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 May 31, 2003 OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from_________ to
_________
Commission file number 1-5767
CIRCUIT CITY STORES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0493875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9950 Mayland Drive
Richmond, Virginia 23233
(Address of principal executive offices) (Zip Code)
(804) 527-4000
(Registrant's telephone number, including area code)
N/A
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No ___
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2003
Common Stock, par value $0.50 208,847,229
An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 30.
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations -
Three Months Ended May 31, 2003 and 2002 3
Consolidated Balance Sheets -
May 31, 2003 and February 28, 2003 4
Consolidated Statements of Cash Flows -
Three Months Ended May 31, 2003 and 2002 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 24
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 28
CERTIFICATION OF CHIEF FINANCIAL OFFICER 29
EXHIBIT INDEX 30
Page 2 of 30
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Amounts in thousands except per share data)
Three Months Ended
May 31
2003 2002
---------- ----------
Net sales and operating revenues $1,933,320 $2,118,243
Cost of sales, buying and warehousing 1,485,010 1,604,893
---------- ----------
Gross profit 448,310 513,350
Finance (loss) income (22,105) 20,419
Selling, general and administrative expenses 496,619 535,794
Interest expense 1,007 -
---------- ----------
Loss from continuing operations before income taxes (71,421) 2,025)
Income tax benefit (27,497) (769)
---------- ----------
Net loss from continuing operations (43,924) (1,256)
Net earnings from discontinued operations - 29,238
---------- ----------
Net (loss) earnings $ (43,924) $ 27,982
========== ==========
Net (loss) earnings from:
Continuing operations $ (43,924) $ (1,256)
========== ==========
Discontinued operations attributed to:
Circuit City common stock $ - $ 18,722
========== ==========
CarMax Group common stock $ - $ 10,516
========== ==========
Weighted average common shares:
Circuit City:
Basic 205,828 206,710
========== ==========
Diluted 205,828 206,710
========== ==========
CarMax Group:
Basic - 36,962
========== ==========
Diluted - 38,826
========== ==========
Net (loss) earnings per share:
Basic:
Continuing operations $ (0.21) $ (0.01)
Discontinued operations attributed to
Circuit City common stock - 0.09
---------- ----------
$ (0.21) $ 0.08
========== ==========
Discontinued operations attributed to
CarMax Group common stock $ - $ 0.28
========== ==========
Diluted:
Continuing operations $ (0.21) $ (0.01)
Discontinued operations attributed to
Circuit City common stock - 0.09
---------- ----------
$ (0.21) $ 0.08
========== ==========
Discontinued operations attributed to
CarMax Group common stock $ - $ 0.27
========== ==========
Cash dividends paid per share:
Circuit City common stock $ 0.0175 $ 0.0175
========== ==========
See accompanying notes to consolidated financial statements.
Page 3 of 30
Circuit City Stores, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands except share data)
May 31, 2003 Feb. 28, 2003
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 615,644 $ 884,670
Accounts receivable, net of allowance for doubtful accounts
of $1,069 and $1,075 181,054 215,125
Retained interests in securitized receivables 762,854 560,214
Merchandise inventory 1,328,659 1,409,736
Prepaid expenses and other current assets 63,494 33,165
---------- ----------
Total current assets 2,951,705 3,102,910
Property and equipment, net 621,067 649,593
Deferred income taxes 26,370 22,362
Other assets 24,227 24,252
---------- ----------
TOTAL ASSETS $3,623,369 $3,799,117
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 900,424 $ 963,701
Accrued expenses and other current liabilities 132,119 128,776
Accrued income taxes - 44,453
Deferred income taxes 128,531 141,729
Current installments of long-term debt 1,469 1,410
---------- ----------
Total current liabilities 1,162,543 1,280,069
Long-term debt, excluding current installments 10,865 11,254
Accrued straight-line rent 99,525 97,427
Other liabilities 69,141 68,792
---------- ----------
TOTAL LIABILITIES 1,342,074 1,457,542
---------- ----------
Stockholders' equity:
Circuit City common stock, $0.50 par value;
525,000,000 shares authorized; 207,710,782 shares
issued and outstanding as of May 31, 2003 103,855 104,977
Capital in excess of par value 837,498 849,083
Retained earnings 1,339,942 1,387,515
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,281,295 2,341,575
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,623,369 $3,799,117
========== ==========
See accompanying notes to consolidated financial statements.
Page 4 of 30
Circuit City Stores, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
Three Months Ended
May 31
2003 2002
------------ ------------
Operating Activities:
Net (loss) earnings $ (43,924) $ 27,982
Adjustments to reconcile net (loss) earnings to net cash used in
operating activities of continuing operations:
Net earnings from discontinued operations - (29,238)
Depreciation and amortization 49,485 35,746
Amortization of restricted stock awards 2,212 5,403
(Gain) loss on dispositions of property and equipment (380) 2,059
Provision for deferred income taxes (17,206) (4,290)
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 34,071 12,516
Increase in retained interests in securitized receivables (202,640) (21,720)
Decrease (increase) in merchandise inventory 81,077 (90,781)
(Increase) decrease in prepaid expenses and other current assets (30,329) 4,354
Decrease in other assets 25 1,144
Decrease in accounts payable (63,277) (2,267)
Decrease in accrued expenses and other current liabilities
and accrued income taxes (42,806) (88,162)
Increase in accrued straight-line rent and other liabilities 2,447 7,684
------------ ------------
Net cash used in operating activities of continuing operations (231,245) (139,570)
------------ ------------
Investing Activities:
Purchases of property and equipment (27,370) (26,051)
Proceeds from sales of property and equipment, net 6,791 4,419
------------ ------------
Net cash used in investing activities of continuing operations (20,579) (21,632)
------------ -------------
Financing Activities:
Proceeds from short-term debt, net - 697
Proceeds from long-term debt - 22,983
Principal payments on long-term debt (330) -
Repurchase and retirement of common stock (13,941) -
Issuances of Circuit City common stock, net 717 5,585
Issuances of CarMax Group common stock, net - 907
Dividends paid (3,648) (3,656)
------------ ------------
Net cash (used in) provided by financing activities of
continuing operations (17,202) 26,516
------------ ------------
Cash provided by discontinued operations - CarMax - 997
------------ ------------
Decrease in cash and cash equivalents (269,026) (133,689)
Cash and cash equivalents at beginning of year 884,670 1,248,246
------------ ------------
Cash and cash equivalents at end of period $ 615,644 $ 1,114,557
============ ============
See accompanying notes to consolidated financial statements.
Page 5 of 30
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
From February 7, 1997, to October 1, 2002, the common stock of Circuit City
Stores, Inc. consisted of two common stock series that were intended to
reflect the performance of the company's two businesses. The Circuit City
Group common stock was intended to reflect the performance of the Circuit
City consumer electronics stores and related operations and the shares of
CarMax Group common stock reserved for the Circuit City Group or for
issuance to holders of Circuit City Group common stock. The CarMax Group
common stock was intended to reflect the performance of the CarMax auto
superstores and related operations.
Effective October 1, 2002, the CarMax auto superstore business was
separated from the Circuit City consumer electronics business through a
tax-free transaction in which CarMax, Inc., formerly a wholly owned
subsidiary of Circuit City Stores, Inc., became an independent, separately
traded public company. Following the separation, the Circuit City Group
common stock was renamed Circuit City common stock. All CarMax results
prior to the separation date are presented as results from discontinued
operations. See Note 3 for an additional discussion of the separation.
As of May 31, 2002, 65,923,200 shares of CarMax Group common stock were
reserved for the Circuit City Group or for issuance to holders of Circuit
City Group common stock. Excluding shares reserved for CarMax employee
stock incentive plans, the reserved CarMax Group shares represented 64.0
percent of the total outstanding and reserved shares of CarMax Group common
stock at May 31, 2002.
Due to the seasonal nature of the company's business, interim results are
not necessarily indicative of results for the entire fiscal year. The
company's consolidated financial statements included herein should be read
in conjunction with the notes to the audited financial statements included
in the company's fiscal 2003 Annual Report on Form 10-K.
2. Accounting Policies
The consolidated financial statements of the company conform to accounting
principles generally accepted in the United States of America. The interim
period financial statements are unaudited; however, in the opinion of
management, all adjustments, which consist only of normal, recurring
adjustments, necessary for a fair presentation of the interim consolidated
financial statements have been included. The February 28, 2003, balance
sheet data was derived from the audited consolidated financial statements
included in the company's fiscal 2003 Annual Report on Form 10-K.
3. 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. On October 1, 2002, the separation was effective and CarMax,
Inc. became an independent, separately traded public company. Each
outstanding share of CarMax Group common stock was redeemed in exchange for
one share of CarMax, Inc. common stock. In addition, each holder of Circuit
City Group common stock received as a tax-free distribution 0.313879 of a
share of CarMax, Inc. common stock for each share of Circuit City Group
common stock owned as of September 16, 2002, the record date for the
distribution. All CarMax results 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.
Page 6 of 30
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 May 31,
2003, the future minimum fixed lease obligations on these 23 leases totaled
approximately $473.6 million.
The relationship between the company and CarMax is governed by a transition
services agreement, under which the company provides CarMax services,
including human resources, administrative services, special technical
services, payroll processing, benefits administration, payroll tax
services, computer center support and telecommunication services, with
initial terms ranging from six to 24 months and varying renewal options.
Under the agreement, CarMax pays the company the allocable portion of all
direct and indirect costs of providing these services plus 10 percent.
Including the 10 percent markup, the company billed CarMax $3.4 million
during the first quarter of fiscal 2004 for services provided under the
agreement. A tax allocation agreement, which generally provides that
pre-separation taxes attributable to the business of each party will be
borne solely by that party, also was executed upon the separation.
For the quarter ended May 31, 2002, earnings from the discontinued CarMax
operations were $29.2 million. Cash flows related to discontinued
operations have been segregated on the consolidated statements of cash
flows.
(B)Divx:
On June 16, 1999, Digital Video Express announced that it would cease
marketing the Divx home video system and discontinue operations. At May 31,
2003, and at February 28, 2003, current liabilities of $8.0 million related
to the former Divx operations were reflected on the consolidated balance
sheets. For the three-month periods ended May 31, 2003 and 2002, the
discontinued Divx operations had no impact on the company's results of
operations.
4. Finance (Loss) Income
For the three-month periods ended May 31, 2003 and 2002, the components of
pretax finance (loss) income were as follows:
At May 31, 2003 At May 31, 2002
(Amounts in millions) Private-Label Bankcard Total Private-Label Bankcard Total
-------------------------------------------------------------------------------------------------------------------------------
Securitization income (loss).......... $ 28.4 $ (15.3) $ 13.1 $ 29.1 $ 21.4 $50.5
Less: Payroll and fringe benefit
expenses................... 7.6 3.2 10.8 7.4 3.3 10.7
Other direct expenses......... 13.1 11.3 24.4 10.1 9.3 19.4
-------------------------------------------------------------------------------------
Finance (loss) income................. $ 7.7 $ (29.8) $(22.1) $ 11.6 $ 8.8 $20.4
=====================================================================================
Securitization income primarily is comprised of the gain on the sale of
receivables generated by the company's finance operation, income from
retained interests in the receivables and income related to servicing the
receivables, as well as the impact of increases or decreases in the fair
value of the retained interests. Finance (loss) 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. Stock-Based Compensation
The company accounts for stock options granted to employees and directors
using the intrinsic value method of accounting in accordance with
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to
Employees" and related interpretations. As the exercise price of all
options granted was
Page 7 of 30
equal to the market price of the underlying common stock on the grant date,
no stock-based compensation cost has been recognized. The following table
summarizes the effect on net (loss) earnings and net (loss) earnings per
share if the company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." The pro forma effect on the first quarter of
fiscal 2004 may not be representative of the pro forma effects on net
(loss) earnings for future quarters.
Three Months Ended
(Amounts in thousands May 31
except per share data) 2003 2002
--------------------------------------------------------------------------------------------------------------
Net loss from continuing operations:
As reported............................................................. $(43,924) $ (1,256)
Less: fair value impact of employee stock compensation.................. 1,432 3,368
----------------------------
Pro forma............................................................... $(45,356) $ (4,624)
============================
Net (loss) earnings attributed to Circuit City common stock:
Continuing operations, as reported...................................... $(43,924) $ (1,256)
Discontinued operations, as reported.................................... - 18,722
Less: fair value impact of employee stock compensation.................. 1,432 3,368
----------------------------
Pro forma............................................................... $(45,356) $ 14,098
============================
Net loss per share from continuing operations:
Basic - as reported.................................................... $ (0.21) $ (0.01)
Basic - pro forma....................................................... (0.22) (0.02)
Diluted - as reported................................................... (0.21) (0.01)
Diluted - pro forma..................................................... (0.22) (0.02)
Net (loss) earnings per share attributed to Circuit City common stock:
Basic - as reported..................................................... $ (0.21) $ 0.08
Basic - pro forma....................................................... (0.22) 0.07
Diluted - as reported................................................... (0.21) 0.08
Diluted - pro forma..................................................... (0.22) 0.07
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant was estimated using the
Black-Scholes option-pricing model. The weighted average assumptions used
in the model were as follows:
Three Months Ended
May 31
2003 2002
-------------------------------------------------------------------------------------
Expected dividend yield........................... 1.2% 0.3%
Expected stock volatility......................... 75.9% 69.8%
Risk-free interest rates.......................... 2.8% 4.7%
Expected lives (in years)......................... 4.6 4.6
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted was $3 per option in the quarter ended May
31, 2003, and $13 per option in the quarter ended May 31, 2002.
Page 8 of 30
6. 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.
Three Months Ended
(Amounts in thousands May 31
except per share data) 2003 2002
----------------------------------------------------------------------------------------
Circuit City:
Weighted average common shares............................. 205,828 206,710
Dilutive potential common shares:
Options................................................. - -
Restricted stock........................................ - -
-------------------------
Weighted average common shares and
dilutive potential common shares........................ 205,828 206,710
=========================
Net (loss) earnings available to common shareholders from:
Continuing operations................................... $ (43,924) $ (1,256)
Discontinued operations ................................ $ - $ 18,722
Basic net (loss) earnings per share from:
Continuing operations................................... $ (0.21) $ (0.01)
Discontinued operations ................................ - 0.09
-------------------------
$ (0.21) $ 0.08
=========================
Diluted net (loss) earnings per share from:
Continuing operations................................... $ (0.21) $ (0.01)
Discontinued operations ................................ - 0.09
-------------------------
$ (0.21) $ 0.08
=========================
CarMax Group:
Weighted average common shares............................. - 36,962
Dilutive potential common shares:
Options................................................. - 1,845
Restricted stock........................................ - 19
-------------------------
Weighted average common shares and
dilutive potential common shares........................ - 38,826
=========================
Net earnings available to common shareholders.............. $ - $ 10,516
Basic net earnings per share............................... $ - $ 0.28
Diluted net earnings per share............................. $ - $ 0.27
CarMax became an independent, separately traded public company on October
1, 2002. All CarMax results prior to the separation date are presented as
results from discontinued operations.
The company reported a loss from continuing operations for the three months
ended May 31, 2003 and May 31, 2002. The diluted net loss per share is the
same as the basic net loss per share for those periods because including
any potentially dilutive securities would be antidilutive to the net loss
per share from continuing operations.
For the three-month period ended May 31, 2003, no options or restricted
stock were included in the computation of diluted net earnings per share
because the company reported a loss from continuing operations. Options to
purchase 19.1 million shares of Circuit City common stock with exercise
prices
Page 9 of 30
ranging from $5.61 to $27.21 and restricted stock amounting to 2.6 million
shares were outstanding at May 31, 2003. For the three-month period ended
May 31, 2002, no options or restricted stock were included in the
computation of diluted net earnings per share because the company reported
a loss from continuing operations. Options to purchase 12.0 million shares
of Circuit City common stock with exercise prices ranging from $9.94 to
$43.03 per share and restricted stock amounting to 2.9 million shares were
outstanding at May 31, 2002.
7. Restricted Cash
Cash and cash equivalents held by the company's regulated subsidiaries and
not available for general corporate purposes were $55.1 million at May 31,
2003, and $48.8 million at February 28, 2003.
8. Common Stock Repurchased
In January 2003, the company announced that its board of directors had
authorized the repurchase of up to $200 million of common stock. As of May
31, 2003, the company had repurchased and retired approximately 2.7 million
shares of common stock at a cost of $13.9 million. Based on the market
value of the common stock at May 31, 2003, the remaining $186.1 million
authorization would allow the company to repurchase up to approximately 12
percent of the 207.7 million shares then outstanding.
9. Securitizations
The company enters into securitization transactions to finance credit card
receivables originated by its finance operation. The company has created
two special purpose subsidiaries to facilitate these securitization
transactions in accordance with the isolation provisions of SFAS No. 140.
The finance operation sells credit card receivables to the special purpose
subsidiaries, which, in turn, sell these receivables to securitization
master trusts. At the time of these sales, the company recognizes gains or
losses as a component of finance income. See Note 4. Private-label and
co-branded Visa credit card receivables, collectively referred to as
private-label receivables, are securitized through one master trust, and
MasterCard and Visa credit card receivables, collectively 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 a 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 interests up to a stated amount until a stated commitment
termination date. Neither master trust agreement provides for recourse to
the company for credit losses on the securitized receivables. However, the
fair value of the company's retained interests in securitized receivables
will be directly affected by credit losses on those securitized
receivables. The finance operation continues to service the securitized
receivables for a fee.
Circuit City retains the rights to receive the finance income from
securitized receivables to the extent it exceeds the sum of contractually
specified investor returns and servicing fees. The excess cash flows
represent the excess of the finance charges and fees generated by the
securitized receivables over the related interest paid to investors,
servicing costs and credit losses. These excess cash flows are referred to
as interest-only strips and are carried at fair value based on estimates of
these future cash flows. The company also holds various subordinated
asset-backed securities, which serve as credit enhancement for the
asset-backed securities held by third-party investors.
The 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 financial tests relating to minimum tangible net worth,
current ratios and debt-to-capital ratios 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
Page 10 of 30
events occur, it would constitute an early amortization event, in which
case the principal payment dates for the term series would be accelerated,
the variable funding commitments would terminate and the variable funding
investors would begin to receive monthly principal payments until paid in
full. The company and the securitized receivables were in compliance with
these financial tests and performance levels at May 31, 2003, and February
28, 2003.
At May 31, At February 28,
(Dollar amounts in millions) 2003 2003
-----------------------------------------------------------------------------------------------------------------
Total principal amount of credit card receivables managed....................... $3,023.6 $3,173.9
Principal amount of receivables securitized..................................... $2,960.4 $3,119.3
Principal amount of receivables held for sale................................... $ 63.2 $ 54.6
Unused capacity of the private-label variable funding program................... $ 151.1 $ 29.5
Unused capacity of the bankcard variable funding program........................ $ 55.5 $ 166.8
Aggregate receivables 31 days or more delinquent................................ $ 196.7 $ 200.0
Aggregate receivables 31 days or more delinquent as a percent
of total principal amount of credit card receivables managed............... 6.5% 6.3%
The principal amount of defaults net of recoveries was $79.0 million for
the quarter ended May 31, 2003, and $70.8 million for the quarter ended May
31, 2002. For the three months ended May 31, 2003, serviced receivables
averaged $3,071.5 million, compared with $2,792.1 million for the same
period last year. The principal amount of defaults net of recoveries as an
annualized percent of average serviced receivables was 10.3 percent for the
quarter ended May 31, 2003, and 10.1 percent for the quarter ended May 31,
2002.
The company completed a $550 million bankcard receivable securitization
transaction and a $500 million private-label credit card receivable
securitization transaction during the first quarter of fiscal 2004 to
replace maturing term securitizations. In addition, the company renewed its
variable funding securities programs, which the company also refers to as
warehouse conduits, during the first quarter of fiscal 2004. The company
completed a $470 million bankcard receivable securitization transaction and
a $300 million private-label credit card receivable securitization
transaction during fiscal 2003 to replace maturing term securitizations.
The finance operation receives annual servicing fees approximating 2
percent of the outstanding principal balance of the securitized
receivables. The servicing fees specified in the securitization agreements
adequately compensate the finance operation for servicing the securitized
receivables. Accordingly, no servicing asset or liability has been
recorded.
The following table summarizes certain cash flows received from and paid to
the securitization trusts.
Three Months Ended
May 31
(Amounts in millions) 2003 2002
---------------------------------------------------------------------------------------
Proceeds from new securitizations.......................... $ 92.4 $360.0*
Proceeds from collections reinvested
in previous credit card securitizations................ $450.3 $326.2*
Servicing fees received.................................... $ 14.6 $ 13.0
Other cash flows received on retained interests**........... $ 42.4 $ 50.7
*To be consistent with the fiscal 2004 presentation, these fiscal 2003
amounts reflect changes in the presentation of securitization cash flows.
**This amount represents cash flows received from retained interests other
than servicing fees, including cash flows from interest-only strips and
cash above the minimum required level in cash collateral accounts.
In accordance with the allocated carrying value method as prescribed by
SFAS No. 140, gains on sales of receivables sold to the securitization
trusts were $6.9 million for the quarter ended May 31, 2003, and $22.1
million for the quarter ended May 31, 2002.
When determining the fair value of the interest-only strips, the company
estimates future cash flows using estimates of key assumptions such as
finance charge income; charge-offs, net of recoveries; payment rates;
Page 11 of 30
and discount rates appropriate for the type of asset and risk. Expected
future cash flows also are based upon the market's expectation about future
movements in interest rates as reflected in forward interest rate curves.
Retained interests in securitized receivables presented on the consolidated
balance sheets are comprised of the following components.
At May 31, 2003 At February 28, 2003
(Amounts in millions) Bankcard Private-Label Total Bankcard Private-Label Total
--------------------------------------------------------------------------------------------------------------------------
Interest-only strips.................. $ 44.4 $ 84.8 $129.2 $ 57.7 $ 79.1 $136.8
Subordinated securities............... 363.7 270.0 633.7 263.3 160.1 423.4
-----------------------------------------------------------------------------
Retained interests in securitized
receivables........................ $408.1 $354.8 $762.9 $321.0 $239.2 $560.2
=============================================================================
At May 31, 2003, the fair value of the retained interests in securitized
receivables was $762.9 million, with a weighted-average life ranging from
0.5 years to 2.4 years. At February 28, 2003, the fair value of the
retained interests in securitized receivables was $560.2 million, with a
weighted-average life ranging from 0.1 years to 4.5 years.
The following tables present the key economic assumptions used in measuring
the fair value of retained interests at May 31, 2003, and a sensitivity
analysis showing the hypothetical effect on the fair value of those
interests when there are unfavorable variations from the assumptions used.
Key valuation assumptions at May 31, 2003, are based on portfolio
performance and market conditions. The discount rates are used to calculate
the fair value of the subordinated asset-backed securities and the
interest-only strips. The subordinated asset-backed securities were valued
primarily using a discount rate of 9 percent. The interest-only strips were
valued with a 15 percent discount rate. The default rates used in valuing
the interest-only strips are forecasted for future months and represent a
loss curve associated with a static pool of receivables. The ranges
provided in the tables below reflect the high and low months on the loss
curve. The weighted average default rates are weighted by the relative
receivable balance for each month and incorporate an adjustment for net
present value. These sensitivities are hypothetical and should be used with
caution. In the following table, the effect of a variation in a particular
assumption on the fair value of the retained interests is calculated
without changing any other assumption; in actual circumstances, changes in
one factor may result in changes in another, which might magnify or
counteract the sensitivities.
BANKCARD
Impact on Fair Impact on Fair
Assumptions Weighted-Average Value of 10% Value of 20%
(Dollar amounts in millions) Used Assumptions Adverse Change Adverse Change
----------------------------------------------------------------------------------------------------------------------------
Monthly payment rate................... 6.3% 6.3% $ 2.5 $ 5.0
Annual default rate.................... 15.0%-18.4% 16.4% $18.2 $35.9
Annual discount rate................... 9.0%-15.0% 9.7% $ 6.5 $12.8
PRIVATE-LABEL
Impact on Fair Impact on Fair
Assumptions Weighted-Average Value of 10% Value of 20%
(Dollar amounts in millions) Used Assumptions Adverse Change Adverse Change
----------------------------------------------------------------------------------------------------------------------------
Monthly payment rate................... 11.1% 11.1% $5.6 $10.0
Annual default rate.................... 7.0%-12.8% 8.9% $6.8 $13.8
Annual discount rate................... 9.0%-15.0% 10.8% $2.9 $ 5.7
Page 12 of 30
10. Financial Derivatives
The company enters into interest rate cap agreements in connection with its
private-label receivable securitization transactions. During the first
quarter of fiscal 2004, the company did not purchase or sell any interest
rate caps. The total notional amount of interest rate caps outstanding was
$512.9 million at May 31, 2003, and at February 28, 2003. Purchased
interest rate caps are included in net accounts receivable on the
consolidated balance sheets and had a fair value of $2.4 million at May 31,
2003, and $4.2 million at February 28, 2003. Written interest rate caps are
included in accounts payable on the consolidated balance sheets and had a
fair value of $2.4 million at May 31, 2003, and $4.2 million at February
28, 2003.
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.
11. 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
subleased 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 changes in 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 May
31, 2003, are presented in the following table.
Fiscal 2004
Total Liability at Payments, Liability at
Exit Cost February 28, Net of May 31,
(Amounts in millions) Accrual 2003 Accretion Expense 2003
----------------------------------------------------------------------------------------------------------------------------
Lease termination costs...................... $27.8 $13.8 $1.1 $12.7
Fixed asset write-downs, net................. 5.0 - - -
Employee termination benefits................ 4.4 - - -
Other........................................ 2.8 - - -
---------------------------------------------------------------------------
Appliance exit costs......................... $40.0 $13.8 $1.1 $12.7
===========================================================================
12. Recent Accounting Pronouncements
Effective in the first quarter of fiscal 2004, the company adopted SFAS No.
143, "Accounting for Asset Retirement Obligations," which requires entities
to record the fair value of a liability for an asset retirement obligation
in the period incurred and recognize accretion expense in subsequent
periods. The adoption of SFAS No. 143 did not have a material impact on the
company's financial position, results of operations or cash flows.
In November 2002, the Financial Accounting Standards Board issued Emerging
Issues Task Force No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." EITF No. 00-21 addresses when and how an
arrangement involving multiple deliverables should be divided into separate
units of accounting, as
Page 13 of 30
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 January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities." FIN No. 46 addresses how to identify
variable interest entities and provides guidance as to how a company may
assess its interests in a variable interest entity for purposes of deciding
whether consolidation of that entity is required. All of the company's
securitization transactions accounted for as a sale in accordance with SFAS
No. 140 are accomplished through qualifying special purpose entities, and
these transactions are not subject to the provisions of FIN No. 46. Circuit
City leases one of its corporate office buildings under an operating lease
arrangement with an off-balance-sheet variable interest entity. This
off-balance-sheet entity owns the building having an original cost of $12.6
million and has incurred debt with an outstanding principal balance of
$10.7 million to finance the cost of the building. If the arrangement
remains in place at September 1, 2003, the effective date of this standard
for the company, the company will report the building and the related debt
on the consolidated balance sheet. The company does not expect the adoption
of this standard to have a material impact on its financial position,
results of operations or cash flows.
13. Segment Information
Due to changes in the management reporting structure that occurred during
the first quarter of fiscal 2004, the Company has identified its retail
operation and its finance operation as reportable segments in accordance
with the provisions of SFAS No. 131, "Segment Reporting." These segments
are identified and managed by the company based on the company's management
reporting structure and on the nature of the products and services offered
by each segment. The retail operation segment is engaged in the business of
selling brand-name consumer electronics, personal computers and
entertainment software. The finance operation issues and services bankcard
and private-label credit cards, including a co-branded Visa credit card.
The finance operation is conducted through the company's wholly owned
subsidiary First North American National Bank, which is a limited-purpose
credit card bank. FNANB sells its credit card receivables to consolidated
special purpose subsidiaries wholly owned by the company, which, in turn,
sell these receivables to securitization master trusts that are
off-balance-sheet qualifying special purpose entities. See Note 4 and Note
9 for additional discussion of the finance operation.
The company's finance operation segment is evaluated by management on a
pretax basis. The company includes substantially all depreciation and
amortization and interest expense within the retail operation segment. The
accounting policies of the segments are the same as those set forth in to
Note 2 to the company's audited consolidated financial statements
incorporated by reference in the company's fiscal 2003 Annual Report on
Form 10-K.
Revenue by reportable segment and the reconciliation to the consolidated
statements of operations were as follows:
Three Months Ended
May 31
(Amounts in millions) 2003 2002
----------------------------------------------------------------------------------------
Retail operation.......................................... $ 1,933.3 $ 2,118.2
Finance operation......................................... 13.1 50.5
---------------------------
Total revenue............................................. 1,946.4 2,168.7
Less: finance operation revenue not included
in net sales and operating revenues*................. 13.1 50.5
---------------------------
Net sales and operating revenues ......................... $ 1,933.3 $ 2,118.2
===========================
*Finance operation revenue is included in finance (loss) income, which is
reported separately on the statements of operations.
Page 14 of 30
(Loss) earnings from continuing operations before income taxes by
reportable segment and the reconciliation to the consolidated statements of
operations were as follows:
Three Months Ended
May 31
(Amounts in millions) 2003 2002
----------------------------------------------------------------------------------------
Retail operation*......................................... $ (49.3) $ (22.4)
Finance operation......................................... (22.1) 20.4
---------------------------
Loss from continuing operations before income
taxes................................................. $ (71.4) $ (2.0)
===========================
*All corporate expenses are included in the retail operation.
Total assets by reportable segment and the reconciliation to the
consolidated balance sheets were as follows:
At May 31, At February 28,
(Amounts in millions) 2003 2003
-----------------------------------------------------------------------------------------------
Retail operation.......................................... $ 4,407.2 $ 4,439.7
Finance operation......................................... 1,123.0 762.4
-----------------------------------
Total assets before intercompany eliminations............. 5,530.2 5,202.1
Less: Intercompany eliminations.......................... 1,906.8 1,403.0
-----------------------------------
Total assets.............................................. $ 3,623.4 $ 3,799.1
===================================
14. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
presentation.
15. Subsequent Event
On June 27, 2003, the company entered into a $500 million, four-year
revolving credit facility secured by the company's inventory and certain
accounts receivable. This facility will be used to support letters of
credit as well as for short-term borrowing needs and generally will bear
interest at a spread over LIBOR or at prime. The facility is scheduled to
mature in June 2007 and provides for an option to extend the facility by
one additional year. The maximum credit extensions, including loans and
outstanding letters of credit, permitted under the credit facility on any
date will be determined from a borrowing base calculated as a percentage of
the company's eligible inventory and accounts receivable as of that date.
If the remaining borrowing availability under the facility falls below $100
million, cash dividends and stock repurchases by the company are limited to
an aggregate of $75 million in any fiscal year. In addition, if the
difference between the borrowing base and the outstanding credit extensions
under the facility falls below $50 million for five consecutive business
days, all proceeds from the sale of inventory must be applied on a daily
basis to payment of amounts owed under the facility. The facility has
customary representations and warranties, covenants and events of default.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From February 7, 1997, to October 1, 2002, the common stock of Circuit City
Stores, Inc. consisted of two common stock series that were intended to reflect
the performance of our two businesses. The Circuit City Group common stock was
intended to reflect the performance of the Circuit City consumer electronics
stores and related operations and the shares of CarMax Group common stock
reserved for the Circuit City Group or for issuance to holders of Circuit City
Group common stock. The CarMax Group common stock was intended to reflect the
performance of the CarMax auto superstores and related operations.
Effective October 1, 2002, the CarMax auto superstore business was separated
from the Circuit City consumer electronics business through a tax-free
transaction in which CarMax, Inc., formerly a wholly owned subsidiary of Circuit
City Stores, Inc., became an independent, separately traded public company.
Following
Page 15 of 30
the separation, the Circuit City Group common stock was renamed Circuit City
common stock. All CarMax results prior to the separation date are presented as
results from discontinued operations. See Note 3 for an additional discussion of
the separation.
As of May 31, 2002, 65,923,200 shares of CarMax Group common stock were reserved
for the Circuit City Group or for issuance to holders of Circuit City Group
common stock. Excluding shares reserved for CarMax employee stock incentive
plans, the reserved CarMax Group shares represented 64.0 percent of the total
outstanding and reserved shares of CarMax Group common stock at May 31, 2002.
CRITICAL ACCOUNTING POLICIES
See the discussion of critical accounting policies incorporated by reference
under Management's Discussion and Analysis of Results of Operations and
Financial Condition in the company's fiscal 2003 Annual Report on Form 10-K.
These policies relate to the calculation of the value of retained interests in
securitization transactions, the calculation of the liability for lease
termination costs, accounting for pension liabilities and accounting for cash
consideration received from vendors.
RESULTS OF OPERATIONS
Our operations, in common with other retailers in general, are subject to
seasonal influences. Historically, we have realized more of our net sales and
net earnings in the fourth quarter, which includes the majority of the holiday
selling season, than in any other fiscal quarter. The net earnings of any
quarter are seasonally disproportionate to net sales since administrative and
certain operating expenses remain relatively constant during the year.
Therefore, quarterly results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
Non-GAAP Financial Measures
In this Management's Discussion and Analysis, we present information that
includes and excludes individual cost items to provide greater understanding of
the effects of these items on our operating performance. These operating
performance measures provide a basis for investors to evaluate our performance
and financial position. Our method of computing these measures may differ from
the methods used by other companies. In addition, these measures do not replace
gross profit margin, expense ratio or net earnings (loss) per share computed in
accordance with accounting principles generally accepted in the United States of
America as a measure of profitability.
Net Sales and Operating Revenues
Total sales for the first quarter of fiscal 2004 decreased 9 percent to $1.93
billion from $2.12 billion in last year's first quarter. Comparable store sales
decreased 10 percent for the first quarter of fiscal 2004. A store is included
in comparable store sales after the store has been open for a full year.
Relocated stores are included immediately in the comparable store base.
Although we experienced modest declines in traffic, the decline in average
retails across many product categories was a larger contributor to the weakness
in first quarter sales for fiscal 2004. The significant declines in average
retail prices were driven by our industry's rapid technological development and
overall economic weakness, particularly early in the first quarter with the
onset of the war with Iraq. First quarter sales reflected continued strength in
new, more complex technologies such as digital imaging and big-screen
televisions and in the traffic-driving entertainment software category. Sales of
personal computers, driven by notebooks, and in computer printers, driven by
their digital imaging capabilities, both improved significantly at the end of
the quarter. While sales in high-profit wireless and digital satellite system
products remained below last year's levels, we saw improving trends in both at
quarter-end. Sales in home audio and camcorders remained soft as these
categories faced significant declines in average retails and a shift in consumer
interest to other, newer technologies such as digital imaging.
Page 16 of 30
The percent of merchandise sales represented by each major product category
during the first quarter of fiscal years 2004 and 2003 was as follows:
Three Months Ended
May 31
2003 2002
---------------------------------------------------------------------------------------
Video..................................................... 40% 40%
Audio..................................................... 14 15
Information Technology.................................... 33 34
Entertainment............................................. 13 11
----------------------
Total..................................................... 100% 100%
======================
We sell extended warranty programs on behalf of unrelated third parties that are
the primary obligors. Under these third-party warranty programs, we have no
contractual liability to the customer. The total extended warranty revenue
included in total sales was $72.4 million, or 3.7 percent of sales, in the first
quarter of fiscal 2004, compared with $87.9 million, or 4.2 percent of sales, in
last year's first quarter. The decrease is due to declines in average retails,
which result in warranty contracts on fewer products, and the shift in the sales
mix to include more products such as entertainment software for which warranty
contracts are not sold.
The following table provides details on our retail units:
May 31, 2003 Feb. 28, 2003 May 31, 2002
-----------------------------------------------------------------------------------------------------------------
Superstores....................................... 611 611 603
Mall-based Express stores......................... 15 15 19
---------------------------------------------------------------
Total............................................. 626 626 622
===============================================================
We expect to open approximately 10 Superstores and relocate 16 Superstores to 20
Superstores in the current fiscal year. In the first quarter of fiscal 2004, we
relocated three Superstores.
Cost of Sales, Buying and Warehousing
The gross profit margin was 23.2 percent of sales in the first quarter of fiscal
2004, compared with 24.2 percent in the same period last year. The lower gross
profit margin reflects competitive pricing; the reduction in extended warranty
sales, which carry above average gross profit margins; and shifts in the
merchandise mix.
Finance (Loss) Income
Our finance operation is conducted through our wholly owned subsidiary First
North American National Bank, which is a limited-purpose credit card bank. FNANB
sells its credit card receivables to consolidated special purpose subsidiaries
wholly owned by the company, which, in turn, sell these receivables to
securitization master trusts that are off-balance-sheet qualifying special
purpose entities. We collectively refer to the private-label and the co-branded
Visa credit card programs as the private-label program, and we collectively
refer to the MasterCard and Visa credit card programs as the bankcard program.
We securitize the private-label credit card receivables through one master trust
and the bankcard receivables through a separate master trust. At May 31, 2003,
approximately 53 percent of the total outstanding private-label receivables had
been created under the co-branded Visa credit card program. At February 28,
2003, approximately 47 percent of the total outstanding private-label
receivables had been created under the co-branded Visa credit card program. Over
time, we expect that receivables created under the co-branded Visa credit card
program will represent a greater percentage of the private-label receivables.
Securitizations are accounted for as sales in accordance with Statement of
Financial Accounting Standards No. 140, and securitization income is recognized
at the time the receivables are securitized. Gains or losses on sales of
receivables primarily reflect the difference between the carrying amount of the
receivables sold
Page 17 of 30
and the sum of the cash proceeds received and the fair value of the retained
interests in the securitized receivables. When receivables are sold, we receive
cash, retain subordinated securities and retain rights to receive the excess
cash flows, referred to as interest-only strips, that the receivables will
produce during their life. The excess cash flows represent the excess of the
finance charges and fees generated by the securitized receivables over the
related interest paid to investors, servicing costs and credit losses. We
continue to service the securitized receivables for a fee. For the three months
ended May 31, 2003, serviced receivables averaged $3.07 billion, compared with
$2.79 billion for the same period last year.
COMPONENTS OF FINANCE (LOSS) INCOME
Three Months Ended
May 31
(Amounts in millions) 2003 2002
--------------------------------------------------------------------------------------
Securitization income..................................... $ 13.1 $50.5
Less: Payroll and fringe benefit expenses................. 10.8 10.7
Other direct expenses............................. 24.4 19.4
-----------------------
Finance (loss) income..................................... $(22.1) $20.4
=======================
Compared with the first quarter of fiscal 2003, the decrease in securitization
income in the first quarter of fiscal 2004 reflects the impact of the
securitization of $500 million in private-label credit card receivables, a
separate securitization of $550 million in bankcard receivables and the renewals
of the credit card receivable warehouse conduits. The current year loss includes
transaction costs; non-cash reductions in the fair value of retained interests,
resulting from the change in duration from one-year variable funding financing
to three-year term financing; increases in valuation allowances related to a
higher level of subordinated interests; and reductions in the fair value of the
interest-only strips. Changes in the fair value of the interest-only strips and
other valuation adjustments reduced first quarter fiscal 2004 securitization
income by $35.6 million and reduced first quarter fiscal 2003 securitization
income by $3.0 million.
The new securitizations also resulted in an increase in our retained interests
in the underlying receivables. This increase resulted in a reduction in cash of
approximately $240 million and an increase in the fair value of the retained
interests in securitized receivables.
The fair value of the interest-only strips totaled $129.2 million at May 31,
2003, and $136.8 million at February 28, 2003. The interest-only strips were
affected by a combination of higher financing costs, the move of a greater
portion of the financing into lower-rated, higher yielding securities and lower
yields on the bankcard portfolio. The decrease in the fair value of the
interest-only strips was partly offset by an increase related to the discounted
sale of private-label receivables. We began to sell private-label receivables at
a discount in December 2002. When determining the fair value of the
interest-only strips, we estimate future cash flows using estimates of key
assumptions such as finance charge income; charge-offs, net of recoveries;
payment rates; and discount rates appropriate for the type of asset and risk.
Expected future cash flows also are based upon the market's expectation about
future movements in interest rates as reflected in forward interest rate curves.
We review the assumptions and estimates used in determining the fair value of
the interest-only strips on a quarterly basis. If the assumptions change or the
actual results differ from the projected results, securitization income will be
affected.
Finance income is reduced by payroll, fringe benefits and other costs directly
associated with the management and securitization of the credit card portfolios.
Payroll and fringe benefit expenses generally vary with the size of the serviced
receivables. Other direct expenses include third-party data processing fees,
rent, credit promotion expenses, Visa and MasterCard fees and other operating
expenses. Finance income does not include any allocation of indirect costs or
income. Examples of indirect costs not included are corporate expenses such as
human resources, administrative services, marketing, information systems,
accounting, legal, treasury and executive payroll, as well as retail store
expenses. See Note 4, Note 9 and Note 13 to the consolidated financial
statements in this report for additional information about our finance
operation.
Page 18 of 30
Selling, General and Administrative Expense
The selling, general and administrative expense ratio was 25.7 percent of sales
in the first quarter of fiscal 2004, compared with 25.3 percent for the same
period last year. Interest income recorded as a reduction to selling, general
and administrative expenses was $2.4 million for the three-month period ended
May 31, 2003, compared with $2.7 million for the same period last year.
The fiscal 2004 first quarter expenses included $16.5 million of remodel and
relocation costs, and the fiscal 2003 first quarter expenses included $8.0
million of remodel and relocation costs. Remodeling and relocation costs for the
first quarter of fiscal 2004 included accelerated depreciation on assets to be
taken out of service as a result of the store remodeling and relocation program.
In this year's first quarter, remodeling and relocation costs included costs
related to the refixturing of nine Superstores and the full remodel of one
Superstore in the Washington, D.C., market, as well as the relocation of one
Superstore in each of the following markets: St. Louis, Mo.; Chicago, Ill.; and
Fort Myers, Fla. In last year's first quarter, remodel and relocation costs
included costs for the initial phase of rolling out a remodeled video
department, which was completed in 18 Superstores, lighting upgrades in more
than 100 Superstores and the relocation of two Superstores.
Excluding remodel and relocation expenses, the selling, general and
administrative expense ratio was 24.8 percent of sales this year, compared with
24.9 percent in last year's first quarter. For these same periods, selling,
general and administrative expenses, excluding remodel and relocation costs,
declined $47.7 million, or 9 percent. The largest contributor to the expense
reduction was the improvement in store payroll, which reflects the change to a
single hourly compensation structure from the mix of commissioned and hourly. A
reduction in advertising expense, which primarily reflects a shift in
advertising expenditures to later quarters, also was a significant contributor
to the expense savings. These savings were partly offset by increases in rent
and occupancy related to new and relocated stores.
The impact of remodel and relocation costs on the expense ratio is presented in
the following table.
Three Months Ended
May 31
(Amounts in millions) 2003 2002
---------------------------------------------------------------------------------------------------------
Before remodel and relocation expenses.................... $480.1 24.8% $527.8 24.9%
Remodel and relocation expenses........................... 16.5 0.9 8.0 0.4
-------------------------------------------
Selling, general and administrative expenses.............. $496.6 25.7% $535.8 25.3%
===========================================
Interest Expense
Interest expense increased to $1.0 million in the first quarter of fiscal 2004.
No interest expense was reported for the same period last year. The increase in
interest expense reflects interest paid as a result of completed audits of prior
year income tax returns.
Income Taxes
The estimated effective income tax rate increased to 38.5 percent in the first
quarter of fiscal 2004 from 38.0 percent in the first quarter of fiscal 2003.
The increase reflects changes in state income tax apportionment following the
CarMax separation, as well as recent changes in income tax laws in several
states.
Net (Loss) Earnings from Continuing Operations
The net loss from continuing operations was $43.9 million, or 21 cents per
share, in the first quarter ended May 31, 2003, compared with the net loss from
continuing operations of $1.3 million, or 1 cent per share, in the first quarter
of last fiscal year.
Results for the quarters ended May 31, 2003, and May 31, 2002, were reduced by
remodeling and relocation costs, including accelerated depreciation on assets to
be taken out of service as a result of the store
Page 19 of 30
remodeling and relocation program. This year's first quarter remodel and
relocation costs totaled 5 cents per share, and last year's first quarter
remodel and relocation costs totaled 2 cents per share.
Three Months Ended
May 31
Net (Loss) Earnings per Share 2003 2002
------------------------------------------------------------------------------------
Before remodel and relocation expenses.................... $(0.16) $ 0.01
Remodel and relocation expenses........................... (0.05) (0.02)
----------------------
Net loss from continuing operations....................... $(0.21) $(0.01)
======================
Net Earnings from Discontinued Operations
On October 1, 2002, we completed the separation of the CarMax auto superstore
business 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. All
CarMax results for periods prior to the separation date are presented as results
from discontinued operations. For the quarter ended May 31, 2002, earnings from
the discontinued CarMax operations were $29.2 million.
Operations Outlook
We believe that increasing our sales volume is the best avenue for improving the
earnings and returns generated by our stores. Although we also are focusing
attention on reducing our cost structure, we believe that the gross profit
margin earned from incremental sales and the fixed expense leverage resulting
from higher sales will produce the greatest portion of any increase in store
earnings. We also are focused on improving the returns from our finance
operation. Given the recent performance of the bankcard portion of our finance
operation, the board has authorized management to analyze all viable options for
the bankcard operation.
Our sales growth initiatives include:
o investments to create a more contemporary shopping environment for our
customers through relocating, remodeling and refixturing our existing
stores and the opening of new stores;
o strategic sourcing of merchandise to provide unique, high value
products for our customers;
o marketing programs that help increase consumer traffic in the stores;
and
o continued development of a Web store that serves customers who prefer
to shop from home or work.
We also continue to emphasize the sharing of product information with our
customers through:
o extensive, online, in-store training programs for our sales associates;
o effective store signage, including an emphasis on consumer electronics
solutions and
o detailed information online at circuitcity.com.
At May 31, 2003, 106 Superstores, or 17 percent of our 611 Superstores, had been
fully remodeled, relocated or newly constructed since the beginning of fiscal
2001. We expect that number to reach approximately 20 percent by the end of the
current fiscal year and approximately 30 percent by the end of next fiscal year.
Based on the strong returns from our relocation program, we are accelerating
that program to include 16 Superstores to 20 Superstores this fiscal year and a
target of 50 Superstores in fiscal 2005, depending on real estate availability.
For stores not slated for near-term relocations, our tests have shown that
remodeling presents an attractive option. In fiscal 2004, we plan to fully
remodel four Superstores and refixture the merchandise areas in approximately
200 Superstores. We believe the new standardized fixtures in these stores will
improve sales volumes by making more products available on the sales floor for
customers, creating better product adjacencies and expanding assortments in some
stores. In addition to providing a more contemporary shopping experience, these
merchandise displays support the simplified store operating
Page 20 of 30
model that we introduced at the end of last fiscal year. That operating model
has reduced compensation costs and has created a staffing model that supports
the way consumers shop today. We expect to realize compensation savings from
that change throughout the current fiscal year.
We expect net cash expenditures and non-cash expenses related to remodeling and
relocations to total approximately $150 million in fiscal 2004. We anticipate
that approximately $80 million of the fiscal 2004 amount will be capitalized and
approximately $70 million will be expensed, reducing fiscal 2004 earnings per
share by an estimated 21 cents. The capital expenditures are net of landlord
reimbursements for property improvement expenditures. The estimated expense
amount includes approximately $50 million of non-cash expenses for leasehold
impairment reserves on stores to be relocated and accelerated depreciation on
assets to be taken out of service as a result of our remodelings and
relocations. As we continue to relocate stores, we expect to incur additional
leasehold termination costs, with the amount primarily dependent on the length
of remaining lease terms and sublease opportunities.
We have identified approximately 100 trade areas that are suitable for new
stores. We do not currently have a plan to aggressively build new stores in
these trade areas, but they represent significant potential for growth through
geographic expansion at the appropriate time. We expect to open approximately 10
stores in incremental trade areas during the current fiscal year.
Our merchandising initiatives are designed to improve availability of products,
especially accessories and peripherals, and to create unique items that offer a
strong set of features at value prices. We have created alliances with key
manufacturers, such as Sharper Image Corporation, Sharp Systems of America and
Disney Consumer Products to provide our customers with products not available at
other big-box consumer electronics retailers. We also anticipate working with
other manufacturers to introduce brand names unique to Circuit City in the
future. In advance of producing higher sales volumes, these merchandising
initiatives may increase inventory levels. However, we also will continue to
monitor inventory levels and adjust purchases based on sales trends.
We are encouraged by the progress that we are making in our store revitalization
efforts and in our efforts to reduce cost throughout the organization.
Nevertheless, we recognize that our results in the near term may be impacted
positively or negatively by changes in the nation's overall economic climate as
well as a number of other factors.
We expect that a combination of factors will continue to pressure the earnings
of our finance operation in fiscal 2004. A continued soft economy could cause
bankruptcy and default rates to remain at higher-than-normal levels, which would
adversely affect finance income. In addition to the new securitizations
completed in the first quarter of fiscal 2004, we expect one or more
securitizations will be required to replace a $275 million private-label term
securitization maturing in the third quarter of fiscal 2004 and to provide
additional financing. The impact of these factors on finance income, cash and
the retained interests in securitized receivables will depend upon the
performance of the private-label and bankcard portfolios during the remainder of
the fiscal year and market conditions at the time of the planned private-label
securitization.
Although we remain dissatisfied with our performance, we believe that we are
taking the right steps to bring a better Circuit City to consumers and that we
recognize the need to improve the performance of the finance operation,
particularly the bankcard portfolio. Our attention is focused on building value
for our shareholders with the primary route to that objective being a superior
consumer electronics shopping experience for consumers nationwide.
Recent Accounting Pronouncements
Effective in the first quarter of fiscal 2004, we adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations," which requires entities to record
the fair value of a liability for an asset retirement obligation in the period
incurred and recognize accretion expense in subsequent periods. The adoption of
SFAS No. 143 did not have a material impact on our financial position, results
of operations or cash flows.
Page 21 of 30
In November 2002, the Financial Accounting Standards Board issued Emerging
Issues Task Force No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." EITF No. 00-21 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 our third quarter of fiscal 2004. We have not yet
determined the impact, if any, of adopting this standard.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities." FIN No. 46 addresses how to identify variable
interest entities and provides guidance as to how a company may assess its
interest in a variable interest entity for purposes of deciding whether
consolidation of that entity is required. All of our securitization transactions
accounted for as a sale in accordance with SFAS No. 140 are accomplished through
qualifying special purpose entities, and these transactions are not subject to
the provisions of FIN No. 46. We lease one of our corporate office buildings
under an operating lease arrangement with an off-balance-sheet variable interest
entity. This off-balance-sheet entity owns the building having an original cost
of $12.6 million and has incurred debt with an outstanding principal balance of
$10.7 million to finance the cost of the building. If the arrangement remains in
place at September 1, 2003, the effective date of this standard for the company,
we will report the building and the related debt on the consolidated balance
sheet. We do not expect the adoption of this standard to have a material impact
on our financial position, results of operations or cash flows.
FINANCIAL CONDITION
Liquidity and Capital Resources
At May 31, 2003, we had cash and cash equivalents of $615.6 million, compared
with $884.7 million at February 28, 2003. The lower cash balance primarily
reflects the higher retained interests in securitized receivables.
Operating Activities. In the three months ended May 31, 2003, Circuit City used
net cash of $231.2 million in operating activities, compared with net cash of
$139.6 million used in the three months ended May 31, 2002. The increase in net
cash used primarily reflects the increase in retained interests in securitized
receivables and the decrease in accounts payable, partly offset by a decrease in
inventory.
Retained interests in securitized receivables increased by $202.6 million in the
first three months of this fiscal year, compared with an increase of $21.7
million in the first three months of last fiscal year. The current year increase
in retained interests in securitized receivables reflects the new
securitizations entered into during the first quarter of this fiscal year. We
completed a $550 million bankcard receivable securitization transaction and a
$500 million private-label credit card receivable securitization transaction
during the first quarter of fiscal 2004 to replace maturing term
securitizations. We also renewed variable funding asset-backed securities
programs, which we refer to as warehouse conduits, during the first quarter of
fiscal 2004. We completed a $470 million bankcard receivable securitization
transaction and a $300 million private-label credit card receivable
securitization transaction during fiscal 2003 to replace maturing term
securitizations.
Merchandise inventory decreased $81.1 million in the first quarter of fiscal
2004, compared with an increase of $90.8 million in the same period last year.
The $171.9 million difference primarily reflected replenishment in the first
quarter of fiscal 2003 of merchandise in key categories in which merchandise was
not available early in the quarter and management of inventory levels to sales
trends, which were stronger in last fiscal year's first quarter compared with
the same period this fiscal year. Accounts payable decreased by $63.3 million in
the first three months of fiscal 2004, compared with a decrease of $2.3 million
in the first three months last year. The $61.0 million difference related to
inventory purchased in the first quarter of fiscal 2003.
Investing Activities. Net cash used in investing activities was $20.6 million in
the three months ended May 31, 2003, compared with net cash of $21.6 million
used in investing activities in the first three months of last fiscal year.
Capital expenditures increased to $27.4 million in the first three months of
fiscal 2004 from $26.1 million in the comparable period last year. Capital
spending in the first three months of fiscal 2004 included spending
Page 22 of 30
related to the relocation of three Superstores, the remodeling of one Superstore
and the refixturing of the merchandise areas in nine Superstores. Capital
expenditures in the first quarter of fiscal 2003 included spending for the
initial phase of rolling out a remodeled video department, which was completed
in 18 Superstores, lighting upgrades in more than 100 Superstores and the
relocation of two Superstores. Proceeds from the sale of property and equipment
increased to $6.8 million in the first three months of fiscal 2004, compared
with $4.4 million in the first three months of last fiscal year.
Financing Activities. Net cash used in financing activities was $17.2 million in
the first three months of fiscal 2004, compared with net cash of $26.5 million
provided by financing activities in the comparable period last year. In January
2003, we announced that our board of directors had authorized the repurchase of
up to $200 million of common stock. As of May 31, 2003, we had repurchased and
retired 2.7 million shares of common stock at a cost of $13.9 million. Based on
the market value of the common stock at May 31, 2003, the remaining $186.1
million authorization would allow the company to repurchase up to approximately
12 percent of the 207.7 million shares then outstanding.
On June 27, 2003, we entered into a $500 million, four-year revolving credit
facility secured by inventory and certain accounts receivables. This facility
will be used to support letters of credit as well as for short-term borrowing
needs and generally will bear interest at a spread over LIBOR or at prime. The
facility is scheduled to mature in June 2007 and provides for an option to
extend the facility by one additional year. The maximum credit extensions,
including loans and outstanding letters of credit, permitted under the credit
facility on any date will be determined from a borrowing base calculated as a
percentage of the company's eligible inventory and accounts receivable as of
that date. If the remaining borrowing availability under the facility falls
below $100 million, cash dividends and stock repurchases by the company are
limited to an aggregate of $75 million in any fiscal year. In addition, if the
difference between the borrowing base and the outstanding credit extensions
under the facility falls below $50 million for five consecutive business days,
all proceeds from the sale of inventory must be applied on a daily basis to
payment of amounts owed under the facility. The facility has customary
representations and warranties, covenants and events of default.
We terminated $210 million in committed seasonal lines on June 27, 2003. At May
31, 2003, and at June 27, 2003, there were no outstanding balances under these
facilities. We were required to meet financial covenants relating to minimum
tangible net worth, debt to net worth and the current ratio. We were in
compliance with these covenants at May 31, 2003.
At May 31, 2003, the aggregate principal amount of securitized credit card
receivables totaled $1.50 billion under the private-label program and $1.46
billion under the bankcard program. At May 31, 2003, the unused capacity of the
private-label variable funding program was $151.1 million and the unused
capacity of the bankcard variable funding program was $55.5 million. Our
securitization agreements do not provide recourse to the company for credit
losses on securitized receivables.
During the second quarter, our finance operation began selectively extending
18-month interest-free promotional financing through the private-label credit
card program. In the past, our finance operation had generally limited
promotional financing to 12 month terms. Depending on the financial success of
the promotion, our private-label receivables may increase significantly. This
potential increase could require additional financing, which could include
additional or larger public or private securitizations during the current fiscal
year.
We anticipate that we will be able to expand or enter into new securitization
agreements to meet the future needs of our finance operation. However, adverse
changes in the performance of our credit card portfolios or changes in the
asset-backed securities market could result in our having to hold larger
retained interests in future securitizations. The private-label and bankcard
securitization agreements require that the aggregate 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 we meet financial tests relating
to minimum tangible net worth, current ratios and debt-to-capital ratios 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
Page 23 of 30
occur, it would constitute an early amortization event, in which case the
principal payment dates for the term series would be accelerated, the variable
funding commitments would terminate and the variable funding investors would
begin to receive monthly principal payments until paid in full.
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 fiscal 2003 Annual
Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Receivables Risk. We manage the market risk associated with the revolving credit
card portfolios of our 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 consolidated balance sheets.
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 remaining accounts are charged interest at fixed annual
percentage rates. The following table presents the breakdown by interest rate
structure of the gross principal receivables outstanding prior to discounting at
May 31, 2003, and February 28, 2003.
(Amounts in millions) May 31 February 28
---------------------------------------------------------------------------------------
Indexed to prime rate..................... $2,866 $2,998
Fixed APR................................. 157 176
-----------------------------------------
Total..................................... $3,023 $3,174
=========================================
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. At May 31, 2003,
and February 28, 2003, the total principal amount of receivables securitized or
held for sale prior to discounting was as follows:
(Amounts in millions) May 31 February 28
---------------------------------------------------------------------------------------
Floating-rate securitizations............. $2,960 $3,119
Held for sale............................. 63 55
----------------------------------------
Total..................................... $3,023 $3,174
========================================
Interest Rate Exposure. Interest rate exposure relating to the credit card
receivable securitizations represents a market risk exposure that we manage
primarily with matched funding. We also have the ability to adjust fixed-APR
revolving credit cards and the index on floating-rate credit cards, subject to
cardholder ratification, but we do not currently anticipate the need to do so.
Our ability to effect these changes may be limited by competitive conditions.
The majority of our cardholder accounts have interest rates indexed to prime,
but the rates we charge our cardholders may not change as frequently or to the
same extent as our funding costs. This is the result of a combination of factors
such as interest rate floors on the accounts which are above the current level
of prime rate, interest-free promotional financing, and by differences between
changes in prime and LIBOR or
Page 24 of 30
commercial paper rates. Accordingly, our securitization income and the value of
our retained interests in the securitized receivables could be adversely
impacted by increases in interest rates.
We use a sensitivity analysis to quantify interest rate risk relating to our
retained interests in securitized receivables. This analysis calculates the
impact on net earnings from a 200 basis point increase in the yield curve
applied equally over the next four quarters. Assuming that no other assumptions
change, this increase in interest rates would result in a decrease in our
securitization income of approximately $12.6 million for the quarter ended May
31, 2003, compared with a decrease of approximately $9.1 million for the quarter
ended May 31, 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. We have
entered into offsetting interest rate cap positions and, therefore, do not
anticipate significant market risk arising from interest rate caps. Credit risk
is the exposure to nonperformance of another party to an agreement. We mitigate
credit risk by dealing with highly rated bank counterparties.
ITEM 4. CONTROLS AND PROCEDURES
The company's principal executive officer and principal financial officer have
evaluated the effectiveness of the company's disclosure controls and procedures
as defined in Rule 13a-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.
Page 25 of 30
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Before June 17, 2003, Circuit City's common stock, par value $0.50 per share,
was subject to the Virginia control share acquisition statute. Under this
statute, an acquirer of shares in excess of certain thresholds, more than
one-fifth, one-third or a majority of a company's shares is not able to vote
those shares until voting rights are granted by a majority, of the outstanding
shares of that company's common stock, excluding shares held by the bidder and
shares held by officers and employee-directors of that company. The acquiring
person may require that company to call a special shareholders meeting to
consider whether to grant voting rights to the shares acquired. Virginia law
permits Circuit City to opt out of the control share acquisition statute.
Effective June 17, 2003, Circuit City opted out of that statute.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3)(i) Amended and Restated Articles of Incorporation of the
company, effective February 3, 1997, as amended through
October 1, 2002, filed as Exhibit 3(i) to the company's
Quarterly Report on Form 10-Q for the quarter ended
November 30, 2002 (File No. 1-5767), are expressly
incorporated herein by this reference.
(3)(ii) Amendment to the Bylaws of the company, effective June
17, 2003, filed herewith.
(3)(iii)Bylaws of the company, as amended and restated June 17,
2003, filed herewith.
(4) Instruments Defining the Rights of Security Holders,
Including Indentures
Third Amended and Restated Rights Agreement dated as of
October 1, 2002, between the company and Wells Fargo Bank
Minnesota, N.A., as Rights Agent, filed as Exhibit 1 to
the company's Form 8-A/A filed on October 1, 2002 (File
No. 1-5767), is expressly incorporated herein by this
reference.
(99)(i) Certification of CEO under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
(99(ii) Certification of CFO under 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 March 3, 2003, announcing
approval by the Office of the Comptroller of the Currency of two
special dividends to the company from First North American
National Bank.
The company filed a Form 8-K on March 10, 2003, announcing the
company's fourth quarter fiscal year 2003 sales.
The company filed a Form 8-K on March 18, 2003, announcing the
declaration of a quarterly dividend of 1.75 cents per share of
Circuit City Stores, Inc. common stock.
The company filed a Form 8-K on April 2, 2003, announcing the
company's fourth quarter and fiscal year 2003 results.
Page 26 of 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CIRCUIT CITY STORES, INC.
(Registrant)
By: /s/ W. Alan McCollough
-------------------------------------
W. Alan McCollough
Chairman, President and
Chief Executive Officer
By: /s/ Michael E. Foss
-------------------------------------
Michael E. Foss
Senior Vice President
Chief Financial Officer
By: /s/ Philip J. Dunn
-------------------------------------
Philip J. Dunn
Senior Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
July 14, 2003
Page 27 of 30
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 officer 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 officer 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 officer 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: July 14, 2003
/s/ W. Alan McCollough
-----------------------
W. Alan McCollough
Chairman, President and
Chief Executive Officer
Page 28 of 30
I, Michael E. Foss, 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 officer 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 officer 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 officer 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: July 14, 2003
/s/ Michael E. Foss
-----------------------
Michael E. Foss
Senior Vice President
Chief Financial Officer
Page 29 of 30
EXHIBIT INDEX
(3)(i) Amended and Restated Articles of Incorporation of
the company, effective February 3, 1997, as
amended through October 1, 2002, filed as Exhibit
3(i) to the company's Quarterly Report on Form
10-Q for the quarter ended November 30, 2002
(File No. 1-5767), are expressly incorporated
herein by this reference.
(3)(ii) Amendment to the Bylaws of the company, effective
June 17, 2003, filed herewith.
(3)(iii) Bylaws of the company, as amended and restated
June 17, 2003, filed herewith.
(4) Instruments Defining the Rights of Security
Holders, Including Indentures
Third Amended and Restated Rights Agreement dated
as of October 1, 2002, between the company and
Wells Fargo Bank Minnesota, N.A., as Rights
Agent, filed as Exhibit 1 to the company's Form
8-A/A filed on October 1, 2002 (File No. 1-5767),
is expressly incorporated herein by this
reference.
(99)(i) Certification of CEO under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
(99)(ii) Certification of CFO under Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
Page 30 of 30