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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5767
CIRCUIT CITY STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-0493875
-------- ----------
(State of Incorporation) (I.R.S. Employer
Identification No.)
9950 MAYLAND DRIVE, RICHMOND, VIRGINIA 23233
(Address of Principal Executive Offices and Zip Code)
(804) 527-4000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 2002
Common Stock, par value $0.50 210,527,021
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 29.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
November 30, 2002, and February 28, 2002 3
Consolidated Statements of Operations -
Three Months and Nine Months Ended November 30, 2002 and 2001 4
Consolidated Statements of Cash Flows -
Nine Months Ended November 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 26
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SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER 27
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SECTION 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER 28
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EXHIBIT INDEX 29
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Page 2 of 29
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share data)
Nov. 30, 2002 Feb. 28, 2002
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 437,539 $1,248,246
Accounts receivable, net 231,167 158,817
Retained interests in securitized receivables 518,192 394,456
Merchandise inventory 2,374,860 1,234,243
Prepaid expenses and other current assets 69,894 39,246
Assets of discontinued operations - 577,703
---------- ----------
Total current assets 3,631,652 3,652,711
Property and equipment, net 693,157 732,802
Deferred income taxes - 2,647
Other assets 7,282 11,354
Assets of discontinued operations - 142,519
---------- ----------
TOTAL ASSETS $4,332,091 $4,542,033
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,575,762 $1,019,519
Accrued expenses and other current liabilities 143,137 157,561
Accrued income taxes - 100,696
Deferred income taxes 124,921 116,297
Short-term debt 58,000 397
Current installments of long-term debt 1,346 23,465
Liabilities of discontinued operations - 223,392
---------- ----------
Total current liabilities 1,903,166 1,641,327
Long-term debt, excluding current installments 11,640 14,064
Other liabilities 156,341 140,853
Deferred income taxes 3,049 -
Liabilities of discontinued operations - 11,351
---------- ----------
TOTAL LIABILITIES 2,074,196 1,807,595
---------- ----------
Stockholders' equity:
Circuit City common stock, $0.50 par value;
350,000,000 shares authorized; 210,533,299 shares
issued and outstanding as of November 30, 2002 105,267 104,411
CarMax Group common stock - 18,426
Capital in excess of par value 841,696 810,047
Retained earnings 1,310,932 1,801,554
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,257,895 2,734,438
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,332,091 $4,542,033
========== ==========
See accompanying notes to consolidated financial statements.
Page 3 of 29
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,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales and operating revenues $2,421,687 $2,263,176 $6,761,134 $6,157,006
Cost of sales, buying and warehousing 1,873,573 1,712,025 5,173,782 4,646,918
---------- ---------- ---------- ----------
Gross profit 548,114 551,151 1,587,352 1,510,088
Finance income 8,308 17,833 54,697 72,195
Selling, general and administrative expenses 590,678 553,669 1,695,821 1,602,678
Interest expense 168 410 718 419
---------- ---------- ---------- ----------
(Loss) earnings from continuing operations
before income taxes (34,424) 14,905 (54,490) (20,814)
Income tax (benefit) provision (13,081) 5,660 (20,706) (7,913)
---------- ---------- ---------- ----------
Net (loss) earnings from continuing operations (21,343) 9,245 (33,784) (12,901)
Net earnings from discontinued operations 3,567 18,443 64,519 72,406
---------- ---------- ---------- ----------
Net (loss) earnings $ (17,776) $ 27,688 $ 30,735 $ 59,505
========== ========== ========== ==========
Net (loss) earnings from:
Continuing operations $ (21,343) $ 9,245 $ (33,784) $ (12,901)
========== ========== ========== ==========
Discontinued operations:
CarMax earnings attributed to Circuit City
Group common stock $ 2,283 $ 11,889 $ 41,303 $ 50,992
========== ========== ========== ==========
CarMax earnings attributed to CarMax
Group common stock $ 1,284 $ 6,554 $ 23,216 $ 21,414
========== ========== ========== ==========
Weighted average common shares:
Circuit City:
Basic 207,454 205,571 207,121 205,278
========== ========== ========== ==========
Diluted 207,454 206,639 207,121 205,278
========== ========== ========== ==========
CarMax Group:
Basic 37,084 36,292 37,023 30,681
========== ========== ========== ==========
Diluted 38,577 38,316 38,701 32,661
========== ========== ========== ==========
Net (loss) earnings per share:
Basic:
Continuing operations $ (0.10) $ 0.04 $ (0.16) $ (0.06)
Discontinued operations attributed to
Circuit City Group common stock 0.01 0.06 0.20 0.25
---------- ---------- ---------- ----------
$ (0.09) $ 0.10 $ 0.04 $ 0.19
========== ========== ========== ==========
Discontinued operations attributed to
CarMax Group common stock $ 0.03 $ 0.18 $ 0.63 $ 0.70
========== ========== ========== ==========
Diluted:
Continuing operations $ (0.10) $ 0.04 (0.16) $ (0.06)
Discontinued operations attributed to
Circuit City Group common stock 0.01 0.06 0.20 0.25
---------- ---------- ---------- ----------
$ (0.09) $ 0.10 $ 0.04 $ 0.19
========== ========== ========== ==========
Discontinued operations attributed to
CarMax Group common stock $ 0.03 $ 0.17 $ 0.60 $ 0.66
========== ========== ========== ==========
Cash dividends paid per share:
Circuit City common stock $ 0.0175 $ 0.0175 $ 0.0525 $ 0.0525
========== ========== ========== ==========
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,
2002 2001
----------- --------
Operating Activities:
Net earnings $ 30,735 $59,505
Net earnings from discontinued operations (64,519) (72,406)
Adjustments to reconcile net earnings to net cash
(used in) provided by operating activities of continuing operations:
Depreciation and amortization 113,396 116,169
Amortization of restricted stock awards 14,354 11,269
Loss on disposition of property and equipment 6,303 7,255
Provision for deferred income taxes 14,320 42,041
Changes in operating assets and liabilities:
Increase in accounts receivable, net (72,350) (25,540)
Increase in retained interests in securitized receivables (123,736) (55,876)
Increase in merchandise inventory (1,140,617) (739,141)
Increase in prepaid expenses and other current assets ( 30,648) (8,703)
Decrease (increase) in other assets 4,072 (894)
Increase in accounts payable 556,243 854,745
(Decrease) increase in accrued expenses and other current
liabilities and accrued income taxes (106,982) 15,044
Increase in other liabilities 15,488 10,066
----------- --------
Net cash (used in) provided by operating activities of
continuing operations (783,941) 213,534
----------- --------
Investing Activities:
Purchases of property and equipment (111,148) (133,879)
Proceeds from sales of property and equipment, net 31,094 53,720
Special dividend received from CarMax 28,400 -
----------- --------
Net cash used in investing activities of continuing operations (51,654) (80,159)
----------- --------
Financing Activities:
Issuances of short-term debt, net 57,603 1,295
Issuances of long-term debt - 16,500
Payments on long-term debt (24,543) -
Issuances of Circuit City common stock, net 9,715 9,461
Issuances of CarMax Group common stock, net 298 975
Proceeds from CarMax Group stock offering, net - 139,633
Dividends paid on Circuit City common stock (11,003) (10,904)
----------- --------
Net cash provided by financing activities of continuing operations 32,070 156,960
----------- --------
Cash used in discontinued operations - Divx - (23,674)
Cash used in discontinued operations - CarMax (7,182) (4,090)
----------- --------
(Decrease) increase in cash and cash equivalents (810,707) 262,571
Cash and cash equivalents at beginning of year 1,248,246 437,329
----------- --------
Cash and cash equivalents at end of period $ 437,539 $699,900
=========== ========
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
Before 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. In the separation, 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. In the
separation, the Company distributed to the holders of Circuit City Group
Common Stock and CarMax Group Common Stock the Company's entire interest in
CarMax. Following the separation, the Circuit City Group Common Stock was
renamed Circuit City common stock. Results attributed to CarMax for periods
prior to the separation date are presented as results from discontinued
operations. See Note 8 for an additional discussion of the separation.
As of November 30, 2001, 65,923,200 shares of CarMax Group Common Stock
were reserved for the Circuit City Group or for issuance to holders of
Circuit City Group Common Stock. Excluding shares reserved for CarMax
employee stock incentive plans, the reserved CarMax Group shares
represented 64.1 percent of the total outstanding and reserved shares of
CarMax Group Common Stock at February 28, 2002, and 64.4 percent at
November 30, 2001.
The Company's consolidated financial statements included herein should be
read in conjunction with the notes to the audited financial statements
included in the Company's Annual Report on Form 10-K/A.
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, 2002, balance
sheet data was derived from the audited financial statements included in
the Company's fiscal 2002 Annual Report on Form 10-K/A.
3. Net (Loss) Earnings per Share
Reconciliations of the numerator and denominator of the basic and diluted
net (loss) earnings per share calculations are presented below.
Page 6 of 29
Three Months Ended Nine Months Ended
(Amounts in thousands November 30, November 30,
except per share data) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------
Circuit City:
Weighted average common shares............................. 207,454 205,571 207,121 205,278
Dilutive potential common shares:
Options................................................. - 259 - -
Restricted stock........................................ - 809 - -
-----------------------------------------------------------
Weighted average common shares and
dilutive potential common shares........................ 207,454 206,639 207,121 205,278
===========================================================
Net (loss) earnings available to common shareholders from:
Continuing operations................................... $(21,343) $ 9,245 $(33,784) $(12,901)
Discontinued operations ................................ $ 2,283 $ 11,889 $ 41,303 $ 50,992
Basic net (loss) earnings per share from:
Continuing operations................................... $ (0.10) $ 0.04 $ (0.16) $ (0.06)
Discontinued operations ................................ 0.01 0.06 0.20 0.25
-----------------------------------------------------------
$ (0.09) $ 0.10 $ 0.04 $ 0.19
===========================================================
Diluted net (loss) earnings per share from:
Continuing operations................................... $ (0.10) $ 0.04 $ (0.16) $ (0.06)
Discontinued operations ................................ 0.01 0.06 0.20 0.25
-----------------------------------------------------------
$ (0.09) $ 0.10 $ 0.04 $ 0.19
===========================================================
CarMax Group:
Weighted average common shares............................. 37,084 36,292 37,023 30,681
Dilutive potential common shares:
Options................................................. 1,492 1,997 1,668 1,944
Restricted stock........................................ 1 27 10 36
-----------------------------------------------------------
Weighted average common shares and
dilutive potential common shares........................ 38,577 38,316 38,701 32,661
===========================================================
Net earnings available to common shareholders.............. $ 1,284 $ 6,554 $ 23,216 $ 21,414
Basic net earnings per share............................... $ 0.03 $ 0.18 $ 0.63 $ 0.70
Diluted net earnings per share............................. $ 0.03 $ 0.17 $ 0.60 $ 0.66
For the three months and the nine months ended November 30, 2002, the
shares of CarMax stock have been weighted over the months during which
CarMax was a wholly owned subsidiary of Circuit City Stores, Inc. CarMax
became an independent, separately traded public company on October 1, 2002.
In the separation, each unexercised option to purchase Circuit City Group
Common Stock, other than those options held by CarMax associates, was
converted into an option to purchase the Company's common stock. The
exercise price and the number of shares covered by the option were adjusted
to reflect the distribution of the Company's interest in the CarMax Group
as a dividend to holders of Circuit City Group Common Stock and to maintain
both the intrinsic value of the option and the ratio of exercise price to
market value per share. As a result of the separation, the number of shares
covered by options to purchase the Company's common stock increased by
5,954,558 shares.
Page 7 of 29
Also in the separation, each unexercised option to purchase Circuit City
Group Common Stock that was held by a CarMax associate was converted into
an option to purchase CarMax, Inc. common stock. The exercise price and
number of shares covered by the option were adjusted to maintain both the
intrinsic value of the option and the ratio of exercise price to market
value per share. As a result of the separation, options to purchase 32,669
shares of Company stock were cancelled.
Because the Company reported a loss from continuing operations for the
three months ended November 30, 2002, and for the nine months ended
November 30, 2002 and 2001, the diluted net (loss) earnings per share is
the same as the basic net (loss) earnings per share for those periods,
since including any potentially dilutive securities would be antidilutive
to the net loss per share from continuing operations. As a result and in
accordance with the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share," the diluted net earnings per share
for the nine months ended November 30, 2001, have been revised to 19 cents
per share, compared with 18 cents per share reported prior to the
presentation of the CarMax Group as a discontinued operation.
For the three-month period ended November 30, 2002, no options or
restricted stock were included in the diluted net earnings per share since
the Company reported a loss from continuing operations. Options to purchase
17,815,321 shares of Circuit City common stock at prices ranging from $6.63
to $27.21 and 3,047,208 shares of restricted stock were outstanding at
November 30, 2002. For the three-month period ended November 30, 2001,
certain options and restricted stock were not included in the computation
of diluted net earnings per share because their effect was not dilutive
under the provisions of SFAS No. 128. Options to purchase 8,385,622 shares
of Circuit City common stock at prices ranging from $13.86 to $43.03 per
share and 117,650 shares of restricted stock were not included in the
calculation.
For the one-month period ended September 30, 2002, options to purchase
1,028,572 shares of CarMax Group Common Stock at prices ranging from $20.00
to $26.83 per share were not included in the calculation of diluted net
earnings per share from discontinued operations. For the three-month period
ended November 30, 2001, options to purchase 8,406 shares of CarMax Group
Common Stock at prices ranging from $16.31 to $16.36 per share were not
included in the calculation of diluted net earnings per share from
discontinued operations.
In a public offering completed during the second quarter of fiscal 2002,
Circuit City Stores, Inc. sold 9,516,800 CarMax Group shares that
previously had been reserved for the Circuit City Group. Because both the
earnings allocation and the outstanding CarMax shares were adjusted to
reflect the impact of the sale, net earnings per CarMax Group share were
not diluted by the sale. With the impact of the offering, 64.0 percent of
the CarMax Group's fiscal 2003 third quarter earnings prior to the
separation date and 64.0 percent of the CarMax Group's nine-month earnings
prior to the separation date were allocated to the Circuit City Group. Last
fiscal year, 64.5 percent of the CarMax Group's third quarter earnings and
70.4 percent of the CarMax Group's nine-month earnings were allocated to
the Circuit City Group. Results attributed to CarMax for periods prior to
the separation date are presented as results from discontinued operations.
4. Supplemental Financial Statement Information
For the three- and nine-month periods ended November 30, 2002 and 2001,
pretax finance income was as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
(Amounts in millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------
Securitization income................................ $ 39.4 $47.7 $145.5 $163.0
Payroll and fringe benefit expenses.................. 10.7 10.4 32.1 30.9
Other direct expenses................................ 20.4 19.5 58.7 59.9
------------------------------------------------------
Finance income...................................... $ 8.3 $17.8 $ 54.7 $ 72.2
=====================================================
Page 8 of 29
Securitization income is primarily comprised of the gain on sale of
receivables generated by the Company's finance operation 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.
5. Securitizations
The Company enters into securitization transactions to finance consumer
revolving credit card receivables originated by its finance operation. The
Company has created special purpose subsidiaries to facilitate these
securitization transactions in accordance with the isolation provisions of
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." Credit card receivables are sold to
the special purpose subsidiaries, which, in turn, transfer these
receivables to securitization master trusts. At the time of these transfers
of receivables that qualify as sales, the Company recognizes gains or
losses as a component of finance operation income. See Note 4.
Private-label and co-branded Visa credit card receivables are securitized
through one master trust, and MasterCard and Visa credit card, referred to
as bankcard, receivables are securitized through a second master trust.
Each master trust periodically issues securities backed by the receivables
in that master trust. Each master trust has issued multiple series of term
asset-backed securities having fixed initial principal amounts. In
addition, each master trust has issued one or more series of variable
funding asset-backed securities 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 securities up to a stated amount until a stated
commitment termination date. The finance operation continues to service the
securitized receivables for a fee, and the special purpose subsidiaries
retain an undivided interest in the securitized receivables and hold
various subordinated asset-backed securities that serve as credit
enhancements for the asset-backed securities held by third-party investors.
Neither master trust agreement provides for recourse to the Company for
credit losses on the securitized receivables. The securitization agreements
require that the aggregate outstanding principal balance of the securitized
receivables exceed a specified amount and that the yield on the securitized
receivables exceed specified rates. In addition, the variable funding
securitization agreements require that the Company meet specified debt to
net worth, current assets to current liabilities and tangible net worth
tests and that the securitized receivables meet specified performance
levels relating to default rates, delinquency rates and principal payment
rates. If these financial tests or performance levels are not met, or if
certain other events occur and are continuing, the Company may be unable to
continue financing receivables through the securitization programs. The
Company and the securitized receivables were in compliance with these
financial tests and performance levels at November 30, 2002, and February
28, 2002.
The total principal amount of credit card receivables managed was $2.93
billion at November 30, 2002, and $2.85 billion at February 28, 2002. Of
the total principal amounts managed, the principal amount of receivables
securitized was $2.82 billion at November 30, 2002, and $2.80 billion at
February 28, 2002, and the principal amount of receivables held for sale
was $109.9 million at November 30, 2002, and $49.2 million at February 28,
2002. During the third quarter of fiscal 2003, the Company completed no new
public securitization transactions. The Company completed a $470 million
bankcard receivable securitization transaction and a $300 million
private-label and co-branded Visa credit card receivable securitization
transaction during the first nine months of fiscal 2003. The Company
completed no new public securitization transactions during the first nine
months of fiscal 2002. At November 30, 2002, the unused capacity of the
private-label variable funding program was $352.4 million and the unused
capacity of the bankcard variable funding program was $272.7 million. At
February 28, 2002, the unused capacity of the private-label variable
funding program was $22.9 million and the unused capacity of the bankcard
variable funding program was $496.5 million.
Page 9 of 29
The aggregate amount of receivables that were 31 days or more delinquent
was $194.5 million at November 30, 2002, and $198.4 million at February 28,
2002. The principal amount of defaults net of recoveries totaled $67.8
million for the quarter ended November 30, 2002, and $65.6 million for the
quarter ended November 30, 2001. The principal amount of defaults net of
recoveries totaled $201.6 million for the nine months ended November 30,
2002, and $197.5 million for the nine months ended November 30, 2001.
The Company receives annual servicing fees approximating 2 percent of the
outstanding principal balance of the securitized receivables and retains
the rights to future cash flows available after the investors in the
asset-backed securities have received the return for which they contracted.
The servicing fees specified in the securitization agreements adequately
compensate the finance operation for servicing the securitized receivables.
Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from and paid to the
securitization trusts.
Three Months Ended Nine Months Ended
November 30, November 30,
(Amounts in millions) 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------------
Proceeds from new securitizations.......................... $381.7 $291.8 $1,165.3 $ 670.0
Proceeds from collections reinvested
in previous credit card securitizations.................. $414.6 $417.8 $1,022.1 $1,234.8
Servicing fees received.................................... $ 13.9 $ 12.6 $ 39.3 $ 38.5
Other cash flows received on retained interests*........... $ 33.3 $ 48.9 $ 127.5 $ 142.9
*This amount represents cash flows received from retained interests other
than servicing fees, including cash flows from interest-only strips and
cash above the minimum required level in cash collateral accounts.
When determining the fair value of retained interests, the Company
estimates future cash flows using management's projections of key factors,
such as finance charge income, default rates, payment rates, forward
interest rate curves and discount rates appropriate for the type of asset
and risk.
The amount by which the estimated future finance income from securitized
receivables exceeds the sum of the contractually specified investor returns
and servicing fees is referred to as interest-only strips and is carried at
fair value. The fair value amounted to $125.3 million at November 30, 2002,
and $131.9 million at February 28, 2002. These amounts are included in
retained interests in securitized receivables on the consolidated balance
sheets. The value of the interest-only strips decreased $1.6 million in the
three months ended November 30, 2002, and decreased $6.6 million in the
three months ended November 30, 2001. The value of the interest-only strips
decreased $6.6 million in the nine months ended November 30, 2002, and
decreased $5.2 million in the nine months ended November 30, 2001.
At November 30, 2002, the fair value of the retained interests in
securitized receivables was $518.2 million, with a weighted-average life
ranging from 0.3 years to 4.8 years. At February 28, 2002, the fair value
of the retained interests in securitized receivables was $394.5 million,
with a weighted-average life ranging from 0.2 years to 1.8 years. The
following table presents the key economic assumptions used in measuring the
fair value of retained interests at November 30, 2002, and a sensitivity
analysis showing the hypothetical effect on the fair value of those
interests when there are unfavorable variations from the assumptions used.
Key economic assumptions at November 30, 2002, are based on portfolio
performance and market conditions. These sensitivities are hypothetical and
should be used with caution. In this table, the effect of a variation in a
particular assumption on the fair value of the retained interest is
calculated without changing any other assumption; in actual circumstances,
changes in one factor may result in changes in another, which might magnify
or counteract the sensitivities.
Page 10 of 29
Impact on Fair Impact on Fair
Assumptions Value of 10% Value of 20%
(Dollar amounts in millions) Used Adverse Change Adverse Change
-------------------------------------------------------------------------------------------
Monthly payment rate............... 6.5%-10.5% $ 9.5 $17.2
Annual default rate................ 7.3%-18.8% $24.3 $48.4
Annual discount rate............... 8.4%-15.0% $ 4.3 $ 8.5
6. Financial Derivatives
The Company enters into interest rate cap agreements to meet the
requirements of the receivable securitization transactions. During the
first quarter of fiscal 2003 and in conjunction with the private-label
public securitization, the Company purchased and sold three offsetting
interest rate caps with an aggregate initial notional amount of $280.5
million. The total notional amount of interest rate caps outstanding was
$935.4 million at November 30, 2002, and $654.9 million at February 28,
2002. Purchased interest rate caps were included in net accounts receivable
and had a fair value of $5.7 million at November 30, 2002, and $2.4 million
at February 28, 2002. Written interest rate caps were included in accounts
payable and had a fair value of $5.7 million at November 30, 2002, and $2.4
million at February 28, 2002.
The market and credit risks associated with interest rate caps are similar
to those relating to other types of financial instruments. Market risk is
the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction
volume. The Company has entered into offsetting interest rate cap positions
and, therefore, does not anticipate significant market risk arising from
interest rate caps. Credit risk is the exposure to nonperformance of
another party to an agreement. The Company mitigates credit risk by dealing
with highly rated bank counterparties.
7. Appliance Exit Costs
In the second quarter of fiscal 2001, the Company began to exit the major
appliance category and expand its selection of key consumer electronics and
home office products in all Circuit City Superstores. This process was
completed in November 2000. To exit the appliance business, the Company
closed eight distribution centers and eight service centers. The Company
leases the majority of these closed properties. While the Company has
entered into contracts to sublease some of these properties, it continues
the process of marketing the remaining properties to be subleased.
In fiscal 2001, the Company recorded appliance exit costs of $30.0 million.
In the fourth quarter of fiscal 2002, the Company recorded additional lease
termination costs of $10.0 million to reflect the rental market for these
leased properties. The appliance exit cost liability is included in accrued
expenses and other current liabilities on the consolidated balance sheets.
The appliance exit cost accrual activity and the remaining liability at
November 30, 2002, are presented in the following table.
Fiscal 2003
Total Liability at Payments Liability at
Exit Cost February 28, or November 30,
(Amounts in millions) Accrual 2002 Write-Downs 2002
--------------------------------------------------------------------------------------------------------------------------
Lease termination costs...................... $27.8 $19.7 $4.8 $14.9
Fixed asset write-downs, net................. 5.0 - - -
Employee termination benefits................ 4.4 - - -
Other........................................ 2.8 - - -
-------------------------------------------------------------------------
Appliance exit costs......................... $40.0 $19.7 $4.8 $14.9
=========================================================================
Page 11 of 29
8. Discontinued Operations
(A)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. The separation was effective October 1, 2002, on which date
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 new 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. Following the separation, the Circuit City Group Common
Stock was renamed Circuit City common stock. Results attributed to CarMax
for periods prior to the separation date 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 on leases related to 23 CarMax locations. At November
30, 2002, the future minimum fixed lease obligations on these 23 leases
totaled approximately $490 million.
The current relationship between the Company and CarMax is governed by a
transition services agreement, under which the Company provides CarMax
services including human resources, payroll, benefits administration, tax
services, television advertising buying, computer center support and
telecommunication services, with 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. 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.
Third quarter net earnings from discontinued operations were $3.6 million
this year, representing CarMax results for the one month prior to the
separation date. Net earnings from discontinued operations were $18.4
million in last year's third quarter. For the nine months ended November
30, 2002, net earnings from discontinued operations were $64.5 million
compared with $72.4 million for the first nine months of fiscal 2002. Prior
to the separation date, CarMax earnings were allocated to the Company's
Circuit City Group and CarMax Group common stocks. Circuit City Group
earnings included earnings attributed to the CarMax Group shares reserved
for the Circuit City Group or for issuance to Circuit City Group
shareholders. The CarMax Group earnings reflected the remainder of the
earnings of the CarMax business.
The assets and liabilities of the discontinued CarMax operations reflected
on the consolidated balance sheet at February 28, 2002, were comprised of
the following:
(Amounts in millions) February 28
---------------------------------------------------------------------------
Inventory................................................... $399
Retained interests in securitized receivables............... 121
Other current assets........................................ 58
-------
Total current assets........................................ 578
Property and equipment, net................................. 121
Other assets................................................ 22
-------
Total assets of discontinued CarMax operations.............. $721
=======
Accounts payable............................................ $ 87
Current installments of allocated long-term debt............ 79
Other current liabilities................................... 57
-------
Total current liabilities................................... 223
Other liabilities........................................... 11
-------
Total liabilities of discontinued CarMax operations......... $234
=======
Page 12 of 29
(B)Divx:
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations. Payments
of $10.5 million were made during the first nine months of fiscal 2003,
reducing current liabilities related to the former Divx operations to $8.0
million on the consolidated balance sheet at November 30, 2002. At February
28, 2002, current liabilities of $18.5 million related to the former Divx
operations were reflected on the consolidated balance sheet. For the three-
and nine-month periods ended November 30, 2002 and 2001, the discontinued
Divx operations had no impact on the Company's results of operations.
Discontinued operations have been segregated on the consolidated statements
of cash flows.
9. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." This statement
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived
asset, except for certain obligations of lessees. This standard requires
entities to record the fair value of a liability for an asset retirement
obligation in the period incurred. The provisions of SFAS No. 143 will be
effective for the Company's fiscal year beginning March 1, 2003. The
Company has not yet determined the impact, if any, of adopting this
standard.
Effective in the third quarter of fiscal 2003, the Company adopted SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities,"
which requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value when
the liability is incurred, rather than at the date of commitment to an exit
or disposal plan. The adoption of SFAS No. 146 did not have a material
impact on the Company's financial position, results of operations or cash
flows.
In November 2002, the FASB issued Emerging Issues Task Force No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This
issue addresses when and how an arrangement involving multiple deliverables
should be divided into separate units of accounting, as well as how the
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. The provisions of EITF No. 00-21
will be effective for the Company's third quarter of fiscal 2004. The
Company has not yet determined the impact, if any, of adopting this
standard.
In November 2002, the FASB issued EITF No. 02-16, "Accounting by a Reseller
for Cash Consideration Received from a Vendor." This issue addresses how
cash consideration received from a vendor by a reseller should be
classified in the reseller's income statement. EITF No. 02-16 provides that
cash consideration received by a reseller from a vendor should be
characterized as a reduction of cost of sales unless the cash consideration
represents a payment for assets or services delivered to the vendor, in
which case, the consideration should be characterized as revenue or other
income. However, if the cash consideration represents a reimbursement of
incremental direct costs incurred by the reseller to sell the vendor's
products, the consideration should be characterized as a reduction of those
direct costs. These provisions of EITF No. 02-16 will be effective for the
Company's fiscal year beginning March 1, 2003. The issue also addresses how
a reseller should recognize a rebate or refund of a specified amount of
cash consideration that is payable only if the reseller completes a
specified cumulative level of purchases or remains a reseller for a
specified time period. EITF No. 02-16 provides that such a rebate or refund
should be recognized as a reduction of cost of sales based on an allocation
of the cash consideration offered to each of the underlying transactions
that results in progress by the reseller toward earning the rebate or
refund. This provision of EITF No. 02-16 was effective for all new
arrangements initiated by the Company after November 21, 2002. EITF No.
02-16 did not have any impact on the quarter ended November 30, 2002. The
Company has not yet determined the future impact, if any, of adopting this
standard.
Page 13 of 29
10. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
presentation. Effective in the first quarter of fiscal 2003, the Company
adopted EITF No. 00-14, "Accounting for Certain Sales Incentives," which
provides that sales incentives, such as mail-in rebates, offered to
customers should be classified as a reduction of revenue. Previously, the
Company recorded these rebates in cost of sales, buying and warehousing.
The reclassification of rebates from cost of sales, buying and warehousing
to sales decreased sales and cost of sales, buying and warehousing by $16.7
million for the quarter ended November 30, 2001, and $41.1 million for the
nine months ended November 30, 2001. This reclassification had no impact on
the Company's results of operations.
Effective in the third quarter of fiscal 2003, pretax profits from Circuit
City's finance operation, previously recorded as a reduction to selling,
general and administrative expenses, are presented separately on the
consolidated statements of operations. The expense ratios for prior periods
have been revised for this change in presentation.
11. Subsequent Event
On January 7, 2003, the Company announced that its board of directors
authorized the repurchase of up to $200 million of the Company's common
stock. These repurchases may be made from time to time in the open market.
The price to be paid and the timing of purchases will be at the discretion
of management. Based on the current market value of the common stock at the
announcement date, the authorization would allow the Company to repurchase
up to approximately 13 percent of the 210.5 million shares then
outstanding.
Page 14 of 29
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this discussion, "we," "our" and "Circuit City" refer to Circuit City Stores,
Inc. and our wholly owned subsidiaries, unless the context requires otherwise.
All references to "quarter" and "year" refer to our fiscal year periods rather
than calendar year periods unless stated otherwise.
Before 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. In
the separation, 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. In the separation, the Company distributed to the holders of
Circuit City Group Common Stock and CarMax Group Common Stock the Company's
entire interest in CarMax. Following the separation, the Circuit City Group
Common Stock was renamed Circuit City common stock. Results attributed to CarMax
for periods prior to the separation date are presented as results from
discontinued operations.
CRITICAL ACCOUNTING POLICIES
See the discussion of critical accounting policies included in the Circuit City
Stores, Inc. 2002 Annual Report on Form 10-K/A. These policies relate to the
calculation of the value of retained interests in securitization transactions
and the calculation of the liability for lease termination costs.
RESULTS OF OPERATIONS
Effective in the first quarter of fiscal 2003, Circuit City adopted Emerging
Issues Task Force No. 00-14, "Accounting for Certain Sales Incentives," which
provides that sales incentives, such as mail-in rebates, offered to customers
should be classified as a reduction of revenue. Previously, the Company recorded
these rebates in cost of sales, buying and warehousing. The reclassification of
rebates from cost of sales, buying and warehousing to sales decreased sales and
cost of sales, buying and warehousing by $16.7 million for the quarter ended
November 30, 2001, and $41.1 million for the nine months ended November 30,
2001. This reclassification had no impact on the Company's results of
operations.
Effective in the third quarter of fiscal 2003, pretax profits from Circuit
City's finance operation, previously recorded as a reduction to selling, general
and administrative expenses, are presented separately on the consolidated
statements of operations. The expense ratios for prior periods have been revised
for this change in presentation.
Our operations, in common with other retailers in general, are subject to
seasonal influences. Historically, Circuit City has realized more of its 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.
Page 15 of 29
Continuing Operations
Net Sales and Operating Revenues
Total sales for the third quarter of fiscal 2003 increased 7 percent to $2.42
billion from $2.26 billion in last year's third quarter. Comparable store sales
increased 6 percent for the third quarter of fiscal 2003. For the nine months
ended November 30, 2002, total sales increased 10 percent to $6.76 billion from
$6.16 billion in the corresponding period of last fiscal year. Comparable store
sales increased 9 percent for the first nine months of fiscal 2003. A Circuit
City store is included in comparable store sales after the store has been open
for a full year. Relocated stores are included in the comparable store base.
Third quarter sales reflected our progress towards improving the overall
shopping experience in our stores. We believe our customer service initiatives,
including better training programs, improved merchandise availability and an
improved visual presentation, as well as continuing improvements in marketing
were largely responsible for our improved comparable store sales performance in
the third quarter. Although comparable store sales growth was the strongest in
September and October, we also generated comparable store sales gains in
November despite a more challenging comparison against prior year results.
Throughout the quarter, we continued to experience solid growth in big-screen
television sales, particularly digital televisions. Entertainment software and
competitively priced entry-level products continued to drive traffic into the
stores. Digital imaging and mobile audio products also posted strong third
quarter sales growth. We experienced solid personal computer hardware sales
growth in the third quarter, despite a moderation of the category's comparable
store sales performance in November. We experienced weaker sales in two higher
margin categories, wireless communications and digital satellite systems, as
industry-wide slowdowns in new customer acquisitions for these categories led to
increased price competition.
The percent of merchandise sales represented by each major product category
during the third quarter and for the first nine months of fiscal years 2003 and
2002 was as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
2002 2001 2002 2001
------------------------------------------------------------------------------------------
Video................................ 40% 41% 39% 39%
Audio................................ 15 14 15 16
Information Technology............... 33 33 34 35
Entertainment........................ 12 12 12 10
-------------------------------------------------
Total................................ 100% 100% 100% 100%
=================================================
Circuit City sells 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 that is reported in total sales was $90.0 million, or 3.7
percent of sales, in the third quarter of fiscal 2003, compared with $88.4
million, or 3.9 percent of sales, in last year's third quarter. The total
extended warranty revenue that is reported in total sales was $261.9 million, or
3.9 percent of sales, in the first nine months of fiscal 2003, compared with
$255.2 million, or 4.1 percent of sales, in last year's corresponding period.
The following table provides details on the Circuit City retail units:
Estimate
Store Mix Nov. 30, 2002 Nov. 30, 2001 Feb. 28, 2003 Feb. 28, 2002
-------------------------------------------------------------------------------------------------------------
Superstores.......................... 611 603 611 604
Mall-based Express stores............ 17 29 17 20
----------------------------------------------------------------------
Total................................ 628 632 628 624
======================================================================
Page 16 of 29
We expect to open eight Superstores and relocate approximately 10 Superstores in
the current fiscal year. In the third quarter of fiscal 2003, we opened five
Superstores and relocated five Superstores. For the first nine months of fiscal
2003, we opened eight Superstores, relocated nine Superstores and closed one
Superstore and three mall-based Express stores.
Cost of Sales, Buying and Warehousing
The Company's gross profit margin was 22.6 percent of sales in the third quarter
of fiscal 2003, compared with 24.4 percent in the same period last year. For the
nine months ended November 30, 2002, the gross profit margin was 23.5 percent
compared with 24.5 percent in the same period last year. The gross profit margin
declines reflected a combination of factors, including changes in merchandise
mix and the impact of a more promotional pricing environment across a broad
range of products. Weaker sales of higher profit wireless communications and
digital satellite systems were primarily responsible for the decline in gross
profit margins. While traffic-driving initiatives have been successful in
improving foot traffic in our stores, increased sales of entertainment software,
entry-level products and personal computers also lowered gross profit margins.
Continuing competitive pressure across a wide range of categories increased the
amount of promotional sales throughout the third quarter. The gross profit
margin pressure was partly offset by continued growth in sales of fully featured
products, particularly big-screen televisions.
Finance Income
For the three- and nine-month periods ended November 30, 2002 and 2001, pretax
finance income was as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
(Amounts in millions) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------
Securitization income....................... $39.4 $47.7 $145.5 $163.0
Payroll and fringe benefit expenses......... 10.7 10.4 32.1 30.9
Other direct expenses....................... 20.4 19.5 58.7 59.9
-------------------------------------------------
Finance income.............................. $ 8.3 $17.8 $ 54.7 $ 72.2
=================================================
Receivables generated by the Circuit City finance operation are sold through
securitization transactions. Circuit City continues to service the securitized
receivables for a fee. For the quarter ended November 30, 2002, serviced
receivables averaged $2.84 billion compared with $2.57 billion for the quarter
ended November 30, 2001. For the nine months ended November 30, 2002, serviced
receivables averaged $2.79 billion, compared with $2.59 billion for the same
period last year.
Securitization income is primarily comprised of the gain on the sale of these
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.
The amount by which the estimated future finance income from securitized
receivables exceeds the sum of the contractually specified investor returns and
servicing fees is referred to as interest-only strips and is carried at fair
value. The fair value amounted to $125.3 million at November 30, 2002, and
$131.9 million at February 28, 2002. Interest-only strips are included in
retained interests in securitized receivables on the consolidated balance
sheets. The key assumptions and estimates in determining the fair value of
interest-only strips include management's projections of key factors, such as
finance charge income, default rates, payment rates, forward interest rate
curves and discount rates appropriate for the type of asset and risk. Based on
these assumptions and estimates and the operation's securitization volume, the
value of the interest-only strips decreased $1.6 million in the three months
ended November 30, 2002, and decreased $6.6 million in the three months ended
November 30, 2001. The value of the interest-only strips decreased $6.6 million
in the nine months ended November 30, 2002, and decreased $5.2 million in the
nine months ended November 30, 2001. Management reviews the assumptions and
estimates used in determining the fair value of the interest-only strips on a
quarterly basis. If these assumptions change or the actual results differ from
the projected results, securitization income will be affected.
Page 17 of 29
In the third quarter of fiscal 2003, the weak economy and a historically high
level of personal bankruptcies adversely affected securitization income. A
negative mark-to-market adjustment to the Company's retained subordinated
interests in the securitized receivables, reduced finance charge collections and
a decrease in the fair value of the interest-only strips also contributed to the
decline in finance income. Securitization income for the nine months ended
November 30, 2002, included costs associated with two new public
securitizations. There were no new public securitizations in fiscal 2002.
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. Payroll
and fringe benefit expenses generally vary with the size of the serviced
portfolio and increased modestly during the quarter and the nine months ended
November 30, 2002, compared with the same periods last year. Other direct
expenses include third-party data processing, rent, credit promotion expenses,
Visa and MasterCard fees, and other operating expenses.
Selling, General and Administrative Expense
The selling, general and administrative expense ratio was 24.4 percent of sales
in the third quarter of fiscal 2003, compared with 24.5 percent for the same
period last year. The decline in the expense ratio primarily reflects reduced
costs and the leverage from increased comparable store sales in fiscal 2003,
offset in part by higher remodel and relocation expenses. Interest income is
recorded as a reduction to selling, general and administrative expenses.
The fiscal 2003 third quarter expenses include $11.4 million of remodel and
relocation costs, and the fiscal 2002 third quarter expenses include $2.2
million of remodel and relocation costs. The expenses for the first nine months
of fiscal 2003 include $45.2 million of remodel and relocation costs, and the
expenses for the first nine months of last year include $18.0 million of remodel
and relocation costs. In this year's third quarter, remodel and relocation costs
include costs related to the completion of 71 video department remodels and 13
full-store lighting upgrades, as well as the relocation of five Superstores. In
last year's third quarter, remodel and relocation costs include costs for five
store relocations. In the nine months ended November 30, 2002, we remodeled the
video department in 301 Superstores, installed full-store lighting upgrades in
311 Superstores and relocated nine Superstores. In the first nine months of last
year, we completed full-store remodels of 24 Superstores primarily located in
the Chicago, Ill.; Baltimore, Md.; and Washington, D.C., markets and relocated
eight Superstores.
The impact of remodel and relocation costs on the expense ratio is presented in
the following table.
Three Months Ended Nine Months Ended
November 30, November 30,
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------
Before remodel and relocation expenses......... 23.9% 24.4% 24.4% 25.7%
Remodel and relocation expenses................ 0.5 0.1 0.7 0.3
----------------------------------------------------
Expense ratio.................................. 24.4% 24.5% 25.1% 26.0%
====================================================
Income Taxes
The effective income tax rate was 38.0 percent for the third quarters and the
nine months ended November 30, 2002 and November 30, 2001.
Page 18 of 29
Net (Loss) Earnings
Circuit City continuing operations generated a loss of $21.3 million, or 10
cents per share, in the quarter ended November 30, 2002, compared with net
earnings of $9.2 million, or 4 cents per share, in the third quarter of last
fiscal year. For the nine months, Circuit City generated a loss from continuing
operations of $33.8 million, or 16 cents per share, this year, compared with a
loss of $12.9 million, or 6 cents per share, in the first nine months of fiscal
2002.
Results for the quarters and nine months ended November 30, 2002, and November
30, 2001, include costs associated with remodeling and relocating Circuit City
Superstores. This year's third quarter remodel and relocation costs totaled 3
cents per share, and last year's third quarter remodel and relocation costs
totaled 1 cent per share. For the first nine months of the current year, remodel
and relocation costs totaled 13 cents per share compared with 5 cents per share
for the same period last year.
Three Months Ended Nine Months Ended
November 30, November 30,
(Loss) Earnings Per Share 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------
Before remodel and relocation expenses.................... $(0.07) $0.05 $(0.03) $(0.01)
Remodel and relocation expenses........................... (0.03) (0.01) (0.13) (0.05)
-----------------------------------------------------
(Loss) earnings from continuing operations................ $(0.10) $0.04 $(0.16) $(0.06)
=====================================================
Discontinued Operations
As previously announced, on 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. Results attributed to CarMax for the periods prior to the separation
date are presented as results from discontinued operations.
Third quarter net earnings from discontinued operations were $3.6 million this
year, representing CarMax results for the one month prior to the separation
date. Net earnings from discontinued operations were $18.4 million in last
year's third quarter. For the nine months ended November 30, 2002, net earnings
from discontinued operations were $64.5 million, compared with $72.4 million for
the first nine months of fiscal 2002. Prior to the separation date, CarMax
earnings were allocated to the Company's Circuit City Group and CarMax Group
common stocks. Circuit City Group earnings included earnings attributed to the
CarMax Group shares reserved for the Circuit City Group or for issuance to
Circuit City Group shareholders. The CarMax Group earnings reflected the
remainder of the earnings of the CarMax business.
Operations Outlook
We are currently engaged in a multi-year program designed to refresh our
existing store base and give Circuit City customers a more contemporary shopping
experience. That multi-year program includes new store designs and remodels and
relocations of existing stores. In fiscal 2003, we remodeled video departments
in 301 Superstores, performed full-store lighting upgrades in 311 Superstores
and relocated 9 stores. One more relocation is scheduled to occur in the fourth
quarter. We had initially anticipated that remodel and relocation expenses would
total approximately 18 cents per share in fiscal 2003. The actual earnings per
share impact through the first nine months totaled 13 cents, and we now
anticipate that the earnings per share impact will be comfortably below the
original 18-cent expectation. Our efforts to provide an improved consumer
electronics shopping experience will continue in fiscal year 2004 and beyond
with a combination of relocations, remodels and new stores. We currently
anticipate that in fiscal 2004 and fiscal 2005 the impact on earnings per share
of remodeling and relocations will be approximately 18 cents per share each
year.
Page 19 of 29
In early November, we reduced our earnings per share expectations for the third
quarter, excluding remodel and relocation costs, for the Circuit City business
as changes in the merchandise sales mix and a highly promotional environment
pressured the gross profit margin. While we met the revised earnings
expectations for the third quarter, we reported lower-than-anticipated finance
income. We had previously anticipated that finance income for the full year
would be similar to the levels produced in fiscal 2002, but now anticipate a
lower profit contribution from finance income in fiscal 2003. On January 7,
2003, we announced a 5 percent decrease in total sales for the calendar month
ended December 31, 2002. Comparable store sales for that month decreased 6
percent. Given the uncertain economic and promotional climate, we have adopted a
more cautious outlook for the fourth quarter and have not at this time provided
specific earnings per share guidance for that quarter and thus for the year.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. This standard requires entities to
record the fair value of a liability for an asset retirement obligation in the
period incurred. The provisions of SFAS No. 143 will be effective for the
Company's fiscal year beginning March 1, 2003. The Company has not yet
determined the impact, if any, of adopting this standard.
Effective in the third quarter of fiscal 2003, the Company adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value when the liability
is incurred, rather than at the date of commitment to an exit or disposal plan.
The adoption of SFAS No. 146 did not have a material impact on the Company's
financial position, results of operations or cash flows.
In November 2002, the FASB issued EITF No. 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." This issue addresses when and how an
arrangement involving multiple deliverables should be divided into separate
units of accounting, as well as how the arrangement consideration should be
measured and allocated to the separate units of accounting in the arrangement.
The provisions of EITF No. 00-21 will be effective for the Company's third
quarter of fiscal 2004. The Company has not yet determined the impact, if any,
of adopting this standard.
In November 2002, the FASB issued EITF No. 02-16, "Accounting by a Reseller for
Cash Consideration Received from a Vendor." This issue addresses how cash
consideration received from a vendor by a reseller should be classified in the
reseller's income statement. EITF No. 02-16 provides that cash consideration
received by a reseller from a vendor should be characterized as a reduction of
cost of sales unless the cash consideration represents a payment for assets or
services delivered to the vendor, in which case, the consideration should be
characterized as revenue or other income. However, if the cash consideration
represents a reimbursement of incremental direct costs incurred by the reseller
to sell the vendor's products, the consideration should be characterized as a
reduction of those direct costs. These provisions of EITF No. 02-16 will be
effective for the Company's fiscal year beginning March 1, 2003. The issue also
addresses how a reseller should recognize a rebate or refund of a specified
amount of cash consideration that is payable only if the reseller completes a
specified cumulative level of purchases or remains a reseller for a specified
time period. EITF No. 02-16 provides that such a rebate or refund should be
recognized as a reduction of cost of sales based on an allocation of the cash
consideration offered to each of the underlying transactions that results in
progress by the reseller toward earning the rebate or refund. This provision of
EITF No. 02-16 was effective for all new arrangements initiated by the Company
after November 21, 2002. EITF No. 02-16 did not have any impact on the quarter
ended November 30, 2002. The Company has not yet determined the future impact,
if any, of adopting this standard.
Page 20 of 29
FINANCIAL CONDITION
Liquidity and Capital Resources
Operating Activities. In the nine months ended November 30, 2002, Circuit City
used net cash of $783.9 million in operating activities; in the nine months
ended November 30, 2001, Circuit City generated net cash of $213.5 million from
operating activities. The $997.5 million difference primarily reflects changes
in working capital, with $918.1 million of cash used for working capital in the
first nine months of the current fiscal year compared with $40.5 million of cash
generated by working capital in the first nine months of last fiscal year.
Changes in merchandise inventory, retained interests in securitized receivables
and accounts payable were the largest contributors to the change in working
capital. Merchandise inventory increased by $1.14 billion in the first nine
months of this fiscal year versus an increase of $739.1 million in the first
nine months of last fiscal year. Although we normally build inventories in
advance of the holiday selling season, this year's increase in merchandise
inventory over the prior year reflects Circuit City's focus on customer service,
which includes a commitment to improved merchandise availability, a broader
assortment in selected categories and improved merchandise displays. We believe
that the improved sales growth posted in the first nine months of this fiscal
year also in part, reflects these strategies. Accounts payable increased by
$556.2 million in the first nine months of this fiscal year versus an increase
of $851.9 million in the first nine months of last year reflecting our earlier
seasonal inventory build in the current year compared with fiscal 2002. Our
accelerated inventory build resulted in a corresponding acceleration of payments
to vendors.
Retained interests in securitized receivables increased by $123.7 million in the
first nine months of this fiscal year versus an increase of $55.9 million in the
first nine months of last fiscal year. The current year increase in retained
interests in securitized receivables reflects our required holding of duplicate
collateral on two public securitizations that are currently in their controlled
accumulation period. With an aggregate face value of $1.40 billion, these are
the Company's two largest securitizations currently outstanding, and, therefore,
the duplicate collateral requirement significantly increases the amount of our
retained interests. One series is scheduled to fully mature in February 2003 and
the other is scheduled to fully mature in March 2003. The requirement to hold
duplicate collateral terminates at the final maturity dates of the underlying
public securitizations.
Investing Activities. Net cash used in investing activities was $51.7 million in
the nine months ended November 30, 2002, compared with net cash of $80.2 million
used in investing activities in the first nine months of last year. Capital
expenditures decreased to $111.1 million in the first nine months of fiscal 2003
from $133.9 million in the comparable period last year. Capital spending in the
first nine months of fiscal 2003 included spending related to eight new
Superstores, nine relocated Superstores, remodeled video departments in 301
Superstores and full-store lighting upgrades in 311 Superstores. Capital
spending in the first nine months of last fiscal year included spending related
to ten new Superstores, eight relocated Superstores and full-store remodeling of
24 Superstores.
Proceeds from the sale of property and equipment declined to $31.1 million in
the first nine months of fiscal 2003, compared with $53.7 million in the first
nine months of last year. Proceeds from sales of property and equipment in the
first nine months of last year included amounts received from the sale-leaseback
of Circuit City's Orlando, Fla., distribution center.
At the separation date, Circuit City received a one-time special dividend
payment of $28.4 million from CarMax. This dividend was paid in recognition of
the Company's ongoing contingent liability associated with lease agreements on
23 of CarMax's sales locations originally entered into by Circuit City.
On January 7, 2003, the Company announced that its board of directors authorized
the repurchase of up to $200 million of the Company's common stock. These
repurchases may be made from time to time in the open market. The price to be
paid and the timing of purchases will be at the discretion of management. Based
on the current market value of the common stock at the announcement date, the
authorization would allow the Company to repurchase up to approximately 13
percent of the 210.5 million shares then outstanding.
Page 21 of 29
Financing Activities. Net cash provided by financing activities was $32.1
million in the first nine months of fiscal 2003, compared with net cash provided
by financing activities of $157.0 million in the comparable period last year.
A $100 million outstanding term loan matured in July 2002 and was repaid using
existing working capital. At the payment date, $22.2 million had been allocated
to Circuit City and is included in payments on long-term debt on the statement
of cash flows as of November 30, 2002. The remaining balance had been allocated
to CarMax and is included in cash used in discontinued operations on the
statement of cash flows as of November 30, 2002.
At November 30, 2002, the Company had cash and cash equivalents of $437.5
million and total outstanding debt of $71.0 million, including $58.0 million
outstanding under short-term seasonal lines of credit. The Company maintains
$210 million in committed seasonal lines of credit that are renewed annually
with various banks. Under these facilities, Circuit City must meet financial
covenants relating to minimum tangible net worth, debt to net worth and the
current ratio. The Company was in compliance with these covenants at November
30, 2002. A $150 million unsecured revolving credit facility was not renewed at
its August 31, 2002, expiration date.
At November 30, 2002, the aggregate principal amount of securitized credit card
receivables totaled $1.38 billion under the private-label program and $1.45
billion under the bankcard program. During the third quarter of fiscal 2003, we
completed no new public securitization transactions. We completed a $470 million
bankcard receivable securitization transaction and a $300 million private-label
and co-branded Visa credit card receivable securitization transaction during the
first nine months of fiscal 2003. At November 30, 2002, the unused capacity of
the private-label variable funding program was $352.4 million and the unused
capacity of the bankcard variable funding program was $272.7 million. At
November 30, 2002, no provisions provided recourse to the Company for credit
losses on the securitized receivables.
We anticipate that we will be able to expand or enter into new securitization
arrangements to meet the future needs of the finance operation.
Our finance operation is conducted through our wholly owned subsidiary First
North American National Bank, a limited-purpose credit card bank chartered,
regulated and supervised by the Office of the Comptroller of the Currency.
Following a structural change in the Company's credit card receivables
securitization programs that substantially reduced the bank's capital
requirements, FNANB requested that the OCC approve an approximately $350 million
reduction in capital in the form of a special dividend to Circuit City Stores,
Inc. During the third quarter, Circuit City Stores, Inc. received a dividend of
approximately $130 million from FNANB in accordance with OCC capital
regulations. Approval by the OCC for the remaining capital reduction in the
amount of approximately $220 million is pending. At November 30, 2002, FNANB had
cash and cash equivalents of approximately $280 million and capital of
approximately $250 million.
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 on Form 10-Q contains "forward-looking statements," which are
subject to risks and uncertainties. Additional discussion of factors that could
cause actual results to differ materially from management's projections,
forecasts, estimates and expectations is contained in the Company's Securities
and Exchange Commission filings, including the Company's Annual Report on Form
10-K/A for the year ended February 28, 2002, and the Company's proxy statement
included in the registration statement on Form S-4 filed by CarMax, Inc. (File
No. 333-85240) related to the separation of CarMax, Inc. from the Company.
Page 22 of 29
ITEM 3.
Quantitative and Qualitative
Disclosures About Market Risk
Receivables Risk
The Company manages the market risk associated with the credit card revolving
loan portfolios of its finance operation. Portions of these portfolios have been
securitized in transactions accounted for as sales in accordance with SFAS No.
140 and, therefore, are not presented on the Company's consolidated balance
sheets.
Consumer Revolving Credit Receivables. The majority of accounts in the credit
card portfolios are charged interest at rates indexed to the prime rate,
adjustable on a monthly basis subject to certain limitations. The balance of the
accounts are charged interest at a fixed annual percentage rate. At November 30,
2002, and February 28, 2002, the total outstanding principal amount of credit
card receivables had the following interest rate structure:
(Amounts in millions) November 30 February 28
--------------------------------------------------------------------------------
Indexed to prime rate..................... $2,756 $2,645
Fixed APR................................. 178 202
------------------------------------
Total..................................... $2,934 $2,847
=====================================
Financing for the 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. The total principal
amount of receivables securitized or held for sale at November 30, 2002, and
February 28, 2002, was as follows:
(Amounts in millions) November 30 February 28
--------------------------------------------------------------------------------
Floating-rate securitizations............. $2,824 $2,798
Held for sale (1)......................... 110 49
---------------------------------
Total..................................... $2,934 $2,847
====================================
(1) Held by a bankruptcy-remote special purpose subsidiary.
Interest Rate Exposure. The Company is exposed to interest rate risk on its
securitized credit card portfolio, especially when interest rates move
dramatically over a relatively short period of time. Market risk is the exposure
created by potential fluctuations in interest rates. We have mitigated this risk
through matched funding. However, the ability to increase the finance charge
yield of the Company's variable rate credit cards may be contractually limited
or limited at some point by competitive conditions. The Company enters into
interest rate cap agreements to meet the requirements of the credit card
receivable securitization transactions. The Company has entered into offsetting
interest rate cap positions and, therefore, does not anticipate market risk
arising from interest rate caps. Generally, changes only in interest rates do
not have a material impact on the Company's results of operations.
Credit risk is the exposure to nonperformance of another party to an agreement.
Credit risk is mitigated by dealing with highly rated bank counterparties. The
market and credit risks associated with financial derivatives are similar to
those relating to other types of financial instruments. Refer to Note 6 for a
description of these items.
Page 23 of 29
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 such term is defined in Rule 13a-14(c) of the Securities
Exchange Act of 1934, as amended, within 90 days of the filing date of 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 were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, since the date the controls were evaluated.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported in the Company's Annual Report on Form 10-K/A
for the fiscal year ended February 28, 2002, and the Company's
Quarterly Reports on Form 10-Q for the quarters ended May 31 and
August 31, 2002, a consolidated amended class action complaint, which
alleges federal securities law violations by the Company and its chief
executive officer, chief financial officer and principal accounting
officer, has been filed in the United States District Court for the
Eastern District of Virginia. In November 2002, the defendants filed a
motion to dismiss the complaint. The Company expects the court to hold
a hearing on this motion during the first quarter of calendar year
2003. At the present time, no class has been certified in the case.
The Company believes that the allegations in the consolidated amended
complaint are without merit and that the Company and the other
defendants have substantial defenses to the claims alleged. The
Company intends to defend this action vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
Separation Agreement dated as of May 21, 2002, between
Circuit City Stores, Inc. and CarMax, Inc. filed as
Exhibit 2.1 to the Form S-4 Registration Statement of
CarMax, Inc. (Registration No. 333-85240) is expressly
incorporated herein by this reference.
(3)(i) Articles of Incorporation
Amended and Restated Articles of Incorporation of
Circuit City Stores, Inc., effective February 3, 1997,
as amended through October 1, 2002, filed herewith.
(3)(ii) Bylaws
Bylaws of Circuit City Stores, Inc., as amended and
restated June 18, 2002, filed as Exhibit 3(ii)(a) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 2002 (File No. 1-5767), are
expressly incorporated herein by this reference.
Page 24 of 29
(4) Instruments Defining the Rights of Security Holders
Third Amended and Restated Rights Agreement dated as of
October 1, 2002, between Registrant 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), is expressly incorporated herein by
this reference.
(99)(i) Certification of the Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
(99)(ii) Certification of the Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
(b) Reports on Form 8-K
The Company filed a Form 8-K on September 10, 2002, announcing
that the Company's shareholders approved the separation of the
CarMax Group from the Company and that the Company's board of
directors authorized the redemption of the Company's CarMax Group
stock and the distribution of CarMax, Inc. common stock to effect
the separation.
The Company filed a Form 8-K on October 1, 2002, announcing the
completion of the separation of the CarMax Group from the
Company.
The Company filed a Form 8-K on October 15, 2002, stating that
its principal executive officer and principal accounting officer
had executed and filed with the SEC the sworn statements required
by SEC Order No. 4-460.
Page 25 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.
By: /s/ W. Alan McCollough
------------------------------------
W. Alan McCollough
Chairman, President and
Chief Executive Officer
By: /s/ Michael T. Chalifoux
------------------------------------
Michael T. Chalifoux
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
By: /s/ Philip J. Dunn
------------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
January 14, 2003
Page 26 of 29
I, W. Alan McCollough, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Circuit City Stores,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ W. Alan McCollough
----------------------
W. Alan McCollough
Chairman, President and
Chief Executive Officer
Page 27 of 29
I, Michael T. Chalifoux, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Circuit City Stores,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ Michael T. Chalifoux
---------------------------
Michael T. Chalifoux
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
Page 28 of 29
EXHIBIT INDEX
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
Separation Agreement dated as of May 21, 2002, between
Circuit City Stores, Inc. and CarMax, Inc. filed as
Exhibit 2.1 to the Form S-4 Registration Statement of
CarMax, Inc. (Registration No. 333-85240) is expressly
incorporated herein by this reference.
(3) (i) Articles of Incorporation
Amended and Restated Articles of Incorporation of
Circuit City Stores, Inc., effective February 3, 1997,
as amended through October 1, 2002, filed herewith.
(3) (ii) Bylaws
Bylaws of Circuit City Stores, Inc., as amended and
restated June 18, 2002, filed as Exhibit 3(ii)(a) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 2002 (File No. 1-5767), are
expressly incorporated herein by this reference.
(4) Instruments Defining the Rights of Security Holders
Third Amended and Restated Rights Agreement dated as of
October 1, 2002, between Registrant 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), is expressly incorporated herein by
this reference.
(99)(i) Certification of the Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
(99)(ii) Certification of the Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
Page 29 of 29