were
impacted by the implementation of discounting. We began to sell private-label
receivables to the master trust at a discount in December 2002. As a result, 2
percent of the principal amount of receivables sold on or after December 1,
2002, are treated as finance charge receivables in the securitization trust and
collections of those receivables are treated as finance charge collections,
thereby boosting yield to the securitization trust. This causes an increase in
the fair value of the interest-only strip and a corresponding decrease in
proceeds received on the sale of receivables.
When determining the fair value of the interest-only strip, we estimate future
cash flows using estimates of key assumptions such as finance charge income;
charge-offs, net of recoveries; payment rates; and discount rates appropriate
for the type of asset and risk. Expected future cash flows also are based upon
the market's expectation about future movements in interest rates as reflected
in forward interest rate curves. We review the assumptions and estimates used in
determining the fair value of the interest-only strip on a quarterly basis.
Page 18 of 29
If the assumptions change or the actual results differ from the projected
results, securitization income will be affected.
Finance income is reduced by payroll, fringe benefits and other costs directly
associated with the management and securitization of the private-label
receivables. Payroll and fringe benefit expenses generally vary with the amount
of serviced receivables. Other direct expenses include third-party data
processing fees, rent, credit promotion expenses, Visa fees and other operating
expenses. Finance 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. See Note 1, Note 4, Note 10 and Note 13 to the consolidated financial
statements in this report for additional discussion concerning our finance
operation.
Selling, General and Administrative Expenses
Three Months Ended November 30 Nine Months Ended November 30
------------------------------ --------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
% of % of % of % of
(Dollar amounts in millions) $ Sales $ Sales $ Sales $ Sales
- ---------------------------------------- ------------------------------------------- --------------------------------------------
Store expenses.......................... $520.0 21.6% $530.2 21.9% $1,443.3 22.2% $1,501.7 22.2%
General and administrative
expenses........................... 43.6 1.8 47.1 1.9 128.7 2.0 151.5 2.2
Remodel expenses........................ 0.3 - 7.0 0.3 29.8 0.5 34.8 0.5
Relocation expenses..................... 9.8 0.4 4.4 0.2 18.9 0.3 10.4 0.2
Pre-opening expenses.................... 4.2 0.2 4.4 0.2 7.3 0.1 7.2 0.1
Interest Income......................... (1.2) - (1.0) - (5.3) (0.1) (6.0) (0.1)
------------------------------------------- --------------------------------------------
Total ................................. $576.7 24.0% $592.1 24.5% $1,622.7 25.0% $1,699.6 25.1%
========================================= ============================================
Total selling, general and administrative expenses declined $15.4 million, or 3
percent, compared with the third quarter of last fiscal year. The largest
contributor to the decline was a $10.2 million, or 2 percent, decline in store
expenses driven by a reduction in store payroll. The third-quarter payroll
savings were partly offset by higher rent and occupancy costs related to new and
relocated stores and increases in advertising costs that reflect our decision to
more heavily weight our advertising expenditures to the higher volume periods of
the year.
This year's third quarter expenses included costs of $280,000 associated with
the refixturing of five stores and $9.8 million of relocation costs, including
accelerated depreciation of assets related to planned future relocations,
related to the relocation of six Superstores. Expenses in last year's third
quarter included costs of $7.0 million associated with the completion of 71
video department remodels and 13 full-store lighting upgrades and $4.4 million
of relocation costs related to the relocation of five Superstores.
Interest Expense
Interest expense was $0.2 million for the third quarter of this fiscal year and
last fiscal year. Interest expense was $1.5 million for the nine months ended
November 30, 2003, and $0.7 million for the nine months ended November 30, 2002.
The increase in interest expense for the first nine months of fiscal 2004
reflects interest paid as a result of completed audits of prior year income tax
returns.
Page 19 of 29
Income Taxes
The effective income tax rate applicable to results from continuing operations
was 33.9 percent for the three months ended November 30, 2003, and 36.5 percent
for the nine months ended November 30, 2003, compared with 37.6 percent for the
three months ended November 30, 2002, and 37.2 percent for the nine months ended
November 30, 2002. The decreases are attributed to lower state and local income
taxes.
Net Loss from Continuing Operations
The net loss from continuing operations was $24.1 million, or 12 cents per
share, in the third quarter ended November 30, 2003, compared with the net loss
from continuing operations of $26.1 million, or 13 cents per share, in the third
quarter of last fiscal year. For the nine-month period ended November 30, 2003,
the net loss from continuing operations was $83.3 million, or 40 cents per
share, compared with the net loss from continuing operations of $54.9 million,
or 27 cents per share, for the same period last fiscal year.
Net Earnings (Loss) from Discontinued Operations
On November 18, 2003, we completed the sale of our bankcard operation to
FleetBoston Financial. Results from the bankcard operation have been classified
as discontinued operations. The sale agreement includes a transition services
agreement under which our finance operation will continue to service the
bankcard accounts until final conversion, which is expected to occur in the
first fiscal quarter ending May 31, 2004. FleetBoston Financial is reimbursing
us for operating costs incurred during the transition period. Employee severance
costs will be incurred ratably from the time at which these costs are eligible
for accrual through the final conversion date. We have not incurred any
severance costs as of November 30, 2003. We expect to incur lease termination
costs in next fiscal year's first quarter.
We anticipate that the sale will result in an after-tax loss of approximately
$82 million, including $75 million of adjustments to the carrying value of our
retained interest in the bankcard portfolio and approximately $7 million of
other costs, including employee severance and lease termination. In the second
quarter ended August 31, 2003, we recognized an after-tax loss of $95 million to
reflect the then-estimated net proceeds from the sale. To reflect the actual
sale proceeds, we recorded a reduction of $19.4 million in the expected
after-tax loss in the quarter ended November 30, 2003.
Including the $19.4 million reduction in the expected after-tax loss, the
after-tax earnings from the discontinued bankcard operation totaled $24.0
million for the quarter ended November 30, 2003, and $4.8 million in the same
period last fiscal year. For the nine months ended November 30, 2003, the
after-tax loss from the discontinued bankcard operation totaled $84.9 million.
For the nine months ended November 30, 2002, the after-tax earnings from the
discontinued bankcard operation totaled $21.2 million. These results also
include bankcard-related income generated by a subsidiary that provides
reinsurance and indemnification related to credit protection products sold by
the finance operation. For the third quarter, the subsidiary's after-tax
earnings related to the discontinued bankcard operation were approximately
$800,000 this fiscal year and approximately $900,000 last fiscal year. For the
nine months, the subsidiary's discontinued after-tax earnings were approximately
$2.2 million this fiscal year and approximately $2.4 million last fiscal year.
In fiscal 2000, we ceased marketing the Divx home video system and discontinued
that business. Operating results of Divx and the loss on the disposal of the
business have been presented as results of discontinued operations for all
periods. In the third quarter of this year, we reduced the provision for
commitments under licensing agreements by $2.3 million. This reduction
contributed $1.5 million after-tax to net earnings from discontinued operations
in this year's third quarter. Divx had no impact on earnings from discontinued
operations last fiscal year.
On October 1, 2002, we completed the separation of the CarMax auto superstore
business from the Circuit City consumer electronics business. CarMax results are
presented as results from discontinued operations. For the quarter ended
November 30, 2002, net earnings from the discontinued CarMax operations were
$3.6
Page 20 of 29
million. For the nine months ended November 30, 2002, net earnings from the
discontinued CarMax operations were $64.5 million.
Operations Outlook
We are focused on three basic areas: 1) driving revenue growth, 2) stabilizing
our gross margins and 3) bringing our overall cost and expense structure in line
with our current level of revenues. We believe we have the right plan in place
to combine profitable revenue growth with improved in-store execution, and we
have the resources to execute that plan. Our attention is focused on building
value for shareholders by providing superior consumer electronics solutions to
America's families.
To drive revenue growth, our plan encompasses our store revitalization effort,
new store builds and the continued strong growth of our e-commerce business.
Since the beginning of fiscal 2001 through December 31, 2003, 125 Superstores,
or 20 percent of our 618 Superstores, had been relocated, newly constructed or
fully remodeled to provide a contemporary shopping experience with easy product
access and more powerful merchandising displays. We expect that number to reach
approximately 30 percent by the end of next fiscal year. Since the beginning of
fiscal 2001, we have relocated 31 stores. As of November 30, 2003, 21 of these
31 relocated stores have been open for more than six months. In their first full
six months following grand opening, these 21 stores produced an average sales
change that was approximately 28 percentage points better than the sales pace of
the remainder of the store base during the same time periods and an internal
rate of return of approximately 20 percent. These averages could moderate as we
relocate additional stores. Ultimately, we expect to relocate a total of
approximately one-third of the existing store base. In addition to opportunities
to relocate stores, we have identified approximately 100 trade areas that are
suitable for new stores that represent potential geographic expansion.
Last fiscal year, we completed an extensive analysis to identify the
characteristics of a successful store. Specific real estate site features were
among those key characteristics. As a result, one of the priorities for
determining our store opening plans is the availability of superior estate that
meets our site requirements. Based on the availability levels, we expect to open
65 to 70 Superstores in the upcoming fiscal year. Slightly more than half of
these stores will be relocations; the remaining stores will be entries into new
trade areas, either in our existing or new smaller markets. Our efforts to
provide superior consumer electronics solutions through the revitalized store
base will continue into fiscal 2005 and beyond.
We believe that our Web-based business is an integral way to build our brand,
support our stores and make it easier for customers to shop and buy consumer
electronics. While sales generated from our Web site are a relatively small
portion of our total business, the Web-based business is growing rapidly. We
continue to enhance the site and fulfillment capabilities as more and more
customers research products on the Web and then purchase them in stores and
online. Many customers choose to take advantage of Express Pick-up, a service
which enables merchandise purchased online to be picked up in the customer's
selected store 15 minutes after completing an online purchase.
Stabilizing our gross margins and reducing our cost and expense structure are
integral pieces of our effort to improve our profitability. Improving attachment
rates of accessories and services and strengthening our product sourcing
operations remain important components of stabilizing gross margins. When we
announced the change to our store compensation structure in February, we
indicated we expected to save approximately $130 million in store payroll
expenses. While we anticipate the impact of this change to be consistent with
the anticipated expense reduction, we have chosen to add incremental staffing to
selected product areas and in selected stores to better serve our customers. As
a result, we currently expect that overall store payroll savings for the fiscal
year will be in the range of $115 to $120 million. We have identified many
actions across the company that will allow us to further reduce our cost and
expense structure. The process of implementing these specific actions is
underway and will continue at least through next fiscal year. We continue to
aggressively look for additional cost and expense reduction and gross margin
stabilization opportunities.
For fiscal 2004, we expect net cash expenditures and non-cash expenses related
to remodeling, relocations and refixturings to total approximately $140 million.
We anticipate that approximately $80 million of that
Page 21 of 29
amount will be capitalized and approximately $60 million will be expensed,
reducing fiscal 2004 earnings per share by an estimated 19 cents. We anticipate
total capital expenditures of approximately $130 million in fiscal 2004. Capital
expenditures are net of landlord reimbursements for property improvement
expenditures and sale-leaseback proceeds. The estimated expense amount includes
approximately $50 million of non-cash expenses for leasehold impairment reserves
on stores we plan to relocate and accelerated depreciation on assets we plan to
take out of service as a result of our remodelings and relocations. As we
continue to relocate stores, we expect to incur additional leasehold termination
costs, with the amount primarily dependent on the length of remaining lease
terms and sublease opportunities.
Recent Accounting Pronouncements
Effective in the third quarter of fiscal 2004, we adopted Emerging Issues Task
Force Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables," which addresses when and how an arrangement involving multiple
deliverables should be divided into separate units of accounting, as well as how
the consideration under the arrangement should be measured and allocated to the
separate units of accounting in the arrangement. The adoption of EITF No. 00-21
did not have a material impact on our financial position, results of operations
or cash flows.
Effective September 1, 2003, we adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," which addresses how to identify
variable interest entities and provides guidance as to how a company may assess
its interests in a variable interest entity for purposes of deciding whether
consolidation of that entity is required. With the adoption of this standard, we
recorded $12.6 million to long-term debt on the consolidated balance sheet. The
adoption of FIN No. 46 did not have a material impact on our financial position,
results of operations or cash flows.
FINANCIAL CONDITION
Liquidity and Capital Resources
At November 30, 2003, we had cash and cash equivalents of $455.3 million,
compared with $884.7 million at February 28, 2003. The lower cash balance
primarily reflects the increase in merchandise inventory, offset by the
corresponding increase in accounts payable, related to the anticipated sales
during the holiday selling season.
At November 30, 2002, we had cash and cash equivalents of $437.5 million. The
year-over-year change in the cash balance reflects in part $282 million in net
cash proceeds received at the closing of the sale of the bankcard operation. We
expect that, after severance, lease termination and other post-closing costs,
cash proceeds from the sale ultimately will net approximately $279 million
after-tax. The cash generated by the sale of the bankcard operation was partly
offset by a higher level of retained interests in securitized private-label
receivables and the loss from continuing operations. In addition, this year, we
increased inventory levels in key product categories in anticipation of a
stronger holiday selling season compared with last year and to support
compelling merchandise displays after the holidays. This strategy increased
inventory by $276.2 million over the same period last year. Inventory growth was
partly financed by accounts payable, which rose $218.1 million to 68 percent of
inventory in this year's third quarter from 66 percent of inventory in the same
period last year.
Operating Activities. In the nine months ended November 30, 2003, Circuit City
used net cash of $606.9 million in operating activities, compared with net cash
of $713.2 million used in the nine months ended November 30, 2002. The decrease
in net cash used is primarily due to the increase in accounts payable, offset by
the increase in merchandise inventory and the increase in retained interests in
securitized receivables.
Merchandise inventory increased $1.24 billion in the first nine months of fiscal
2004, compared with an increase of $1.14 billion in the same period last fiscal
year. The difference primarily reflects the increased inventory levels in key
product categories in anticipation of a stronger selling season compared with
last year and to support compelling merchandise displays after the holidays.
Accounts payable increased by $830.2
Page 22 of 29
million in the first nine months of fiscal 2004, compared with an increase of
$556.2 million in the first nine months of last fiscal year. The difference
reflects the earlier fiscal 2003 inventory build for the holiday selling season.
Retained interests in securitized receivables increased by $98.7 million in the
first nine months of this fiscal year, compared with an increase of $74.9
million in the first nine months of last fiscal year. The current year increase
in retained interests in securitized receivables reflects the completion of a
$500 million private-label credit card receivable securitization transaction
during the first quarter of fiscal 2004 to replace a maturing term
securitization. We renewed a private-label variable funding program, which we
refer to as a warehouse conduit, during the first quarter of fiscal 2004. We
completed a $300 million private-label credit card receivable securitization
transaction during the first quarter of fiscal 2003 to replace a maturing term
securitization. No new securitization transactions were completed during the
second and third quarters of fiscal 2004. During the third quarter of this
fiscal year, we replaced a maturing term securitization with a variable funding
program.
Investing Activities. Net cash used in investing activities was $113.0 million
in the nine months ended November 30, 2003, compared with net cash of $80.1
million used in investing activities in the first nine months of last fiscal
year. Capital expenditures increased to $134.3 million in the first nine months
of fiscal 2004 from $111.1 million in the comparable period last fiscal year.
Capital spending in the first nine months of fiscal 2004 includes spending
related to the opening of seven new Superstores, the relocation of 10
Superstores, the remodeling of four Superstores and the refixturing of the
merchandise areas in 222 Superstores. Capital spending in the first nine months
of fiscal 2003 includes spending related to the opening of eight new
Superstores, nine relocated Superstores, remodeled video departments in 301
Superstores and full-store lighting upgrades in 311 Superstores.
Financing Activities. Net cash used in financing activities was $16.3 million in
the first nine months of fiscal 2004 compared with net cash provided by
financing activities of $32.1 million in the same period last year. The
difference primarily reflects net proceeds from short-term seasonal lines of
credit of $57.6 million received in the third quarter of fiscal 2003. In January
2003, our board of directors authorized the repurchase of up to $200 million of
common stock. We did not repurchase any shares of common stock during the third
quarter. As of November 30, 2003, we had repurchased and retired 2.7 million
shares of common stock at a cost of $13.9 million. Based on the market value of
the common stock at November 30, 2003, the remaining $186.1 million authorized
would allow for the repurchase of up to approximately 7 percent of the 210.5
million shares then outstanding.
On June 27, 2003, we entered into a $500 million, four-year revolving credit
facility secured by inventory and certain accounts receivables. This facility
will be used to support letters of credit as well as for short-term borrowing
needs and generally will bear interest at a spread over LIBOR or at prime. The
facility is scheduled to mature in June 2007 and provides for an option to
extend the facility by one year. The maximum credit extensions, including loans
and outstanding letters of credit, permitted under the credit facility on any
date will be determined using a borrowing base calculated as a percentage of our
eligible inventory and accounts receivable as of that date. If the remaining
borrowing availability under the facility falls below $100 million, cash
dividends and stock repurchases are limited to an aggregate of $75 million in
any fiscal year. In addition, if the difference between the borrowing base and
the outstanding credit extensions under the facility falls below $50 million for
five consecutive business days, all proceeds from the sale of inventory must be
applied on a daily basis to payment of amounts owed under the facility. The
facility has customary representations and warranties, covenants and events of
default. This credit facility replaced $210 million in committed seasonal lines,
which were terminated on the same date. At November 30, 2003, there were no
short-term borrowings on this facility. At November 30, 2003, outstanding
letters of credit related to this facility were $52.1 million, leaving $447.9
million available for borrowing.
At November 30, 2003, the aggregate principal amount of managed private-label
credit card receivables totaled $1.76 billion. At November 30, 2003, the unused
capacity of the private-label variable funding program was $47.9 million. Our
securitization agreements do not provide recourse to the company for credit
losses on securitized receivables. However, the fair value of our retained
interests in securitized receivables would be directly affected by credit losses
on those securitized receivables.
Page 23 of 29
We anticipate that we will be able to expand or enter into new securitization
agreements to meet the future needs of our finance operation. However, adverse
changes in the performance of our private-label credit card portfolio or changes
in the asset-backed securities market could result in our having to hold larger
retained interests in future securitizations. The private-label securitization
agreement requires that the aggregate outstanding principal balance of the
securitized receivables exceeds a specified amount and that the yield on the
securitized receivables exceeds specified rates. In addition, the variable
funding securitization agreements require that we meet financial tests relating
to minimum tangible net worth, current ratio and debt-to-capital ratio and that
the securitized receivables meet specified performance levels relating to
delinquency rates, default rates and principal payment rates. If these financial
tests or performance levels are not met, or if certain other events occur, it
would constitute an early amortization event, in which case the 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. The company and the
securitized receivables were in compliance with these financial tests and
performance levels at November 30, 2003.
We expect that available cash resources, credit facilities, sale-leaseback
transactions, landlord reimbursements and cash generated by operations will be
sufficient to fund capital expenditures and working capital for the foreseeable
future.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, which are subject to risks and
uncertainties. 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. We wish to take
advantage of the "safe harbor" provisions of the Act. Our statements that are
not historical facts, including statements about management's expectations for
fiscal 2004 and beyond, are forward-looking statements and involve various risks
and uncertainties.
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. The United States retail industry, and the specialty retail industry
in particular, are dynamic by nature and have undergone significant changes in
recent years. Our ability to anticipate and successfully respond to the
continuing challenges of our industry is key to achieving our expectations.
Important factors that could cause actual results to differ materially from
estimates or projections contained in our forward-looking statements include:
o The timing and amount of any post-closing costs or other charges to income
that may be required as a result of the sale of the bankcard operation;
o Changes in the amount and degree of promotional intensity exerted by
current competitors and potential new competition from competitors using
either similar or 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, trends in consumer retail spending, both in general and in
our product categories, 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 we sell;
o Changes in availability or cost of financing for working capital and
capital expenditures, including securitization financing and financing to
support development of our business;
o Lack of availability or access to sources of inventory;
o Inability to liquidate excess inventory should excess inventory develop;
Page 24 of 29
o Failure to successfully implement sales and profitability improvement
programs, including our remodel program, and our effort to stabilize gross
margins and reduce our cost and expense structure;
o Changes in the performance of the private-label portfolio, including
material changes in cardholder default rates or payment rates;
o Our ability to attract and retain an effective management team or changes
in the costs or availability of a suitable work force to manage and support
our service-driven operating strategies;
o Changes in production or distribution costs or costs of materials for our
advertising;
o Availability of appropriate real estate locations for relocations and new
stores;
o Successful implementation of our various customer service initiatives;
o Consumer response to our efforts to improve sales of accessories and
services;
o Successful implementation of stronger product sourcing operations;
o Negative investment returns in our pension plan;
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, the imposition of new environmental
restrictions, regulations or laws or the discovery of environmental
conditions at current or future locations, or any failure to comply with
such laws or any adverse change in such laws; and
o Significant adverse results in litigation matters.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Receivables Risk. We manage the market risk associated with the revolving
private-label credit card portfolio of our finance operation. Portions of this
portfolio have been securitized in transactions accounted for as sales in
accordance with SFAS No. 140 and, therefore, are not presented on the
consolidated balance sheets.
The majority of accounts in the private-label credit card portfolio is charged
interest at rates indexed to the prime rate, adjustable on a monthly basis
subject to certain limitations. The remaining accounts are charged interest at
fixed annual percentage rates. The following table presents the breakdown by
interest rate structure of the gross principal receivables outstanding prior to
discounting at November 30, 2003, and February 28, 2003.
(Amounts in millions) November 30 February 28
- ----------------------------------------- ------------ -----------
Indexed to prime rate..................... $1,628 $1,460
Fixed APR................................. 131 176
------ ------
Total..................................... $1,759 $1,636
====== ======
Financing for the private-label credit card 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. At November
30, 2003, and February 28, 2003, the total principal amount of receivables
securitized or held for sale prior to discounting was as follows:
(Amounts in millions) November 30 February 28
- ----------------------------------------- ------------ -----------
Floating-rate securitizations............. $1,636 $1,592
Held for sale............................. 123 44
------ ------
Total..................................... $1,759 $1,636
====== ======
Interest Rate Exposure. Interest rate exposure relating to the private-label
credit card receivable securitizations represents a market risk exposure that we
manage primarily with matched funding. We also have the ability to adjust the
rate on fixed-APR revolving credit cards and the index on floating-rate credit
Page 25 of 29
cards, subject to cardholder ratification, but we do not currently anticipate
the need to do so. Our ability to effect these changes may be limited by
competitive conditions.
The majority of our cardholder accounts have interest rates indexed to prime,
but the rates we charge our cardholders may not change as frequently or to the
same extent as our funding costs. This is the result of a combination of factors
such as interest rate floors on the accounts that are above the current level of
the prime rate, interest-free promotional financing and by differences between
changes in prime and LIBOR or commercial paper rates. Accordingly, our
securitization income and the fair value of our retained interests in the
securitized receivables could be adversely impacted by increases in interest
rates.
We use a sensitivity analysis to quantify interest rate risk relating to our
retained interests in securitized receivables. This analysis calculates the
impact on net earnings from a 200 basis point increase in the yield curve
applied equally over the next four quarters. Assuming that no other assumptions
change, this increase in interest rates would result in a decrease in our
securitization income of approximately $9.5 million for the quarter ended
November 30, 2003, compared with a decrease of approximately $8.9 million for
the quarter ended November 30, 2002.
The market and credit risks associated with our 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. We have
entered into offsetting interest rate cap positions and, therefore, do not
anticipate significant market risk arising from our interest rate caps. Credit
risk is the exposure to nonperformance of another party to an agreement. We
mitigate credit risk by dealing with highly rated bank counterparties.
ITEM 4. CONTROLS AND PROCEDURES
The company's principal executive officer and principal financial officer have
evaluated the effectiveness of the company's disclosure controls and procedures
as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this Quarterly Report on Form 10-Q. Based
upon their evaluation, the principal executive officer and principal financial
officer concluded that the company's disclosure controls and procedures are
effective. There have been no changes in internal control over financial
reporting for the period covered by this report that have materially affected,
or are reasonably likely to materially affect, the company's internal control
over financial reporting.
Page 26 of 29
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of
the company, effective February 3,1997, as amended
through October 1, 2002, filed as Exhibit 3(i) to
the company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 2002 (File No. 1-5767),
expressly incorporated herein by this reference
3.2 Bylaws of the company, as amended and restated June
17, 2003, filed as Exhibit (3)(iii) to the
company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 2003 (File No. 1-5767),
expressly incorporated herein by this reference
4.1 Third Amended and Restated Rights Agreement dated
as of October 1, 2002, between he company and Wells
Fargo Bank Minnesota, N.A., as Rights Agent, filed
as Exhibit 1 to the company's Form 8-A/A filed on
October 1, 2002 (File No. 1-5767), expressly
incorporated herein by this reference
10.2 Employment agreement between the company and W.
Alan McCollough effective November 19, 2003, filed
herewith*
31.1 Certification by Registrant's Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith
31.2 Certification by Registrant's Chief Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith
32.1 Certification of CEO under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith
32.2 Certification of CFO under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith
* Indicates management contracts, compensatory plans
or arrangements of the company required to be filed
as an exhibit.
(b) Reports on Form 8-K
The exhibits listed below were furnished to the SEC during the
period covered by this report pursuant to Item 12 of Form 8-K
and shall not be deemed "filed" for purposes of the Securities
Exchange Act of 1934, as amended, or incorporated by reference
into any document filed under the Securities Act of 1933, as
amended, except as shall be expressly set forth by specific
reference in such filing.
The company furnished a Form 8-K to the SEC on September 9,
2003, announcing the company's second quarter fiscal year 2004
sales.
The company furnished a Form 8-K to the SEC on September 17,
2003, announcing the company's second quarter fiscal year 2004
results.
The company furnished a Form 8-K to the SEC on October 22,
2003, announcing that it had entered into an agreement to sell
its bankcard operation.
Page 27 of 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRCUIT CITY STORES, INC.
(Registrant)
By: /s/ W. Alan McCollough
-------------------------
W. Alan McCollough
Chairman, President and
Chief Executive Officer
By: /s/ Michael E. Foss
-------------------------
Michael E. Foss
Senior Vice President and
Chief Financial Officer
By: /s/ Philip J. Dunn
------------------------
Philip J. Dunn
Senior Vice President,
Treasurer,Corporate
Controller and Chief
Accounting Officer
January 9, 2004
Page 28 of 29
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation of
the company, effective February 3,1997, as amended
through October 1, 2002, filed as Exhibit 3(i) to
the company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 2002 (File No. 1-5767),
expressly incorporated herein by this reference
3.2 Bylaws of the company, as amended and restated June
17, 2003, filed as Exhibit (3)(iii) to the
company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 2003 (File No. 1-5767),
expressly incorporated herein by this reference
4.1 Third Amended and Restated Rights Agreement dated
as of October 1, 2002, between he company and Wells
Fargo Bank Minnesota, N.A., as Rights Agent, filed
as Exhibit 1 to the company's Form 8-A/A filed on
October 1, 2002 (File No. 1-5767), expressly
incorporated herein by this reference
10.2 Employment agreement between the company and W.
Alan McCollough effective November 19, 2003, filed
herewith*
31.1 Certification by Registrant's Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith
31.2 Certification by Registrant's Chief Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith
32.1 Certification of CEO under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith
32.2 Certification of CFO under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith
* Indicates management contracts, compensatory plans
or arrangements of the company required to be filed
as an exhibit.
Page 29 of 29