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  • 1. Circuit City Stores, Inc. Annual Report 2001 focus on the customer
  • 2. Financial Highlights Years Ended February 28 or 29 2001 2000 1999 (Dollar amounts in thousands except per share data) CIRCUIT CITY STORES, INC. $12,959,028 Net Sales and Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $12,614,390 $10,810,468 $ 160,802 Earnings from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . $ 327,830 $ 211,470 $ 3,871,333 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,955,348 $ 3,445,266 $ 2,356,483 Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,142,174 $ 1,905,130 $ 1,555,580 Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,536,456 $ 1,430,710 CIRCUIT CITY GROUP $10,458,037 Net Sales and Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $10,599,406 $ 9,344,170 Earnings from Continuing Operations Before Inter-Group $ 115,238 Interest in the CarMax Group . . . . . . . . . . . . . . . . . . . . . . . . . $ 326,712 $ 234,984 $ 149,247 Earnings from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . $ 327,574 $ 216,927 Earnings per Share from Continuing Operations: $ 0.73 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.63 $ 1.09 $ 0.73 Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.60 $ 1.08 594 Number of Circuit City Superstores . . . . . . . . . . . . . . . . . . . . . . . . 571 537 CARMAX GROUP $ 2,500,991 Net Sales and Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,014,984 $ 1,466,298 $ 45,564 Net Earnings (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,118 $ (23,514) Net Earnings (Loss) per Share: $ 0.45 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.01 $ (0.24) $ 0.43 Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.01 $ (0.24) 40 Number of CarMax Retail Units . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 31 All Circuit City Group earnings per share calculations have been adjusted to reflect a two-for-one stock split effective June 30, 1999. On June 16, 1999, Digital Video Express announced that it would discontinue operations. Results of continuing operations of Circuit City Stores, Inc. and Circuit City Group shown in the tables above exclude Digital Video Express. See notes to consolidated and group financial statements. THE CIRCUIT CITY STORES, INC. COMMON STOCK SERIES INCLUDE: Circuit City Group Common Stock (NYSE:CC). Circuit City is a leading national retailer of brand-name consumer electronics, personal computers and entertainment software. At the end of fiscal year 2001, the Circuit City business included 594 Superstores in 161 markets and 35 Circuit City Express mall stores. The Circuit City Group also includes a retained interest in the equity of the CarMax Group. The Circuit City Group includes Digital Video Express, which is now classified as a discontinued operation for financial reporting purposes. CarMax Group Common Stock (NYSE:KMX). As the pioneer of the used-car superstore concept, CarMax is transforming automobile retailing with a friendly offer that delivers low, no-haggle prices, a broad selection and high-quality customer service. At the end of fiscal year 2001, CarMax operated 40 retail units in 37 locations, including 33 used-car superstores and 22 new-car franchises. IN THIS REPORT, WE USE THE FOLLOWING TERMS AND DEFINITIONS: Circuit City Stores and Circuit City Stores, Inc. refer to the corporation, which includes the Circuit City retail stores and related operations, the CarMax retail stores and related operations, and the company’s interest in Digital Video Express, which is classified as a discontinued operation. Circuit City refers to the retail operations bearing the Circuit City name and to all related operations such as product service and its finance operation. Circuit City Group refers to the Circuit City and Circuit City-related operations, the retained interest in the equity of the CarMax Group and the company’s interest in Digital Video Express, which is classified as a discontinued operation. CarMax Group and CarMax refer to retail locations bearing the CarMax name and to all related operations such as its finance operation. FORWARD-LOOKING STATEMENTS: This report contains forward-looking statements, which are subject to risks and uncertainties, including, but not limited to, risks associ- ated with the development of new business concepts. 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 SEC filings, including the Circuit City Stores, Inc. “Management’s Discussion and Analysis” contained in this annual report.
  • 3. customer focus on the At Circuit City and CarMax, our unremitting focus is on providing customers with the shopping experience—the service, the information, the selection and the value—that assures Circuit City is their first choice for consumer electronics and CarMax is their first choice for used and new vehicles. In every facet of our businesses, our Associates are committed to continuously enhancing our powerful consumer offers…for the benefit of our customers and our shareholders. 1
  • 4. letter management Even though we accomplished a great deal, we were nonetheless disappointed with our financial results. For fiscal 2001, total sales for the Circuit City Group were $10.46 billion compared with $10.60 billion last year, and earnings from continuing operations for the Circuit City business were $115.2 million, or 56 cents per Circuit City Group share, compared with $326.7 million, or $1.60 per share. Including the retained interest in CarMax, earnings from continuing operations for the Circuit City Group were $149.2 million, or 73 cents per Circuit City Group share, compared with $327.6 million, or $1.60 per share. Sales Environment. Although we started the year with healthy growth in virtually all product categories, by late in the first quarter we had already begun to see wide variations in monthly sales performance. The one consis- tent trend throughout the year was the strong growth W. A L A N M c C O L L O U G H pace for new and digital products relative to more tradi- tional products, which were particularly vulnerable to By focusing on the customer, Circuit City Stores, Inc. has rapid declines in average retails. Exciting growth cate- built a high-volume consumer electronics business that gories included digital televisions; DVD players; digital excels at bringing new, often complex, products to the imaging; computer software, accessories and peripherals; marketplace and developed an automotive retail business new video game platforms; and entertainment software. differentiated by its ability to sell high-quality used cars During the first half of the year, our appliance business in a consumer-friendly way. was characterized by weakening growth, the entry of significant competition and below-average operating CONSOLIDATED RESULTS margins. These trends led to our exit from the business Circuit City Stores, Inc. reported consolidated sales of beginning in late July. Many of the growth categories $12.96 billion for the fiscal year ended February 28, 2001, benefited from the expanded space made available by compared with $12.61 billion in fiscal 2000. Earnings from our exit from the major appliance business. After a continuing operations were $160.8 million compared with strong first half, the desktop PC business softened industry- last year’s $327.8 million. wide during the second half. Customer-Focused. We went into this sales environment CIRCUIT CITY BUSINESS REVIEW with an intense focus on the consumer. Our Circuit City In fiscal 2001, our Circuit City business operated in a chal- Superstores always have excelled at introducing new lenging retail environment that included an erratic sales technologies. Our longtime emphasis on product-knowledge- pattern during the first half of the year and a significant based sales training and the strength of our interactive softening across virtually all product categories during the in-store demonstrations have enabled us to build a second half. In this environment, we undertook a number strong brand identity with consumers seeking product of initiatives to better prepare our company for the future. information. Nevertheless, our segment today includes These initiatives included: numerous traditional products with which the consumer a major design change that was rolled out in 23 new q needs little assistance. Lower prices and product familiarity and 26 fully remodeled Superstores; allow consumers to self-select these items. Recognizing exiting the appliance business and fully remerchandising q that we need to adapt as consumer preferences change, the vacated appliance space to include new and expanded we entered the year with a new store design that makes selections in key consumer electronics categories; and, it easy for consumers to shop the way they want to upgrading key, technology-focused merchandise displays q shop—with or without sales counselor assistance and in all stores. with a layout that invites browsing throughout the store. 2
  • 5. The more contemporary shopping experience includes including rate plans, available online from a brick-and- shopping carts and a bank of cash registers at the front mortar retailer. Equally important, we enhanced the site of the store, brighter lighting, more colorful signs, more and added customers while also maintaining high open space and improved product adjacencies. During standards for customer service. Even during the peak hol- the year, we fully remodeled 26 stores, primarily in south iday season, all orders for in-stock merchandise received and central Florida, to reflect this design, and we opened by 1:00 p.m. Eastern time were shipped the same day, 23 new stores that follow this concept. and the site was available to consumers more than 99 The new design excluded major appliances, allowing percent of the time. us to dramatically increase our selection of faster grow- The Challenges Ahead. I feel good about what we have ing, more profitable consumer electronics and home accomplished, but believe there remains much yet to do. office products. Our original intent was to test a free- The cost of last year’s full remodels and the business dis- standing appliance store. However, as appliance sales ruption to the existing store environment were not softened and competition intensified, we decided to exit acceptable. And, although customers in these stores have that category and remerchandise the appliance space in given us great reviews, with the sales and economic all remaining Superstores. That exit cost us approximately uncertainty experienced at the end of the year, it is difficult 29 cents per share, including one-time exit costs, appli- to immediately measure the results of our investment. In ance merchandise markdowns, the appliance space fiscal 2002, we expect to open 15 to 20 new stores and remodeling expenses and sales disruption. But, I believe relocate approximately 10, all of which will follow last it was the right decision for Circuit City. This move pro- year’s design. However, we will limit our remodels to 20 vided the needed space to quickly expand selections of to 25 and refine the design so that it is less costly and digital imaging products; computer software, peripherals less disruptive. and accessories; video game hardware and software; We also will direct significant attention to marketing DVD movie titles; and telecommunications products. programs that cost effectively communicate the changes In addition to the full and the partial remodel programs, we have made. We have added new leadership to our mar- we continued to enhance other areas of the Circuit City keting team and believe that the combination of talent and shopping experience. During the first half, we added experience we now have will give creative life to our displays for Internet accessibility, digital memory devices advertising initiatives. and digital video and audio to virtually all stores. We Circuit City’s financial strength has been driven not expanded our wireless displays to include four providers just by our consumer offer, but also by our ability to in most markets, strengthened our ability to demonstrate deliver the offer consistently and efficiently. In addition the high-quality image available via digital television and to the changes in our store design, we began in fiscal expanded our broadband offering to include more 2001 to roll out Internet-based sales training programs providers than any other retailer. for all our store Associates. We plan to expand this We also continued to develop our e-commerce site, the training method to more product categories in the first launched by a national brick-and-mortar consumer coming fiscal year. electronics specialty retailer. In fiscal 2001, we added Given the challenging retail climate, we will even more more than 1,000 consumer electronics and home office closely examine our operating practices. Specifically, we products, bringing to 2,400 the number of products we are undertaking initiatives to: offer for sale on the Web. And, in an agreement with Alliance Entertainment, we gave CircuitCity.com cus- further tighten inventory management, including q tomers seamless access to Alliance’s selection of more enhancing our forecasting tools, so that we reduce than 250,000 entertainment software titles. Early in the inventory in the distribution system and increase year, we became the first consumer electronics retailer to inventory turnover while also maintaining high provide access to Web warehouse inventory through our in-stock positions in the stores; in-store point-of-sale system, and at year-end, we apply the Six Sigma methodology to critical processes q became the first to offer 360-degree views of products. so that we measurably increase customer satisfaction We also added online sales of wireless phones and the while also reducing costs; and, most extensive wireless communications information, 3
  • 6. leverage our longstanding information systems advan- 2001, we consistently exceeded our sales expectations and q tages to speed customer transaction times and create significantly exceeded our earnings expectations. The additional informative in-store product demonstrations sales strength continued through the fourth quarter, com- that help customers through their purchase decisions. pared to healthy sales growth in last year’s fourth quarter when CarMax saw the exit of a significant competitor We expect that, for our Circuit City business, fiscal from the business. 2002 will be a challenging year with an unpredictable In fiscal 2001, CarMax sales increased 24 percent to sales and earnings climate. In this environment, we must $2.50 billion from $2.01 billion in fiscal 2000. Net earn- make decisions that undergird our longer-term financial ings rose to $45.6 million from $1.1 million. Net earn- performance. We must remain focused on our customers ings per CarMax Group share were 43 cents compared and continue taking steps to stay competitive and up-to- with 1 cent in fiscal 2000. Net earnings attributed to the date with consumer preferences. We must analyze all our Circuit City Group Common Stock were $34.0 million in processes to ensure all activity is productive. Although fiscal 2001 compared with $862,000 in the prior year. we expect our earnings will be disappointing in fiscal We achieved this profit level, in part, by focusing on 2002, we believe that by completing these short-term the used-car segment. In the United States, sales of late- initiatives, we can improve our returns over a more model used cars, which comprise the majority of CarMax’s sustained period. used-car sales, total approximately $250 billion annually. Leadership Advances. I am especially pleased with the More than 85 percent of CarMax’s unit sales are used management team we have in place to guide our deci- vehicles. Unlike new cars, each used car is unique. By sions. Last year, several promotions and additions further finding the best mix of top-quality used cars, recondition- strengthened this team. John Froman was promoted to ing them to a high standard and guaranteeing them for a executive vice president—merchandising. John joined period after the sale, CarMax is able to add value for the Circuit City’s store operations in 1986, was named presi- consumer and earn a higher return per car sold. dent of our Central operating division in 1994 and senior Customer-Focused. CarMax sales are driven by a differen- vice president—merchandising in 1997. Ann-Marie tiated consumer offer that enables each sales consultant Austin-Stephens was promoted to senior vice president— to focus on the needs of the consumer rather than the store innovation and development. Ann-Marie joined profit of the deal. It starts with low, no-haggle prices on Circuit City in 1999 as vice president—strategic planning, the vehicle, the financing and the extended warranty. following an extensive career in marketing, strategy and Trade-ins also are handled as a separate no-haggle trans- product development. In November 2000, Fiona Dias action, including a written appraisal offer good with or joined Circuit City as senior vice president—marketing, without a purchase. We typically offer a broad selection bringing with her broad brand management and marketing of 250 to 400 high-quality used vehicles per superstore. experience. Ed Brett was named president of the Northeast Each vehicle has been thoroughly inspected and recondi- operating division. Ed began his Circuit City career in tioned to meet CarMax’s mechanical, electrical, safety and human resources in 1989, became vice president—Superstore cosmetic standards. Used vehicles include a five-day, human resources and training in 1998 and from 1999 money-back guarantee and a limited warranty. On-site until his promotion had served as a division manager and repair service also is available for all vehicles. then regional vice president. In fiscal 2001, we refined our television advertising to CARMAX BUSINESS REVIEW emphasize more strongly the aspects of the offer that are most important to consumers, and we doubled the When we began exploring the CarMax business in 1991, frequency of our advertising while lowering its cost. Our we approached it with the same consumer focus that had advertising also helped to increase awareness and drive generated success for Circuit City. Even today, research significant additional traffic to CarMax.com, our Web site. consistently acknowledges widespread consumer dissatis- Surveys conducted during the year showed that more than faction with the automobile-buying experience. Our goal 40 percent of consumers who visited a CarMax store first is to offer an alternative, especially for the purchase of visited CarMax.com. Late in fiscal 2000, we increased the high-quality used cars. We have hit bumps along the way, functionality of CarMax.com, adding photographs and particularly during the 1997 to 1998 period when we complete specifications on every car in CarMax’s 12,000- rapidly expanded and added megastores to our mix. vehicle inventory and enabling consumers to easily However, our standard-format store has achieved a high compare prices and features on selected cars and to degree of success in all markets and our megastore in the estimate trade-in values. In fiscal 2001, we introduced a multi-store Washington, D.C., market ranks as the top- new site design and continued to enhance functionality, performing used-car sales location in the nation. In fiscal 4
  • 7. adding tax, title, tag and document fee information and Beyond fiscal 2002, we expect to gradually increase the the ability to receive insurance quotations. expansion pace. We currently expect to open four to six The numbers prove that consumers like what CarMax stores, including satellites, in fiscal 2003. Adding satellite has to offer. With an average of 4,000 used cars sold per fill-in stores extends the CarMax consumer offer into store, CarMax’s fiscal 2001 store volumes were more than underserved trade areas in our existing metro markets and three times the combined new- and used-car volume of leverages our operations and advertising in those markets. the average new-car dealership. New-car dealers, who sell We look forward to continuing sales and profit growth more than 85 percent of late-model used cars, constitute from CarMax, enabling us to fulfill the return on invest- our primary competition. ment opportunities envisioned when we launched the business in 1993. Profit Driven by Execution. Sales are not the only driver Leadership Recognition. Austin Ligon, president of CarMax, of profits. Profitability is enhanced by: and the entire CarMax team have made considerable purchasing and inventory management systems: q progress developing the CarMax offer and establishing a We must purchase large volumes of used cars—one at strong profitable base for growth. Last year, we were pleased a time. To accomplish this task, we have developed to announce the promotion of Tom Folliard to senior vice unique training programs for our buying team and president—store operations. Early this year, he became exec- proprietary databases that track each car’s purchase utive vice president—store operations. Tom joined CarMax in price and activity, from the point of purchase to its 1993 as senior buyer and was an early member of the used- sale at retail. These systems enable us to measure car superstore development team. He became director of our performance and continuously hone our buying purchasing in 1994 and, since 1996, had served as vice skills. Our integrated inventory management system president—merchandising. Tom played the key leadership further helps ensure that we have the right cars in the role in the development of CarMax’s buying and inventory right location at the right time, providing historical management team and system. statistical data about which makes and models sell at which locations during which months. efficient and high-quality reconditioning: CarMax’s Only our outstanding team of Circuit City Associates q unique, systematic reconditioning process is critical to could have met the challenges Circuit City faced in fiscal guaranteeing high quality at low cost. A methodical, 2001, and the great year enjoyed by CarMax followed years sequenced procedure brings every CarMax used car up of tenacious work by the CarMax team. I am proud to be to our exacting mechanical, electrical, safety and working with these Associates, and I thank them and their cosmetic standards. Through process engineering, we families for the sacrifices they make for our company on a have reduced the average reconditioning time per car daily basis. I also thank our customers, our vendors, our by approximately 35 percent over the last two years. board of directors and our shareholders for their support. effective store operations processes: The consumer q offer and operating processes are identical in all stores. Company-wide integrated information systems support cost efficiencies, consistent execution across all stores and continuous operational improvement. Management W. Alan McCollough development and store Associate training reinforce President and Chief Executive Officer CarMax’s distinct methods to ensure that we deliver Circuit City Stores, Inc. high levels of customer satisfaction. April 2, 2001 Growth Opportunities. With a year of solid profitability behind us and an expectation for sustained profitable growth, we plan to resume our geographic expansion. Our focus for the next several years will be on single- store markets and satellite fill-in stores in our multi- store markets, both of which we believe offer the lowest risk, highest return growth opportunities. Single-store markets typically are mid-sized cities with populations of 1 million to 2.5 million people. In fiscal 2002, CarMax plans to enter two single-store markets—Sacramento, Calif., and Greensboro, N.C. 5
  • 8. customer- defined shopping Our new and fully remodeled Superstores are designed completely around today’s consumer. The store’s contemporary look and brighter lights and colors reflect the energy of our product categories. The open floor plan is simple to nav- The success of any retail superstore has historically igate so that customers can find help if they stemmed from its focus on customer service, broad need it or browse and select their products as product selections, low prices and continued satis- they prefer. Shopping carts and baskets and cash faction after the sale. This value equation holds register checkouts at the front of the store create true today. However, the definition of its various a comfortable shopping environment for “take- “WE WANT CUSTOMERS TO BE components has evolved as consumers and, in our with” products. With our exit from the appliance DELIGHTED WITH THEIR CIRCUIT CITY retail segment, the products have evolved. business, we were able in all stores to add cash SHOPPING EXPERIENCE…TO FEEL THE The consumer electronics and home office registers and place more products on the floor. MOMENT THEY WALK INTO THE STORE THAT THIS IS WHERE THEIR categories include a broad array of traditional Improved product adjacencies in the new store NEEDS WILL BE MET.” products—VCRs, portable audio, small-screen design enable our commissioned sales Associates ANN-MARIE AUSTIN-STEPHENS televisions—with which the consumer is already to easily demonstrate related products and help SENIOR VICE PRESIDENT STORE INNOVATION AND familiar and that sell at relatively low average customers compare features and benefits across DEVELOPMENT retails. It includes deep selections of entertain- models. Hourly store Associates help to ensure ment software—movie titles, music and video that product displays are adequately stocked at games. At the same time, we are adding new all times. and more complex technologies at a rapid rate. Finally, we recognize that the Web has added At Circuit City, we are adapting our store to the an exciting dimension to retail shopping. It new dichotomy in our product lines and to the enables consumers to learn about and purchase changes in consumer buying behavior so that products 24-hours-a-day, seven-days-a-week. we continue to serve the needs of a broad cus- Since launching our site in July 1999, we have tomer base. Today, Circuit City customers find maintained a tight integration with our stores. In the same knowledgeable sales assistance upon all stores, sales Associates can access the Web “NEW TRAINING PROGRAMS AND NEW which they have always relied, but they also store inventory through the point-of-sale system DISPLAYS REFLECT OUR DETERMINED COMMITMENT TO PROVIDE CON- find more products quickly accessible on the and order merchandise not available at the store. SUMERS THE INFORMATION THEY NEED floor with more cash registers for easier check- We have continued to add products and features TO BUY NEW TECHNOLOGIES. AT THE out. And, ensuring that we cover all consumer to the site since its launch. We view CircuitCity.com SAME TIME, OUR EXPANDED SELECTIONS AND NEW STORE LAYOUTS ENCOURAGE shopping preferences, we were the first national as an integral part of our efforts to provide con- MORE BROWSING IN ALL AREAS.” brick-and-mortar specialty retailer to sell con- sumers with information and make it easy for RICHARD BIRNBAUM sumer electronics over the Internet. customers to shop the way they want to shop. EXECUTIVE VICE PRESIDENT OPERATIONS 6
  • 9. CIRCUIT CITY Today, Circuit City customers find the same knowledgeable sales assistance upon which they have always relied, but they also find more products quickly accessible on the floor and conveniently located cash registers for easy checkout. And, we were the first national brick-and-mortar specialty retailer to sell consumer electronics over the Internet. 7
  • 10. information comprehensive to today’s sales Associates, who are familiar with the layout of Internet pages. Equally important, the Internet gives us a way to more quickly and more efficiently deliver information on fast-changing technologies to our store Associates and ultimately to the consumer. In fiscal 2002, we expect to add more product modules as well as introduce management “OUR WEB-BASED TRAINING PROVIDES TECHNOLOGICAL KNOW- development courseware. HOW TO OUR STORE ASSOCIATES AT We continue to reward our sales Associates A PACE THAT MIRRORS TODAY’S with incentive compensation. This compensation RAPIDLY CHANGING CONSUMER ELECTRONICS PRODUCT OFFERINGS.” structure recognizes the value they add to the JEFF WELLS shopping experience for consumers seeking We have added new ways for the consumer to SENIOR VICE PRESIDENT in-store information. It also helps us to attract shop, but also maintained our emphasis on HUMAN RESOURCES Associates who value customer service and have providing the comprehensive information needed a keen interest in the products we sell. to purchase many consumer electronics and In addition to sales Associate training, we home office products. Our long-standing commit- focus significant resources on in-store product ment to product-knowledgeable sales assistance displays and demonstrations. At the digital distinguishes Circuit City from all our signifi- imaging displays in our new and fully remodeled cant competitors. stores, customers learn how to take digital still Delivering on that commitment requires photos, upload them to a personal computer and contemporary sales training programs. All e-mail them to family and friends or make high- Circuit City store Associates complete training quality prints. Our digital television display modules focused on customer service and store “CIRCUIT CITY IS FIRMLY COMMITTED provides a vivid comparison between a big- procedures. Sales training includes initial and TO IN-STORE SYSTEMS THAT CREATE A FAST, EASY, INFORMATIVE SHOPPING screen, analog television and various digital ongoing product modules to ensure that sales EXPERIENCE. E-COMMERCE, WITH display devices. Speaker sound rooms and car Associates can answer questions on even the IN-STORE PICK-UP, AND THE PLANNED LAUNCH OF BROADBAND STATIONS audio/video product rooms enable consumers latest products. In fiscal 2001, we began moving EXEMPLIFY THIS COMMITMENT.” to compare systems. In the home office area, from classroom training to Internet-based DENNIS BOWMAN customers can see demonstrations of various training courses. C-learning is more user-friendly SENIOR VICE PRESIDENT AND CHIEF INFORMATION OFFICER 8
  • 11. CIRCUIT CITY Product-knowledgeable sales assistance distinguishes Circuit City from all our significant competitors. In-store product displays and demonstrations help our customers learn about the benefits of technology, and CircuitCity.com provides a wealth of information on more than 2,600 products. Internet access technologies, including the speed of broadband. And, in our new video game departments, they can play with the full range of game platforms. Finally, we believe the Internet is becoming a more important information source for today’s consumer. CircuitCity.com provides a wealth of information on more than 2,600 products, not just those available for sale on the site. Consumers can compare side-by-side the features and benefits of specific prod- ucts, and in fiscal 2001, we added 360-degree views of more than 500 products. In the new year, we will continue to add informa- tion and expand 360-degree views to more products. 9
  • 12. selection optimal We recognize that consumers purchasing big-ticket extended our digital camera and accessories selec- items often shop multiple retailers. Nevertheless, tion, allowing us to meet high demand over the we strive to provide an experience that enables holidays, and added 35mm cameras. We doubled them to shop only at Circuit City for a broad, our DVD movie offering, expanding from an aver- feature-rich selection of name-brand consumer age of 2,500 titles to an average of 5,000 titles in electronics and home office products. all stores. And, we added a full assortment of Our merchandising team provides a selection video game platforms, including hardware and that includes a variety of brands, features and software. We will continue to expand our video price points. The selection extends from the basic game selection as developing platforms are entry-level products to the highest-quality tele- introduced in the new year. vision available for your family or media room. “IN FISCAL 2002, WE WILL FOCUS You can grab a replacement VCR or learn about ON BUILDING MARKET SHARE IN new digital television products. We were one of THE PROFITABLE TECHNOLOGIES the first national retailers to introduce DIRECTV THAT WE BELIEVE WILL DRIVE INDUSTRY GROWTH DURING THIS and one of the first to introduce CableLabs- DIGITAL DECADE.” certified DOCSIS modems. In fiscal 2001, we JOHN FROMAN helped introduce new ways to access the Internet— EXECUTIVE VICE PRESIDENT MERCHANDISING from your wireless phone, your handheld computer or even your television. And, we expanded our wireless communications selection to include options from four major carriers in most markets. Finally, our e-commerce team mirrors the We are careful, however, to not offer selection store’s focus on selection. More than 2,400 that provides no distinguishing value for the con- products are available for purchase on the Web sumer. As products become similar in the features site, including approximately 115 televisions, offered, we adjust our selection to help simplify 45 digital cameras and 20 notebook PCs. Circuit the customer’s purchase decision. Today, for City Web customers can purchase products online example, we carry only about 15 VCR models for delivery to their home or check inventory at versus approximately 50 five years ago. These up to three stores, purchase the products online “ADVANCES IN SUPPLY CHAIN MANAGEMENT CAN HELP REDUCE reductions free space for other products that have and pick them up from the store at their conve- INVENTORY IN WAREHOUSES WHILE a greater variety of features across models. nience. In addition, the Web site enables us to offer MAINTAINING OR EVEN IMPROVING THE STORES’ ALREADY SOLID Our new store design and our exit from the special selections of product line extensions only IN-STOCK LEVELS. WE ARE TARGETING appliance business allowed us to dramatically available in limited supply. It further expands the IMPROVED RETURNS WITH REDUCED expand our selections in many categories during stores’ inventories by providing access to these INVENTORY INVESTMENT AND DISTRIBUTION COSTS.” fiscal 2001. Now, our typical Superstore displays more limited quantities as well as to the full Web GARY MIERENFELD approximately 1,000 computer software titles store warehouse inventory. And, CircuitCity.com SENIOR VICE PRESIDENT compared with only about 50 previously. We customers now have access to more than 250,000 DISTRIBUTION AND NATIONAL SERVICE increased the selling square footage for computer music and movie titles through our agreement peripherals and accessories by 70 percent. We with Alliance Entertainment. 10
  • 13. CIRCUIT CITY Circuit City provides a broad, feature-rich selection of name-brand consumer electronics and home office products. In fiscal 2001, we dramatically expanded our selections in computer software, peripherals and accessories; digital and 35mm cameras and imaging accessories; DVD movies; and video game hardware and software. 11
  • 14. value customers trust At Circuit City, we believe that for today’s con- for home delivery are shipped the same day if the sumer, value is critical to an outstanding shopping order is received before 1:00 p.m. Eastern time experience. Value includes not only extensive or the following day if after 1:00 p.m. Customer product information and a vast product array, but e-mails are responded to within 24 hours of also low prices and satisfaction after the sale. receipt. We now have operated the site through As a primary shopping destination, our stores two peak selling seasons and have set the stan- must offer competitive pricing with all major dard, meeting our shipping and e-mail response retailers in our categories. Our Web pricing must criteria more than 99 percent of the time. And be competitive with available product from other finally, unlike pure-play e-tailers or brick-and- major e-tailers and with our stores. We actively mortar retailers without fully integrated sites, any “WE’RE CHANGING OUR STORES shop the competition and continuously enhance products, whether they are picked up at the store TO MATCH CHANGED CONSUMER our inventory management systems to improve or delivered to the home, may be returned or SHOPPING PREFERENCES. WE MUST ALSO CHANGE OUR ADVERTISING forecasting and reduce inventory carrying and exchanged at any Circuit City Superstore. TO REACH TODAY’S CONSUMER, distribution costs, all as part of our efforts to During fiscal 2001, we made significant GIVING IT THE SAME FRESH APPROACH WE’RE INTRODUCING keep prices low. Finally, we offer a low price changes to the Circuit City consumer offer, exiting IN OUR STORES.” guarantee at all stores, and customers buying the appliance business to focus on the more FIONA DIAS online and picking up products at the store promising consumer electronics and home office SENIOR VICE PRESIDENT automatically receive the lower of the Web categories, adding more “take-with” selection to MARKETING price or the in-store price. all stores and introducing a store environment But to maintain our relationship with the con- that is more contemporary and more conducive to sumer, we also must continue our commitment to browsing as well as to finding and learning about service and satisfaction after the sale is complete. new technologies. And yet, we kept the underly- That commitment includes competitive return ing principles of our value equation—exceptional policies, home delivery for larger items, installa- customer service, a broad product selection, low tion for items such as DIRECTV, and in-shop and prices and satisfaction after the sale. In fiscal in-home product repair. For in-shop repair, cus- 2002, we will maintain our focus on customers tomers simply bring a product to the most conve- while we continue refining the store design as nient Circuit City Superstore, and we send it to well as the operating and management informa- one of our 23 regional repair centers. tion systems that support our consumer offer. Our CircuitCity.com customers also receive superior objective, as always, remains to achieve the best after-the-sale service. Products purchased online returns we can for Circuit City shareholders. 12
  • 15. CIRCUIT CITY At Circuit City, we are committed to providing the value that is critical to an out- standing shopping experience—extensive product information, a vast product array, low prices and satisfaction after the sale—in an environment that lets customers shop the way they want to shop. 13
  • 16. customer- defined shopping An overriding focus on the customer also drives customer’s needs rather than negotiating the best the success of our CarMax used-car superstores. “deal” for the dealership. Whether buying a luxury They must offer the same value—exceptional vehicle or a sub-compact, the CarMax customer “IN FISCAL 2001, CARMAX’S UNIQUE customer service, broad selection, low prices and receives the same help and attention. CONSUMER OFFER AND OPERATIONAL CONCEPT BEGAN TO DELIVER THE continued satisfaction after the sale—that character- In addition, the sales consultant is able to assist PROFITABILITY ENVISIONED WHEN THE izes successful specialty superstores nationwide. the customer at every stage of the buying process, BUSINESS WAS LAUNCHED, AND NOW CarMax’s pioneering consumer offer is unmatched from selection and test driving, through the trade- WE LOOK FORWARD TO TAKING THE CARMAX CONCEPT TO MORE MARKETS.” in automobile retailing. in appraisal and sale, and sign-ups for financing AUSTIN LIGON CarMax has been a hit with the consumer and extended warranty plans. Our proprietary, PRESIDENT since the day the first store opened in Richmond, enterprise-wide information system facilitates and Va., in 1993. In our first year, the Richmond speeds the shopping process. It allows the sales store’s used-vehicle sales were higher than the consultant and customer to instantly check system- combined used- and new-vehicle sales of any wide inventory information, price an extended new-car dealer in the Richmond market. Today, warranty or submit an application for financing. the average used-car sales of our 33 CarMax Qualified customers receive online financing used-car superstores are more than three times the approval on primary credit financing from either national new-car-dealer averages for new- and CarMax Auto Finance, Bank of America, or both, “CARMAX SALES CONSULTANTS TAKE used-car sales combined, and our largest super- typically in less than five minutes. Sub-prime THE CUSTOMER THROUGH THE ENTIRE store in Laurel, Md., sells nearly eight times that financing is provided through the system by a BUYING PROCESS, FROM VEHICLE average. Over the past eight years, we have further variety of third-party lenders. SELECTION THROUGH TEST DRIVING AND FINANCING TO DELIVERY.” refined the consumer offer, strengthened our oper- CarMax also provides a customer-defined shop- TOM FOLLIARD ating skills and capacity, and honed our ability to ping experience on the Web. While most used-car EXECUTIVE VICE PRESIDENT deliver CarMax’s value equation consistently customers prefer to view and test drive these STORE OPERATIONS across all stores on a daily basis. unique vehicles, CarMax.com provides comprehen- One of the keys to our customer focus is the sive information on our entire vehicle inventory. CarMax sales consultant. These consultants Both used-car and new-car customers can contact receive the same commission amount for every dedicated “eOffice” consultants online via car they sell. Pricing on vehicles, financing and CarMax.com, by telephone or by fax. Customers warranties are set at low, no-haggle levels, and can work with these eOffice sales consultants from trade-ins are handled as separate no-haggle trans- the comfort of home—including applying for actions. These incentive and pricing policies financing—and need only visit the store to sign the “COMPETITIVE FINANCING IS A KEY enable the sales consultant to focus solely on the paperwork and pick up their vehicle. COMPONENT THAT MAKES THE CARMAX OFFER WORK FOR THE CUSTOMER.” ANGIE SCHWARZ VICE PRESIDENT CARMAX AUTO FINANCE 14
  • 17. CARMAX CarMax’s pioneering consumer offer is unmatched in automobile retailing: low, no-haggle prices; a broad selection; guaranteed quality; and customer- friendly service. 15
  • 18. information comprehensive CarMax further improves the car-buying experi- vehicle make and model. After sorting, customers ence with easily accessible information on each can see side-by-side comparisons that include used and new vehicle in our inventory. Vehicle the features, specifications and color photos of information that includes features, specifica- the selected vehicles. Once the customer selects tions and the low, no-haggle CarMax price is a vehicle of interest, the system prints an available in-store via our automated touch- information sheet with a map showing the screen kiosks and online at CarMax.com. Both vehicle’s exact location on the CarMax site. systems provide the comparative Kelley Blue More and more consumers are researching “OUR ADVERTISING AND MARKETING MESSAGES EXPLAIN IN A STRAIGHT- Book price for used cars and the manufacturer’s vehicle purchases on the Web before entering a FORWARD, ‘NO-GAMES’ MANNER suggested retail price and the dealer invoice for store. Early on, CarMax laid the foundation with HOW THE ELEMENTS OF THE new cars. Inventory information on the more information systems that could be naturally CARMAX OFFER DIFFER FROM THOSE OF A TRADITIONAL DEALER.” than 12,000 vehicles available for sale is updat- integrated into a Web site, and in 1996, we JOE KUNKEL ed daily on CarMax.com and instantaneously on launched CarMax.com. CarMax.com allows SENIOR VICE PRESIDENT our in-store system. consumers to search our entire used- and new- MARKETING AND STRATEGY Customers visiting our stores are offered sales car inventory, including the prices of all vehicles. assistance when they enter the store, but also Consumers also can view financing and warranty are free to roam the vehicle selections on their information, estimate monthly payments, own. Inventory is arranged by vehicle type— approximate trade-in values and compare the from subcompacts to light trucks and luxury features and specifications of selected vehicles vehicles—and by make within each type. An easy side-by-side. In fiscal 2001, we introduced a way to sort through the vast inventory selection new site design and added vehicle reviews, the is via our automated touch-screen terminals. ability to estimate tax, title and tag fees and a Using these kiosks inside the store, customers link offering insurance quotes. can search the inventory by price point or “THE SYSTEMS CARMAX CUSTOMERS SEE, IN OUR STORES AND ON THE WEB, PROVIDE THE COMPREHENSIVE INFORMATION THAT DISTINGUISHES OUR CONSUMER OFFER; THE OPERATIONAL SYSTEMS THEY DON’T SEE HELP US SUCCESSFULLY DELIVER OUR OFFER.” MIKE DOLAN SENIOR VICE PRESIDENT AND CHIEF INFORMATION OFFICER 16
  • 19. CARMAX CarMax provides easily accessible information, including our low, no-haggle prices, on each used and new vehicle in our entire inventory—in-store via automated touch screens and online via CarMax.com. 17
  • 20. selection optimal CarMax is a superstore for used cars. To achieve purchase it from the consumer whether or not our volume objectives, we must offer a broad he or she buys a vehicle from CarMax. Second, selection of vehicles that appeal to a large num- we provide extensive training for CarMax buyers. ber of consumers. Within each category, we also From their first day with us, buyers-in-training must offer a variety of makes and models so are mentored by experienced buyers. In class- that our customers have enough choices without room training, buyers learn how to evaluate a having to shop all over town. used car, as well as important in-store and Each CarMax used-car superstore offers no business operating procedures. But, the most “SUPERVISED BY EXPERIENCED BUYERS, OUR BUYERS-IN-TRAINING APPRAISE fewer than 250 vehicles, and typical inventories important education they receive is their on- THOUSANDS OF CARS BEFORE range from 250 vehicles to 400 vehicles. At our the-job training. This training allows them to MAKING THEIR FIRST SOLO PURCHASE highest volume locations, the selection rises to appraise thousands of vehicles and receive a FOR CARMAX.” as many as 650 vehicles. Every CarMax super- critique on each appraisal made before making CLIFF WOOD VICE PRESIDENT store offers a wide selection representing all their first solo purchase for CarMax. MERCHANDISING popular makes and models, from subcompact, In addition to our used-car superstores, we mid-sized and luxury cars to sport utilities, operate 21 new-car franchises, most of which trucks and mini-vans. CarMax also offers are integrated or co-located with our super- consumers the option to transfer used vehicles stores. Brands represented include Chrysler, from any other CarMax location. Dodge, Jeep, Nissan, Mitsubishi, Toyota, BMW, CarMax used cars are less than six years old, Chevrolet and Ford. At each franchise, CarMax have fewer than 60,000 miles and generally offers the full selection of manufacturer’s range in price from $6,500 to $30,000. For models at no-haggle prices. the most cost-conscious consumer, we offer Maintaining CarMax’s superior selection also ValuMax®, which are high-quality vehicles that requires excellent inventory management skills. “AN AUTO PURCHASE IS A are more than six years old or have 60,000 Our inventory management system tracks each DOCUMENT-INTENSIVE PROCESS. miles or more. They generally range in price vehicle from its point of wholesale purchase to OUR EFFICIENT ASSOCIATES AND EFFECTIVE SYSTEMS MAKE THIS from $4,000 to $19,000. its sale at retail. Measuring the time a vehicle PROCESS APPEAR SIMPLE AND Because these unique used vehicles cannot remains on our lot, tracking its purchase price SEAMLESS TO THE CUSTOMER.” be purchased in bulk, delivering this broad versus its ultimate retail sales price and tracking FRED WILSON VICE PRESIDENT selection requires special buying skills. First, to movement of vehicles between locations helps STORE ADMINISTRATION make sure our selection matches consumer tastes generate an efficient inventory turn ratio. We in each market, we purchase most cars directly are constantly using the information provided from consumers in the market or at regional by this system to refine our buying skills, our auctions. We appraise any vehicle and offer to selection and our retail prices. 18
  • 21. CARMAX CarMax is a superstore for used cars, with typical inventories ranging from 250 vehicles to 400 vehicles. In fiscal 2001, CarMax sold an average of 4,000 used cars per superstore, more than three times the combined new- and used-car volume of the average new-car dealership. 19
  • 22. value customers trust Creating value for automotive consumers means equipment standards. Vehicle inspections are providing top-notch customer service, a broad completed systematically by CarMax mechanics, selection of vehicles and easily accessible product most of whom are A.S.E.-certified. Fewer than information. But, most of all, it means providing half the cars we purchase from consumers meet low prices on high-quality vehicles. CarMax the CarMax retail standard; the remainder are delivers the entire value equation. wholesaled to other dealers at onsite auctions. On average, CarMax used cars are priced A five-day, 250-mile return guarantee and a $1,500 below the Kelley Blue Book price. In fiscal limited 30-day warranty back every used car sold “OUR SERVICE TECHNICIANS KNOW THAT WHETHER OR NOT A 2001, approximately 75 percent of our new cars at CarMax. The majority of customers also choose CUSTOMER BECOMES A REPEAT were priced below dealer’s invoice. Every consumer to purchase extended warranties that provide CUSTOMER DEPENDS ON THE QUALITY receives these low prices—without having to comprehensive mechanical protection for periods OF OUR RECONDITIONING AND SERVICE OPERATIONS.” negotiate. At CarMax, we extend no-haggle to all ranging from six months to 72 months. All ED HILL parts of the transaction. Consumers can receive CarMax used-car locations provide vehicle repair VICE PRESIDENT written appraisals on any vehicle, and we will service, including warranty service. CarMax SERVICE OPERATIONS buy their cars even if they don’t buy from us. We extended warranty customers also have access also set financing and warranty rates at low, no- to an additional 14,000 independent service haggle levels and offer customers a choice of providers nationwide. Factory-authorized warranty rates and terms when they are approved by more service is available for all new cars at CarMax than one financing source. Other automobile new-car franchises. retailers may offer a good deal on the vehicle or From the day we opened the doors, consumers even advertise no-haggle pricing, but most then have told us they like CarMax. Today, we operate vary the pricing on trade-ins, financing and war- 37 locations and used cars account for more than ranties to earn back the margin lost on the vehicle. 85 percent of the vehicles we sell. We have refined The prices are low, but the quality is high. the offer and strengthened the systems that support “PAYING THE SAME FIXED DOLLAR Every CarMax used car undergoes our rigorous it and our capacity to consistently deliver it. As we COMMISSION ON EVERY VEHICLE ALLOWS OUR SALES CONSULTANTS TO Certified Quality InspectionSM. This comprehensive enter fiscal 2002, we are once again beginning to FOCUS ON FINDING THE RIGHT CAR inspection includes the engine, cooling and fuel extend the CarMax offer to customers in new FOR THE CUSTOMER.” system, drive axle, transmission, electronic systems, markets. As we engage in this expansion program, SCOTT RIVAS VICE PRESIDENT suspension, brake system, steering, air condition- we expect that continuing to offer consumers HUMAN RESOURCES ing, interior and optional equipment. ValuMax® “car-buying the way it should be” will produce must meet the same mechanical, electrical and healthy returns for our shareholders. safety standards, but fewer cosmetic and optional 20
  • 23. CARMAX Creating value for automotive consumers means providing top-notch customer service, easily accessible product information and low prices on high-quality vehicles. CarMax delivers the entire value equation. 21
  • 24. Selected Financial Data 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 CONSOLIDATED SUMMARY OF EARNINGS FROM CONTINUING OPERATIONS (Amounts in millions except per share data) Net sales and operating revenues................ $12,959 $12,614 $10,810 $ 8,871 $ 7,664 $ 7,029 $ 5,583 $ 4,130 $ 3,270 $ 2,790 Gross profit .......................................................... $ 2,795 $ 2,863 $ 2,456 $ 2,044 $ 1,761 $ 1,635 $ 1,385 $ 1,106 $ 924 $ 809 Selling, general and administrative expenses.............................. $ 2,515 $ 2,310 $ 2,087 $ 1,815 $ 1,499 $ 1,315 $ 1,105 $ 892 $ 745 $ 676 Earnings from continuing operations before income taxes................. $ 259 $ 529 $ 341 $ 202 $ 233 $ 295 $ 270 $ 209 $ 175 $ 124 Earnings from continuing operations.......... $ 161 $ 328 $ 211 $ 125 $ 144 $ 184 $ 169 $ 132 $ 110 $ 78 Earnings (loss) per share from continuing operations: Circuit City Group: Basic......................................................... $ 0.73 $ 1.63 $ 1.09 $ 0.68 $ 0.74 $ 0.95 $ 0.88 $ 0.70 $ 0.59 $ 0.43 Diluted ..................................................... $ 0.73 $ 1.60 $ 1.08 $ 0.67 $ 0.73 $ 0.94 $ 0.87 $ 0.69 $ 0.58 $ 0.42 CarMax Group: Basic......................................................... $ 0.45 $ 0.01 $ (0.24) $ (0.35) $ (0.01) $ — $ — $ — $ — $ — Diluted ..................................................... $ 0.43 $ 0.01 $ (0.24) $ (0.35) $ (0.01) $ — $ — $ — $ — $ — CONSOLIDATED SUMMARY OF EARNINGS FROM CONTINUING OPERATIONS PERCENTAGES (% to sales except effective tax rate) 21.6 Gross profit........................................................... 22.7 22.7 23.0 23.0 23.3 24.8 26.8 28.3 29.0 Selling, general and 19.4 administrative expenses.............................. 18.3 19.3 20.5 19.6 18.7 19.8 21.6 22.8 24.2 Earnings from continuing operations 2.0 before income taxes..................................... 4.2 3.2 2.3 3.0 4.2 4.8 5.1 5.4 4.5 38.0 Effective tax rate................................................. 38.0 38.0 38.0 38.0 37.5 37.5 36.7 37.0 37.0 1.2 Earnings from continuing operations............... 2.6 2.0 1.4 1.9 2.6 3.0 3.2 3.4 2.8 CONSOLIDATED SUMMARY BALANCE SHEETS (Amounts in millions) $ 2,847 Total current assets .......................................... $ 2,943 $ 2,394 $ 2,146 $ 2,163 $ 1,736 $ 1,387 $ 1,024 $ 791 $ 597 $ 989 Property and equipment, net........................... $ 965 $ 1,006 $ 1,049 $ 886 $ 774 $ 593 $ 438 $ 371 $ 319 $ – Deferred income taxes..................................... $ — $ — $ — $ — $ — $ 6 $ 79 $ 88 $ 68 $ 35 Other assets....................................................... $ 47 $ 45 $ 37 $ 32 $ 16 $ 18 $ 14 $ 13 $ 15 Total assets....................................................... $ 3,871 $ 3,955 $ 3,445 $ 3,232 $ 3,081 $ 2,526 $ 2,004 $ 1,555 $ 1,263 $ 999 $ 1,292 Total current liabilities .................................... $ 1,406 $ 964 $ 906 $ 837 $ 831 $ 706 $ 546 $ 373 $ 279 Long-term debt, excluding $ 116 current installments................................... $ 249 $ 426 $ 424 $ 430 $ 399 $ 179 $ 30 $ 82 $ 85 $ 92 Deferred revenue and other liabilities........... $ 130 $ 112 $ 145 $ 166 $ 214 $ 242 $ 268 $ 232 $ 187 $ 15 Deferred income taxes..................................... $ 28 $ 38 $ 27 $ 33 $ 18 $ — $ — $ — $ — Total liabilities.................................................. $ 1,515 $ 1,813 $ 1,540 $ 1,502 $ 1,466 $ 1,462 $ 1,127 $ 844 $ 687 $ 551 Total stockholders’ equity.............................. $ 2,356 $ 2,142 $ 1,905 $ 1,730 $ 1,615 $ 1,064 $ 877 $ 711 $ 576 $ 448 Total liabilities and stockholders’ equity...... $ 3,871 $ 3,955 $ 3,445 $ 3,232 $ 3,081 $ 2,526 $ 2,004 $ 1,555 $ 1,263 $ 999 CONSOLIDATED STATEMENTS OF CASH FLOWS FROM CONTINUING OPERATIONS (Amounts in millions) Depreciation and amortization....................... $ 153 $ 148 $ 130 $ 115 $ 99 $ 80 $ 67 $ 55 $ 42 $ 36 Cash flow from operating activities of continuing operations........................... $ 156 $ 626 $ 319 $ 236 $ 26 $ (46) $ 51 $ 111 $ 163 $ 67 Capital expenditures ........................................ $ 286 $ 222 $ 352 $ 576 $ 540 $ 517 $ 375 $ 252 $ 190 $ 110 OTHER DATA Cash dividends per share paid on Circuit City Group Common Stock............ $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.06 $ 0.05 $ 0.04 $ 0.03 $ 0.03 7.1 Return on average stockholders’ equity (%)..... 9.8 7.9 6.2 10.2 18.5 21.1 20.6 21.5 19.2 Number of Associates at year-end................... 56,865 60,083 53,710 46,691 42,312 37,086 31,413 23,625 20,107 16,635 Number of Circuit City retail units 629 at year-end.................................................... 616 587 556 493 419 352 294 260 228 40 Number of CarMax retail units at year-end ... 40 31 18 7 4 2 1 – – All earnings per share and dividends per share calculations for the Circuit City Group have been adjusted to reflect a two-for-one stock split effective June 30, 1999. On June 16, 1999, Digital Video Express announced that it would discontinue operations. Results of continuing operations shown above exclude Digital Video Express. See notes to consolidated and group financial statements. 22
  • 25. HIGH-LOW PRICES CIRCUIT CITY MARKETS (as of 2/28/01) Circuit City ALABAMA ILLINOIS NEBRASKA TENNESSEE Anniston Champaign/ Lincoln Chattanooga $70 Birmingham (2) Springfield (3) Omaha Jackson $65 Huntsville Chicago (25) Johnson City NEVADA $60 Montgomery Peoria/ Kingsport Las Vegas (3) $55 Tuscaloosa Bloomington (2) Knoxville (2) Reno $50 Rockford Memphis (2) ARIZONA NEW MEXICO $45 Nashville (5) INDIANA Phoenix (8) Albuquerque $40 TEXAS Tucson (2) Evansville NEW YORK $35 Fort Wayne Abilene ARKANSAS Albany $30 Indianapolis (7) Amarillo Ft. Smith (2) Binghamton $25 Lafayette Austin (3) Little Rock (2) Buffalo (3) $20 South Bend Beaumont CALIFORNIA New York (32) $15 Terre Haute Corpus Christi Bakersfield Rochester (3) $10 Dallas/Fort Worth(10) KANSAS Chico/Redding (2) Syracuse $5 El Paso (2) Kansas City (5) Fresno (3) NORTH CAROLINA Houston (12) $0 Topeka Los Angeles (41) Charlotte (6) 1234 1234 1234 1234 1234 Lubbock Wichita (2) Palm Springs 1997 1998 1999 2000 2001 Greensboro (3) McAllen/ KENTUCKY Sacramento (5) Greenville/ Brownsville (2) CarMax Salinas (3) Lexington New Bern (2) Midland/Odessa (2) San Diego (8) Louisville (4) Raleigh (5) San Antonio (3) $25 San Francisco (16) Paducah (2) Wilmington Tyler/Longview (3) $20 Santa Barbara (2) LOUISIANA OHIO Waco (4) $15 COLORADO Baton Rouge Cincinnati (6) Wichita Falls $10 Colorado Springs (3) Lafayette Cleveland (9) UTAH $5 Denver (8) New Orleans (4) Columbus (4) Salt Lake City (5) $0 Grand Junction Lake Charles Dayton (3) 1234 1234 1234 1234 1234 VERMONT Texarkana/ CONNECTICUT Toledo (2) 1997 1998 1999 2001 2000 Burlington Shreveport Hartford (4) Youngstown (2) VIRGINIA MAINE Common Stock Prices FLORIDA OKLAHOMA Charlottesville Bangor Fort Myers (3) Oklahoma City (2) As of February 28, 2001, there were approximately 8,600 holders of the Circuit City Harrisonburg Portland Gainesville (2) Tulsa (2) Group Common Stock and 535 holders of the CarMax Group Common Stock. Norfolk (7) MARYLAND Jacksonville (4) The first graph above shows the common stock trends for Circuit City Stores, OREGON Richmond (5) Miami (9) Baltimore (6) Inc. Common Stock from March 1, 1996, through February 3, 1997, and the com- Eugene Roanoke (3) Orlando (7) Salisbury mon stock trends for Circuit City Stores, Inc.—Circuit City Group Common Stock Medford Winchester Panama City from February 4, 1997, through February 28, 2001. The Circuit City Stores, Inc. MASSACHUSETTS Portland (5) WASHINGTON Pensacola (3) Common Stock was redesignated as and, on February 4, 1997, began trading as Boston (14) PENNSYLVANIA Seattle (9) Tallahassee Circuit City Group Common Stock. It includes a retained interest in the equity of Springfield (2) Erie Spokane (2) Tampa (9) newly issued Circuit City Stores, Inc.—CarMax Group Common Stock. Circuit City MICHIGAN Harrisburg (4) Yakima West Palm Beach (5) Group Common Stock prices have been adjusted to reflect a two-for-one stock split Detroit (11) Johnstown (3) WASHINGTON D.C. effective June 30, 1999. GEORGIA Flint (2) Philadelphia (14) Maryland (8) The second graph shows the common stock trends for Circuit City Stores, Inc.— Albany Grand Rapids (5) Pittsburgh (5) N. Virginia (9) CarMax Group Common Stock from February 4, 1997, the first day it was traded, Atlanta (16) Lansing (3) Scranton/ through February 28, 2001. WEST VIRGINIA Augusta Traverse City Wilkes-Barre (3) Columbus Charleston/ MINNESOTA RHODE ISLAND Macon Huntington (2) SHAREHOLDER INFORMATION Minneapolis (9) Providence (5) Savannah Clarksburg (2) MISSISSIPPI SOUTH CAROLINA Wheeling (2) CERTIFIED PUBLIC ACCOUNTANTS ANNUAL MEETING HAWAII Biloxi Charleston KPMG LLP June 15, 2001, 10:00 a.m. WISCONSIN Honolulu Jackson Columbia (2) Richmond, Virginia The Jefferson Hotel Appleton/ IDAHO Tupelo Florence (2) Franklin and Adams Streets Green Bay (2) TRANSFER AGENT & REGISTRAR Boise Greenville (4) MISSOURI Richmond, Virginia Madison (2) Wells Fargo Bank Minnesota, N.A. Idaho Falls Columbia Milwaukee (4) FORM 10-K South St. Paul, Minnesota St. Louis (7) Form 10-K Annual Report to the (800) 468-9716 WYOMING Springfield Securities and Exchange Commission www.wellsfargo.com/com/shareowner_ Cheyenne provides certain additional information services and will be available in June. RIGHTS AGENT CARMAX MARKETS (as of 2/28/01) A copy of this report may be obtained Wells Fargo Bank Minnesota, N.A. without charge upon request to: South St. Paul, Minnesota CALIFORNIA ILLINOIS TEXAS Los Angeles (4) Chicago (6) Dallas/Fort Worth (5) OFFICE OF THE CORPORATE CORPORATE OFFICES Houston (4) SECRETARY FLORIDA NORTH CAROLINA 9950 Mayland Drive San Antonio Circuit City Stores, Inc. Miami (3) Charlotte Richmond, Virginia 23233-1464 9950 Mayland Drive VIRGINIA Orlando (2) Raleigh WEB SITES Richmond, Virginia 23233-1464 Tampa (2) Richmond SOUTH CAROLINA www.CircuitCity.com SHAREHOLDER INQUIRIES GEORGIA WASHINGTON, D.C./ Greenville www.CarMax.com Office of Financial Relations BALTIMORE (5) Atlanta (3) TENNESSEE INVESTOR INFORMATION WEB SITES (804) 527-4000, extension 2077 Nashville http://investor.CircuitCity.com SECURITIES ANALYST INQUIRIES http://investor.CarMax.com Ann M. Collier Vice President Financial and Public Relations (804) 527-4058
  • 26. Reported Historical Information 2001 2000 1999 1998 1997 (Amounts in thousands except per share data) $12,959,028 Net sales and operating revenues ................................ $12,614,390 $10,810,468 $8,870,797 $7,663,811 $ 160,802 Earnings from continuing operations ......................... $ 327,830 $ 211,470 $ 124,947 $ 144,234 $ – Loss from discontinued operations.............................. $ (130,240) $ (68,546) $ (20,636) $ (7,820) Circuit City Stores, Inc. $ 160,802 Net earnings.................................................................... $ 197,590 $ 142,924 $ 104,311 $ 136,414 Net earnings (loss) per share attributed to: Circuit City Group: Basic: $ 0.73 Continuing operations................................... $ 1.63 $ 1.09 $ 0.68 $ 0.74 $ – Discontinued operations............................... $ (0.65) $ (0.34) $ (0.11) $ (0.04) $ 0.73 Net earnings................................................... $ 0.98 $ 0.75 $ 0.57 $ 0.70 Diluted: $ 0.73 Continuing operations .................................. $ 1.60 $ 1.08 $ 0.67 $ 0.73 $ – Discontinued operations............................... $ (0.64) $ (0.34) $ (0.10) $ (0.04) $ 0.73 Net earnings................................................... $ 0.96 $ 0.74 $ 0.57 $ 0.69 CarMax Group: $ 0.45 Basic...................................................................... $ 0.01 $ (0.24) $ (0.35) $ (0.01) $ 0.43 Diluted.................................................................. $ 0.01 $ (0.24) $ (0.35) $ (0.01) $ 3,871,333 Total assets...................................................................... $ 3,955,348 $ 3,445,266 $3,231,701 $ 3,081,173 $ 116,137 Long-term debt, excluding current installments ....... $ 249,241 $ 426,585 $ 424,292 $ 430,290 $ 92,165 Deferred revenue and other liabilities......................... $ 130,020 $ 112,085 $ 145,107 $ 166,295 Cash dividends per share paid on $ 0.07 Circuit City Group Common Stock ......................... $ 0.07 $ 0.07 $ 0.07 $ 0.07 See notes to consolidated financial statements. Circuit City Stores, Inc. Management’s Discussion and Analysis of Results of Operations and Financial Condition The common stock of Circuit City Stores, Inc. consists of two com- Group could affect the results of operations or financial condition mon stock series, which are intended to reflect the performance of of the other Group. The discussion and analysis for Circuit City the Company's two businesses. The Circuit City Group Common Stores, Inc. presented below should be read in conjunction with Stock is intended to track the performance of the Circuit City busi- the discussion and analysis presented for each Group and in ness and related operations and the Group’s retained interest in conjunction with all the Company’s SEC filings. the CarMax Group. The effects of the retained interest in the RESULTS OF OPERATIONS CarMax Group on the Circuit City Group’s financial statements are Sales Growth identified by the term “Inter-Group.” During the three-year period discussed in this annual report, the financial results for the Total sales for Circuit City Stores, Inc. increased 3 percent in fiscal Company and the Circuit City Group also have included the 2001 to $12.96 billion. In fiscal 2000, total sales increased 17 per- Company's investment in Digital Video Express, which has been cent to $12.61 billion from $10.81 billion in fiscal 1999. discontinued. The CarMax Group Common Stock is intended to track the performance of the CarMax stores and related opera- PERCENTAGE SALES CHANGE FROM PRIOR YEAR Circuit City Circuit City CarMax tions. The Circuit City Group’s retained interest is not considered Stores, Inc. Group Group outstanding CarMax Group Common Stock. Therefore, the net Fiscal Total Total Comparable Total Comparable earnings or losses attributed to the retained interest are not 2001............. 3% (1)% (4)% 24% 17 % included in the CarMax Group’s per share calculations. 2000 ............ 17% 13 % 8% 37% 2% Holders of Circuit City Group Common Stock and holders of 1999 ............ 22% 17 % 8% 68% (2)% CarMax Group Common Stock are shareholders of the Company 1998 ............ 16% 12 % (1)% 71% 6% and as such are subject to all of the risks associated with an 1997 ............ 9% 6% (8)% 85% 23 % investment in the Company and all of its businesses, assets and liabilities. The results of operations or financial condition of one 23 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 27. THE CIRCUIT CITY GROUP. For the Circuit City Group, total sales existing markets or built in one- or two-store markets given that decreased 1 percent in fiscal 2001 to $10.46 billion. In fiscal 2000, we already operate stores in virtually all of the nation’s top total sales were $10.60 billion, a 13 percent increase from $9.34 metropolitan markets. billion in fiscal 1999. The fiscal 2001 total sales decline includes a From fiscal 1997 through fiscal 1998, a lack of significant 4 percent decline in the comparable store sales of the Circuit City consumer electronics product introductions resulted in weak business, partly offset by the net addition of 23 Circuit City industry sales. Geographic expansion was the primary contributor Superstores. Throughout fiscal 2001, we experienced significant to growth of the Circuit City business during this time. The industry variability in the Circuit City comparable store sales pace. The began to emerge from this period of declining sales in fiscal sales pace in the major appliance category softened significantly 1999, and that trend continued in fiscal 2000. As noted above, at the end of the first quarter and into the second quarter. In late sales softened again in fiscal 2001. We continue to believe that July, we announced plans to exit the appliance business and new technologies will generate significant industry growth during expand our selection of key consumer electronics and home office the current decade. However, we expect little, if any, sales growth products. A product profitability analysis had indicated that the in fiscal 2002. appliance category produced below-average profits. This analysis, In most states, Circuit City sells extended warranty programs combined with the declining sales pace and expected increases in on behalf of unrelated third parties who are the primary obligors. competition, led to the decision to exit the category. The exit from Under these third-party warranty programs, we have no contrac- the appliance business and remerchandising of the appliance sell- tual liability to the customer. In states where third-party warranty ing space was completed by the end of the third fiscal quarter. sales are not permitted, Circuit City sells an extended warranty Nevertheless, the Circuit City business continued to experience a for which we are the primary obligor. Gross dollar sales from all highly variable comparable store sales pace, and sales softened extended warranty programs were 5.1 percent of total sales of the substantially in the last two months of the fiscal year. We believe Circuit City business in fiscal 2001, compared with 5.4 percent in the variability reflects the slower consumer spending experienced fiscal 2000 and fiscal 1999. Total extended warranty revenue, by most retailers during the second half of the year, some disrup- which is reported in total sales, was 4.0 percent of sales in fiscal tion to sales caused by the partial remodeling to remerchandise 2001, 4.4 percent of sales in fiscal 2000 and 4.6 percent of sales the appliance space, significant declines in average retails and in fiscal 1999. The gross profit margins on products sold with industry-wide declines in desktop personal computer sales by extended warranties are higher than the gross profit margins on year-end. Throughout the year, new technologies, better-featured products sold without extended warranties. The fiscal 2001 consumer electronics and the new and expanded selections added decline in extended warranty sales as a percent of total sales to the store produced strong sales growth, although not always in reflects the increased selection of products, such as entertainment line with our expectations. Excluding the appliance category from software, for which extended warranties are not available and fiscal 2001 and fiscal 2000 sales, comparable store sales rose 3 per- reduced consumer demand for warranties on many consumer cent in fiscal 2001. electronics and home office products that have experienced sig- In addition to the partial remodels, we fully remodeled 25 nificant declines in average retails. Third-party extended war- Circuit City Superstores in central and south Florida and one ranty revenue was 3.9 percent of total sales in fiscal 2001 and 4.1 Superstore in Richmond, Va., to a design that we believe is more percent of total sales in fiscal 2000 and fiscal 1999. contemporary and easier to navigate. The full remodels offer better THE CARMAX GROUP. For the CarMax Group, total sales product adjacencies, shopping carts and baskets, more and highly increased 24 percent in fiscal 2001 to $2.50 billion. In fiscal 2000, visible cash registers, better lighting and signs, and the expanded total sales increased 37 percent to $2.01 billion from $1.47 billion and new product selections now available in all stores. The 23 in fiscal 1999. The fiscal 2001 total sales increase reflects a 17 new stores opened from August 2000 through February 2001 also percent increase in the comparable store sales of the CarMax busi- reflect this new design, and all new stores planned for fiscal 2002 ness, driven by higher-than-anticipated used-car sales, and the net will reflect this design. Consumer reaction to the design has been addition of two used-car superstores, two prototype satellite stores positive, but the ability to meet our longer-term expectations has and six new-car franchises since the end of fiscal 1999. The new been difficult to determine given the overall slowdown that stores and four of the franchises moved into the comparable store occurred during the second half of the fiscal year. In addition, the sales base throughout fiscal 2001. cost of remodeling and the disruption to sales in remodeled stores We believe CarMax’s fiscal 2001 sales performance primarily were higher than anticipated. Fiscal 2002 remodels will follow a reflects the improved execution of the CarMax offer at individual less costly design that can be completed over a shorter time period, stores, increased awareness and use of the CarMax Web site and but which we believe will offer similar benefits to the consumer. the exit of CarMax’s primary used-car superstore competitor late We also will focus on new marketing programs designed to in fiscal 2000. We believe this competitor’s exit from five multi- increase foot traffic at all Circuit City Superstores. store markets helped eliminate consumer confusion over the two Geographic expansion is currently a limited contributor to offers. CarMax’s used-car comparable store sales growth remained Circuit City’s growth. We opened 23 new Circuit City Superstores strong through the fiscal 2001 anniversary of this competitor’s and relocated two Circuit City Superstores in fiscal 2001, increas- exit from the used-car superstore business. We also believe that ing the store base 4 percent. New Superstores were added to the continuation of CarMax’s robust used-car sales growth during 24 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 28. the second half of the fiscal year indicates that the CarMax used- fiscal 2000 and 2.0 percent in fiscal 1999. Third-party extended car concept offers strong consumer value and can generate steady warranty revenue was 1.8 percent of total sales in fiscal 2001, sales growth in an economic downturn. 1.6 percent in fiscal 2000 and 1.9 percent in fiscal 1999. Geographic expansion of the CarMax used-car superstore IMPACT OF INFLATION. Inflation has not been a significant Circuit City Stores, Inc. concept and the addition of new-car franchises were the primary contributor to the Company’s results. For the Circuit City busi- contributors to CarMax's total sales growth from fiscal 1999 ness, average retail prices have declined in virtually all product through the first half of fiscal 2000. Throughout this period, categories during the past three years. Although product intro- weak used-car sales more than offset CarMax’s strong compara- ductions could help reverse this trend in selected areas, we ble store sales growth in new cars. Late in fiscal 1999, CarMax expect no significant short-term change overall. Because we adopted a hub and satellite operating strategy in existing multi- purchase substantially all products sold in Circuit City stores in store markets. Under the hub and satellite operating model, a U.S. dollars, prices are not directly impacted by the value of the satellite store delivers the same consumer offer as a hub store, dollar in relation to foreign currencies. but uses the reconditioning, purchasing and business office For the CarMax business, profitability is based on achieving operations of a nearby hub store. The prototype satellites require specific gross profit dollars per vehicle rather than on average one-half to one-third the acreage of a standard “A” store. In fis- retail prices. Because the wholesale market generally adjusts to cal 1999, we converted five CarMax superstores in multi-store reflect retail price trends, we believe that if the stores meet markets to satellite operations and opened two prototype satellite inventory turn objectives then changes in average retail prices stores. During fiscal 2000, we opened two CarMax used-car will have only a short-term impact on the gross margin and thus superstores, two prototype satellite used-car superstores, five profitability of that business. stand-alone new-car stores and one new-car franchise that was Cost of Sales, Buying and Warehousing integrated with a used-car superstore. CarMax also converted For the Company, the gross profit margin was 21.6 percent of one existing store into a satellite operation and relocated one sales in fiscal 2001, compared with 22.7 percent of sales in fiscal franchise next to a used-car superstore. 2000 and fiscal 1999. The fiscal 2001 gross profit margin reflects In the second half of fiscal 2000, CarMax limited its geo- lower gross profit margins for the Circuit City business and graphic expansion to focus on building sales and profitability in higher gross profit margins for the CarMax business, compared existing markets. The sales pace improved at CarMax's used-car with fiscal 2000. Because the CarMax business produces lower superstores, including those stores with integrated new-car fran- gross margins than the Circuit City business, the increased sales chises, and CarMax generated comparable store sales growth for contribution from CarMax may reduce the Company’s overall the last two quarters and for the fiscal year. That success contin- gross profit margin even though CarMax’s gross profit margin ued in fiscal 2001 with strong comparable store sales throughout may increase. Excluding the impact of the appliance merchan- the year and used-car sales that exceeded expectations in all dise markdowns and the one-time appliance exit costs incurred four quarters. During the year, CarMax added two new-car fran- by the Circuit City business, the Company’s gross profit margin chises, integrating them with existing used-car superstores. was 22.0 percent of sales in fiscal 2001. Although the performance of the used-car superstores and THE CIRCUIT CITY GROUP. For the Circuit City business, the integrated used- and new-car superstores exceeded expectations gross profit margin was 23.6 percent of sales in fiscal 2001, 24.7 in fiscal 2001, we have been disappointed by the performance of percent of sales in fiscal 2000 and 24.4 percent of sales in fiscal the stand-alone new-car stores. Operations at these stores have 1999. The fiscal 2001 gross profit margin was reduced by one- improved significantly versus their levels prior to acquisition; time costs of $28.3 million and merchandise markdowns of $28.0 however, they remain below our expectations. million associated with the exit from the appliance business, sig- In most states, CarMax sells extended warranties on behalf of nificantly lower appliance gross margins prior to the announced unrelated third parties who are the primary obligors. Under this plans to exit that business and a merchandise mix that included a third-party warranty program, we have no contractual liability high percentage of traditional products that carry lower gross to the customer. In states where third-party warranty sales were profit margins. The one-time appliance exit costs included lease not permitted, CarMax has sold its own extended warranty for terminations, employee severance, fixed asset impairment and which we are the primary obligor. Gross dollar sales from all other related costs. Excluding the appliance category, the gross extended warranty programs were 4.0 percent of total sales of profit margin was 24.7 percent of sales in fiscal 2001, compared the CarMax business in fiscal 2001, 3.7 percent in fiscal 2000 with 25.4 percent of sales in fiscal 2000 and 24.7 percent of sales and 4.3 percent in fiscal 1999. The fiscal 2001 increase reflects in fiscal 1999. Excluding the impact of the appliance merchan- the increase in used-car sales as a percentage of the overall mix, dise markdowns and the one-time appliance exit costs, the gross enhanced manufacturers’ programs on new cars and improved profit margin was 24.1 percent of sales in fiscal 2001. warranty penetration. Used cars achieve a higher warranty pene- The improvement in the gross profit margin from fiscal 1999 tration rate than new cars. The fiscal 2000 decrease reflects the to fiscal 2000 primarily reflected the higher percentage of sales increase in new-car sales as a percentage of the overall mix. from better-featured products and newer technologies, which Total extended warranty revenue, which is reported in total carry higher gross profit margins, and continued improvements sales, was 1.8 percent of total sales in fiscal 2001, 1.6 percent in in inventory management partly offset by the strength in 25 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 29. personal computer sales, which carry lower gross margins. In and comparable store sales growth; more efficient advertising fiscal 2001, the decline in the gross profit margin was limited by expenditures; overall improvements in store productivity, including lower personal computer sales and by continued double-digit those achieved through the hub and satellite operating strategy sales growth in new technologies and in higher margin cate- we adopted in multi-store markets; and a favorable contribution gories where selection was expanded as part of the exit from the from the finance operation. The fiscal 2001 improvements were appliance business. The impact of the appliance category and the partly offset by an $8.7 million write-off of goodwill associated high proportion of sales represented by traditional products more with two underperforming stand-alone new-car franchises. than offset these factors. Excluding these costs, the fiscal 2001 expense ratio would have THE CARMAX GROUP. For the CarMax business, the gross profit been 9.4 percent of sales. The fiscal 2000 improvements were margin was 13.2 percent in fiscal 2001, 11.9 percent in fiscal 2000 partly offset by $4.8 million in charges related to lease termination and 11.7 percent in fiscal 1999. At the end of fiscal 1998, CarMax costs on undeveloped property and a write-down of assets instituted a profit improvement plan that included better inven- associated with excess property for sale. Excluding these costs, tory management, increased retail service sales, pricing adjust- the fiscal 2000 expense ratio would have been 11.1 percent of ments and the addition of consumer electronics accessory sales. sales. The higher ratio in fiscal 1999 reflects the costs associated CarMax’s gross profit margins have improved significantly since with the expansion of CarMax superstores and the below-plan that time. In fiscal 2001, the increase in used-car sales as a percent sales in a number of multi-store metropolitan markets. of the total sales mix and continued strong inventory management Interest Expense throughout the year, especially during the second half when the Interest expense has remained unchanged as a percent of sales model-year transition occurs in the new-car segment, contributed across the three-year period at 0.2 percent of sales. to a higher gross margin. Significant increases in unit sales of new Earnings from Continuing Operations cars as a percentage of total unit sales limited the gross margin improvement in fiscal 2000. Earnings from continuing operations for Circuit City Stores, Inc. were $160.8 million in fiscal 2001, compared with $327.8 mil- Selling, General and Administrative Expenses lion in fiscal 2000 and $211.5 million in fiscal 1999. The fiscal For the Company, selling, general and administrative expenses were 2001 decrease reflects the lower earnings for the Circuit City 19.4 percent of sales in fiscal 2001, compared with 18.3 percent of business, partly offset by the earnings increase achieved by the sales in fiscal 2000 and 19.3 percent of sales in fiscal 1999. Profits CarMax business. The fiscal 2000 increase reflects earnings generated by the Company’s finance operations are recorded as a growth of 39 percent for the Circuit City business and a slight reduction to selling, general and administrative expenses. profit for the CarMax business. THE CIRCUIT CITY GROUP. For the Circuit City business, selling, THE CIRCUIT CITY GROUP. For the Circuit City business, earn- general and administrative expenses were 21.7 percent of sales in ings from continuing operations before the Inter-Group Interest fiscal 2001, compared with 19.6 percent of sales in fiscal 2000 in the CarMax Group were $115.2 million, or 56 cents per share, and 20.1 percent of sales in fiscal 1999. The fiscal 2001 increase in fiscal 2001, compared with $326.7 million, or $1.60 per share, reflects the decline in comparable store sales, $41.9 million in in fiscal 2000 and $235.0 million, or $1.17 per share, in fiscal remodeling costs for the Florida stores, $30.0 million in costs 1999. Excluding the estimated sales disruption during the seven related to the partial remodels and $5.0 million in severance costs to 10 days of partial remodeling, the appliance merchandise associated with the fourth quarter workforce reduction. Excluding markdowns, exit costs, remodel expenses and severance costs these costs and the estimated sales disruption during the seven to related to the workforce reduction, earnings from continuing 10 days of partial remodeling that occurred primarily in the third operations before the Inter-Group Interest in the CarMax Group quarter, the fiscal 2001 expense ratio would have been 20.9 per- would have been $205.1 million, or $1.00 per share, in fiscal 2001. cent of sales. The improvement in the expense ratio from fiscal The net earnings attributed to the Circuit City Group’s Inter- 1999 to fiscal 2000 primarily reflects leverage gained from the Group Interest in the CarMax Group were $34.0 million in fiscal fiscal 2000 comparable store sales increase. 2001, compared with net earnings of $862,000 in fiscal 2000 THE CARMAX GROUP. For the CarMax business, selling, general and a net loss of $18.1 million in fiscal 1999. and administrative expenses were 9.8 percent of sales in fiscal Earnings from continuing operations attributed to the Circuit 2001, 11.3 percent of sales in fiscal 2000 and 13.9 percent of City Group were $149.2 million, or 73 cents per share, in fiscal sales in fiscal 1999. The fiscal 2001 selling, general and adminis- 2001; $327.6 million, or $1.60 per share, in fiscal 2000; and trative expense ratio continued the improvement experienced in $216.9 million, or $1.08 per share, in fiscal 1999. fiscal 2000 and reflects the leverage achieved from strong total 26 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 30. Circuit City Group Operations Outlook Earnings per Share from THE CIRCUIT CITY GROUP. For the Circuit City business, we Continuing Operations Fiscal 2001 2000 1999 believe that increased household penetration of products and services such as broadband Internet access, wireless communica- Circuit City store business ........................ $ 1.00 $1.60 $ 1.17 Circuit City Stores, Inc. tions, multi-channel video programming devices, digital televi- Impact of merchandise markdowns* ........ (0.08) – – sion and digital imaging will drive profitability of the consumer Impact of appliance exit ........................... (0.09) – – electronics business during the current decade. For that reason, Impact of Florida remodels** ..................... (0.13) – – we are focused on store designs, sales counselor training, inven- Impact of partial remodels** ....................... (0.09) – – tory management, marketing programs and Six Sigma process Impact of sales disruption ........................ (0.03) – – improvements that will maintain Circuit City’s position as a Impact of workforce reduction**.............. (0.02) . – – leading retailer of new technologies. Inter-Group Interest in CarMax............... 0.17 – (0.09) Despite these plans and longer-term outlook, we recognize Circuit City Group...................................... $ 0.73 $1.60 $ 1.08 that the sales pace shifted significantly throughout fiscal 2001 and that sales were especially weak at the end of the fiscal year. ** Reflected as a reduction in gross profit margins. ** Reflected as an increase in selling, general and administrative expenses. Therefore, we are cautious in our outlook for fiscal 2002. We expect to open 15 to 20 new Circuit City Superstores, relocate THE CARMAX GROUP. For the CarMax business, net earnings approximately 10 Superstores and fully remodel 20 to 25 were $45.6 million in fiscal 2001, compared with net earnings of Superstores. We expect limited sales and earnings growth for the $1.1 million in fiscal 2000 and a net loss of $23.5 million in fiscal Circuit City business in fiscal 2002. We do, however, expect con- 1999. Excluding the write-off of goodwill, net earnings would tinued strong sales and earnings growth for the CarMax business have been $51.0 million in fiscal 2001. Excluding lease termination and anticipate that CarMax will make a greater contribution to costs and the write-down of assets, net earnings would have been the earnings attributed to the Circuit City Group in fiscal 2002. $4.1 million in fiscal 2000. THE CARMAX GROUP. We believe that the higher-than-expected Net earnings attributed to the CarMax Group Common Stock sales and earnings growth produced by CarMax in fiscal 2001 were $11.6 million, or 43 cents per share, in fiscal 2001, compared indicates that the CarMax business has developed a store concept with $256,000, or 1 cent per share, in fiscal 2000, and a net loss that can generate sustained profits. We believe that we have in of $5.5 million, or 24 cents per share, in fiscal 1999. place the infrastructure that will enable CarMax to maintain its improved level of execution, generate additional comparable Loss from Discontinued Operations store sales growth and resume geographic expansion. On June 16, 1999, Digital Video Express announced that it would In single-store markets, our most mature CarMax stores have cease marketing of the Divx home video system and discontinue captured market shares of 8 percent to 10 percent. We have iden- operations, but existing, registered customers would be able to tified approximately 35 additional markets that could support an view discs during a two-year phase-out period. The operating “A” store, the standard CarMax store size going forward. We results of Divx and the loss on disposal of the Divx business have expect to enter two of these markets, Sacramento, Calif., and been segregated from continuing operations and reported as sepa- Greensboro, N.C., in late fiscal 2002. We also believe that we can rate line items, after tax, on the Company's statements of earnings add another 10 satellite CarMax superstores in our existing for the periods presented. multi-store markets. Assuming the CarMax used-car business The loss from the discontinued operations of Divx totaled continues to meet our expectations, we plan to open, in fiscal $16.2 million after an income tax benefit of $9.9 million in fiscal 2003, four to six stores, including openings in single-store mar- 2000 and $68.5 million after an income tax benefit of $42.0 mil- kets and satellite stores in existing multi-store markets, and, in lion in fiscal 1999. fiscal 2004 through fiscal 2006, six to eight stores per year, again In fiscal 2000, the loss on the disposal of the Divx business focusing near-term growth on single-store markets or satellites. totaled $114.0 million after an income tax benefit of $69.9 mil- Based on the performance of the existing used-car superstores, lion. The loss on the disposal includes a provision for operating we believe that a standard “A” store in a single-store market will losses to be incurred during the phase-out period. It also at maturity produce sales in the $50 million to $100 million includes provisions for commitments under licensing agreements range and a pretax, before non-store overhead, store operating with motion picture distributors, the write-down of assets to net profit margin in the range of 5.0 percent to 9.5 percent. We realizable value, lease termination costs, employee severance and believe a satellite store at maturity will produce sales in the $36 benefit costs and other contractual commitments. million to $72 million range and a pretax, before non-store over- Net Earnings head, store operating profit margin in the range of 5.0 percent to Net earnings for the Company were $160.8 million in fiscal 2001, 9.3 percent. In both cases, maturity is assumed to be the fifth $197.6 million in fiscal 2000 and $142.9 million in fiscal 1999. year of operation. If we meet our store opening and sales per 27 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 31. store objectives, we believe that CarMax can produce annual FINANCIAL CONDITION sales volumes of $5 billion within five years. Non-store overhead, Liquidity and Capital Resources which includes all field operating expenses outside the store as In fiscal 2001, net cash provided by operating activities of con- well as corporate overhead, was 2.3 percent of sales in fiscal tinuing operations was $155.8 million, compared with $626.2 2001, and we estimate it will decline to approximately 1.7 percent million in fiscal 2000 and $319.0 million in fiscal 1999. The fis- of sales when annual volumes reach $5 billion. cal 2001 decrease reflects the lower earnings from continuing Given the strong fiscal 2001 performance, we are highly opti- operations for the Circuit City business and a decrease in mistic about our growth plan for CarMax. Nevertheless, we will accounts payable, partly offset by the increase in earnings for proceed cautiously as we seek to ensure that all sales growth is the CarMax business. The fiscal 2000 increase primarily reflects profitable sales growth and that we are delivering an attractive increased earnings from the Circuit City and CarMax businesses return on investment. and increases in accounts payable for both businesses, partly offset by increases in inventory. RECENT ACCOUNTING PRONOUNCEMENTS During fiscal 2001, a term loan totaling $175 million was In June 1998, the Financial Accounting Standards Board issued repaid using existing working capital. In addition, a term loan Statement of Financial Accounting Standards No. 133, “Accounting totaling $130 million and due in June 2001 was classified as a cur- for Derivative Instruments and Hedging Activities.” SFAS No. rent liability. Although the Company has the ability to refinance 133, as amended by SFAS No. 137 and No. 138, is effective for this debt, we intend to repay it using existing working capital. quarters in fiscal years beginning after June 15, 2000. SFAS No. Capital expenditures have been funded primarily through 133, as amended, standardizes the accounting for derivative sale-leaseback transactions, landlord reimbursements and short- instruments and requires that an entity recognize those items as and long-term debt. Capital expenditures of $285.6 million in either assets or liabilities and measure them at fair value. fiscal 2001 primarily were related to Circuit City Superstore In September 2000, the FASB issued SFAS No. 140, “Accounting remodeling and new Circuit City Superstore construction. Capital for Transfers and Servicing of Financial Assets and Extinguish- expenditures of $222.3 million in fiscal 2000 and $352.4 million ments of Liabilities—a replacement of FASB Statement No. 125.” in fiscal 1999 largely were incurred in connection with the While SFAS No. 140 carries over most of the provisions of SFAS expansion programs for both businesses. Sale-leasebacks, land- No. 125, it provides new standards for reporting financial assets lord reimbursement transactions and fixed asset sales totaled transferred as collateral and new standards for the derecognition of $115.7 million in fiscal 2001, $100.2 million in fiscal 2000 and financial assets, in particular transactions involving the use of spe- $273.6 million in fiscal 1999. cial purpose entities. SFAS No. 140 also prescribes additional dis- During fiscal 2001, CarMax acquired one new-car franchise closures for securitization transactions accounted for as sales. SFAS for a total of $1.3 million. In fiscal 2000, CarMax acquired five No. 140 is effective for transfers and servicing of financial assets new-car franchises for a total of $34.8 million. These acquisi- and extinguishments of liabilities occurring after March 31, 2001, tions were financed through cash resources. Costs in excess of except for certain disclosures that are required for fiscal years end- the acquired net tangible assets, which were primarily inventory, ing after December 15, 2000. The Company does not expect the were recorded as goodwill and covenants not to compete. adoption of SFAS No. 133 or SFAS No. 140 to have a material Receivables generated by the Company's finance operations impact on its financial position, results of operations or cash flows. are funded through securitization transactions that allow the In July 2000, the FASB issued Emerging Issues Task Force operations to sell their receivables while retaining a small inter- No. 00-14, “Accounting for Certain Sales Incentives,” which is est in them. The Circuit City finance operation has a master trust effective for the fiscal quarter beginning after March 15, 2001. securitization facility for its private-label credit card that allows The issue provides guidance for sales incentives offered to cus- the transfer of up to $1.31 billion in receivables through both tomers to be classified as a reduction of revenue. The Company private placement and the public market. A second master trust offers certain mail-in rebates that the Company currently records securitization program allows for the transfer of up to $1.94 bil- in cost of sales, buying and warehousing. The Company does not lion in receivables related to the operation’s bankcard programs. expect the adoption of EITF No. 00-14 to have a material impact Securitized receivables under all Circuit City programs totaled on its financial position, results of operations or cash flows. $2.75 billion at February 28, 2001. However, the Company expects to reclassify certain rebate The Company also has an asset securitization program oper- expenses from cost of sales, buying and warehousing to net sales ated through a special purpose subsidiary on behalf of CarMax. and operating income to be in compliance with EITF No. 00-14. At the end of fiscal 2001, that program allowed the transfer of For fiscal 2001, this reclassification would have increased our up to $450 million in automobile loan receivables. In October gross profit margin and our expense ratio by 20 basis points. 1999, the Company formed an owner trust securitization facility that allowed for a $644 million securitization of automobile loan receivables in the public market. At February 28, 2001, the program had a capacity of $329 million. In January 2001, the Company formed an additional owner trust securitization facility that allowed for a $655 million securitization of automobile loan 28 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 32. receivables in the public market. The program had a capacity of financial activities include the investment of surplus cash, $655 million at the end of fiscal 2001. Securitized receivables issuance and repayment of debt, securitization of receivables, under all CarMax programs totaled $1.28 billion at the end of sale-leasebacks of real estate and Inter-Group loans. fiscal 2001. Circuit City Stores, Inc. MARKET RISK The receivables are sold to unaffiliated third parties with the servicing rights retained. We expect that securitization The Company manages the private-label and bankcard revolving programs can be expanded to accommodate future growth for loan portfolios of the Circuit City finance operation and the both businesses. automobile installment loan portfolio of the CarMax finance operation. Portions of these portfolios are securitized and, there- Capital Structure fore, are not presented on the Company’s balance sheets. Interest Total assets at February 28, 2001, were $3.87 billion, down $84.0 rate exposure relating to these receivables represents a market million, or 2 percent, since February 29, 2000. A $197.8 million risk exposure that the Company has managed with matched decrease in cash offset by a $68.5 million increase in inventory funding and interest rate swaps. primarily contributed to the decrease in total assets. Revolving Loans Over the past three years, expansion for the Circuit City and CarMax businesses has been funded with internally generated Interest rates charged on the accounts in the managed private- cash, sale-leaseback transactions, operating leases and short- label and bankcard portfolios are primarily indexed to the term and long-term debt. Finance operation receivables have prime rate, adjustable on a monthly basis, with the balance at a been funded through securitization transactions. fixed annual percentage rate. Total principal outstanding at During fiscal 2001, stockholders’ equity increased 10 percent February 28, 2001, and February 29, 2000, had the following to $2.36 billion. Capitalization for the past five years is illus- APR structure: trated in the “Capitalization” table below. Net earnings for the 2001 2000 Circuit City Group and the CarMax Group produced a return on (Amounts in millions) equity of 7.1 percent in fiscal 2001, compared with 9.8 percent Indexed to prime rate .......................................... $2,596 $2,631 in fiscal 2000. Fixed APR.............................................................. 203 213 We anticipate that in fiscal 2002 capital expenditures of Total........................................................................ $2,799 $2,844 approximately $295 million will be funded through a combina- tion of internally generated cash, sale-leaseback transactions, Financing for the securitization programs is achieved primar- operating leases or floor plan financing of inventory and that ily through the issuance of public market debt, which is issued at securitization transactions will finance the growth in receiv- floating rates based on LIBOR. Receivables held by the Company ables. At the end of fiscal 2001, we maintained a multi-year, for sale are financed with working capital. At February 28, 2001, $150 million unsecured revolving credit agreement and $360 and February 29, 2000, financings were as follows: million in committed seasonal lines that are renewed annually with various banks. 2001 2000 (Amounts in millions) The Groups rely on the external debt of Circuit City Stores, Floating-rate (including synthetic Inc. to provide working capital needed to fund net assets not alteration) securitizations.............................. $2,754 $2,689 otherwise financed through sale-leasebacks or the securitization Fixed-rate securitizations.................................... — 137 of receivables. All significant financial activities of each Group Held by the Company for sale ........................... 45 18 are managed by the Company on a centralized basis and are dependent on the financial condition of the Company. These Total........................................................................ $2,799 $2,844 CAPITALIZATION Fiscal 2001 2000 1999 1998 1997 $ % $ % $ % $ % $ % (Dollar amounts in millions) Long-term debt, excluding current installments................................... 116.1 5 249.2 10 426.6 17 424.3 18 430.3 19 Other long-term liabilities .............................. 107.1 4 157.8 6 149.7 6 171.5 7 199.4 9 Total stockholders’ equity............................... 2,356.5 91 2,142.2 84 1,905.1 77 1,730.0 75 1,614.8 72 Total capitalization .......................................... 2,579.7 100 2,549.2 100 2,481.4 100 2,325.8 100 2,244.5 100 29 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 33. Automobile Installment Loans tion from both retail stores and alternative methods or channels of distribution such as online and telephone shopping services Total principal outstanding for fixed-rate automobile loans at and mail order; February 28, 2001, and February 29, 2000, was as follows: (b) changes in general U.S. or regional U.S. economic condi- 2001 2000 tions including, but not limited to, consumer credit availability, (Amounts in millions) consumer credit delinquency and default rates, interest rates, Fixed APR.............................................................. $1,296 $932 inflation, personal discretionary spending levels and consumer sentiment about the economy in general; Financing for these receivables is achieved through asset (c) the presence or absence of, or consumer acceptance of, securitization programs that, in turn, issue fixed- and floating- new products or product features in the merchandise categories rate securities. Interest rate exposure is hedged through the use the Company sells and changes in the Company’s actual mer- of interest rate swaps matched to projected payoffs. Receivables chandise sales mix; held by the Company for investment or sale are financed with (d) significant changes in retail prices for products sold by working capital. Financings at February 28, 2001, and February any of the Company’s businesses, including changes in prices for 29, 2000, were as follows: new and used cars and the relative consumer demand for new or used cars; 2001 2000 (Amounts in millions) (e) lack of availability or access to sources of supply for Fixed-rate securitization ..................................... $ 984 $559 appropriate Circuit City or CarMax inventory; Floating-rate securitizations (f) inability on the part of either of the Company’s businesses synthetically altered to fixed........................ 299 327 to liquidate excess inventory should excess inventory develop; Floating-rate securitizations............................... 1 1 (g) unanticipated adverse results from the remodeling of Held by the Company: Circuit City Superstores; For investment*............................................... . 9 22 (h) the ability to attract and retain an effective management For sale............................................................. 3 23 team in a dynamic environment or changes in the cost or avail- Total........................................................................ $1,296 $932 ability of a suitable work force to manage and support the Company’s service-driven operating strategies; * Held by a bankruptcy remote special purpose company. (i) changes in availability or cost of capital expenditure and working capital financing, including the availability of long- The Company has analyzed its interest rate exposure and has term financing to support development of the Company’s busi- concluded that it did not represent a material market risk at nesses and the availability of securitization financing for credit February 28, 2001, and February 29, 2000. Because programs are card and automobile installment loan receivables; in place to manage interest rate exposure relating to the con- (j) changes in production or distribution costs or cost of sumer loan portfolios, we expect to experience relatively little materials for the Company’s advertising; impact as interest rates fluctuate. The Company also has the (k) availability of appropriate real estate locations for expansion; ability to adjust fixed-APR revolving cards and the index on (l) the imposition of new restrictions or regulations regarding floating-rate cards, subject to cardholder ratification, but does the sale of products and/or services the Company sells, changes not currently anticipate the need to do so. in tax rules and regulations applicable to the Company or its competitors, the imposition of new environmental restrictions, FORWARD-LOOKING STATEMENTS regulations or laws or the discovery of environmental conditions The provisions of the Private Securities Litigation Reform Act of at current or future locations or any failure to comply with such 1995, which became law in December 1995, provide companies laws or any adverse change in such laws; with a “safe harbor” when making forward-looking statements. (m) adverse results in significant litigation matters; This “safe harbor” encourages companies to provide prospective (n) changes in levels of competition in the car business from information about their companies without fear of litigation. The either traditional competitors and/or new nontraditional com- Company wishes to take advantage of the “safe harbor” provi- petitors utilizing auto superstore or other formats; and, sions of the Act. Company statements that are not historical (o) the inability of the CarMax business to reach expected facts, including statements about management’s expectations for mature sales and earnings potential. fiscal 2002 and beyond, are forward-looking statements and The United States retail industry and the specialty retail involve various risks and uncertainties. Factors that could cause industry in particular are dynamic by nature and have undergone the Company’s actual results to differ materially from manage- significant changes over the past several years. The Company’s ment’s projections, forecasts, estimates and expectations include, ability to anticipate and successfully respond to continuing chal- but are not limited to, the following: lenges is key to achieving its expectations. (a) changes in the amount and degree of promotional inten- sity exerted by current competitors and potential new competi- 30 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 34. COMMON STOCK The common stock of Circuit City Stores, Inc. includes two series: Circuit City Stores, Inc.—Circuit City Group Common Stock and Circuit City Stores, Inc.—CarMax Group Common Stock. Both Group stocks are traded on the New York Stock Exchange. The quarterly Circuit City Stores, Inc. dividend data shown below applies to the Circuit City Group Common Stock for the applicable periods. No dividend data is shown for the CarMax Group Common Stock since it pays no dividends at this time. Circuit City Group* CarMax Group Market Price of Common Stock Dividends Market Price of Common Stock Fiscal 2001 2000 2001 2000 2001 2000 Quarter HIGH LOW HIGH LOW HIGH LOW HIGH LOW 1st .............................................. $65.19 $37.25 $39.19 $25.94 $.0175 $.0175 $4.25 $1.56 $5.50 $3.69 2nd............................................. $56.63 $21.00 $52.97 $35.44 $.0175 $.0175 $4.88 $2.63 $7.13 $3.38 3rd.............................................. $28.25 $ 11.56 $53.88 $35.00 $.0175 $.0175 $5.38 $3.38 $4.00 $1.75 4th.............................................. $19.90 $ 8.69 $51.69 $32.50 $.0175 $.0175 $5.50 $3.69 $3.25 $1.31 Total $.0700 $.0700 * Circuit City Group stock prices and dividends per share have been adjusted to reflect a two-for-one stock split effective June 30, 1999. 31 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 35. Consolidated Statements of Earnings Years Ended February 28 or 29 2001 % 2000 % 1999 % (Amounts in thousands except per share data) NET SALES AND OPERATING REVENUES........................................... $12,959,028 100.0 $12,614,390 100.0 $10,810,468 100.0 10,135,380 Cost of sales, buying and warehousing ..................................... 78.2 9,751,833 77.3 8,354,230 77.3 28,326 Appliance exit costs [NOTE 15] ........................................................ 0.2 — — — — 2,795,322 21.6 2,862,557 22.7 2,456,238 22.7 GROSS PROFIT................................................................................. 2,514,912 Selling, general and administrative expenses [NOTE 11] ................ 19.4 2,309,593 18.3 2,086,838 19.3 1,670 Appliance exit costs [NOTE 15] ........................................................ — — — — — 19,383 Interest expense [NOTE 5]................................................................. 0.2 24,206 0.2 28,319 0.2 2,535,965 19.6 2,333,799 18.5 2,115,157 19.5 TOTAL EXPENSES.............................................................................. 259,357 Earnings from continuing operations before income taxes ....... 2.0 528,758 4.2 341,081 3.2 98,555 Provision for income taxes [NOTE 6] .............................................. 0.8 200,928 1.6 129,611 1.2 160,802 1.2 327,830 2.6 211,470 2.0 EARNINGS FROM CONTINUING OPERATIONS................................. Discontinued operations [NOTE 16]: Loss from discontinued operations of Divx, – less income tax benefit ..................................................... — (16,215) (0.1) (68,546) (0.7) – Loss on disposal of Divx, less income tax benefit................ — (114,025) (0.9) — — – Loss from discontinued operations ............................................ — (130,240) (1.0) (68,546) (0.7) NET EARNINGS................................................................................. $ 160,802 1.2 $ 197,590 1.6 $ 142,924 1.3 Net earnings (loss) attributed to [NOTES 1 AND 2]: Circuit City Group Common Stock: Continuing operations ...................................................... $ 149,247 $ 327,574 $ 216,927 – Discontinued operations ................................................... (130,240) (68,546) 11,555 CarMax Group Common Stock ............................................. 256 (5,457) $ 160,802 $ 197,590 $ 142,924 Weighted average common shares [NOTES 2 AND 8]: 203,774 Circuit City Group basic......................................................... 201,345 198,304 205,830 Circuit City Group diluted...................................................... 204,321 200,812 25,554 CarMax Group basic ............................................................... 23,778 22,604 26,980 CarMax Group diluted............................................................ 25,788 22,604 NET EARNINGS (LOSS) PER SHARE ATTRIBUTED TO [NOTES 2 AND 8]: Circuit City Group basic: Continuing operations............................................................ $ 0.73 $ 1.63 $ 1.09 – Discontinued operations......................................................... (0.65) (0.34) Net earnings............................................................................. $ 0.73 $ 0.98 $ 0.75 Circuit City Group diluted: Continuing operations............................................................ $ 0.73 $ 1.60 $ 1.08 – Discontinued operations ........................................................ (0.64) (0.34) Net earnings............................................................................. $ 0.73 $ 0.96 $ 0.74 CarMax Group basic..................................................................... $ 0.45 $ 0.01 $ (0.24) CarMax Group diluted ................................................................. $ 0.43 $ 0.01 $ (0.24) See accompanying notes to consolidated financial statements. 32 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 36. Consolidated Balance Sheets At February 28 or 29 2001 2000 (Amounts in thousands except share data) ASSETS Circuit City Stores, Inc. CURRENT ASSETS: Cash and cash equivalents.................................................................................................................... $ 446,131 $ 643,933 585,761 Net accounts receivable [NOTE 12] ........................................................................................................... 593,276 Inventory ................................................................................................................................................ 1,757,664 1,689,209 57,623 Prepaid expenses and other current assets......................................................................................... 16,197 2,847,179 2,942,615 TOTAL CURRENT ASSETS........................................................................................................................... 988,947 Property and equipment, net [NOTES 4 AND 5] .......................................................................................... 965,181 35,207 Other assets............................................................................................................................................. 47,552 TOTAL ASSETS........................................................................................................................................... $3,871,333 $3,955,348 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Current installments of long-term debt [NOTES 5 AND 10] ....................................................................... $ 132,388 $ 177,344 902,560 Accounts payable................................................................................................................................... 960,131 1,200 Short-term debt [NOTE 5] .......................................................................................................................... 3,005 162,972 Accrued expenses and other current liabilities.................................................................................. 204,561 92,479 Deferred income taxes [NOTE 6] ............................................................................................................... 61,118 1,291,599 1,406,159 TOTAL CURRENT LIABILITIES..................................................................................................................... 116,137 Long-term debt, excluding current installments [NOTES 5 AND 10] ........................................................ 249,241 92,165 Deferred revenue and other liabilities................................................................................................. 130,020 14,949 Deferred income taxes [NOTE 6] ............................................................................................................... 27,754 1,514,850 1,813,174 TOTAL LIABILITIES..................................................................................................................................... STOCKHOLDERS’ EQUITY [NOTES 1 AND 7]: Circuit City Group Common Stock, $0.50 par value; 350,000,000 shares authorized; 103,510 207,020,000 shares issued and outstanding (203,868,000 in 2000).......................................... 101,934 CarMax Group Common Stock, $0.50 par value; 175,000,000 shares authorized; 12,820 25,639,000 shares issued and outstanding (25,614,000 in 2000) .............................................. 12,807 642,838 Capital in excess of par value .............................................................................................................. 576,574 1,597,315 Retained earnings .................................................................................................................................. 1,450,859 2,356,483 2,142,174 TOTAL STOCKHOLDERS’ EQUITY.............................................................................................................. Commitments and contingent liabilities [NOTES 1, 9, 10, 12, 13, 14, 15 and 16] TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY.................................................................................... $3,871,333 $3,955,348 See accompanying notes to consolidated financial statements. 33 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 37. Consolidated Statements of Cash Flows Years Ended February 28 or 29 2001 2000 1999 (Amounts in thousands) OPERATING ACTIVITIES: Net earnings.......................................................................................................... $ 160,802 $ 197,590 $ 142,924 Adjustments to reconcile net earnings to net cash provided by operating activities of continuing operations: – Loss from discontinued operations [NOTE 16].................................................. 16,215 68,546 – Loss on disposal of discontinued operations [NOTE 16].................................. 114,025 — Depreciation and amortization ..................................................................... 153,090 148,164 129,727 4,674 Loss on disposition of property and equipment ......................................... 17 3,087 19,765 Provision for deferred income taxes ............................................................ 43,053 17,235 Changes in operating assets and liabilities, net of effects from business acquisitions: (17,855) Decrease in deferred revenue and other liabilities ............................... (15,565) (33,022) 7,541 Decrease (increase) in net accounts receivable ..................................... (18,922) 23,640 (67,655) Increase in inventory................................................................................ (184,507) (97,597) (41,426) (Increase) decrease in prepaid expenses and other current assets......... 81,316 31,257 1,012 Decrease (increase) in other assets.......................................................... 240 (607) (Decrease) increase in accounts payable, accrued expenses and (64,193) other current liabilities ....................................................................... 244,559 33,838 NET CASH PROVIDED BY OPERATING ACTIVITIES 155,755 626,185 319,028 OF CONTINUING OPERATIONS ............................................................................ INVESTING ACTIVITIES: (1,325) Cash used in business acquisitions [NOTE 3]......................................................... (34,849) (41,562) (285,556) Purchases of property and equipment............................................................... (222,268) (352,384) 115,695 Proceeds from sales of property and equipment.............................................. 100,151 273,647 NET CASH USED IN INVESTING ACTIVITIES (171,186) OF CONTINUING OPERATIONS ......................................................................... (156,966) (120,299) FINANCING ACTIVITIES: (1,805) Payments on short-term debt, net ..................................................................... (5,011) (960) (178,060) Principal payments on long-term debt [NOTE 5] .................................................. (2,707) (1,301) 38,123 Issuances of Circuit City Group Common Stock, net ...................................... 18,591 34,301 (109) Issuances of CarMax Group Common Stock, net ............................................ 2,361 2,324 (14,346) Dividends paid on Circuit City Group Common Stock ................................... (14,207) (13,981) NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (156,197) OF CONTINUING OPERATIONS ......................................................................... (973) 20,383 (26,174) (90,193) (69,844) CASH USED IN DISCONTINUED OPERATIONS [NOTE 16]................................................ (197,802) (Decrease) increase in cash and cash equivalents ................................................. 378,053 149,268 643,933 Cash and cash equivalents at beginning of year................................................... 265,880 116,612 Cash and cash equivalents at end of year.............................................................. $ 446,131 $ 643,933 $ 265,880 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest................................................................................................................... $ 25,336 $ 34,389 $ 31,858 Income taxes......................................................................................................... $ 117,366 $ 14,908 $ 53,528 See accompanying notes to consolidated financial statements. 34 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 38. Consolidated Statements of Stockholders’ Equity Common Shares Outstanding Common Stock Capital In Circuit City CarMax Circuit City CarMax Excess of Retained (Amounts in thousands except per share data) Group Group Group Group Par Value Earnings Total 99,282 22,204 $ 49,641 $ 11,102 $530,763 $1,138,533 $1,730,039 BALANCE AT MARCH 1, 1998............................................... Circuit City Stores, Inc. Net earnings................................................................. — — — — — 142,924 142,924 Exercise of common stock options [NOTE 7]................ 1,004 543 502 272 16,945 — 17,719 Shares issued under Employee Stock Purchase Plans [NOTE 7]................................. 429 269 215 134 19,431 — 19,780 Shares issued under the 1994 Stock Incentive Plan [NOTE 7]............................................. 360 100 180 50 14,588 — 14,818 Tax benefit from stock issued.................................... — — — — 9,523 — 9,523 Other.............................................................................. 32 — 16 — 1,445 — 1,461 Shares cancelled upon reacquisition by Company............................................................ (287) — (144) — (14,239) — (14,383) Unearned compensation-restricted stock................. — — — — (2,770) — (2,770) Cash dividends-Circuit City Group Common Stock ($0.14 per share).......................................... — — — — — (13,981) (13,981) 100,820 23,116 50,410 11,558 575,686 1,267,476 1,905,130 BALANCE AT FEBRUARY 28, 1999......................................... Effect of two-for-one stock split [NOTE 1] ................... 100,820 — 50,410 — (50,410) — — Net earnings................................................................. — — — — — 197,590 197,590 Exercise of common stock options [NOTE 7]................ 2,864 2,027 1,432 1,014 34,232 — 36,678 Shares issued under Employee Stock Purchase Plans [NOTE 7]................................. 502 506 251 253 21,547 — 22,051 Shares issued under the 1994 Stock Incentive Plan [NOTE 7]............................................. 346 30 173 15 13,996 — 14,184 Tax benefit from stock issued .................................... — — — — 32,459 — 32,459 Shares cancelled upon reacquisition by Company............................................................ (1,484) (65) (742) (33) (52,173) — (52,948) Unearned compensation-restricted stock................. — — — — 1,237 — 1,237 Cash dividends-Circuit City Group Common Stock ($0.07 per share).......................................... — — — — — (14,207) (14,207) 203,868 25,614 101,934 12,807 576,574 1,450,859 2,142,174 BALANCE AT FEBRUARY 29, 2000......................................... Net earnings................................................................. — — — — — 160,802 160,802 Exercise of common stock options [NOTE 7]................ 1,526 56 763 28 35,391 — 36,182 Shares issued under Employee Stock Purchase Plans [NOTE 7]................................. 862 — 431 — 16,119 — 16,550 Shares issued under the 1994 Stock Incentive Plan [NOTE 7]............................................. 1,486 — 743 — 31,912 — 32,655 Tax benefit from stock issued .................................... — — — — 29,839 — 29,839 Shares cancelled upon reacquisition by Company............................................................ (722) (31) (361) (15) (32,774) — (33,150) Unearned compensation-restricted stock................. — — — — (14,223) — (14,223) Cash dividends-Circuit City Group Common Stock ($0.07 per share).......................................... — — — — — (14,346) (14,346) 207,020 25,639 $103,510 $12,820 $642,838 $1,597,315 $2,356,483 BALANCE AT FEBRUARY 28, 2001......................................... See accompanying notes to consolidated financial statements. 35 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 39. Notes to Consolidated Financial Statements 1. BASIS OF PRESENTATION of such services by each Group. Where determinations based on utilization alone have been impractical, other methods and crite- The common stock of Circuit City Stores, Inc. consists of two ria are used that management believes are equitable and provide common stock series, which are intended to reflect the perfor- a reasonable estimate of the costs attributable to each Group. mance of the Company's two businesses. The Circuit City Group (C) INCOME TAXES: The Groups are included in the consoli- Common Stock is intended to track the performance of the Circuit dated federal income tax return and in certain state tax returns City store-related operations, the Group’s retained interest in the filed by the Company. Accordingly, the financial statement pro- CarMax Group and the Company’s investment in Digital Video vision and the related tax payments or refunds are reflected in Express, which has been discontinued (see Note 16). The CarMax each Group’s financial statements in accordance with the Group Common Stock is intended to track the performance of the Company’s tax allocation policy for such Groups. In general, this CarMax Group's operations. The Circuit City Group held a 74.6 policy provides that the consolidated tax provision and related percent interest in the CarMax Group at February 28, 2001, a tax payments or refunds are allocated between the Groups based 74.7 percent interest at February 29, 2000, and a 76.6 percent principally upon the financial income, taxable income, credits interest at February 28, 1999. The terms of each series of com- and other amounts directly related to each Group. Tax benefits mon stock are discussed in detail in the Company's Form 8-A that cannot be used by the Group generating such attributes, but registration statement on file with the SEC. can be utilized on a consolidated basis, are allocated to the Notwithstanding the attribution of the Company’s assets and Group that generated such benefits. liabilities, including contingent liabilities, and stockholders’ equity between the Circuit City Group and the CarMax Group On June 15, 1999, the board of directors declared a two-for- for the purposes of preparing the financial statements, holders one split of the outstanding Circuit City Group Common Stock in of Circuit City Group Common Stock and holders of CarMax the form of a 100 percent stock dividend. All share, earnings per Group Common Stock are shareholders of the Company and share and dividends per share calculations for the Circuit City continue to be subject to all of the risks associated with an Group included in the accompanying consolidated financial investment in the Company and all of its businesses, assets and statements reflect this stock split. liabilities. Such attribution and the equity structure of the 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Company do not affect title to the assets or responsibility for (A) PRINCIPLES OF CONSOLIDATION: The consolidated financial the liabilities of the Company or any of its subsidiaries. The statements include the accounts of the Circuit City Group and results of operations or financial condition of one Group could the CarMax Group, which combined comprise all accounts of the affect the results of operations or financial condition of the Company. All significant intercompany balances and transactions other Group. Net losses of either Group, and dividends or distri- have been eliminated in consolidation. butions on, or repurchases of, Circuit City Group Common Stock (B) CASH AND CASH EQUIVALENTS: Cash equivalents of or CarMax Group Common Stock will reduce funds legally $408,778,000 at February 28, 2001, and $583,506,000 at available for dividends on, or repurchases of, both stocks. February 29, 2000, consist of highly liquid debt securities with Accordingly, the Company’s consolidated financial statements original maturities of three months or less. included herein should be read in conjunction with the financial (C) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For trans- statements of each Group and the Company's SEC filings. fers of financial assets that qualify as sales, the Company may The financial statements of the Company reflect each Group’s retain interest-only strips, one or more subordinated tranches, resid- businesses as well as the allocation of the Company’s assets, ual interests in a securitization trust, servicing rights and a cash liabilities, expenses and cash flows between the Groups in accor- reserve account, all of which are retained interests in the securitized dance with the policies adopted by the board of directors. These receivables. These retained interests are measured based on the fair policies may be modified or rescinded, or new policies may be value at the date of transfer. The Company determines fair value adopted, at the sole discretion of the board of directors, although based on the present value of future expected cash flows using the board of directors has no present plans to do so. These man- management’s best estimates of the key assumptions such as agement and allocation policies include the following: finance charge income, default rates, payment rates, forward yield (A) FINANCIAL ACTIVITIES: Most financial activities are man- curves and discount rates appropriate for the type of asset and risk. aged by the Company on a centralized basis. Such financial Retained interests are included in net accounts receivable and are activities include the investment of surplus cash and the carried at fair value with changes in fair value reflected in earnings. issuance and repayment of short-term and long-term debt. Debt (D) FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of the Company is either allocated between the Groups (pooled of the Company’s financial instruments, excluding interest rate debt) or is allocated in its entirety to one Group. The pooled debt swaps held for hedging purposes, approximates fair value. Credit bears interest at a rate based on the average pooled debt balance. risk is the exposure created by the potential nonperformance of Expenses related to increases in pooled debt are reflected in the another material party to an agreement because of changes in weighted average interest rate of such pooled debt. economic, industry or geographic factors. The Company mitigates (B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporate credit risk by dealing only with counterparties that are highly general and administrative costs and other shared services gen- rated by several financial rating agencies. Accordingly, the erally have been allocated to the Groups based upon utilization Company does not anticipate material loss for nonperformance. 36 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 40. The Company broadly diversifies all financial instruments along (K) REVENUE RECOGNITION: The Company recognizes revenue industry, product and geographic areas. when the earnings process is complete, generally at either the time (E) INVENTORY: Inventory is stated at the lower of cost or mar- of sale to a customer or upon delivery to a customer. ket. Cost is determined by the average cost method for the Circuit (L) DEFERRED REVENUE: The Circuit City Group sells its own Circuit City Stores, Inc. City Group’s inventory and by specific identification for the extended warranty contracts and extended warranty contracts on CarMax Group’s vehicle inventory. Parts and labor used to recon- behalf of unrelated third parties. The contracts extend beyond the dition vehicles, as well as transportation and other incremental normal manufacturer’s warranty period, usually with terms expenses associated with acquiring vehicles, are included in the (including the manufacturer’s warranty period) between 12 and 60 CarMax Group’s inventory. months. Commission revenue for the unrelated third-party (F) PROPERTY AND EQUIPMENT: Property and equipment is extended warranty plans is recognized at the time of sale, because stated at cost less accumulated depreciation and amortization. the third parties are the primary obligors under these contracts. Depreciation and amortization are calculated using the straight- Inasmuch as Circuit City is the primary obligor on its own con- line method over the assets’ estimated useful lives. tracts, all revenue from the sale of these contracts is deferred and Property held under capital lease is stated at the lower of the amortized on a straight-line basis over the life of the contracts. present value of the minimum lease payments at the inception of Incremental direct costs related to the sale of contracts are deferred the lease or market value and is amortized on a straight-line and charged to expense in proportion to the revenue recognized. basis over the lease term or the estimated useful life of the asset, The CarMax Group sells service contracts on behalf of unre- whichever is shorter. lated third parties and, prior to July 1997, sold its own contracts (G) COMPUTER SOFTWARE COSTS: The Company accounts for at one location where third-party warranty sales were not per- computer software costs in accordance with the American mitted. Contracts usually have terms of coverage between 12 Institute of Certified Public Accountants Statement of Position and 72 months. Commission revenue for the unrelated third- 98-1, “Accounting for the Costs of Computer Software Developed party service contracts is recognized at the time of sale, because or Obtained for Internal Use.” Once the capitalization criteria of the third parties are the primary obligors under these contracts. SOP 98-1 have been met, external direct costs of materials and Inasmuch as CarMax is the primary obligor on its own contracts, services used in the development of internal-use software and all revenue from the sale of these contracts was deferred and payroll and payroll-related costs for employees directly involved amortized over the life of the contracts consistent with the pat- in the development of internal-use software are capitalized. tern of repair experience of the industry. Incremental direct costs Amounts capitalized are amortized on a straight-line basis over related to the sale of contracts were deferred and charged to a period of three to five years. expense in proportion to the revenue recognized. (H) INTANGIBLE ASSETS: Amounts paid for acquired businesses (M) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating in excess of the fair value of the net tangible assets acquired are profits generated by the Company’s finance operations are recorded recorded as goodwill, which is amortized on a straight-line basis as a reduction to selling, general and administrative expenses. over 15 years, and covenants not to compete, which are amor- (N) ADVERTISING EXPENSES: All advertising costs are expensed tized on a straight-line basis over the life of the covenant not to as incurred. exceed five years. Both goodwill and covenants not to compete (O) NET EARNINGS (LOSS) PER SHARE: The Company calculates are included in other assets on the accompanying consolidated earnings per share based upon SFAS No. 128, “Earnings per balance sheets. The carrying values of intangible assets are peri- Share.” Basic net earnings per share attributed to Circuit City odically reviewed by the Company and impairments are recog- Group Common Stock is computed by dividing net earnings nized when the future undiscounted operating cash flows expected attributed to Circuit City Group Common Stock, including the from such intangible assets are less than the carrying values. Circuit City Group's retained interest in the CarMax Group, by (I) PRE-OPENING EXPENSES: Effective March 1, 1999, the the weighted average number of shares of Circuit City Group Company adopted SOP 98-5, “Reporting on the Costs of Start-Up Common Stock outstanding. Diluted net earnings per share Activities.” SOP 98-5 requires costs of start-up activities, includ- attributed to Circuit City Group Common Stock is computed by ing organization and pre-opening costs, to be expensed as dividing net earnings attributed to Circuit City Group Common incurred. Prior to fiscal 2000, the Company capitalized pre-open- Stock, which includes the Circuit City Group's retained interest ing costs for new store locations. Beginning in the month after in the CarMax Group, by the weighted average number of shares the store opened for business, the pre-opening costs were amor- of Circuit City Group Common Stock outstanding and dilutive tized over the remainder of the fiscal year. potential Circuit City Group Common Stock. (J) INCOME TAXES: The Company accounts for income taxes in Basic net earnings (loss) per share attributed to CarMax accordance with SFAS No. 109, “Accounting for Income Taxes.” Group Common Stock is computed by dividing net earnings Deferred income taxes reflect the impact of temporary differ- (loss) attributed to CarMax Group Common Stock by the ences between the amounts of assets and liabilities recognized weighted average number of shares of CarMax Group Common for financial reporting purposes and the amounts recognized for Stock outstanding. Diluted net earnings per share attributed to income tax purposes, measured by applying currently enacted CarMax Group Common Stock is computed by dividing net tax laws. The Company recognizes deferred tax assets if it is earnings attributed to CarMax Group Common Stock by the more likely than not that a benefit will be realized. weighted average number of shares of CarMax Group Common 37 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 41. Stock outstanding and dilutive potential CarMax Group 4. PROPERTY AND EQUIPMENT Common Stock. Property and equipment, at cost, at February 28 or 29 is summa- (P) STOCK-BASED COMPENSATION: The Company accounts for rized as follows: stock-based compensation in accordance with Accounting 2001 2000 Principles Board Opinion No. 25, “Accounting For Stock Issued to (Amounts in thousands) Employees,” and provides the pro forma disclosures of SFAS No. Land and buildings (20 to 25 years)............ $ 178,042 $ 180,422 123, “Accounting for Stock-Based Compensation.” Land held for sale........................................... 30,730 41,850 (Q) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters Land held for development........................... 4,285 17,697 into interest rate swap agreements to manage exposure to interest Construction in progress ............................... 58,659 69,388 rates and to more closely match funding costs to the use of funding. Furniture, fixtures and equipment Swaps entered into by a seller as part of a sale of financial assets (3 to 8 years).............................................. 874,367 750,737 are considered proceeds at fair value in the determination of the Leasehold improvements gain or loss on the sale. If such a swap were to be terminated, the (10 to 15 years).......................................... 619,782 586,005 impact on the fair value of the financial asset created by the sale of Capital leases, primarily buildings the related receivables would be estimated and included in earnings. (20 years).................................................... 12,471 12,471 (R) RISKS AND UNCERTAINTIES: The Circuit City Group is a lead- 1,778,336 1,658,570 ing national retailer of brand-name consumer electronics, personal Less accumulated depreciation and computers and entertainment software. The diversity of the Circuit amortization .............................................. 789,389 693,389 City Group's products, customers, suppliers and geographic opera- Property and equipment, net........................ $ 988,947 $ 965,181 tions reduces the risk that a severe impact will occur in the near term as a result of changes in its customer base, competition, Land held for development is land owned for future sites sources of supply or markets. It is unlikely that any one event that are scheduled to open more than one year beyond the fiscal would have a severe impact on the Company’s operating results. year reported. The CarMax Group is a used- and new-car retail business. The diversity of the CarMax Group’s customers and suppliers reduces 5. DEBT the risk that a severe impact will occur in the near term as a Long-term debt at February 28 or 29 is summarized as follows: result of changes in its customer base, competition or sources of supply. However, because of the CarMax Group’s limited overall 2001 2000 (Amounts in thousands) size, management cannot assure that unanticipated events will Term loans ............................................................ $230,000 $405,000 not have a negative impact on the Company. Industrial Development Revenue Bonds due The preparation of financial statements in conformity with through 2006 at various prime-based rates accounting principles generally accepted in the United States of of interest ranging from 5.5% to 6.7%........ 4,400 5,419 America requires management to make estimates and assumptions Obligations under capital leases [NOTE 10] .......... 12,049 12,416 that affect the reported amounts of assets, liabilities, revenues and Note payable ........................................................ 2,076 3,750 expenses and the disclosure of contingent assets and liabilities. Total long-term debt........................................... 248,525 426,585 Actual results could differ from those estimates. Less current installments.................................... 132,388 177,344 (S) RECLASSIFICATIONS: Certain amounts in prior years have been reclassified to conform to classifications adopted in fiscal 2001. Long-term debt, excluding current installments .................................................... $116,137 $249,241 3. BUSINESS ACQUISITIONS The CarMax Group acquired the franchise rights and the related In July 1994, the Company entered into a seven-year, assets of one new-car dealership for an aggregate cost of $1.3 $100,000,000 unsecured bank term loan. The loan was restructured million in fiscal 2001, five new-car dealerships for an aggregate in August 1996 as a $100,000,000, six-year unsecured bank term cost of $34.8 million in fiscal 2000 and four new-car dealerships loan. Principal is due in full at maturity with interest payable peri- for an aggregate cost of 49.6 million in fiscal 1999. These acquisi- odically at LIBOR plus 0.40 percent. At February 28, 2001, the tions were financed through available cash resources and, in fiscal interest rate on the term loan was 5.97 percent. 1999, the issuance of two promissory notes aggregating $8.0 mil- In May 1995, the Company entered into a five-year, lion. Costs in excess of the fair value of the net tangible assets $175,000,000 unsecured bank term loan. As scheduled, the acquired (primarily inventory) have been recorded as goodwill and Company used existing working capital to repay this term loan covenants not to compete. These acquisitions were accounted for in May 2000. under the purchase method and the results of the operations of In June 1996, the Company entered into a five-year, each acquired franchise were included in the accompanying con- $130,000,000 unsecured bank term loan. Principal is due in full at solidated financial statements since the dates of acquisition. maturity with interest payable periodically at LIBOR plus 0.35 per- Unaudited pro-forma information related to these acquisitions is cent. At February 28, 2001, the interest rate on the term loan was not included because the impact of these acquisitions on the 5.73 percent. This term loan is due in June 2001 and was classi- accompanying consolidated financial statements is not material. 38 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 42. fied as a current liability at February 28, 2001. Although the Years Ended February 28 or 29 2001 2000 1999 (Amounts in thousands) Company has the ability to refinance this loan, it intends to repay Current: the debt using existing working capital. Federal ...................................... $69,832 $140,119 $ 99,228 The Company maintains a multi-year, $150,000,000 unsecured Circuit City Stores, Inc. State .......................................... 10,167 17,756 13,148 revolving credit agreement with four banks. The agreement calls for interest based on both committed rates and money market 79,999 157,875 112,376 rates and a commitment fee of 0.18 percent per annum. The Deferred: agreement was entered into as of August 31, 1996, and terminates Federal ...................................... 17,999 41,762 16,718 August 31, 2002. No amounts were outstanding under the revolv- State .......................................... 557 1,291 517 ing credit agreement at February 28, 2001, or February 29, 2000. 18,556 43,053 17,235 The Industrial Development Revenue Bonds are collateralized Provision for income taxes ......... $98,555 $200,928 $129,611 by land, buildings and equipment with an aggregate carrying value of approximately $6,243,000 at February 28, 2001, and $8,404,000 at February 29, 2000. The effective income tax rate differed from the federal statu- In November 1998, the CarMax Group entered into a four- tory income tax rate as follows: year, unsecured $5,000,000 promissory note. Principal is due Years Ended February 28 or 29 2001 2000 1999 annually with interest payable periodically at 8.25 percent. Federal statutory income tax rate .... 35% 35% 35% The scheduled aggregate annual principal payments on long- State and local income taxes, term obligations for the next five fiscal years are as follows: net of federal benefit .................... 3% 3% 3% 2002—$132,388,000; 2003—$102,073,000; 2004—$1,410,000; 2005—$2,521,000; 2006—$1,083,000. Effective income tax rate................... 38% 38% 38% Under certain of the debt agreements, the Company must meet financial covenants relating to minimum tangible net worth, cur- In accordance with SFAS No. 109, the tax effects of temporary rent ratios and debt-to-capital ratios. The Company was in com- differences that give rise to a significant portion of the deferred pliance with all such covenants at February 28, 2001, and tax assets and liabilities at February 28 or 29 are as follows: February 29, 2000. Short-term debt is funded through committed lines of credit 2001 2000 (Amounts in thousands) and informal credit arrangements, as well as the revolving credit Deferred tax assets: agreement. Amounts outstanding and committed lines of credit Inventory ................................................. $ — $ 2,609 available are as follows: Accrued expenses................................... 48,126 33,484 Other......................................................... 7,546 7,476 Years Ended February 28 or 29 Total gross deferred tax assets ....... 55,672 43,569 2001 2000 (Amounts in thousands) Deferred tax liabilities: Average short-term debt outstanding .......... $ 56,065 $ 44,692 Depreciation and amortization ............ 46,338 51,035 Maximum short-term debt outstanding....... $365,275 $411,791 Deferred revenue .................................... 32,825 29,656 Aggregate committed lines of credit ............. $360,000 $370,000 Securitized receivables .......................... 51,519 18,988 Inventory ................................................. 16,376 — The weighted average interest rate on the outstanding short- Prepaid expenses.................................... 12,417 26,111 term debt was 6.8 percent during fiscal 2001, 5.6 percent during Other......................................................... 3,625 6,651 fiscal 2000 and 5.1 percent during fiscal 1999. Total gross deferred tax liabilities ... 163,100 132,441 The Company capitalizes interest in connection with the con- struction of certain facilities and software developed or obtained Net deferred tax liability............................. $107,428 $ 88,872 for internal use. Interest capitalized amounted to $2,121,000 in fis- cal 2001, $3,420,000 in fiscal 2000 and $5,423,000 in fiscal 1999. Based on the Company’s historical and current pretax earnings, management believes the amount of gross deferred tax assets will 6. INCOME TAXES more likely than not be realized through future taxable income; The Company files a consolidated federal income tax return. The therefore, no valuation allowance is necessary. components of the provision for income taxes on earnings from continuing operations are as follows: 7. ASSOCIATE BENEFIT AND STOCK INCENTIVE PLANS (A) 401(k) PLAN: Effective August 1, 1999, the Company began sponsoring a 401(k) Plan for all employees meeting certain eligibil- ity criteria. Under the Plan, eligible employees can contribute up to 15 percent of their salaries, and the Company matches a portion of those associate contributions. The Company's expense for this plan was $4,682,000 in fiscal 2001 and $2,475,000 in fiscal 2000. 39 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 43. (B) PREFERRED STOCK: In conjunction with the Company’s generally expire three to seven years from the date of grant. Shareholders Rights Plan as amended and restated, preferred Total restricted stock awards of 1,483,358 shares of Circuit City stock purchase rights were distributed as a dividend at the rate Group Common Stock were granted to eligible employees in fis- of one right for each share of Circuit City Group Common Stock cal 2001. Approximately 1,047,000 of those shares were granted and CarMax Group Common Stock. The rights are exercisable as a one-for-one replacement for cancelled options that were only upon the attainment of, or the commencement of a tender originally granted on June 13, 2000. Options held by senior offer to attain, a specified ownership interest in the Company by management were excluded from this replacement grant. a person or group. When exercisable, each Circuit City right Approximately 782,000 of those shares vest two-and-one-half would entitle shareholders to buy one eight-hundredth of a share years from the date of grant and approximately 265,000 shares of Cumulative Participating Preferred Stock, Series E, $20 par vest four to five years from the grant date with accelerated value, at an exercise price of $125 per share subject to adjust- vesting if certain performance factors are met. The market value ment. Each CarMax right, when exercisable, would entitle share- at the date of grant of all shares granted has been recorded as holders to buy one four-hundredth of a share of Cumulative unearned compensation and is a component of stockholders’ Participating Preferred Stock, Series F, $20 par value, at an exer- equity. Unearned compensation is expensed over the restriction cise price of $100 per share subject to adjustment. A total of periods. In fiscal 2001, a total of $11,364,700 was charged to 1,000,000 shares of such preferred stock, which have preferential operations ($12,095,900 in fiscal 2000 and $9,167,700 in fiscal dividend and liquidation rights, have been designated. No such 1999). As of February 28, 2001, 2,364,051 restricted shares of shares are outstanding. In the event that an acquiring person or Circuit City Group Common Stock and 56,667 restricted shares group acquires the specified ownership percentage of the of CarMax Group Common Stock were outstanding. Company’s common stock (except pursuant to a cash tender (E) EMPLOYEE STOCK PURCHASE PLANS: The Company has offer for all outstanding shares determined to be fair by the Employee Stock Purchase Plans for all employees meeting cer- board of directors) or engages in certain transactions with the tain eligibility criteria. Under the Circuit City Group Plan and Company after the rights become exercisable, each right will be the CarMax Group Plan, eligible employees may purchase converted into a right to purchase, for half the current market shares of Circuit City Group Common Stock or CarMax Group price at that time, shares of the related Group stock valued at Common Stock, subject to certain limitations. For each $1.00 two times the exercise price. The Company also has 1,000,000 contributed by employees under the Plans, the Company shares of undesignated preferred stock authorized of which no matches $0.15. Purchases are limited to 10 percent of an shares are outstanding. employee’s eligible compensation, up to a maximum of $7,500 (C) VOTING RIGHTS: The holders of both series of common per year. At February 28, 2001, a total of 2,501,731 shares stock and any series of preferred stock outstanding and entitled remained available under the Circuit City Group Plan and to vote together with the holders of common stock will vote 581,599 shares remained available under the CarMax Group together as a single voting group on all matters on which com- Plan. During fiscal 2001, 862,315 shares of Circuit City Group mon shareholders generally are entitled to vote other than a Common Stock were issued to or purchased on the open market matter on which the common stock or either series thereof or for employees (501,984 shares in fiscal 2000 and 858,710 shares any series of preferred stock would be entitled to vote as a sepa- in fiscal 1999), and 477,094 shares of CarMax Group Common rate voting group. On all matters on which both series of com- Stock were issued to or purchased on the open market on behalf mon stock would vote together as a single voting group, (i) each of employees (580,000 in fiscal 2000 and 268,532 in fiscal outstanding share of Circuit City Group Common Stock shall 1999). The average price per share of Circuit City Group have one vote and (ii) each outstanding share of CarMax Group Common Stock purchased under the Plan was $29.93 in fiscal Common Stock shall have a number of votes based on the 2001, $41.70 in fiscal 2000 and $21.69 in fiscal 1999. The aver- weighted average ratio of the market value of a share of age price per share of CarMax Group Common Stock purchased CarMax Group Common Stock to a share of Circuit City Group under the Plan was $4.18 in fiscal 2001, $3.68 in fiscal 2000 Common Stock. If shares of only one series of common stock and $7.56 in fiscal 1999. The Company match or purchase price are outstanding, each share of that series shall be entitled to discount totaled $2,766,500 in fiscal 2001, $2,903,800 in fiscal one vote. If either series of common stock is entitled to vote as 2000 and $2,984,500 in fiscal 1999. a separate voting group with respect to any matter, each share (F) STOCK INCENTIVE PLANS: Under the Company’s stock incen- of that series shall, for purposes of such vote, be entitled to one tive plans, nonqualified stock options may be granted to manage- vote on such matter. ment, key employees and outside directors to purchase shares of (D) RESTRICTED STOCK: The Company has issued restricted Circuit City Group Common Stock or CarMax Group Common stock under the provisions of the 1994 Stock Incentive Plan Stock. The exercise price for nonqualified options is equal to, or whereby management and key employees are granted restricted greater than, the market value at the date of grant. Options gener- shares of Circuit City Group Common Stock or CarMax Group ally are exercisable over a period of from one to 10 years from the Common Stock. Shares are awarded in the name of the date of grant. employee, who has all the rights of a shareholder, subject to certain restrictions or forfeitures. Restrictions on the awards 40 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 44. TABLE 1 2001 2000 1999 Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price (Shares in thousands) Circuit City Group: Circuit City Stores, Inc. Outstanding at beginning of year................ 7,380 $25.07 8,894 $18.25 9,988 $16.00 Granted ............................................................ 4,280 34.80 1,564 40.75 1,080 21.17 Exercised.......................................................... (1,526) 23.64 (2,864) 12.65 (2,008) 8.77 Cancelled.......................................................... (1,414) 34.25 (214) 22.06 (166) 16.80 Outstanding at end of year........................... 8,720 $28.60 7,380 $25.07 8,894 $18.25 Options exercisable at end of year .............. 3,158 $21.86 1,258 $13.89 2,966 $12.02 CarMax Group: Outstanding at beginning of year................ 3,324 $ 3.87 4,380 $ 1.77 4,822 $ 1.49 Granted ............................................................ 1,281 1.70 1,132 5.89 205 8.63 Exercised.......................................................... (56) 0.22 (2,027) 0.22 (543) 0.22 Cancelled.......................................................... (442) 4.67 (161) 6.94 (104) 10.54 Outstanding at end of year........................... 4,107 $ 3.16 3,324 $ 3.87 4,380 $ 1.77 Options exercisable at end of year .............. 1,943 $ 2.94 1,203 $ 2.54 1,566 $ 0.96 TABLE 2 Options Outstanding Options Exercisable Weighted Average Number Remaining Weighted Average Number Weighted Average (Shares in thousands) Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price Circuit City Group: $ 9.09 to 14.75 ............................................ 1,344 3.8 $14.10 879 $13.93 15.18 to 18.00............................................. 1,067 3.0 17.24 876 17.23 18.43 to 25.28............................................. 864 4.1 21.11 212 20.78 29.50............................................................. 1,000 1.1 29.50 1,000 29.50 34.84 to 35.21............................................. 3,038 7.2 35.21 — — 35.22 to 47.53............................................. 1,407 5.4 40.72 191 40.81 Total.................................................................. 8,720 4.9 $28.60 3,158 $21.86 CarMax Group: $ 0.22............................................................. 1,578 1.0 $ 0.22 1,338 $ 0.22 1.63............................................................. 1,094 6.0 1.63 — — 3.22 to 6.25.............................................. 1,011 4.7 5.89 305 6.07 8.68 to16.31.............................................. 424 3.4 11.55 300 11.91 Total.................................................................. 4,107 3.5 $ 3.16 1,943 $ 2.94 A summary of the status of the Company’s stock options to the CarMax Group would have changed to the pro forma and changes during the years ended February 28, 2001, amounts indicated in the following table. In accordance with the February 29, 2000, and February 28, 1999, are shown in Table 1. transition provisions of SFAS No. 123, the pro forma amounts Table 2 summarizes information about stock options outstand- reflect options with grant dates subsequent to March 1, 1995. ing as of February 28, 2001. Therefore, the full impact of calculating compensation cost for The Company applies APB Opinion No. 25 and related inter- stock options under SFAS No. 123 is not reflected in the pro pretations in accounting for its stock option plans. Accordingly, forma net earnings (loss) amounts presented because compensa- no compensation cost has been recognized. Had compensation tion cost is reflected over the options’ vesting periods and com- cost been determined based on the fair value at the grant date pensation cost of options granted prior to March 1, 1995, is not consistent with the methods of SFAS No. 123, the net earnings considered. The pro forma effect on fiscal year 2001 may not be and net earnings per share attributed to the Circuit City Group and representative of the pro forma effects on net earnings (loss) for the net earnings (loss) and net earnings (loss) per share attributed future years. 41 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 45. 8. EARNINGS (LOSS) PER SHARE Years Ended February 28 or 29 (Amounts in thousands 2001 2000 1999 except per share data) Reconciliations of the numerator and denominator of basic and diluted earnings (loss) per share are presented below. Circuit City Group: Earnings from continuing Years Ended February 28 or 29 (Amounts in thousands operations: 2001 2000 1999 except per share data) As reported........................... $149,247 $327,574 $216,927 Circuit City Group: Pro forma ............................. 136,957 319,337 211,025 Weighted average Net earnings: common shares........................ 203,774 201,345 198,304 As reported........................... $149,247 $197,334 $148,381 Dilutive potential Pro forma ............................. 136,957 189,097 142,479 common shares: Earnings per share from Options...................................... 885 2,145 1,700 continuing operations: Restricted stock........................ 1,171 831 808 Basic – as reported.............. $ 0.73 $ 1.63 $ 1.09 Weighted average common Basic – pro forma................ 0.67 1.59 1.06 shares and dilutive Diluted – as reported .......... $ 0.73 $ 1.60 $ 1.08 potential common shares....... 205,830 204,321 200,812 Diluted – pro forma ............ 0.67 1.56 1.05 Net earnings per share: Earnings from continuing Basic – as reported.............. $ 0.73 $ 0.98 $ 0.75 operations available to Basic – pro forma................ 0.67 0.94 0.72 common shareholders............. $149,247 $327,574 $216,927 Diluted – as reported .......... $ 0.73 $ 0.96 $ 0.74 Basic earnings per share from Diluted – pro forma ............ 0.67 0.93 0.71 continuing operations ............ $ 0.73 $ 1.63 $ 1.09 CarMax Group: Diluted earnings per share from Net earnings (loss): continuing operations ............ $ 0.73 $ 1.60 $ 1.08 As reported........................... $ 11,555 $ 256 $ (5,457) CarMax Group: Pro forma ............................. 11,345 75 (5,537) Weighted average Net earnings (loss) per share: common shares ....................... 25,554 23,778 22,604 Basic – as reported.............. $ 0.45 $ 0.01 $ (0.24) Dilutive potential common Basic – pro forma................ 0.44 0.00 (0.24) shares: Diluted – as reported .......... $ 0.43 $ 0.01 $ (0.24) Options ..................................... 1,332 1,814 — Diluted – pro forma ............ 0.42 0.00 (0.24) Restricted stock ....................... 94 196 — For the purpose of computing the pro forma amounts indi- Weighted average common cated above, the fair value of each option on the date of grant is shares and dilutive potential estimated using the Black-Scholes option-pricing model. The common shares ....................... 26,980 25,788 22,604 weighted average assumptions used in the model are as follows: Net earnings (loss) available to common shareholders ............ $ 11,555 $ 256 $ (5,457) 2001 2000 1999 Basic net earnings (loss) Circuit City Group: per share................................... $ 0.45 $ 0.01 $ (0.24) Expected dividend yield ................ 0.2% 0.2% 0.4% Diluted net earnings (loss) Expected stock volatility ............... 49% 38% 33% per share................................... $ 0.43 $ 0.01 $ (0.24) Risk-free interest rates................... 6% 6% 6% Expected lives (in years)................ 5 5 5 Certain options were outstanding and not included in the CarMax Group: computation of diluted earnings per share because the options’ Expected dividend yield ................ — — — exercise prices were greater than the average market price of the Expected stock volatility ............... 71% 62% 50% common shares. Options to purchase 8,469,700 shares of Circuit Risk-free interest rates................... 7% 6% 6% City Group Common Stock ranging from $14.75 to $47.53 per Expected lives (in years)................ 4 4 3 share were outstanding and not included in the calculation at the end of fiscal 2001; 2,900 shares ranging from $43.03 to Using these assumptions in the Black-Scholes model, the $47.53 per share at the end of fiscal 2000; and 2,000,000 shares weighted average fair value of options granted for the Circuit at $29.50 per share at the end of fiscal 1999. Options to pur- City Group is $17 in fiscal 2001, $17 in fiscal 2000 and $8 in chase 1,357,200 shares of CarMax Group Common Stock rang- fiscal 1999; and for the CarMax Group, $1 in fiscal 2001, $3 in ing from $6.06 to $16.31 per share were outstanding and not fiscal 2000 and $3 in fiscal 1999. included in the calculation at the end of fiscal 2001, and 42 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 46. 1,685,400 shares ranging from $3.90 to $16.31 per share were The components of net pension expense are as follows: not included at the end of fiscal 2000. Because the CarMax Years Ended February 28 or 29 Group had a net loss in fiscal 1999, no dilutive potential shares 2001 2000 1999 (Amounts in thousands) of CarMax Group Common Stock were included in the calcula- Circuit City Stores, Inc. Service cost.......................................... $14,142 $14,678 $11,004 tion of diluted net loss per share. Interest cost.......................................... 9,045 7,557 6,202 9. PENSION PLANS Expected return on plan assets.......... (11,197) (9,078) (7,794) The Company has a noncontributory defined benefit pension plan Amortization of prior service cost.... (142) (134) (105) covering the majority of full-time employees who are at least age Amortization of transitional asset .... (202) (202) (202) 21 and have completed one year of service. The cost of the pro- Recognized actuarial (gain) loss....... (183) 87 — gram is being funded currently. Plan benefits generally are based Net pension expense........................... $11,463 $12,908 $ 9,105 on years of service and average compensation. Plan assets consist primarily of equity securities and included 160,000 shares of Assumptions used in the accounting for the Pension Plan were: Circuit City Group Common Stock at February 28, 2001, and February 29, 2000. Contributions were $15,733,000 in fiscal Years Ended February 28 or 29 2001, $12,123,000 in fiscal 2000 and $10,306,000 in fiscal 1999. 2001 2000 1999 The following tables set forth the Pension Plan’s financial Weighted average discount rate................... 7.5% 8.0% 6.8% status and amounts recognized in the consolidated balance Rate of increase in compensation levels ...... 6.0% 6.0% 5.0% sheets as of February 28 or 29: Expected rate of return on plan assets ......... 9.0% 9.0% 9.0% 2001 2000 (Amounts in thousands) The Company also has an unfunded nonqualified plan that Change in benefit obligation: restores retirement benefits for certain senior executives who are Benefit obligation at beginning of year........ $113,780 $112,566 affected by Internal Revenue Code limitations on benefits provided Service cost....................................................... 14,142 14,678 under the Company's Pension Plan. The projected benefit obliga- Interest cost....................................................... 9,045 7,557 tion under this plan was $10.4 million at February 28, 2001, and Actuarial loss (gain)......................................... 21,776 (16,870) $6.6 million at February 29, 2000. Benefits paid..................................................... (2,994) (4,151) 10. LEASE COMMITMENTS Benefit obligation at end of year.................. $155,749 $113,780 The Company conducts a substantial portion of its business in Change in plan assets: leased premises. The Company’s lease obligations are based upon Fair value of plan assets at beginning contractual minimum rates. For certain locations, amounts in of year.......................................................... $132,353 $ 95,678 excess of these minimum rates are payable based upon specified Actual return on plan assets .......................... (10,667) 28,703 percentages of sales. Rental expense and sublease income for all Employer contributions .................................. 15,733 12,123 operating leases are summarized as follows: Benefits paid..................................................... (2,994) (4,151) Fair value of plan assets at end of year......... $134,425 $132,353 Years Ended February 28 or 29 2001 2000 1999 (Amounts in thousands) Reconciliation of funded status: Minimum rentals..................... $341,122 $322,598 $296,706 Funded status ................................................... $ (21,324) $ 18,573 Rentals based on sales Unrecognized actuarial loss (gain)................ 16,961 (26,862) volume................................. 1,229 1,327 1,247 Unrecognized transition asset........................ (202) (404) Sublease income...................... (15,333) (16,425) (14,857) Unrecognized prior service benefit ............... (285) (427) Net rental expense .................. $327,018 $307,500 $283,096 Net amount recognized................................... $ (4,850) $ (9,120) The Company computes rent based on a percentage of sales volumes in excess of defined amounts in certain store locations. Most of the Company’s other leases are fixed-dollar rental com- mitments, with many containing rent escalations based on the Consumer Price Index. Most provide that the Company pay taxes, maintenance, insurance and operating expenses applica- ble to the premises. 43 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 47. The initial term of most real property leases will expire within Bankcard receivables also are financed through a master trust the next 20 years; however, most of the leases have options pro- securitization program. Provisions under the master trust agreement viding for additional lease terms of five to 25 years at terms provide recourse to the Company for any cash flow deficiencies on similar to the initial terms. $188 million of the receivables sold. The Company believes that as Future minimum fixed lease obligations, excluding taxes, of February 28, 2001, no liability existed under the recourse provi- insurance and other costs payable directly by the Company, as of sions. The bankcard securitization program had a total program February 28, 2001, were: capacity of $1.94 billion as of February 28, 2001. At February 28, 2001, the total principal amount of loans Operating Operating managed or securitized was $2,799 million. Of the total loans, Capital Lease Sublease (Amounts in thousands) the principal amount of loans securitized was $2,754 million and Fiscal Leases Commitments Income the principal amount of loans held for sale was $45 million. The 2002.................................................. $ 1,725 $ 328,205 $(13,350) principal amount of loans that were 31 days or more delinquent 2003.................................................. 1,726 325,116 (12,638) was $192.3 million at February 28, 2001. The credit losses net of 2004.................................................. 1,768 322,072 (11,142) recoveries were $229.9 million for fiscal 2001. 2005.................................................. 1,798 320,038 (10,193) The Company receives annual servicing compensation 2006.................................................. 1,807 317,279 (9,132) approximating 2 percent of the outstanding principal loan balance After 2006........................................ 12,859 3,255,150 (34,437) of the receivables and retains the rights to future cash flows aris- Total minimum lease payments ..... 21,683 $4,867,860 $(90,892) ing after the investors in the securitization trusts have received Less amounts representing the return for which they contracted. The servicing fees specified interest ......................................... (9,634) in the credit card securitization agreements adequately compen- Present value of net minimum sate the finance operation for servicing the securitized assets. capital lease payments [NOTE 5].... $12,049 Accordingly, no servicing asset or liability has been recorded. The table below summarizes certain cash flows received from and paid to securitization trusts: In fiscal 2001, the Company entered into sale-leaseback transactions with unrelated parties at an aggregate selling price Year Ended of $61,526,000 ($36,795,000 in fiscal 2000 and $235,500,000 in February 28, 2001 (Amounts in thousands) fiscal 1999). The Company does not have continuing involvement Proceeds from new securitizations .............................. $1,092,500 under sale-leaseback transactions. Proceeds from collections reinvested 11. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION in previous credit card securitizations................... $ 1,730,511 Advertising expense from continuing operations, which is Servicing fees received .................................................. $ 52,044 included in selling, general and administrative expenses in the Other cash flows received on retained interests*........ $ 173,775 accompanying consolidated statements of earnings, amounted to * This amount represents total cash flows received from retained interests by $467,786,000 (3.6 percent of net sales and operating revenues) the transferor other than servicing fees, including cash flows from interest-only strips and cash above the minimum required level in cash collateral accounts. in fiscal 2001, $438,781,000 (3.5 percent of net sales and operat- ing revenues) in fiscal 2000 and $426,359,000 (3.9 percent of net sales and operating revenues) in fiscal 1999. In determining the fair value of retained interests, the Company estimates future cash flows using management’s best 12. SECURITIZATIONS estimates of key assumptions such as finance charge income, (A) CREDIT CARD SECURITIZATIONS: The Company enters into default rates, payment rates, forward yield curves and discount securitization transactions, which allow for the sale of credit rates. The Company employs a risk-based pricing strategy that card receivables to unrelated entities, to finance the consumer increases the stated annual percentage rate for accounts that revolving credit receivables generated by its finance operation. have a higher predicted risk of default. Accounts with a lower In these securitizations, the Company retains servicing rights and risk profile also may qualify for promotional financing. subordinated interests. Rights recorded for future finance income from serviced Private-label credit card receivables are financed through a assets that exceed the contractually specified servicing fees are master trust securitization program. During fiscal year 2001, a carried at fair value and amounted to $131.0 million at February $300 million, five-year public securitization related to the private- 28, 2001, and are included in net accounts receivable. Gains on label card matured and was paid off. The Company entered into a sales of $182.6 million were recorded in fiscal 2001. $275 million, three-year public securitization in fiscal 2001. As of The fair value of retained interests at February 28, 2001, was February 28, 2001, the master trust securitization program had a $246.1 million with a weighted-average life ranging from 0.4 capacity of $1.31 billion. The master trust agreement has no years to 3 years. The following table shows the key economic recourse provisions. assumptions used in measuring the fair value of retained interests at February 28, 2001, and a sensitivity analysis showing the 44 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 48. hypothetical effect on the fair value of those interests when The table below summarizes certain cash flows received from there are unfavorable variations from the assumptions used. Key and paid to securitization trusts: economic assumptions at February 28, 2001, are not materially Year Ended different than assumptions used to measure the fair value of Circuit City Stores, Inc. February 28, 2001 (Amounts in thousands) retained interests at the time of securitization. These sensitivi- Proceeds from new securitizations ................................ $619,525 ties are hypothetical and should be used with caution. In this Proceeds from collections reinvested table, the effect of a variation in a particular assumption on the in previous automobile loan securitizations........... $313,827 fair value of the retained interest is calculated without changing Servicing fees received ................................................... $ 10,474 any other assumption; in reality, changes in one factor may Other cash flows received on retained interests*......... $ 39,265 result in changes in another, which might magnify or counter- act the sensitivities. * This amount represents total cash flows received from retained interests by the transferor other than servicing fees, including cash flows from interest-only strips and cash above the minimum required level in cash collateral accounts. Impact on Impact on Assumptions Fair Value Fair Value Used of 10% of 20% (Dollar amounts In determining the fair value of retained interests, the (Annual) Adverse Change Adverse Change in thousands) Company estimates future cash flows using management’s best Payment rate ........... 7.1—11.3% $10,592 $20,107 estimates of key assumptions such as finance charge income, Default rate.............. 7.0—14.3% $21,159 $42,318 default rates, prepayment rates and discount rates. The Company Discount rate ........... 10.0—15.0% $ 2,973 $ 5,892 employs a risk-based pricing strategy that increases the stated annual percentage rate for accounts that have a higher predicted (B) AUTOMOBILE LOAN SECURITIZATIONS: The Company also risk of default. Accounts with a lower risk profile also may qual- has an asset securitization program, operated through a special ify for promotional financing. purpose subsidiary on behalf of the CarMax Group, to finance Rights recorded for future finance income from serviced the consumer installment credit receivables generated by its assets that exceed the contractually specified servicing fees are automobile loan finance operation. This automobile loan securi- carried at fair value and amounted to $42.0 million at February tization program had a total program capacity of $450 million 28, 2001, and are included in net accounts receivable. Gains on as of February 28, 2001, with no recourse provisions. In October sales of $35.4 million were recorded in fiscal 2001. 1999, the Company formed a second securitization facility that The fair value of retained interests at February 28, 2001, was allowed for a $644 million securitization of automobile loan $74.1 million with a weighted-average life ranging from 1.5 years receivables in the public market. Because of the amortization of to 1.8 years. The table below shows the key economic assumptions the automobile loan receivables and corresponding securities in used in measuring the fair value of retained interests at February this facility, the program had a capacity of $329 million as of 28, 2001, and a sensitivity analysis showing the hypothetical February 28, 2001, with no recourse provisions. In January effect on the fair value of those interests when there are unfavor- 2001, the Company sold $655 million of receivables in the pub- able variations from the assumptions used. Key economic assump- lic market through an additional owner trust structure. The pro- tions at February 28, 2001, are not materially different than gram had a capacity of $655 million as of February 28, 2001, assumptions used to measure the fair value of retained interests at with no recourse provisions. In these securitizations, the the time of securitization. These sensitivities are hypothetical and Company retains servicing rights and subordinated interests. should be used with caution. In this table, the effect of a variation The Company’s retained interests are subject to credit and pre- in a particular assumption on the fair value of the retained interest payment risks on the transferred financial assets. is calculated without changing any other assumption; in reality, At February 28, 2001, the total principal amount of loans changes in one factor may result in changes in another, which managed or securitized was $1,296 million. Of the total loans, might magnify or counteract the sensitivities. the principal amount of loans securitized was $1,284 million and the principal amount of loans held for sale or investment was Impact on Impact on Assumptions Fair Value Fair Value $12 million. The principal amount of loans that were 31 days or Used of 10% of 20% (Dollar amounts more delinquent was $18.1 million at February 28, 2001. The (Annual) Adverse Change Adverse Change in thousands) credit losses net of recoveries were $7.2 million for fiscal 2001. Prepayment speed..... 1.5 —1.6% $1,840 $3,864 The Company receives annual servicing fees approximating Default rate ................ 1.0 —1.2% $1,471 $3,050 1 percent of the outstanding principal balance of the securitized Discount rate.............. 12.0% $ 890 $1,786 automobile loans and rights to future cash flows arising after the investors in the securitization trust have received the return for which they contracted. The servicing fee specified in the auto- mobile loan securitization agreements adequately compensates the finance operation for servicing the accounts. Accordingly, no servicing asset or liability has been recorded. 45 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 49. 13. INTEREST RATE SWAPS Company recorded appliance exit costs of $30 million. Most of these expenses are included in cost of sales, buying and ware- The Company enters into amortizing swaps relating to automobile housing on the statement of earnings for fiscal 2001. There were loan receivable securitizations to convert variable-rate financing no adjustments to the exit costs as of February 28, 2001. costs to fixed-rate obligations to better match funding costs to the Approximately 850 employees have been terminated and receivables being securitized. The Company entered into nine 40- approximately 100 employees will be terminated as locations month amortizing swaps with notional amounts totaling approxi- close or consolidate. These reductions were mainly in the service, mately $735 million in fiscal 2001, four 40-month amortizing distribution and merchandising functions. Because severance is swaps with notional amounts totaling approximately $344 million being paid to employees on a bi-weekly schedule based on years in fiscal 2000 and four 40-month amortizing swaps with notional of service, cash payments lag job eliminations. The exit costs amounts totaling approximately $387 million in fiscal 1999. These also include $17.8 million for lease termination costs and $5.0 swaps were entered into as part of sales of receivables and are million, net of salvage value, for the write-down of fixed assets. included in the gain or loss on sales of receivables. The remaining total notional amount of all swaps related to the automobile loan Expenses receivable securitizations was approximately $299 million at Paid or Liability at February 28, 2001, $327 million at February 29, 2000, and $499 Total Assets February 28, Exit Costs Written Off 2001 (Amounts in millions) million at February 28, 1999. The reduction in the total notional Lease termination costs ................. $17.8 $ 1.8 $16.0 amount of the CarMax interest rate swaps in fiscal 2001 and in fis- Fixed asset write-downs................ 5.0 5.0 — cal 2000 relates to the replacement of floating-rate securitizations Employee termination benefits..... 4.4 2.2 2.2 with a $655 million fixed-rate securitization in January 2001 and a Other ................................................. 2.8 2.8 — $644 million fixed-rate securitization in October 1999. The market and credit risks associated with interest rate Appliance exit costs....................... $30.0 $11.8 $18.2 swaps are similar to those relating to other types of financial instruments. Market risk is the exposure created by potential 16. DISCONTINUED OPERATIONS fluctuations in interest rates and is directly related to the product On June 16, 1999, Digital Video Express announced that it type, agreement terms and transaction volume. The Company would cease marketing the Divx home video system and discon- does not anticipate significant market risk from swaps, because tinue operations, but that existing, registered customers would their use is to more closely match funding costs to the use of the be able to view discs during a two-year phase-out period. The funding. Credit risk is the exposure to nonperformance of operating results of Divx and the loss on disposal of the Divx another party to an agreement. The Company mitigates credit business have been segregated from continuing operations and risk by dealing with highly rated counterparties. reported as separate line items, after taxes, on the consolidated 14. CONTINGENT LIABILITIES statements of earnings for the periods presented. Discontinued In the normal course of business, the Company is involved in var- operations also have been segregated on the consolidated state- ious legal proceedings. Based upon the Company’s evaluation of ments of cash flows for the periods presented. However, Divx is the information presently available, management believes that the not segregated on the consolidated balance sheets. ultimate resolution of any such proceedings will not have a mate- For fiscal 2001, the discontinued Divx operations had no rial adverse effect on the Company’s financial position, liquidity impact on the net earnings of Circuit City Stores, Inc. The loss or results of operations. from the discontinued Divx operations totaled $16.2 million after an income tax benefit of $9.9 million in fiscal 2000 and 15. APPLIANCE EXIT COSTS $68.5 million after an income tax benefit of $42.0 million in fis- On July 25, 2000, the Company announced plans to exit the cal 1999. The loss on the disposal of the Divx business totaled major appliance category to expand its selection of key con- $114.0 million after an income tax benefit of $69.9 million in sumer electronics and home office products in all Circuit City fiscal 2000. The loss on the disposal includes a provision for Superstores. This decision reflected significant sales weakness operating losses to be incurred during the phase-out period. It and increased competition in the major appliance category and also includes provisions for commitments under licensing agree- management’s earnings expectations for these other products. To ments with motion picture distributors, the write-down of assets exit the appliance business, the Company closed six distribution to net realizable value, lease termination costs, employee sever- centers and seven service centers in fiscal 2001 and expects to ance and benefit costs and other contractual commitments. close two distribution centers and one service center by July 31, 2001. The majority of these properties are leased. The Company is in the process of marketing these properties to be subleased. Circuit City maintains control over its in-home major appliance repair business, although repairs are subcontracted to an unre- lated third party. In the second quarter of fiscal 2001, the 46 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 50. The net liabilities of the discontinued Divx operations 17. OPERATING SEGMENT INFORMATION reflected in the accompanying consolidated balance sheets as of The Company conducts business in two operating segments: February 28 or 29 are comprised of the following: Circuit City and CarMax. These segments are identified and managed by the Company based on the different products and Circuit City Stores, Inc. 2001 2000 (Amounts in thousands) services offered by each. Circuit City refers to the retail opera- tions bearing the Circuit City name and to all related operations, Current assets..................................................... $ 8 $ 612 such as its finance operation. This segment is engaged in the Property and equipment, net........................... — 513 business of selling brand-name consumer electronics, personal Other assets ........................................................ 324 — computers and entertainment software. CarMax refers to the Current liabilities............................................... (27,522) (32,650) used- and new-car retail locations bearing the CarMax name and Other liabilities .................................................. (14,082) (35,291) to all related operations, such as its finance operation. Financial Net liabilities of discontinued operations...... $(41,272) $(66,816) information for these segments for fiscal 2001, 2000 and 1999 are shown in Table 3. TABLE 3 2001 Total Circuit City CarMax Segments (Amounts in thousands) Revenues from external customers ................................................................... $10,458,037 $2,500,991 $12,959,028 Interest expense ................................................................................................... 7,273 12,110 19,383 Depreciation and amortization .......................................................................... 126,297 26,793 153,090 Earnings from continuing operations before income taxes........................... 185,875 73,482 259,357 Provision for income taxes ................................................................................ 70,637 27,918 98,555 Earnings from continuing operations ............................................................... 115,238 45,564 160,802 Total assets ........................................................................................................... $ 3,160,048 $ 710,953 $ 3,871,001 2000 Total Circuit City CarMax Segments (Amounts in thousands) Revenues from external customers ................................................................... $10,599,406 $2,014,984 $12,614,390 Interest expense ................................................................................................... 13,844 10,362 24,206 Depreciation and amortization .......................................................................... 132,923 15,241 148,164 Earnings from continuing operations before income taxes........................... 526,955 1,803 528,758 Provision for income taxes ................................................................................ 200,243 685 200,928 Earnings from continuing operations ............................................................... 326,712 1,118 327,830 Total assets ........................................................................................................... $ 3,278,728 $ 675,495 $ 3,954,223 1999 Total Circuit City CarMax Segments (Amounts in thousands) Revenues from external customers ................................................................... $ 9,344,170 $1,466,298 $10,810,468 Interest expense ................................................................................................... 21,926 6,393 28,319 Depreciation and amortization .......................................................................... 119,724 10,003 129,727 Earnings (loss) from continuing operations before income taxes................. 379,630 (38,549) 341,081 Income tax provision (benefit)........................................................................... 144,646 (15,035) 129,611 Earnings (loss) from continuing operations..................................................... 234,984 (23,514) 211,470 Total assets ........................................................................................................... $ 2,816,954 $ 571,198 $ 3,388,152 Earnings from continuing operations and total assets for Circuit City on this table exclude: (1) the Inter-Group Interest in CarMax and (2) the discontinued Divx operations as discussed in Note 16. 47 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 51. 18. QUARTERLY FINANCIAL DATA (UNAUDITED) First Quarter Second Quarter Third Quarter Fourth Quarter Year (Amounts in thousands 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 except per share data) Net sales and operating revenues.......... $3,074,851 $2,690,982 $3,179,781 $2,958,394 $2,887,269 $2,984,607 $3,817,127 $3,980,407 $12,959,028 $12,614,390 Gross profit ............................................... $ 683,262 $ 602,727 $ 673,465 $ 668,283 $ 582,128 $ 670,910 $ 856,467 $ 920,637 $ 2,795,322 $ 2,862,557 Net earnings (loss) attributed to: Circuit City Group Common Stock: Continuing operations .............. $ 57,123 $ 41,398 $ 55,341 $ 73,692 $ (64,407) $ 52,335 $ 101,190 $ 160,149 $ 149,247 $ 327,574 Discontinued operations........... $ — $ (130,240) $ —$ — $ —$ —$ —$ —$ — $ (130,240) CarMax Group Common Stock....... $ 3,535 $ 646 $ 4,126 $ 775 $ 1,920 $ (757) $ 1,974 $ (408) $ 11,555 $ 256 Net earnings (loss) per share attributed to: Circuit City Group Common Stock: Basic: Continuing operations....... $ 0.28 $ 0.21 $ 0.27 $ 0.37 $ (0.32) $ 0.26 $ 0.50 $ 0.79 $ 0.73 $ 1.63 Discontinued operations ... $ —$ (0.65) $ —$ — $ —$ —$ —$ —$ —$ (0.65) Net earnings (loss).............. $ 0.28 $ (0.44) $ 0.27 $ 0.37 $ (0.32) $ 0.26 $ 0.50 $ 0.79 $ 0.73 $ 0.98 Diluted: Continuing operations....... $ 0.28 $ 0.20 $ 0.27 $ 0.36 $ (0.32) $ 0.26 $ 0.49 $ 0.78 $ 0.73 $ 1.60 Discontinued operations..... $ —$ (0.64) $ —$ — $ —$ —$ —$ —$ —$ (0.64) Net earnings (loss).............. $ 0.28 $ (0.44) $ 0.27 $ 0.36 $ (0.32) $ 0.26 $ 0.49 $ 0.78 $ 0.73 $ 0.96 CarMax Group Common Stock: Basic ............................................ $ 0.14 $ 0.03 $ 0.16 $ 0.03 $ 0.08 $ (0.03) $ 0.08 $ (0.02) $ 0.45 $ 0.01 Diluted......................................... $ 0.13 $ 0.03 $ 0.15 $ 0.03 $ 0.07 $ (0.03) $ 0.07 $ (0.02) $ 0.43 $ 0.01 Independent Auditors’ Report The Board of Directors and Stockholders of Circuit City Stores, Inc.: We have audited the accompanying consolidated balance management, as well as evaluating the overall financial state- sheets of Circuit City Stores, Inc. and subsidiaries as of February ment presentation. We believe that our audits provide a reason- 28, 2001 and February 29, 2000 and the related consolidated able basis for our opinion. statements of earnings, stockholders’ equity and cash flows for In our opinion, the consolidated financial statements referred each of the fiscal years in the three-year period ended February to above present fairly, in all material respects, the financial posi- 28, 2001. These consolidated financial statements are the respon- tion of Circuit City Stores, Inc. and subsidiaries as of February 28, sibility of the Company’s management. Our responsibility is to 2001 and February 29, 2000 and the results of their operations express an opinion on these consolidated financial statements and their cash flows for each of the fiscal years in the three-year based on our audits. period ended February 28, 2001 in conformity with accounting We conducted our audits in accordance with auditing stan- principles generally accepted in the United States of America. dards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in Richmond, Virginia the financial statements. An audit also includes assessing the April 2, 2001 accounting principles used and significant estimates made by 48 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 52. Circuit City Group Management’s Discussion and Analysis of Results of Operations and Financial Condition The common stock of Circuit City Stores, Inc. consists of two category produced below-average profits. This analysis, com- common stock series, which are intended to reflect the perfor- bined with the declining sales pace and expected increases in mance of the Company's two businesses. The Circuit City Group competition, led to the decision to exit the category. The exit Common Stock is intended to track the performance of the Circuit from the appliance business and remerchandising of the appli- City business and related operations and the Group’s retained ance selling space was completed by the end of the third fiscal interest in the CarMax Group. The effects of the retained interest quarter. Nevertheless, the Circuit City business continued to in the CarMax Group on the Circuit City Group’s financial state- experience a highly variable comparable store sales pace, and ments are identified by the term “Inter-Group.” During the three- sales softened substantially in the last two months of the fiscal year period discussed in this annual report, the financial results year. We believe the variability reflects the slower consumer for the Company and the Circuit City Group also have included spending experienced by most retailers during the second half of the Company's investment in Digital Video Express, which has the year, some disruption to sales caused by the partial remodel- been discontinued. The CarMax Group Common Stock is intended ing to remerchandise the appliance space, significant declines in to track the performance of the CarMax stores and related opera- average retails and industry-wide declines in desktop personal tions. The Circuit City Group’s retained interest is not considered computer sales by year-end. Throughout the year, new technolo- outstanding CarMax Group Common Stock. Therefore, the net gies, better-featured consumer electronics and the new and earnings or losses attributed to the retained interest are not expanded selections added to the store produced strong sales included in the CarMax Group’s per share calculations. growth, although not always in line with our expectations. Holders of Circuit City Group Common Stock and holders of Excluding the appliance category from fiscal 2001 and fiscal CarMax Group Common Stock are shareholders of the Company 2000 sales, comparable store sales rose 3 percent in fiscal 2001. and as such are subject to all of the risks associated with an invest- In addition to the partial remodels, we fully remodeled 25 ment in the Company and all of its businesses, assets and liabili- Superstores in central and south Florida and one Superstore in ties. The results of operations or financial condition of one Group Richmond, Va., to a design that we believe is more contemporary could affect the results of operations or financial condition of the and easier to navigate. The full remodels offer better product Circuit City Group other Group. The discussion and analysis for the Circuit City Group adjacencies, shopping carts and baskets, more and highly visible presented below should be read in conjunction with the discussion cash registers, better lighting and signs, and the expanded and and analysis for Circuit City Stores, Inc. and for the CarMax Group new product selections now available in all stores. The 23 new and in conjunction with all the Company’s SEC filings. stores opened from August 2000 through February 2001 also The Circuit City Group held a 74.6 percent interest in the reflect this new design, and all new stores planned for fiscal CarMax Group at February 28, 2001, a 74.7 percent interest at 2002 will reflect this design. Consumer reaction to the design February 29, 2000, and a 76.6 percent interest at February 28, 1999. has been positive, but the ability to meet our longer-term expecta- tions has been difficult to determine given the overall slowdown RESULTS OF OPERATIONS that occurred during the second half of the fiscal year. In addition, Sales Growth the cost of remodeling and the disruption to sales in remodeled Total sales for the Circuit City Group decreased 1 percent in fiscal stores were higher than anticipated. Fiscal 2002 remodels will 2001 to $10.46 billion. In fiscal 2000, total sales were $10.60 bil- follow a less costly design that can be completed over a shorter lion, a 13 percent increase from $9.34 billion in fiscal 1999. time period, but which we believe will offer similar benefits to the consumer. We also will focus on new marketing programs designed to increase foot traffic at all Circuit City stores. PERCENTAGE SALES CHANGE FROM PRIOR YEAR Fiscal Total Comparable Geographic expansion is currently a limited contributor to Circuit City’s growth. We opened 23 new Circuit City Superstores 2001...................................................................... (1)% (4)% and relocated two Circuit City Superstores in fiscal 2001, 2000...................................................................... 13 % 8% increasing the store base 4 percent. New Superstores were added 1999...................................................................... 17 % 8% to existing markets or built in one- or two-store markets given 1998...................................................................... 12 % (1)% that we already operate stores in virtually all of the nation’s top 1997...................................................................... 6% (8)% metropolitan markets. From fiscal 1997 through fiscal 1998, a lack of significant The fiscal 2001 total sales decline includes a 4 percent decline consumer electronics product introductions resulted in weak in the comparable store sales of the Circuit City business, partly industry sales. Geographic expansion was the primary contribu- offset by the net addition of 23 Circuit City Superstores. Through- tor to growth of the Circuit City business during this time. The out fiscal 2001, we experienced significant variability in the industry began to emerge from this period of declining sales in Circuit City comparable store sales pace. The sales pace in the fiscal 1999, and that trend continued in fiscal 2000. As noted major appliance category softened significantly at the end of the above, sales softened again in fiscal 2001. We continue to first quarter and into the second quarter. In late July, we believe that new technologies will generate significant industry announced plans to exit the appliance business and expand our growth during the current decade. However, we expect little, if selection of key consumer electronics and home office products. any, sales growth in fiscal 2002. A product profitability analysis had indicated that the appliance 49 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 53. SALES BY MERCHANDISE CATEGORIES* to fiscal 1998 reflects the impact of larger-format stores, which Fiscal 2001 2000 1999 1998 1997 generate lower sales per square foot than smaller stores, declines in comparable store sales and declines in industry Video........................... 35% 32% 31% 31% 32% sales. The Group ceased construction of these larger stores after Audio .......................... 16% 16% 17% 18% 19% fiscal 1999. Information Technology........... 35% 33% 32% 30% 29% STORE MIX Entertainment............ 7% 5% 5% 6% 5% Retail Units at Year-End Appliances.................. 7% 14% 15% 15% 15% Fiscal 2001 2000 1999 1998 1997 Total ............................ 100% 100% 100% 100% 100% Superstores ...................... 594 571 537 500 443 Circuit City Express........ 35 45 48 52 45 * Circuit City updated its sales by merchandise category classifications in fis- cal 2001 to reflect the changes in the Company’s product selections in recent Electronics-only.............. — — 2 4 5 years and expected changes going forward. Information for prior years has Total.................................. 629 616 587 556 493 been reclassified for consistency. In most states, the Group sells extended warranty programs IMPACT OF INFLATION. Inflation has not been a significant on behalf of unrelated third parties who are the primary oblig- contributor to results. In fact, during the past three years, aver- ors. Under these third-party warranty programs, we have no age retail prices declined in virtually all of Circuit City’s prod- contractual liability to the customer. In states where third-party uct categories. Although product introductions could help warranty sales are not permitted, the Group sells an extended reverse this trend in selected areas, we expect no significant warranty for which we are the primary obligor. Gross dollar short-term change overall. Because we purchase substantially sales from all extended warranty programs were 5.1 percent of all products sold in Circuit City stores in U.S. dollars, prices are total sales of the Circuit City business in fiscal 2001, compared not directly impacted by the value of the dollar in relation to with 5.4 percent in fiscal 2000 and fiscal 1999. Total extended foreign currencies. warranty revenue, which is reported in total sales, was 4.0 per- Cost of Sales, Buying and Warehousing cent of sales in fiscal 2001, 4.4 percent of sales in fiscal 2000 The gross profit margin was 23.6 percent of sales in fiscal 2001, and 4.6 percent of sales in fiscal 1999. The gross profit margins 24.7 percent of sales in fiscal 2000 and 24.4 percent of sales in on products sold with extended warranties are higher than the fiscal 1999. The fiscal 2001 gross profit margin was reduced by gross profit margins on products sold without extended war- one-time costs of $28.3 million and merchandise markdowns of ranties. The fiscal 2001 decline in extended warranty sales as a $28.0 million associated with the exit from the appliance business, percent of total sales reflects the increased selection of products, significantly lower appliance gross margins prior to the announced such as entertainment software, for which extended warranties plans to exit that business and a merchandise mix that included a are not available and reduced consumer demand for warranties high percentage of traditional products that carry lower gross on many consumer electronics and home office products that profit margins. The one-time appliance exit costs included lease have experienced significant declines in average retails. Third- terminations, employee severance, fixed asset impairment and party extended warranty revenue was 3.9 percent of total sales other related costs. Excluding the appliance category, the gross in fiscal 2001 and 4.1 percent of total sales in fiscal 2000 and profit margin was 24.7 percent of sales in fiscal 2001, compared fiscal 1999. with 25.4 percent of sales in fiscal 2000 and 24.7 percent of sales in fiscal 1999. Excluding the impact of the appliance SUPERSTORE SALES PER TOTAL SQUARE FOOT merchandise markdowns and the one-time appliance exit costs, Fiscal the gross profit margin was 24.1 percent of sales in fiscal 2001. 2001.................................................................................................. $528 2000 ................................................................................................. $555 GROSS PROFIT MARGIN COMPONENTS 1999 ................................................................................................. $514 Fiscal 2001 2000 1999 1998 ................................................................................................. $478 Circuit City store business..................... 24.1 % 24.7% 24.4% 1997 ................................................................................................. $499 Impact of appliance markdowns........... (0.2)% — — One-time appliance exit costs............... (0.3)% — — SUPERSTORE SALES PER TOTAL SQUARE FOOT. At the end of Gross profit margin ................................ 23.6 % 24.7% 24.4% fiscal 2001, total space for all Circuit City Superstores equaled 19,706,588 square feet and selling space equaled 11,469,092 Gross profit margin excluding square feet. The fiscal 2001 sales per total square foot decrease appliance category............................ 24.7 % 25.4% 24.7% reflects the decline in comparable store sales. The improvements from fiscal 1998 through fiscal 2000 were driven by comparable store sales growth in those years. The decline from fiscal 1997 50 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 54. The improvement in the gross profit margin from fiscal 1999 Earnings from Continuing Operations Before Inter-Group Interest to fiscal 2000 primarily reflected the higher percentage of sales in the CarMax Group from better-featured products and newer technologies, which Earnings from continuing operations before the Inter-Group carry higher gross profit margins, and continued improvements Interest in the CarMax Group were $115.2 million in fiscal 2001, in inventory management partly offset by the strength in per- compared with $326.7 million in fiscal 2000 and $235.0 million sonal computer sales, which carry lower gross margins. In fiscal in fiscal 1999. Excluding the estimated sales disruption during 2001, the decline in the gross profit margin was limited by the seven to 10 days of partial remodeling, the appliance mer- lower personal computer sales and by continued double-digit chandise markdowns, exit costs, remodel expenses and severance sales growth in new technologies and in higher margin cate- costs related to the workforce reduction, earnings from continu- gories where selection was expanded as part of the exit from ing operations before the Inter-Group Interest in the CarMax the appliance business. The impact of the appliance category Group would have been $205.1 million in fiscal 2001. and the high proportion of sales represented by traditional Net Earnings (Loss) Related to Inter-Group Interest products more than offset these factors. in the CarMax Group Selling, General and Administrative Expenses The net earnings attributed to the Circuit City Group’s Inter-Group Selling, general and administrative expenses were 21.7 percent of Interest in the CarMax Group were $34.0 million in fiscal 2001, sales in fiscal 2001, compared with 19.6 percent of sales in fiscal compared with net earnings of $862,000 in fiscal 2000 and a net 2000 and 20.1 percent of sales in fiscal 1999. The fiscal 2001 loss of $18.1 million in fiscal 1999. increase reflects the decline in comparable store sales, $41.9 mil- Earnings from Continuing Operations lion in remodeling costs for the Florida stores, $30.0 million in Earnings from continuing operations attributed to the Circuit costs related to the partial remodels and $5.0 million in sever- City Group were $149.2 million in fiscal 2001, $327.6 million in ance costs associated with the fourth quarter workforce reduc- fiscal 2000 and $216.9 million in fiscal 1999. tion. Excluding these costs and the estimated sales disruption Circuit City Group during the seven to 10 days of partial remodeling that occurred Loss from Discontinued Operations primarily in the third quarter, the fiscal 2001 expense ratio would On June 16, 1999, Digital Video Express announced that it would have been 20.9 percent of sales. The improvement in the expense cease marketing of the Divx home video system and discontinue ratio from fiscal 1999 to fiscal 2000 primarily reflects leverage operations, but existing, registered customers would be able to gained from the fiscal 2000 comparable store sales increase. view discs during a two-year phase-out period. The operating results of Divx and the loss on disposal of the Divx business have been segregated from continuing operations and reported as sep- EXPENSE RATIO COMPONENTS Fiscal 2001 2000 1999 arate line items, after tax, on the Circuit City Group statements of earnings for the periods presented. Circuit City store business ........... 20.9% 19.6% 20.1% The loss from the discontinued operations of Divx totaled Florida remodel costs ................... 0.4% — — $16.2 million after an income tax benefit of $9.9 million in fis- Partial remodel costs .................... 0.3% — — cal 2000 and $68.5 million after an income tax benefit of $42.0 Sales disruption impact................ 0.1% — — million in fiscal 1999. Expense ratio ................................. 21.7% 19.6% 20.1% In fiscal 2000, the loss on the disposal of the Divx business totaled $114.0 million after an income tax benefit of $69.9 mil- Interest Expense lion. The loss on the disposal includes a provision for operating Interest expense was relatively unchanged as a percent of sales losses to be incurred during the phase-out period. It also includes across the three-year period at 0.1 percent of sales in fiscal 2001 provisions for commitments under licensing agreements with and fiscal 2000 and 0.2 percent of sales in fiscal 1999. Interest motion picture distributors, the write-down of assets to net real- expense was incurred on allocated debt used to fund store expan- izable value, lease termination costs, employee severance and sion, remodeling and working capital, including inventory. benefit costs and other contractual commitments. Income Taxes Net Earnings The Group’s effective income tax rate was 38.0 percent in fiscal Net earnings attributed to the Circuit City Group were $149.2 2001 and fiscal 2000 and 38.1 percent in fiscal 1999. million in fiscal 2001, $197.3 million in fiscal 2000 and $148.4 million in fiscal 1999. 51 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 55. Operations Outlook During fiscal 2001, a term loan totaling $175 million was repaid using the Company’s existing working capital. In addition, We believe that increased household penetration of products and a term loan totaling $130 million and due in June 2001 was clas- services such as broadband Internet access, wireless communica- sified as a current liability. Although the Company has the ability tions, multi-channel video programming devices, digital televi- to refinance this debt, we intend to repay it using existing work- sion and digital imaging will drive profitability of the consumer ing capital. Payment of corporate debt does not necessarily result electronics business during the current decade. For that reason, in a reduction of Circuit City Group allocated debt. we are focused on store designs, sales counselor training, inven- The Circuit City Group's capital expenditures were $274.7 tory management, marketing programs and Six Sigma process million in fiscal 2001, $176.9 million in fiscal 2000 and $214.1 improvements that will maintain Circuit City’s position as a million in fiscal 1999. The Group's capital expenditures in fiscal leading retailer of new technologies. 2001 primarily were related to Superstore remodeling and new Despite these plans and longer-term outlook, we recognize Circuit City Superstore construction. In fiscal 2000 and fiscal that the sales pace shifted significantly throughout fiscal 2001 1999, these expenditures primarily reflected new store construc- and that sales were especially weak at the end of the fiscal tion. Capital expenditures for the Circuit City Group have been year. Therefore, we are cautious in our outlook for fiscal 2002. funded through sale-leaseback transactions, landlord reimburse- We expect to open 15 to 20 new Circuit City Superstores, relo- ments and allocated short- and long-term debt. In fiscal 2002, cate approximately 10 Superstores and fully remodel 20 to 25 the Group anticipates capital expenditures of approximately Superstores. We expect limited sales and earnings growth for $215 million, primarily related to construction of new Superstores, the Circuit City business in fiscal 2002. We do, however, expect the remodeling of 20 to 25 existing Superstores and the reloca- continued strong sales and earnings growth for the CarMax tion of approximately 10 Superstores. Sale-leasebacks, landlord business and anticipate that CarMax will make a greater contri- reimbursement transactions and fixed asset sales totaled $100.2 bution to the earnings attributed to the Circuit City Group in million in fiscal 2001, $74.8 million in fiscal 2000 and $134.3 fiscal 2002. million in fiscal 1999. RECENT ACCOUNTING PRONOUNCEMENTS Circuit City’s finance operation primarily funds its credit card programs through securitization transactions that allow the opera- Refer to the “Management’s Discussion and Analysis of Results tion to sell its receivables while retaining a small interest in them. of Operations and Financial Condition” for Circuit City Stores, The finance operation has a master trust securitization facility Inc. for a review of recent accounting pronouncements. for its private-label credit card that allows the transfer of up to FINANCIAL CONDITION $1.31 billion in receivables through both private placement and the public market. A second master trust securitization program In fiscal 2001, net cash provided by operating activities of con- allows for the transfer of up to $1.94 billion in receivables tinuing operations was $137.9 million, compared with $650.2 related to the operation’s bankcard programs. Securitized million in fiscal 2000 and $399.4 million in fiscal 1999. The fis- receivables totaled $2.75 billion at February 28, 2001. Under cal 2001 decrease reflects the lower earnings from continuing the securitization programs, receivables are sold to unaffiliated operations for the Circuit City business and a decrease in third parties with the servicing rights retained. We expect that accounts payable. The fiscal 2000 increase reflects a 39 percent both securitization programs can be expanded to accommodate increase in earnings from continuing operations for the Circuit future receivables growth. City business and an increase in accounts payable, partly offset At the end of fiscal 2001, the Circuit City Group retained a by an increase in inventory. 74.6 percent interest in the equity of the CarMax Group. As of Most financial activities, including the investment of surplus February 28, 2001, the Circuit City Group’s equity in the CarMax cash and the issuance and repayment of short-term and long- Group was $292.2 million. term debt, are managed by the Company on a centralized basis. We believe that proceeds from sales of property and equipment Allocated debt of the Circuit City Group consists of (1) Company and receivables, future increases in the Company’s debt allocated debt, if any, that has been allocated in its entirety to the Circuit to the Circuit City Group and cash generated by operations will City Group and (2) a portion of the Company’s debt that is allo- be sufficient to fund the capital expenditures and operations of cated between the Groups. This pooled debt bears interest at a the Circuit City business. rate based on the average pooled debt balance. Expenses related to increases in pooled debt are reflected in the weighted average interest rate of the pooled debt. 52 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 56. MARKET RISK The Company has analyzed its interest rate exposure and has concluded that it did not represent a material market risk at The Company manages the private-label and bankcard revolving February 28, 2001, or February 29, 2000. Because programs are loan portfolios of the Circuit City finance operation. Portions of in place to manage interest rate exposure relating to the con- these portfolios are securitized and, therefore, are not presented sumer loan portfolios, the Company expects to experience rela- on the Group’s balance sheets. Interest rate exposure relating to tively little impact as interest rates fluctuate. The Company also these receivables represents a market risk exposure that the has the ability to adjust fixed-APR revolving cards and the index Company has managed with matched funding. on floating-rate cards, subject to cardholder ratification, but Interest rates charged on the managed private-label and does not currently anticipate the need to do so. bankcard portfolios are primarily indexed to the prime rate, adjustable on a monthly basis, with the balance at a fixed FORWARD-LOOKING STATEMENTS annual percentage rate. Total principal outstanding at February Company statements that are not historical facts, including 28, 2001, and February 29, 2000, had the following APR structure: statements about management’s expectations for fiscal year 2002 and beyond, are forward-looking statements and involve 2001 2000 (Amounts in millions) various risks and uncertainties. Refer to the “Circuit City Stores, Indexed to prime rate.......................................... $2,596 $2,631 Inc. Management’s Discussion and Analysis of Results of Fixed APR.............................................................. 203 213 Operations and Financial Condition” for a review of possible Total........................................................................ $2,799 $2,844 risks and uncertainties. Financing for the securitization programs is achieved primar- ily through the issuance of public market debt, which is issued at floating rates based on LIBOR. Receivables held by the Company for sale are financed with working capital. At February 28, 2001, Circuit City Group and February 29, 2000, financings were as follows: 2001 2000 (Amounts in millions) Floating-rate (including synthetic alteration) securitizations.............................. $2,754 $2,689 Fixed-rate securitizations.................................... — 137 Held by the Company for sale ........................... 45 18 Total ....................................................................... $2,799 $2,844 53 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 57. Circuit City Group Statements of Earnings Years Ended February 28 or 29 2001 % 2000 % 1999 % (Amounts in thousands) NET SALES AND OPERATING REVENUES......................................... $10,458,037 100.0 $10,599,406 100.0 $9,344,170 100.0 7,964,148 Cost of sales, buying and warehousing................................... 76.1 7,977,214 75.3 7,060,198 75.6 28,326 Appliance exit costs [NOTE 12] ...................................................... 0.3 — — — — 2,465,563 23.6 2,622,192 24.7 2,283,972 24.4 GROSS PROFIT............................................................................... Selling, general and administrative 2,270,745 expenses [NOTES 1 AND 9] ........................................................... 21.7 2,081,393 19.6 1,882,416 20.1 1,670 Appliance exit costs [NOTE 12] ...................................................... — — — — — 7,273 Interest expense [NOTES 1 AND 4] .................................................... 0.1 13,844 0.1 21,926 0.2 2,279,688 21.8 2,095,237 19.7 1,904,342 20.3 TOTAL EXPENSES............................................................................ Earnings from continuing operations before income taxes and Inter-Group Interest 185,875 in the CarMax Group ........................................................... 1.8 526,955 5.0 379,630 4.1 70,637 Provision for income taxes [NOTES 1 AND 5].................................. 0.7 200,243 1.9 144,646 1.6 EARNINGS FROM CONTINUING OPERATIONS BEFORE 115,238 1.1 326,712 3.1 234,984 2.5 INTER-GROUP INTEREST IN THE CARMAX GROUP.................... Net earnings (loss) related to Inter-Group Interest in 34,009 the CarMax Group [NOTES 1 AND 2]........................................... 0.3 862 0.0 (18,057) (0.2) 149,247 1.4 327,574 3.1 216,927 2.3 EARNINGS FROM CONTINUING OPERATIONS............................... Discontinued operations [NOTE 13]: Loss from discontinued operations of Divx, – less income tax benefit................................................... — (16,215) (0.1) (68,546) (0.7) – Loss on disposal of Divx, less income tax benefit ........... — (114,025) (1.1) — — – Loss from discontinued operations .......................................... — (130,240) (1.2) (68,546) (0.7) NET EARNINGS............................................................................... $ 149,247 1.4 $ 197,334 1.9 $ 148,381 1.6 See accompanying notes to Group financial statements. 54 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 58. Circuit City Group Balance Sheets At February 28 or 29 2001 2000 (Amounts in thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents..................................................................................................................... $ 437,329 $ 633,952 451,099 Net accounts receivable [NOTE 10] ............................................................................................................. 464,023 1,410,527 Merchandise inventory........................................................................................................................... 1,405,617 55,317 Prepaid expenses and other current assets .......................................................................................... 13,353 2,354,272 TOTAL CURRENT ASSETS ............................................................................................................................ 2,516,945 796,789 Property and equipment, net [NOTES 3 AND 4]............................................................................................ 753,325 292,179 Inter-Group Interest in the CarMax Group [NOTE 2] .............................................................................. 257,535 9,319 Other assets .............................................................................................................................................. 9,583 $3,452,559 TOTAL ASSETS ............................................................................................................................................ $3,537,388 LIABILITIES AND GROUP EQUITY CURRENT LIABILITIES: $ 24,237 Current installments of long-term debt [NOTES 4 AND 8] .......................................................................... $ 85,735 820,077 Accounts payable .................................................................................................................................... 884,172 213 Short-term debt [NOTE 4]............................................................................................................................ 1,453 146,818 Accrued expenses and other current liabilities ................................................................................... 184,705 Circuit City Group 74,317 Deferred income taxes [NOTE 5]................................................................................................................. 53,971 1,065,662 TOTAL CURRENT LIABILITIES ...................................................................................................................... 1,210,036 33,080 Long-term debt, excluding current installments [NOTES 4 AND 8] ........................................................... 127,984 85,329 Deferred revenue and other liabilities .................................................................................................. 122,771 11,329 Deferred income taxes [NOTE 5]................................................................................................................. 21,877 1,195,400 TOTAL LIABILITIES ...................................................................................................................................... 1,482,668 2,257,159 2,054,720 GROUP EQUITY.......................................................................................................................................... Commitments and contingent liabilities [NOTES 1, 7, 8, 10, 11, 12, AND 13] $3,452,559 $3,537,388 TOTAL LIABILITIES AND GROUP EQUITY..................................................................................................... See accompanying notes to Group financial statements. 55 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 59. Circuit City Group Statements of Cash Flows Years Ended February 28 or 29 2001 2000 1999 (Amounts in thousands) OPERATING ACTIVITIES: Net earnings.......................................................................................................... $ 149,247 $ 197,334 $ 148,381 Adjustments to reconcile net earnings to net cash provided by operating activities of continuing operations: – Loss from discontinued operations [NOTE 13].................................................. 16,215 68,546 – Loss on disposal of discontinued operations [NOTE 13] ................................. 114,025 — Net (earnings) loss related to Inter-Group Interest in (34,009) the CarMax Group .................................................................................... (862) 18,057 Depreciation and amortization ..................................................................... 126,297 132,923 119,724 4,259 Loss (gain) on sales of property and equipment ........................................ (418) 3,087 11,007 Provision for deferred income taxes ............................................................ 41,828 5,951 (17,442) Decrease in deferred revenue and other liabilities ..................................... (17,799) (32,771) 12,950 Decrease in net accounts receivable ............................................................ 12,967 60,138 (4,910) Increase in merchandise inventory .............................................................. (144,598) (16,107) (41,964) (Increase) decrease in prepaid expenses and other current assets .............. 83,540 5,543 588 Decrease (increase) in other assets ............................................................... (1,015) 202 (Decrease) increase in accounts payable, accrued expenses (68,074) and other current liabilities ..................................................................... 216,043 18,609 NET CASH PROVIDED BY OPERATING ACTIVITIES 137,949 650,183 399,360 OF CONTINUING OPERATIONS.......................................................................... INVESTING ACTIVITIES: (274,722) Purchases of property and equipment............................................................... (176,873) (214,085) 100,189 Proceeds from sales of property and equipment.............................................. 74,811 134,315 NET CASH USED IN INVESTING ACTIVITIES (174,533) (102,062) (79,770) OF CONTINUING OPERATIONS.......................................................................... FINANCING ACTIVITIES: (1,240) Decrease in allocated short-term debt, net ....................................................... (1,958) (2,180) (156,402) Decrease in allocated long-term debt, net ........................................................ (74,603) (109,885) 38,123 Equity issuances, net ........................................................................................... 18,591 34,301 (14,346) Dividends paid...................................................................................................... (14,207) (13,981) NET CASH USED IN FINANCING ACTIVITIES (133,865) (72,177) (91,745) OF CONTINUING OPERATIONS.......................................................................... (26,174) (90,193) (69,844) CASH USED IN DISCONTINUED OPERATIONS [NOTE 13]................................................ (196,623) (Decrease) increase in cash and cash equivalents ................................................. 385,751 158,001 633,952 Cash and cash equivalents at beginning of year................................................... 248,201 90,200 Cash and cash equivalents at end of year.............................................................. $ 437,329 $ 633,952 $ 248,201 See accompanying notes to Group financial statements. 56 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 60. Circuit City Group Statements of Group Equity (Amounts in thousands) $ 1,648,332 BALANCE AT MARCH 1, 1998................................................................................................................................................................... Net earnings..................................................................................................................................................................................... 148,381 Equity issuances, net ...................................................................................................................................................................... 42,165 Cash dividends................................................................................................................................................................................. (13,981) Inter-Group Interest adjustment [NOTE 2] ........................................................................................................................................ 576 1,825,473 BALANCE AT FEBRUARY 28, 1999............................................................................................................................................................. Net earnings..................................................................................................................................................................................... 197,334 Equity issuances, net ...................................................................................................................................................................... 50,205 Cash dividends................................................................................................................................................................................. (14,207) Inter-Group Interest adjustment [NOTE 2] ........................................................................................................................................ (4,085) 2,054,720 BALANCE AT FEBRUARY 29, 2000............................................................................................................................................................. Net earnings..................................................................................................................................................................................... 149,247 Equity issuances, net ...................................................................................................................................................................... 66,903 Cash dividends................................................................................................................................................................................. (14,346) Inter-Group Interest adjustment [NOTE 2] ........................................................................................................................................ 635 $2,257,159 BALANCE AT FEBRUARY 28, 2001............................................................................................................................................................. See accompanying notes to Group financial statements. Circuit City Group 57 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 61. Notes to Circuit City Group Financial Statements 1. BASIS OF PRESENTATION equivalents, if any, that are allocated between the Groups. Allocated debt of the Circuit City Group consists of (i) Company The common stock of Circuit City Stores, Inc. consists of two debt, if any, that has been allocated in its entirety to the Circuit common stock series, which are intended to reflect the perfor- City Group and (ii) a portion of the Company’s pooled debt, mance of the Company's two businesses. The Circuit City Group which is debt allocated between the Groups. The pooled debt Common Stock is intended to track the performance of the bears interest at a rate based on the average pooled debt balance. Circuit City store-related operations, the Group’s retained interest Expenses related to increases in pooled debt are reflected in the in the CarMax Group and the Company’s investment in Digital weighted average interest rate of such pooled debt. Video Express, which has been discontinued (see Note 13). The (B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporate effects of this retained interest on the Circuit City Group’s finan- general and administrative costs and other shared services gener- cial statements are identified by the term “Inter-Group.” The ally have been allocated to the Circuit City Group based upon uti- CarMax Group Common Stock is intended to track the perfor- lization of such services by the Group. Where determinations based mance of the CarMax Group's operations. The Inter-Group on utilization alone have been impractical, other methods and cri- Interest is not considered outstanding CarMax Group Common teria are used that management believes are equitable and provide Stock. Therefore, any net earnings or loss attributed to the Inter- a reasonable estimate of the costs attributable to the Group. Group Interest is not included in the CarMax Group’s per share (C) INCOME TAXES: The Circuit City Group is included in the calculations. The Circuit City Group held a 74.6 percent interest consolidated federal income tax return and certain state tax in the CarMax Group at February 28, 2001, a 74.7 percent inter- returns filed by the Company. Accordingly, the financial state- est at February 29, 2000, and a 76.6 percent interest at February ment provision and the related tax payments or refunds are 28, 1999. The terms of each series of common stock are dis- reflected in each Group’s financial statements in accordance with cussed in detail in the Company's Form 8-A registration state- the Company’s tax allocation policy for such Groups. In general, ment on file with the SEC. this policy provides that the consolidated tax provision and Notwithstanding the attribution of the Company’s assets and related tax payments or refunds are allocated between the liabilities, including contingent liabilities, and stockholders’ equity Groups based principally upon the financial income, taxable between the Circuit City Group and the CarMax Group for the income, credits and other amounts directly related to each purposes of preparing the financial statements, holders of Circuit Group. Tax benefits that cannot be used by the Group generating City Group Common Stock and holders of CarMax Group such attributes, but can be utilized on a consolidated basis, are Common Stock are shareholders of the Company and continue to allocated to the Group that generated such benefits. As a result, be subject to all of the risks associated with an investment in the the allocated Group amounts of taxes payable or refundable are Company and all of its businesses, assets and liabilities. Such not necessarily comparable to those that would have resulted if attribution and the equity structure of the Company do not affect the Groups had filed separate tax returns. title to the assets or responsibility for the liabilities of the Company or any of its subsidiaries. The results of operations or 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES financial condition of one Group could affect the results of opera- (A) CASH AND CASH EQUIVALENTS: Cash equivalents of tions or financial condition of the other Group. Net losses of either $408,778,000 at February 28, 2001, and $581,736,000 at Group, and dividends or distributions on, or repurchases of, February 29, 2000, consist of highly liquid debt securities with Circuit City Group Common Stock or CarMax Group Common original maturities of three months or less. Stock will reduce funds legally available for dividends on, or (B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For trans- repurchases of, both stocks. Accordingly, the Circuit City Group fers of financial assets that qualify as sales, the Company may financial statements included herein should be read in conjunction retain interest-only strips, one or more subordinated tranches, with the Company’s consolidated financial statements, the CarMax residual interests in a securitization trust, servicing rights and a Group financial statements and the Company's SEC filings. cash reserve account, all of which are retained interests in the The Circuit City Group’s financial statements reflect the appli- securitized receivables. These retained interests are measured cation of the management and allocation policies adopted by the based on the fair value at the date of transfer. The Company board of directors. These policies may be modified or rescinded, determines fair value based on the present value of future or new policies may be adopted, at the sole discretion of the expected cash flows using management’s best estimates of the board of directors, although the board of directors has no pre- key assumptions such as finance charge income, default rates, sent plans to do so. These management and allocation policies payment rates, forward yield curves and discount rates appropri- include the following: ate for the type of asset and risk. Retained interests are included (A) FINANCIAL ACTIVITIES: Most financial activities are managed in net accounts receivable and are carried at fair value with by the Company on a centralized basis. Such financial activities changes in fair value reflected in earnings. include the investment of surplus cash and the issuance and (C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company repayment of short-term and long-term debt. Allocated invested enters into financial instruments on behalf of the Circuit City surplus cash of the Circuit City Group consists of (i) Company Group. The carrying value of the Company's financial instru- cash equivalents, if any, that have been allocated in their entirety ments, excluding interest rate swaps held for hedging purposes, to the Circuit City Group and (ii) a portion of the Company’s cash 58 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 62. approximates fair value. Credit risk is the exposure created by 60 months. Commission revenue for the unrelated third-party the potential nonperformance of another material party to an extended warranty plans is recognized at the time of sale because agreement because of changes in economic, industry or geo- the third parties are the primary obligors under these contracts. graphic factors. The Company mitigates credit risk by dealing Inasmuch as Circuit City is the primary obligor on its own only with counterparties that are highly rated by several finan- contracts, all revenue from the sale of these contracts is deferred cial rating agencies. Accordingly, the Company does not antici- and amortized on a straight-line basis over the life of the contracts. pate material loss for nonperformance. The Company broadly Incremental direct costs related to the sale of contracts are deferred diversifies all financial instruments along industry, product and and charged to expense in proportion to the revenue recognized. geographic areas. (K) INTER-GROUP INTEREST: The Circuit City Group held a 74.6 (D) MERCHANDISE INVENTORY: Inventory is stated at the lower percent Inter-Group Interest in the CarMax Group at February 28, of cost or market. Cost is determined by the average cost method. 2001, a 74.7 percent Inter-Group Interest at February 29, 2000, (E) PROPERTY AND EQUIPMENT: Property and equipment is and a 76.6 percent Inter-Group Interest at February 28, 1999. For stated at cost less accumulated depreciation and amortization. purposes of the Circuit City Group financial statements, the Circuit Depreciation and amortization are calculated using the straight- City Group accounts for the Inter-Group Interest in a manner sim- line method over the assets’ estimated useful lives. ilar to the equity method of accounting. Accordingly, the Circuit Property held under capital lease is stated at the lower of the City Group’s Inter-Group Interest in the Company’s equity value present value of the minimum lease payments at the inception of that is attributed to the CarMax Group is reflected as “Inter-Group the lease or market value and is amortized on a straight-line Interest in the CarMax Group” on the Circuit City Group balance basis over the lease term or the estimated useful life of the asset, sheets. Similarly, the net earnings (loss) of the CarMax Group whichever is shorter. attributed to the Circuit City Group’s Inter-Group Interest are (F) COMPUTER SOFTWARE COSTS: The Company accounts for reflected as “Net earnings (loss) related to Inter-Group Interest in computer software costs in accordance with the American the CarMax Group” on the Circuit City Group statements of earn- Institute of Certified Public Accountants Statement of Position ings. All amounts corresponding to the Circuit City Group’s Inter- Circuit City Group 98-1, “Accounting for the Costs of Computer Software Developed Group Interest in the CarMax Group in these Group financial or Obtained for Internal Use.” Once the capitalization criteria of statements represent the Circuit City Group’s proportional interest SOP 98-1 have been met, external direct costs of materials and in the businesses, assets and liabilities and income and expenses services used in the development of internal-use software and of the CarMax Group. payroll and payroll-related costs for employees directly involved The carrying value of the Circuit City Group’s Inter-Group in the development of internal-use software are capitalized. Interest in the CarMax Group has been adjusted proportionally Amounts capitalized are amortized on a straight-line basis over for the net earnings (loss) of the CarMax Group. In addition, in a period of three to five years. the event of any dividend or other distribution on CarMax Group (G) PRE-OPENING EXPENSES: Effective March 1, 1999, the Common Stock, an amount that is proportionate to the aggre- Company adopted SOP 98-5, “Reporting on the Costs of Start-Up gate amount paid in respect to shares of CarMax Group Common Activities.” SOP 98-5 requires costs of start-up activities, includ- Stock would be transferred to the Circuit City Group from the ing organization and pre-opening costs, to be expensed as CarMax Group with respect to its Inter-Group Interest and would incurred. Prior to fiscal 2000, the Company capitalized pre-opening reduce the related book value. costs for new store locations. Beginning in the month after the (L) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating store opened for business, the pre-opening costs were amortized profits generated by the finance operation are recorded as a over the remainder of the fiscal year. reduction to selling, general and administrative expenses. (H) INCOME TAXES: Income taxes are accounted for in accor- (M) ADVERTISING EXPENSES: All advertising costs are expensed dance with SFAS No. 109, “Accounting for Income Taxes.” as incurred. Deferred income taxes reflect the impact of temporary differ- (N) STOCK-BASED COMPENSATION: The Company accounts for ences between the amounts of assets and liabilities recognized stock-based compensation in accordance with Accounting for financial reporting purposes and the amounts recognized for Principles Board Opinion No. 25, “Accounting for Stock Issued to income tax purposes, measured by applying currently enacted Employees,” and provides the pro forma disclosures of SFAS No. tax laws. A deferred tax asset is recognized if it is more likely 123, “Accounting for Stock-Based Compensation.” than not that a benefit will be realized. (O) RISKS AND UNCERTAINTIES: The Circuit City Group is a (I) REVENUE RECOGNITION: The Circuit City Group recognizes leading national retailer of brand-name consumer electronics, revenue when the earnings process is complete, generally at either personal computers and entertainment software. The diversity the time of sale to a customer or upon delivery to a customer. of the Circuit City Group's products, customers, suppliers and (J) DEFERRED REVENUE: The Circuit City Group sells its own geographic operations reduces the risk that a severe impact will extended warranty contracts and extended warranty contracts on occur in the near term as a result of changes in its customer behalf of unrelated third parties. The contracts extend beyond the base, competition, sources of supply or markets. It is unlikely normal manufacturer’s warranty period, usually with terms that any one event would have a severe impact on the Circuit (including the manufacturer’s warranty period) between 12 and City Group's operating results. 59 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 63. Because of the Inter-Group Interest, the Circuit City Group 4. DEBT also is subject to risks and uncertainties related to the CarMax Long-term debt of the Company at February 28 or 29 is summa- Group. The CarMax Group is a used- and new-car retail busi- rized as follows: ness. The diversity of the CarMax Group’s customers and suppli- 2001 2000 ers reduces the risk that a severe impact will occur in the near (Amounts in thousands) term as a result of changes in its customer base, competition or Term loans.......................................................... $230,000 $405,000 sources of supply. However, because of the CarMax Group’s lim- Industrial Development Revenue Bonds due ited overall size, management cannot assure that unanticipated through 2006 at various prime-based rates events will not have a negative impact on the Circuit City Group. of interest ranging from 5.5% to 6.7%...... 4,400 5,419 The preparation of financial statements in conformity with Obligations under capital leases [NOTE 8]......... 12,049 12,416 accounting principles generally accepted in the United States of Note payable ...................................................... 2,076 3,750 America requires management to make estimates and assump- Total long-term debt......................................... 248,525 426,585 tions that affect the reported amounts of assets, liabilities, rev- Less current installments.................................. 132,388 177,344 enues and expenses and the disclosure of contingent assets and Long-term debt, excluding current liabilities. Actual results could differ from those estimates. installments .................................................. 116,137 249,241 (P) RECLASSIFICATIONS: Certain amounts in prior years have been Portion of long-term debt allocated reclassified to conform to classifications adopted in fiscal 2001. to the Circuit City Group............................ $ 57,317 $ 213,719 3. PROPERTY AND EQUIPMENT Property and equipment, at cost, at February 28 or 29 is summa- In July 1994, the Company entered into a seven-year, rized as follows: $100,000,000 unsecured bank term loan. The loan was restruc- tured in August 1996 as a $100,000,000, six-year unsecured 2001 2000 (Amounts in thousands) bank term loan. Principal is due in full at maturity with interest Land and buildings (20 to 25 years)............ $ 76,660 $ 98,537 payable periodically at LIBOR plus 0.40 percent. At February 28, Land held for sale........................................... 2,759 — 2001, the interest rate on the term loan was 5.97 percent. Construction in progress ............................... 44,335 51,378 In May 1995, the Company entered into a five-year, Furniture, fixtures and equipment $175,000,000 unsecured bank term loan. As scheduled, the (3 to 8 years).............................................. 809,501 690,512 Company used existing working capital to repay this term loan Leasehold improvements in May 2000. (10 to 15 years)........................................... 598,586 566,103 In June 1996, the Company entered into a five-year, Capital leases, primarily buildings $130,000,000 unsecured bank term loan. Principal is due in full (20 years).................................................... 12,471 12,471 at maturity with interest payable periodically at LIBOR plus 0.35 1,544,312 1,419,001 percent. At February 28, 2001, the interest rate on the term loan Less accumulated depreciation and was 5.73 percent. This term loan is due in June 2001 and was amortization............................................... 747,523 665,676 classified as a current liability at February 28, 2001. Although Property and equipment, net........................ $ 796,789 $ 753,325 the Company has the ability to refinance this loan, it intends to repay the debt using existing working capital. The Company maintains a multi-year, $150,000,000 unsecured revolving credit agreement with four banks. The agreement calls for interest based on both committed rates and money market rates and a commitment fee of 0.18 percent per annum. The agreement was entered into as of August 31, 1996, and terminates August 31, 2002. No amounts were outstanding under the revolv- ing credit agreement at February 28, 2001, or February 29, 2000. The Industrial Development Revenue Bonds are collateralized by land, buildings and equipment with an aggregate carrying value of approximately $6,243,000 at February 28, 2001, and $8,404,000 at February 29, 2000. Under certain of the debt agreements, the Company must meet financial covenants relating to minimum tangible net worth, current ratios and debt-to-capital ratios. The Company was in compliance with all such covenants at February 28, 2001, and February 29, 2000. 60 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 64. Short-term debt of the Company is funded through committed In accordance with SFAS No. 109, the tax effects of temporary lines of credit and informal credit arrangements, as well as the differences that give rise to a significant portion of the deferred revolving credit agreement. Amounts outstanding and committed tax assets and liabilities at February 28 or 29 are as follows: lines of credit available are as follows: 2001 2000 (Amounts in thousands) Years Ended Deferred tax assets: February 28 or 29 Inventory ...................................................... $ — $ 7,264 2001 2000 (Amounts in thousands) Accrued expenses ........................................ 42,953 27,974 Average short-term debt outstanding .......... $ 56,065 $ 44,692 Other .............................................................. 7,311 7,167 Maximum short-term debt outstanding....... $365,275 $411,791 Total gross deferred tax assets............. 50,264 42,405 Aggregate committed lines of credit ............ $360,000 $370,000 Deferred tax liabilities: The weighted average interest rate on the outstanding short- Depreciation and amortization.................. 42,488 44,854 term debt was 6.8 percent during fiscal 2001, 5.6 percent during Deferred revenue ......................................... 32,825 29,656 fiscal 2000 and 5.1 percent during fiscal 1999. Securitized receivables................................ 36,257 14,069 Interest expense allocated by the Company to the Circuit City Inventory ...................................................... 9,927 — Group, excluding interest capitalized, was $7,273,000 in fiscal Prepaid expenses ......................................... 10,788 23,023 2001, $13,844,000 in fiscal 2000 and $21,926,000 in fiscal 1999. Other .............................................................. 3,625 6,651 The Circuit City Group capitalizes interest in connection with the Total gross deferred tax liabilities....... 135,910 118,253 construction of certain facilities and the development or purchase Net deferred tax liability.................................. $ 85,646 $ 75,848 of software for internal use. Interest capitalized amounted to $2,121,000 in fiscal 2001, $2,166,000 in fiscal 2000 and Based on the Company’s historical and current pretax earn- $2,749,000 in fiscal 1999. Circuit City Group ings, management believes the amount of gross deferred tax 5. INCOME TAXES assets will more likely than not be realized through future tax- The components of the provision for income taxes on earnings able income; therefore, no valuation allowance is necessary. from continuing operations before the Inter-Group Interest in the 6. ASSOCIATE BENEFIT AND STOCK INCENTIVE PLANS CarMax Group are as follows: (A) 401(k) PLAN: Effective August 1, 1999, the Company began sponsoring a 401(k) Plan for all employees meeting certain eligi- Years Ended February 28 or 29 2001 2000 1999 (Amounts in thousands) bility criteria. Under the Plan, eligible employees can contribute Current: up to 15 percent of their salaries, and the Company matches a Federal...................................... $52,846 $141,514 $123,001 portion of those associate contributions. The Company's expense State.......................................... 7,993 16,901 15,694 for this plan for Circuit City Group associates was $3,996,000 in fiscal 2001 and $2,158,000 in fiscal 2000. 60,839 158,415 138,695 (B) PREFERRED STOCK: In conjunction with the Company’s Deferred: Shareholders Rights Plan as amended and restated, preferred Federal...................................... 9,505 40,572 5,773 stock purchase rights were distributed as a dividend at the rate State.......................................... 293 1,256 178 of one right for each share of Circuit City Group Common 9,798 41,828 5,951 Stock. The rights are exercisable only upon the attainment of, or Provision for income taxes......... $70,637 $200,243 $144,646 the commencement of a tender offer to attain, a specified own- ership interest in the Company by a person or group. When exercisable, each Circuit City Group right would entitle share- The effective income tax rate differed from the federal statutory holders to buy one eight-hundredth of a share of Cumulative income tax rate as follows: Participating Preferred Stock, Series E, $20 par value, at an Years Ended February 28 or 29 exercise price of $125 per share subject to adjustment. A total 2001 2000 1999 of 500,000 shares of such preferred stock, which have preferen- Federal statutory income tax rate........ 35.0% 35.0% 35.0% tial dividend and liquidation rights, have been designated. No State and local income taxes, such shares are outstanding. In the event that an acquiring per- net of federal benefit........................ 3.0% 3.0% 3.1% son or group acquires the specified ownership percentage of the Effective income tax rate ...................... 38.0% 38.0% 38.1% Company’s common stock (except pursuant to a cash tender offer for all outstanding shares determined to be fair by the board of directors) or engages in certain transactions with the Company after the rights become exercisable, each right will be converted into a right to purchase, for half the current market price at that time, shares of the related Group stock valued at 61 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 65. two times the exercise price. The Company also has 1,000,000 grant and approximately 265,000 shares vest four to five years shares of undesignated preferred stock authorized of which no from the grant date with accelerated vesting if certain perfor- shares are outstanding and an additional 500,000 shares of pre- mance factors are met. The market value at the date of grant of ferred stock designated as Series F, which are related to similar all shares granted has been recorded as unearned compensation rights held by CarMax Group shareholders. and is a component of stockholders’ equity. Unearned compen- (C) VOTING RIGHTS: The holders of both series of common sation is expensed over the restriction periods. In fiscal 2001, a stock and any series of preferred stock outstanding and entitled total of $11,211,200 was charged to operations ($11,648,700 in to vote together with the holders of common stock will vote fiscal 2000 and $8,741,100 in fiscal 1999). As of February 28, together as a single voting group on all matters on which com- 2001, 2,364,051 restricted shares of Circuit City Group Common mon shareholders generally are entitled to vote other than a Stock were outstanding. matter on which the common stock or either series thereof or (E) EMPLOYEE STOCK PURCHASE PLANS: The Company has any series of preferred stock would be entitled to vote as a sepa- Employee Stock Purchase Plans for all employees meeting rate voting group. On all matters on which both series of com- certain eligibility criteria. Under the Circuit City Group Plan, mon stock would vote together as a single voting group, (i) each eligible employees may purchase shares of Circuit City Group outstanding share of Circuit City Group Common Stock shall Common Stock, subject to certain limitations. For each $1.00 have one vote and (ii) each outstanding share of CarMax Group contributed by employees under the Plan, the Company matches Common Stock shall have a number of votes based on the $0.15. Purchases are limited to 10 percent of an employee’s weighted average ratio of the market value of a share of eligible compensation, up to a maximum of $7,500 per year. CarMax Group Common Stock to a share of Circuit City Group At February 28, 2001, a total of 2,501,731 shares remained Common Stock. If shares of only one series of common stock available under the Circuit City Group Plan. During fiscal 2001, are outstanding, each share of that series shall be entitled to 862,315 shares were issued to or purchased on the open market one vote. If either series of common stock is entitled to vote as for employees (501,984 shares in fiscal 2000 and 858,710 shares a separate voting group with respect to any matter, each share in fiscal 1999). The average price per share purchased under the of that series shall, for purposes of such vote, be entitled to one Plan was $29.93 in fiscal 2001, $41.70 in fiscal 2000 and $21.69 vote on such matter. in fiscal 1999. The Company match or purchase price discount (D) RESTRICTED STOCK: The Company has issued restricted for the Circuit City Group totaled $2,519,500 in fiscal 2001, stock under the provisions of the 1994 Stock Incentive Plan $2,682,300 in fiscal 2000 and $2,716,400 in fiscal 1999. whereby management and key employees are granted restricted (F) STOCK INCENTIVE PLANS: Under the Company’s stock shares of Circuit City Group Common Stock. Shares are incentive plans, nonqualified stock options may be granted to awarded in the name of the employee, who has all the rights of management, key employees and outside directors to purchase a shareholder, subject to certain restrictions or forfeitures. shares of Circuit City Group Common Stock. The exercise price Restrictions on the awards generally expire three to seven years for nonqualified options is equal to, or greater than, the market from the date of grant. Total restricted stock awards of value at the date of grant. Options generally are exercisable 1,483,358 shares of Circuit City Group Common Stock were over a period of one to 10 years from the date of grant. granted to eligible employees in fiscal 2001. Approximately A summary of the status of the Circuit City Group’s stock 1,047,000 of those shares were granted as a one-for-one options and changes during the years ended February 28, 2001, replacement for cancelled options that were originally granted February 29, 2000, and February 28, 1999, are shown in Table 1. on June 13, 2000. Options held by senior management were Table 2 summarizes information about stock options outstanding excluded from this replacement grant. Approximately 782,000 as of February 28, 2001. of those shares vest two-and-one-half years from the date of 62 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 66. TABLE 1 2001 2000 1999 Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price (Shares in thousands) Outstanding at beginning of year................ 7,380 $25.07 8,894 $18.25 9,988 $16.00 Granted........................................................... 4,280 34.80 1,564 40.75 1,080 21.17 Exercised.......................................................... (1,526) 23.64 (2,864) 12.65 (2,008) 8.77 Cancelled.......................................................... (1,414) 34.25 (214) 22.06 (166) 16.80 Outstanding at end of year........................... 8,720 $28.60 7,380 $25.07 8,894 $18.25 Options exercisable at end of year .............. 3,158 $21.86 1,258 $13.89 2,966 $12.02 TABLE 2 Options Outstanding Options Exercisable Weighted Average Number Remaining Weighted Average Number Weighted Average (Shares in thousands) Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price $ 9.09 to 14.75 ............................................. 1,344 3.8 $14.10 879 $13.93 15.18 to 18.00............................................. 1,067 3.0 17.24 876 17.23 18.43 to 25.28............................................. 864 4.1 21.11 212 20.78 29.50............................................................. 1,000 1.1 29.50 1,000 29.50 34.84 to 35.21 ............................................. 3,038 7.2 35.21 — — 35.22 to 47.53............................................. 1,407 5.4 40.72 191 40.81 Total ................................................................ 8,720 4.9 $28.60 3,158 $21.86 Circuit City Group The Circuit City Group applies APB Opinion No. 25 and For the purpose of computing the pro forma amounts, the fair related interpretations in accounting for its stock option plans. value of each option on the date of grant is estimated using the Accordingly, no compensation cost has been recognized. Had Black-Scholes option-pricing model. The weighted average compensation cost been determined based on the fair value at assumptions used in the model are as follows: the grant date consistent with the methods of SFAS No. 123, the 2001 2000 1999 net earnings attributed to the Circuit City Group would have changed to the pro forma amounts indicated in the following Expected dividend yield.................. 0.2% 0.2% 0.4% table. In accordance with the transition provisions of SFAS No. Expected stock volatility................. 49% 38% 33% 123, the pro forma amounts reflect options with grant dates Risk-free interest rates..................... 6% 6% 6% subsequent to March 1, 1995. Therefore, the full impact of cal- Expected lives (in years)................. 5 5 5 culating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts pre- Using these assumptions in the Black-Scholes model, the sented because compensation cost is reflected over the options’ weighted average fair value of options granted for the Circuit vesting periods and compensation cost of options granted prior City Group is $17 in fiscal 2001, $17 in fiscal 2000 and $8 in to March 1, 1995, is not considered. The pro forma effect on fis- fiscal 1999. cal year 2001 may not be representative of the pro forma effects 7. PENSION PLANS on net earnings for future years. The Company has a noncontributory defined benefit pension plan covering the majority of full-time employees who are at Years Ended February 28 or 29 2001 2000 1999 least age 21 and have completed one year of service. The cost of (Amounts in thousands) the program is being funded currently. Plan benefits generally Earnings from continuing are based on years of service and average compensation. Plan operations: assets consist primarily of equity securities and included 160,000 As reported ............................ $149,247 $327,574 $216,927 shares of Circuit City Group Common Stock at February 28, Pro forma............................... 136,957 319,337 211,025 2001, and February 29, 2000. Eligible employees of the Circuit Net earnings: City Group participate in the Company’s plan. Pension costs for As reported ............................ $149,247 $197,334 $148,381 these employees have been allocated to the Circuit City Group Pro forma............................... 136,957 189,097 142,479 based on its proportionate share of the projected benefit obligation. 63 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 67. The following tables set forth the Circuit City Group’s share 8. LEASE COMMITMENTS of the Pension Plan’s financial status and amounts recognized in The Circuit City Group conducts a substantial portion of its busi- the balance sheets as of February 28 or 29: ness in leased premises. The Circuit City Group’s lease obliga- tions are based upon contractual minimum rates. For certain 2001 2000 (Amounts in thousands) locations, amounts in excess of these minimum rates are payable based upon specified percentages of sales. Rental expense and Change in benefit obligation: sublease income for all operating leases are summarized as follows: Benefit obligation at beginning of year.... $109,337 $ 110,001 Service cost .................................................... 12,617 13,428 Years Ended February 28 or 29 Interest cost.................................................... 8,690 7,384 2001 2000 1999 (Amounts in thousands) Actuarial loss (gain)...................................... 20,262 (17,325) Minimum rentals ...................... $305,177 $288,037 $273,185 Benefits paid .................................................. (2,994) (4,151) Rentals based on sales Benefit obligation at end of year ............... $147,912 $109,337 volume .................................. 1,229 1,327 1,247 Change in plan assets: Sublease income ....................... (15,242) (16,425) (14,857) Fair value of plan assets at beginning Net rental expense.................... $291,164 $272,939 $259,575 of year....................................................... $129,638 $ 94,125 Actual return on plan assets ....................... (10,396) 28,166 The Circuit City Group computes rent based on a percentage Employer contributions ............................... 14,103 11,498 of sales volumes in excess of defined amounts in certain store Benefits paid .................................................. (2,994) (4,151) locations. Most of the Circuit City Group’s other leases are fixed- Fair value of plan assets at end of year .... $130,351 $129,638 dollar rental commitments, with many containing rent escalations Reconciliation of funded status: based on the Consumer Price Index. Most provide that the Circuit Funded status ................................................ $ (17,561) $ 20,301 City Group pay taxes, maintenance, insurance and operating Unrecognized actuarial loss (gain)............. 13,922 (27,924) expenses applicable to the premises. Unrecognized transition asset..................... (199) (398) The initial term of most real property leases will expire within Unrecognized prior service benefit ............ (281) (421) the next 20 years; however, most of the leases have options pro- viding for additional lease terms of five to 25 years at terms Net amount recognized................................ $ (4,119) $ (8,442) similar to the initial terms. Future minimum fixed lease obligations, excluding taxes, The components of net pension expense are as follows: insurance and other costs payable directly by the Circuit City Group, as of February 28, 2001, were: Years Ended February 28 or 29 2001 2000 1999 (Amounts in thousands) Operating Operating Capital Lease Sublease Service cost......................................... $12,617 $13,428 $10,479 (Amounts in thousands) Fiscal Leases Commitments Income Interest cost......................................... 8,690 7,384 6,135 2002.................................................. $ 1,725 $ 293,829 $(13,350) Expected return on plan assets ........ (10,914) (8,919) (7,675) 2003.................................................. 1,726 290,899 (12,638) Amortization of prior service cost.... (140) (132) (104) 2004.................................................. 1,768 288,436 (11,142) Amortization of transitional asset.... (199) (199) (199) 2005.................................................. 1,798 286,700 (10,193) Recognized actuarial (gain) loss....... (274) 10 – 2006.................................................. 1,807 284,673 (9,132) Net pension expense ......................... $ 9,780 $11,572 $ 8,636 After 2006........................................ 12,859 2,828,888 (34,437) Total minimum lease payments..... 21,683 $4,273,425 $(90,892) Assumptions used in the accounting for the Pension Plan were: Less amounts representing interest ......................................... (9,634) Years Ended February 28 or 29 2001 2000 1999 Present value of net minimum Weighted average discount rate ................. 7.5% 8.0% 6.8% capital lease payments [NOTE 4].... $12,049 Rate of increase in compensation levels..... 6.0% 6.0% 5.0% Expected rate of return on plan assets....... 9.0% 9.0% 9.0% In fiscal 2001, the Company entered into sale-leaseback transactions with unrelated parties on behalf of the Circuit City The Company also has an unfunded nonqualified plan that Group at an aggregate selling price of $61,526,000 ($24,295,000 restores retirement benefits for certain senior executives who are in fiscal 2000 and $103,750,000 in fiscal 1999). Neither the affected by Internal Revenue Code limitations on benefits pro- Company nor the Circuit City Group has continuing involvement vided under the Company's Pension Plan. The projected benefit under the sale-leaseback transactions. obligation under this plan and allocated to the Circuit City Group was $9.9 million at February 28, 2001, and $6.3 million at February 29, 2000. 64 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 68. 9. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION The table below summarizes certain cash flows received from and paid to securitization trusts: Advertising expense from continuing operations, which is included in selling, general and administrative expenses in the Year Ended accompanying statements of earnings, amounted to $422,874,000 February 28, 2001 (Amounts in thousands) (4.0 percent of net sales and operating revenues) in fiscal 2001, Proceeds from new securitizations ................................ $1,092,500 $390,144,000 (3.7 percent of net sales and operating revenues) in Proceeds from collections reinvested fiscal 2000 and $376,316,000 (4.0 percent of net sales and oper- in previous credit card securitizations..................... $ 1,730,511 ating revenues) in fiscal 1999. Servicing fees received .................................................... $ 52,044 10. SECURITIZATIONS Other cash flows received on retained interests*.......... $ 173,775 On behalf of the Circuit City Group, the Company enters into * This amount represents total cash flows received from retained interests by securitization transactions, which allow for the sale of credit the transferor other than servicing fees, including cash flows from interest-only card receivables to unrelated entities, to finance the consumer strips and cash above the minimum required level in cash collateral accounts. revolving credit receivables generated by its finance operation. In these securitizations, the Company retains servicing rights and In determining the fair value of retained interests, the subordinated interests. Company estimates future cash flows using management’s best Private-label credit card receivables are financed through a estimates of key assumptions such as finance charge income, master trust securitization program. During fiscal year 2001, a default rates, payment rates, forward yield curves and discount $300 million, five-year public securitization related to the pri- rates. The Company employs a risk-based pricing strategy that vate-label card matured and was paid off. The Company entered increases the stated annual percentage rate for accounts that into a $275 million, three-year public securitization in fiscal have a higher predicted risk of default. Accounts with a lower 2001. As of February 28, 2001, the master trust securitization risk profile also may qualify for promotional financing. program had a capacity of $1.31 billion. The master trust agree- Rights recorded for future finance income from serviced Circuit City Group ment has no recourse provisions. assets that exceed the contractually specified servicing fees are Bankcard receivables also are financed through a master trust carried at fair value and amounted to $131.0 million at February 28, securitization program. Provisions under the master trust agreement 2001, and are included in net accounts receivable. Gains on sales provide recourse to the Company for any cash flow deficiencies of $182.6 million were recorded in fiscal 2001. on $188 million of the receivables sold. The Company believes The fair value of retained interests at February 28, 2001, was that as of February 28, 2001, no liability existed under the $246.1 million with a weighted-average life ranging from 0.4 years recourse provisions. The bankcard securitization program had a to 3 years. The table below shows the key economic assumptions total program capacity of $1.94 billion as of February 28, 2001. used in measuring the fair value of retained interests at February At February 28, 2001, the total principal amount of loans 28, 2001, and a sensitivity analysis showing the hypothetical effect managed or securitized was $2,799 million. Of the total loans, on the fair value of those interests when there are unfavorable the principal amount of loans securitized was $2,754 million and variations from the assumptions used. Key economic assumptions the principal amount of loans held for sale was $45 million. The at February 28, 2001, are not materially different than assumptions principal amount of loans that were 31 days or more delinquent used to measure the fair value of retained interests at the time of was $192.3 million at February 28, 2001. The credit losses net of securitization. These sensitivities are hypothetical and should be recoveries were $229.9 million for fiscal 2001. used with caution. In this table, the effect of a variation in a The Company receives annual servicing compensation approxi- particular assumption on the fair value of the retained interest is mating 2 percent of the outstanding principal loan balance of the calculated without changing any other assumption; in reality, receivables and retains the rights to future cash flows arising after changes in one factor may result in changes in another, which the investors in the securitization trusts have received the return might magnify or counteract the sensitivities. for which they contracted. The servicing fees specified in the credit Impact on Impact on card securitization agreements adequately compensate the finance Assumptions Fair Value Fair Value operation for servicing the securitized assets. Accordingly, no Used of 10% of 20% (Dollar amounts (Annual) Adverse Change Adverse Change in thousands) servicing asset or liability has been recorded. Payment rate .............. 7.1 —11.3% $10,592 $20,107 Default rate................. 7.0 —14.3% $21,159 $42,318 Discount rate.............. 10.0 —15.0% $ 2,973 $ 5,892 65 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 69. 11. CONTINGENT LIABILITIES 13. DISCONTINUED OPERATIONS In the normal course of business, the Company is involved in On June 16, 1999, Digital Video Express announced that it various legal proceedings. Based upon the evaluation of the would cease marketing the Divx home video system and discon- information presently available, management believes that the tinue operations, but that existing, registered customers would ultimate resolution of any such proceedings will not have a be able to view discs during a two-year phase-out period. The material adverse effect on the Circuit City Group’s financial posi- operating results of Divx and the loss on disposal of the Divx tion, liquidity or results of operations. business have been segregated from continuing operations and reported as separate line items, after taxes, on the Circuit City 12. APPLIANCE EXIT COSTS Group statements of earnings for the periods presented. On July 25, 2000, the Company announced plans to exit the Discontinued operations also have been segregated on the major appliance category to expand its selection of key consumer Circuit City Group statements of cash flows for the periods electronics and home office products in all Circuit City Superstores. presented. However, Divx is not segregated on the Circuit City This decision reflected significant sales weakness and increased Group balance sheets. competition in the major appliance category and management’s For fiscal 2001, the discontinued Divx operations had no earnings expectations for these other products. To exit the appli- impact on the net earnings of the Circuit City Group. The loss ance business, the Company closed six distribution centers and from the discontinued Divx operations totaled $16.2 million seven service centers in fiscal 2001 and expects to close two dis- after an income tax benefit of $9.9 million in fiscal 2000 and tribution centers and one service center by July 31, 2001. The $68.5 million after an income tax benefit of $42.0 million in majority of these properties are leased. The Company is in the fiscal 1999. The loss on the disposal of the Divx business totaled process of marketing these properties to be subleased. Circuit City $114.0 million after an income tax benefit of $69.9 million in maintains control over its in-home major appliance repair busi- fiscal 2000. The loss on the disposal includes a provision for ness, although repairs are subcontracted to an unrelated third operating losses to be incurred during the phase-out period. It party. In the second quarter of fiscal 2001, the Company recorded also includes provisions for commitments under licensing agree- appliance exit costs of $30 million. Most of these expenses are ments with motion picture distributors, the write-down of assets included in cost of sales, buying and warehousing on the state- to net realizable value, lease termination costs, employee sever- ment of earnings for fiscal 2001. There were no adjustments to ance and benefit costs and other contractual commitments. the exit costs as of February 28, 2001. The net liabilities of the discontinued Divx operations Approximately 850 employees have been terminated and reflected in the accompanying Group balance sheets as of approximately 100 employees will be terminated as locations February 28 or 29 are comprised of the following: close or consolidate. These reductions were mainly in the service, distribution and merchandising functions. Because severance is 2001 2000 (Amounts in thousands) being paid to employees on a bi-weekly schedule based on years Current assets................................................... $ 8 $ 612 of service, cash payments lag job eliminations. The exit costs Property and equipment, net......................... — 513 also include $17.8 million for lease termination costs and $5.0 Other assets....................................................... 324 — million, net of salvage value, for the write-down of fixed assets. Current liabilities............................................. (27,522) (32,650) Other liabilities ................................................. (14,082) (35,291) Expenses Total Paid or Liability at Net liabilities of discontinued operations...... $(41,272) $(66,816) Exit Assets February 28, Costs Written Off 2001 (Amounts in millions) Lease termination costs................... $17.8 $ 1.8 $16.0 Fixed asset write-downs ................. 5.0 5.0 — Employee termination benefits...... 4.4 2.2 2.2 Other .................................................. 2.8 2.8 — Appliance exit costs ........................ $30.0 $11.8 $18.2 66 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 70. 14. QUARTERLY FINANCIAL DATA (UNAUDITED) First Quarter Second Quarter Third Quarter Fourth Quarter Year 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 (Amounts in thousands) Net sales and operating revenues...... $2,449,110 $2,204,919 $2,506,220 $2,422,667 $2,325,576 $2,495,649 $3,177,131 $3,476,171 $10,458,037 $10,599,406 Gross profit ........................................... $ 597,800 $ 540,731 $ 582,916 $ 604,503 $ 510,449 $ 618,182 $ 774,398 $ 858,776 $ 2,465,563 $ 2,622,192 Earnings (loss) from continuing operations before Inter-Group Interest in the CarMax Group ..... $ 46,714 $ 39,311 $ 43,196 $ 71,234 $ (70,055) $ 54,714 $ 95,383 $ 161,453 $ 115,238 $ 326,712 Earnings (loss) from continuing operations....................................... $ 57,123 $ 41,398 $ 55,341 $ 73,692 $ (64,407) $ 52,335 $ 101,190 $ 160,149 $ 149,247 $ 327,574 Loss from discontinued operations....................................... $ — $ (130,240) $ —$ —$ —$ —$ —$ —$ — $ (130,240) Net earnings (loss)................................ $ 57,123 $ (88,842) $ 55,341 $ 73,692 $ (64,407) $ 52,335 $ 101,190 $ 160,149 $ 149,247 $ 197,334 Independent Auditors’ Report Circuit City Group The Board of Directors and Stockholders of Circuit City Stores, Inc.: We have audited the accompanying balance sheets of the Inc. and subsidiaries and the financial statements of the Circuit City Group (as defined in Note 1) as of February 28, 2001 CarMax Group. and February 29, 2000 and the related statements of earnings, The Circuit City Group has accounted for its interest in the group equity and cash flows for each of the fiscal years in the CarMax Group in a manner similar to the equity method of three-year period ended February 28, 2001. These financial state- accounting. Accounting principles generally accepted in the ments are the responsibility of Circuit City Stores, Inc.’s manage- United States of America require that the CarMax Group be ment. Our responsibility is to express an opinion on these consolidated with the Circuit City Group. financial statements based on our audits. In our opinion, except for the effects of not consolidating We conducted our audits in accordance with auditing stan- the Circuit City Group and the CarMax Group as discussed in dards generally accepted in the United States of America. Those the preceding paragraph, the financial statements referred to standards require that we plan and perform the audit to obtain above present fairly, in all material respects, the financial reasonable assurance about whether the financial statements are position of the Circuit City Group as of February 28, 2001 and free of material misstatement. An audit includes examining, on February 29, 2000 and the results of its operations and its cash a test basis, evidence supporting the amounts and disclosures in flows for each of the fiscal years in the three-year period ended the financial statements. An audit also includes assessing the February 28, 2001 in conformity with accounting principles accounting principles used and significant estimates made by generally accepted in the United States of America. management, as well as evaluating the overall financial state- ment presentation. We believe that our audits provide a reason- able basis for our opinion. As more fully discussed in Note 1, the financial statements of the Circuit City Group should be read in conjunction with Richmond, Virginia the consolidated financial statements of Circuit City Stores, April 2, 2001 67 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 71. Carmax Group Management’s Discussion and Analysis of Results of Operations And Financial Condition The common stock of Circuit City Stores, Inc. consists of two We believe CarMax’s fiscal 2001 sales performance primarily common stock series, which are intended to reflect the perfor- reflects the improved execution of the CarMax offer at individ- mance of the Company's two businesses. The CarMax Group ual stores, increased awareness and use of the CarMax Web site Common Stock is intended to track the performance of the and the exit of CarMax’s primary used-car superstore competitor CarMax stores and related operations. The Circuit City Group late in fiscal 2000. We believe this competitor’s exit from five Common Stock is intended to track the performance of the multi-store markets helped eliminate consumer confusion over Circuit City business and related operations and the Group’s the two offers. CarMax’s used-car comparable store sales growth retained interest in the CarMax Group. The Circuit City Group’s remained strong through the fiscal 2001 anniversary of this retained interest is not considered outstanding CarMax Group competitor’s exit from the used-car superstore business. We also Common Stock. believe that the continuation of CarMax’s robust used-car sales Holders of Circuit City Group Common Stock and holders of growth during the second half of the fiscal year indicates that CarMax Group Common Stock are shareholders of the Company the CarMax used-car concept offers strong consumer value and and as such are subject to all of the risks associated with an invest- can generate steady sales growth in an economic downturn. ment in the Company and all of its businesses, assets and liabili- Geographic expansion of the CarMax used-car superstore con- ties. The results of operations or financial condition of one Group cept and the addition of new-car franchises were the primary con- could affect the results of operations or financial condition of the tributors to CarMax's total sales growth from fiscal 1999 through other Group. The discussion and analysis for the CarMax Group the first half of fiscal 2000. Throughout this period, weak used-car presented below should be read in conjunction with the discussion sales more than offset CarMax’s strong comparable store sales and analysis for Circuit City Stores, Inc. and for the Circuit City growth in new cars. Late in fiscal 1999, CarMax adopted a hub and Group and in conjunction with all the Company’s SEC filings. satellite operating strategy in existing multi-store markets. Under Reported earnings and losses attributed to the CarMax Group the hub and satellite operating model, a satellite store delivers the Common Stock exclude the earnings and losses attributed to the same consumer offer as a hub store, but uses the reconditioning, Circuit City Group’s retained interest, which was 74.6 percent at purchasing and business office operations of a nearby hub store. February 28, 2001, 74.7 percent at February 29, 2000, and 76.6 The prototype satellites require one-half to one-third the acreage of percent at February 28, 1999. a standard “A” store. In fiscal 1999, we converted five CarMax superstores in multi-store markets to satellite operations and RESULTS OF OPERATIONS opened two prototype satellite stores. During fiscal 2000, we Sales Growth opened two CarMax used-car superstores, two prototype satellite Total sales for the CarMax Group increased 24 percent in fiscal used-car superstores, five stand-alone new-car stores and one new- 2001 to $2.50 billion. In fiscal 2000, total sales increased 37 per- car franchise that was integrated with a used-car superstore. cent to $2.01 billion from $1.47 billion in fiscal 1999. The fiscal CarMax also converted one existing store into a satellite operation 2001 total sales increase reflects a 17 percent increase in the and relocated one franchise next to a used-car superstore. comparable store sales of the CarMax business, driven by In the second half of fiscal 2000, CarMax limited its geo- higher-than-anticipated used-car sales, and the net addition of graphic expansion to focus on building sales and profitability in two used-car superstores, two prototype satellite stores and six existing markets. The sales pace improved at CarMax's used-car new-car franchises since the end of fiscal 1999. The new stores superstores, including those stores with integrated new-car fran- and four of the franchises moved into the comparable store sales chises, and the Group generated comparable store sales growth base throughout fiscal 2001. for the last two quarters and for the fiscal year. That success con- tinued in fiscal 2001 with strong comparable store sales through- out the year and used-car sales that exceeded expectations in all PERCENTAGE SALES CHANGE FROM PRIOR YEAR Fiscal Total Comparable four quarters. During the year, CarMax added two new-car fran- chises, integrating them with existing used-car superstores. 2001............................................................................ 24% 17 % Although the performance of the used-car superstores and 2000 ........................................................................... 37% 2% integrated used- and new-car superstores exceeded expectations 1999 ........................................................................... 68% (2)% in fiscal 2001, we have been disappointed by the performance of 1998 ........................................................................... 71% 6% the stand-alone new-car stores. Operations at these stores have 1997 ........................................................................... 85% 23 % improved significantly versus their levels prior to acquisition; however, they remain below our expectations. PERCENT VEHICLE SALES BY CATEGORY Fiscal 2001 2000 1999 1998 1997 Vehicle Dollars: Used Vehicles......... 81% 79% 90% 89% 88% New Vehicles.......... 19% 21% 10% 11% 12% Vehicle Units: Used Vehicles......... 87% 86% 94% 93% 92% New Vehicles.......... 13% 14% 6% 7% 8% 68 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 72. RETAIL UNITS* ics accessory sales. CarMax’s gross profit margins have improved Retail Units at Year-End significantly since that time. In fiscal 2001, the increase in used- Fiscal 2001 2000 1999 1998 1997 car sales as a percent of the total sales mix and continued strong “C” and “B” Stores....................... 14 14 13 8 2 inventory management throughout the year, especially during the “A” Stores....................................... 17 17 16 10 5 second half when the model-year transition occurs in the new- Prototype Satellite Stores............. 4 4 2 — — car segment, contributed to a higher gross margin. Significant Stand-Alone New-Car Stores...... 5 5 — — — increases in unit sales of new cars as a percentage of total unit sales limited the gross margin improvement in fiscal 2000. Total ............................................... 40 40 31 18 7 Selling, General and Administrative Expenses * CarMax opened two prototype satellite stores in late fiscal 1999 and two proto- type satellite stores in late fiscal 2000. In addition to the four prototype satellite Selling, general and administrative expenses were 9.8 percent of stores in operation, six “A,” “B” or “C” stores have been converted to satellite sales in fiscal 2001, 11.3 percent of sales in fiscal 2000 and 13.9 operations. “C” stores represent the largest format. percent of sales in fiscal 1999. The fiscal 2001 selling, general and administrative expense ratio continued the improvement experi- NEW-CAR FRANCHISES enced in fiscal 2000 and reflects the leverage achieved from New-Car Franchises at Year-End Fiscal 2001 2000 1999 1998 1997 strong total and comparable store sales growth; more efficient advertising expenditures; overall improvements in store produc- Integrated/Co-Located tivity, including those achieved through the hub and satellite New-Car Franchises ............. 17 15 16 2 1 operating strategy we adopted in multi-store markets; and a Stand-Alone favorable contribution from the finance operation. The fiscal 2001 New-Car Franchises............... 5 5 — — — improvements were partly offset by an $8.7 million write-off of Total New-Car Franchises .......... 22 20 16 2 1 goodwill associated with two underperforming stand-alone new- car franchises. Excluding these costs, the fiscal 2001 expense ratio In most states, the Group sells extended warranties on behalf of would have been 9.4 percent of sales. The fiscal 2000 improve- unrelated third parties who are the primary obligors. Under this ments were partly offset by $4.8 million in charges related to lease third-party warranty program, we have no contractual liability to termination costs on undeveloped property and a write-down of the customer. In states where third-party warranty sales were not assets associated with excess property for sale. Excluding these permitted, the Group has sold its own extended warranty for which costs, the fiscal 2000 expense ratio would have been 11.1 percent we are the primary obligor. Gross dollar sales from all extended of sales. The higher ratio in fiscal 1999 reflects the costs associ- warranty programs were 4.0 percent of total sales of the CarMax ated with the expansion of CarMax superstores and the below- business in fiscal 2001, 3.7 percent in fiscal 2000 and 4.3 percent plan sales in a number of multi-store metropolitan markets. in fiscal 1999. The fiscal 2001 increase reflects the increase in Profits generated by CarMax’s finance operation and fees received used-car sales as a percentage of the overall mix, enhanced manu- for arranging financing through third parties are recorded as a facturers’ programs on new cars and improved warranty penetra- reduction to selling, general and administrative expenses. tion. Used cars achieve a higher warranty penetration rate than new cars. The fiscal 2000 decrease reflects the increase in new-car Interest Expense sales as a percentage of the overall mix. Total extended warranty Interest expense was relatively unchanged as a percent of sales revenue, which is reported in total sales, was 1.8 percent of total across the three-year period, at 0.5 percent of sales in fiscal 2001 sales in fiscal 2001, 1.6 percent in fiscal 2000 and 2.0 percent in and fiscal 2000 and 0.4 percent of sales in fiscal 1999. Interest fiscal 1999. Third-party extended warranty revenue was 1.8 per- expense was incurred primarily on allocated debt to fund new cent of total sales in fiscal 2001, 1.6 percent in fiscal 2000 and 1.9 store growth, franchise acquisitions and working capital, includ- percent in fiscal 1999. ing inventory. IMPACT OF INFLATION. Inflation has not been a significant Earnings (Loss) Before Income Taxes contributor to results. For the CarMax business, profitability is Earnings before income taxes were $73.5 million in fiscal 2001, Carmax Group based on achieving specific gross profit dollars per vehicle significantly exceeding our original expectations. Fiscal 2000 rather than on average retail prices. Because the wholesale mar- earnings before income taxes were $1.8 million. In the fourth ket generally adjusts to reflect retail price trends, we believe quarter of fiscal 2001, CarMax recorded a pretax charge of $8.7 that if the stores meet inventory turn objectives, then changes million relating to the write-off of goodwill associated with two in average retail prices will have only a short-term impact on underperforming stand-alone new-car franchises. Excluding these the gross margin and thus profitability of that business. charges, earnings before income taxes were $82.2 million. In the Cost of Sales fourth quarter of fiscal 2000, CarMax recorded a pretax charge of The gross profit margin was 13.2 percent in fiscal 2001, 11.9 per- $4.8 million relating to lease termination costs on undeveloped cent in fiscal 2000 and 11.7 percent in fiscal 1999. At the end of property and the write-down of assets associated with excess fiscal 1998, CarMax instituted a profit improvement plan that property for sale. Excluding these charges, earnings before income included better inventory management, increased retail service taxes were $6.6 million. For fiscal 1999, CarMax recorded a pretax sales, pricing adjustments and the addition of consumer electron- loss of $38.5 million. 69 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 73. Income Taxes proceed cautiously as we seek to ensure that all sales growth is profitable sales growth and that we are delivering an attractive The Group’s effective income tax rate was 38.0 percent in fiscal return on investment. 2001 and fiscal 2000, compared with 39.0 percent in fiscal 1999. In fiscal 1999, the CarMax Group generated a loss and therefore RECENT ACCOUNTING PRONOUNCEMENTS recorded related income tax benefits. Refer to the “Management’s Discussion and Analysis of Results Net Earnings (Loss) of Operations and Financial Condition” for Circuit City Stores, Net earnings were $45.6 million in fiscal 2001, compared with Inc. for a review of recent accounting pronouncements. net earnings of $1.1 million in fiscal 2000 and a net loss of $23.5 million in fiscal 1999. Excluding the write-off of goodwill, FINANCIAL CONDITION net earnings would have been $51.0 million in fiscal 2001. In fiscal 2001, net cash provided by CarMax operating activities Excluding lease termination costs and the write-down of assets, was $17.8 million. The fiscal 2001 increase reflects a $44.4 mil- net earnings would have been $4.1 million in fiscal 2000. lion increase in net earnings, offset by an increase in inventory. Net earnings attributed to the CarMax Group Common Stock Net cash used in operating activities was $24.0 million in fiscal were $11.6 million in fiscal 2001, compared with $256,000 in 2000 and $80.3 million in fiscal 1999. For the three-year period, fiscal 2000 and a net loss of $5.5 million in fiscal 1999. cash primarily was used to purchase inventory related to compa- Operations Outlook rable store sales growth, store openings and additional new-car franchises. In fiscal 1999, cash also was used to fund net losses. We believe that the higher-than-expected sales and earnings Most financial activities, including the investment of surplus growth produced in fiscal 2001 indicates that the CarMax busi- cash and the issuance and repayment of short-term and long- ness has developed a store concept that can generate sustained term debt, are managed by the Company on a centralized basis. profits. We believe that we have in place the infrastructure that Allocated debt of the CarMax Group consists of (1) Company will enable CarMax to maintain its improved level of execution, debt, if any, that has been allocated in its entirety to the CarMax generate additional comparable store sales growth and resume Group and (2) a portion of the Company’s debt that is allocated geographic expansion. between the Circuit City Group and the CarMax Group. This In single-store markets, our most mature CarMax stores have pooled debt bears interest at a rate based on the average pooled captured market shares of 8 percent to 10 percent. We have iden- debt balance. Expenses related to increases in pooled debt are tified approximately 35 additional markets that could support an reflected in the weighted average interest rate of the pooled debt. “A” store, the standard CarMax store size going forward. We During fiscal 2001, a term loan totaling $175 million was expect to enter two of these markets, Sacramento, Calif., and repaid using the Company's existing working capital. In addi- Greensboro, N.C., in late fiscal 2002. We also believe that we can tion, a term loan totaling $130 million and due in June 2001 add another 10 satellite CarMax stores in our existing multi- was classified as a current liability. Although we have the ability store markets. Assuming the CarMax used-car business contin- to refinance this debt, we intend to repay it using existing working ues to meet our expectations, we plan to open, in fiscal 2003, capital. Payment of corporate pooled debt does not necessarily four to six stores, including openings in single-store markets and result in a reduction of CarMax Group allocated debt. satellite stores in existing multi-store markets, and, in fiscal The CarMax Group’s capital expenditures were $10.8 million 2004 through fiscal 2006, six to eight stores per year, again in fiscal 2001, $45.4 million in fiscal 2000 and $138.3 million in focusing near-term growth on single-store markets or satellites. fiscal 1999. In fiscal 2001, CarMax’s capital expenditures pri- Based on the performance of the existing used-car super- marily were related to equipment purchases. CarMax’s capital stores, we believe that a standard “A” store in a single-store expenditures through fiscal 2000 primarily were related to store market will at maturity produce sales in the $50 million to $100 expansion. Capital expenditures for the CarMax Group have million range and a pretax, before non-store overhead, store been funded through sale-leaseback transactions, landlord reim- operating profit margin in the range of 5.0 percent to 9.5 per- bursements and allocated short- and long-term debt. In fiscal cent. We believe a satellite store at maturity will produce sales in 2002, CarMax anticipates capital expenditures of approximately the $36 million to $72 million range and a pretax, before non- $80 million, primarily related to new store construction. Fixed store overhead, store operating profit margin in the range of 5.0 asset sales, sale-leasebacks and landlord reimbursements trans- percent to 9.3 percent. In both cases, maturity is assumed to be actions totaled $15.5 million in fiscal 2001, $25.3 million in fiscal the fifth year of operation. If we meet our store opening and 2000 and $139.3 million in fiscal 1999. sales per store objectives, we believe that CarMax can produce During fiscal 2001, CarMax acquired one new-car franchise annual sales volumes of $5 billion within five years. Non-store for a total of $1.3 million. In fiscal 2000, CarMax acquired five overhead, which includes all field operating expenses outside the new-car franchises for a total of $34.8 million. These acquisitions store as well as corporate overhead, was 2.3 percent of sales in were financed through available cash resources, including allocated fiscal 2001, and we estimate it will decline to approximately debt. Costs in excess of the acquired net tangible assets, which 1.7 percent of sales when annual volumes reach $5 billion. were primarily inventory, were recorded as goodwill and covenants Given the strong fiscal 2001 performance, we are highly opti- not to compete. mistic about our growth plan for CarMax. Nevertheless, we will 70 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 74. The Company has an asset securitization program operated Financing for these receivables is achieved through asset securi- through a special purpose subsidiary on behalf of CarMax. At tization programs that, in turn, issue both fixed- and floating-rate the end of fiscal 2001, that program allowed the transfer of up to securities. Interest rate exposure is hedged through the use of inter- $450 million in automobile loan receivables. In October 1999, est rate swaps matched to projected payoffs. Receivables held by the Company formed an owner trust securitization facility that the Company for sale are financed with working capital. Financings allowed for a $644 million securitization of automobile loan at February 28, 2001, and February 29, 2000, were as follows: receivables in the public market. At February 28, 2001, the pro- 2001 2000 gram had a capacity of $329 million. In January 2001, the (Amounts in millions) Company formed an additional owner trust securitization facility Fixed-rate securitizations................................. $ 984 $559 that allowed for a $655 million securitization of automobile loan Floating-rate securitizations receivables in the public market. The program had a capacity of synthetically altered to fixed...................... 299 327 $655 million at the end of fiscal 2001. Securitized receivables Floating-rate securitizations ............................. 1 1 under all CarMax programs totaled $1.28 billion at the end of Held by the Company: fiscal 2001. Under the securitization programs, receivables are For investment*.............................................. 9 22 sold to unaffiliated third parties with the servicing rights For sale......................................................... 3 23 retained. We expect that these securitization programs can be Total ...................................................................... $1,296 $932 expanded to accommodate future receivables growth. CarMax expects to open two used-car superstores late in fiscal * Held by a bankruptcy remote special purpose company. 2002 and assuming the business continues to meet our expecta- The Company has analyzed its interest rate exposure and has tions, as many as 30 stores over the following four years. The ini- concluded that it did not represent a material market risk at tial cash investment per store is expected to be in the range of February 28, 2001, or February 29, 2000. The Company has a $22 million to $30 million for an “A” store and $11 million to program in place to manage interest rate exposure relating to its $18 million for a satellite store. The initial investment includes installment loan portfolio and expects to experience relatively the land and building; furniture, fixtures and equipment; inven- little impact as interest rates fluctuate. tory; and CarMax’s seller’s interest in the automobile loan receiv- ables of the Group’s finance operation. These investments are FORWARD-LOOKING STATEMENTS expected primarily to be funded through sale-leasebacks, securiti- Company statements that are not historical facts, including zation of receivables or floor plan financing for inventory. If statements about management’s expectations for fiscal year CarMax takes full advantage of building and land sale-leaseback 2002 and beyond, are forward-looking statements and involve and inventory financing, the net cash investment per store is various risks and uncertainties. Refer to the “Circuit City Stores, expected to be $4 million to $6 million for an “A” store and $2 Inc. Management’s Discussion and Analysis of Results of million to $3 million for a satellite store. Operations and Financial Condition” for a review of possible We believe that the proceeds from sales of property and risks and uncertainties. equipment and receivables, future increases in the Company's debt allocated to the CarMax Group, Inter-Group loans, floor plan financing and cash generated by operations will be suffi- cient to fund the capital expenditures and operations of the CarMax business. MARKET RISK The Company manages the automobile installment loan portfolio of the CarMax finance operation. A portion of this portfolio is securitized and, therefore, is not presented on the Group’s balance Carmax Group sheets. Interest rate exposure relating to these receivables repre- sents a market risk exposure that the Company has managed with matched funding and interest rate swaps. Total principal outstand- ing for fixed-rate automobile loans at February 28, 2001, and February 29, 2000, was as follows: 2001 2000 (Amounts in millions) Fixed APR.............................................................. $1,296 $932 71 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 75. CarMax Group Statements of Operations Years Ended February 28 or 29 2001 % 2000 % 1999 % (Amounts in thousands) $2,500,991 100.0 $2,014,984 100.0 $1,466,298 100.0 NET SALES AND OPERATING REVENUES......................................... 2,171,232 Cost of sales ................................................................................ 86.8 1,774,619 88.1 1,294,032 88.3 329,759 13.2 240,365 11.9 172,266 11.7 GROSS PROFIT............................................................................... Selling, general and administrative 244,167 expenses [NOTES 1 and 10] ........................................................... 9.8 228,200 11.3 204,422 13.9 12,110 Interest expense [NOTES 1 AND 5] .................................................... 0.5 10,362 0.5 6,393 0.4 256,277 10.3 238,562 11.8 210,815 14.3 TOTAL EXPENSES............................................................................ 73,482 Earnings (loss) before income taxes ........................................ 2.9 1,803 0.1 (38,549) (2.6) 27,918 Income tax provision (benefit) [NOTES 1 AND 6] ............................ 1.1 685 0.0 (15,035) (1.0) $ 45,564 1.8 $ 1,118 0.1 $ (23,514) (1.6) NET EARNINGS (LOSS).................................................................... Net earnings (loss) attributed to [NOTE 1]: $ 34,009 Circuit City Group Common Stock..................................... $ 862 $ (18,057) 11,555 CarMax Group Common Stock ........................................... 256 (5,457) $ 45,564 $ 1,118 $ (23,514) See accompanying notes to Group financial statements. 72 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 76. CarMax Group Balance Sheets At February 28 or 29 2001 2000 (Amounts in thousands) ASSETS CURRENT ASSETS: $ 8,802 Cash and cash equivalents..................................................................................................................... $ 9,981 134,662 Net accounts receivable [NOTE 11] ............................................................................................................. 129,253 347,137 Inventory.................................................................................................................................................. 283,592 2,306 Prepaid expenses and other current assets .......................................................................................... 2,844 492,907 TOTAL CURRENT ASSETS ............................................................................................................................ 425,670 192,158 Property and equipment, net [NOTES 4 AND 5]............................................................................................ 211,856 25,888 Other assets .............................................................................................................................................. 37,969 $710,953 TOTAL ASSETS ............................................................................................................................................ $675,495 LIABILITIES AND GROUP EQUITY CURRENT LIABILITIES: 108,151 Current installments of long-term debt [NOTE 5] .................................................................................... $ 91,609 82,483 Accounts payable .................................................................................................................................... 75,959 987 Short-term debt [NOTE 5]............................................................................................................................ 1,552 16,154 Accrued expenses and other current liabilities ................................................................................... 19,856 18,162 Deferred income taxes [NOTE 6]................................................................................................................. 7,147 225,937 TOTAL CURRENT LIABILITIES ...................................................................................................................... 196,123 83,057 Long-term debt, excluding current installments [NOTE 5] ..................................................................... 121,257 6,836 Deferred revenue and other liabilities .................................................................................................. 7,249 3,620 Deferred income taxes [NOTE 6]................................................................................................................. 5,877 319,450 330,506 TOTAL LIABILITIES....................................................................................................................................... 391,503 344,989 GROUP EQUITY........................................................................................................................................... Commitments and contingent liabilities [NOTES 1, 8, 9, 11, 12 AND 13] $710,953 $675,495 TOTAL LIABILITIES AND GROUP EQUITY..................................................................................................... See accompanying notes to Group financial statements. Carmax Group 73 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 77. CarMax Group Statements of Cash Flows Years Ended February 28 or 29 2001 2000 1999 (Amounts in thousands) OPERATING ACTIVITIES: $ 45,564 Net earnings (loss)................................................................................................... $ 1,118 $ (23,514) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: 18,116 Depreciation and amortization ........................................................................ 15,241 10,003 8,677 Write-down of assets and lease termination costs [NOTE 10] ........................... 4,755 — 415 Loss (gain) on disposition of property and equipment ................................. (820) — 8,758 Provision for deferred income taxes ............................................................... 1,225 11,284 Changes in operating assets and liabilities, net of effects from business acquisitions: (413) (Decrease) increase in deferred revenue and other liabilities ................. 2,234 (251) (5,409) Increase in net accounts receivable ........................................................... (31,889) (36,498) (62,745) Increase in inventory ................................................................................... (39,909) (81,490) 538 Decrease (increase) in prepaid expenses and other current assets ........... (2,224) 25,714 424 Decrease (increase) in other assets ............................................................. 1,255 (809) Increase in accounts payable, accrued expenses and 3,881 other current liabilities........................................................................... 25,016 15,229 17,806 (23,998) (80,332) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........................................ INVESTING ACTIVITIES: (1,325) Cash used in business acquisitions [NOTE 3] ............................................................ (34,849) (41,562) (10,834) Purchases of property and equipment.................................................................. (45,395) (138,299) 15,506 Proceeds from sales of property and equipment................................................. 25,340 139,332 3,347 (54,904) (40,529) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......................................... FINANCING ACTIVITIES: (565) (Decrease) increase in allocated short-term debt, net......................................... (3,053) 1,220 (21,658) (Decrease) increase in allocated long-term debt, net.......................................... 71,896 108,584 (109) Equity issuances, net............................................................................................... 2,361 2,324 (22,332) 71,204 112,128 NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........................................ (1,179) Decrease in cash and cash equivalents ...................................................................... (7,698) (8,733) 9,981 Cash and cash equivalents at beginning of year...................................................... 17,679 26,412 $ 8,802 Cash and cash equivalents at end of year ................................................................. $ 9,981 $ 17,679 See accompanying notes to Group financial statements. 74 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 78. CarMax Group Statements of Group Equity (Amounts in thousands) $ 359,946 BALANCE AT MARCH 1, 1998...................................................................................................................................................................... Net loss ................................................................................................................................................................................................ (23,514) Equity issuances, net ......................................................................................................................................................................... 3,983 340,415 BALANCE AT FEBRUARY 28, 1999................................................................................................................................................................ Net earnings........................................................................................................................................................................................ 1,118 Equity issuances, net ......................................................................................................................................................................... 3,456 344,989 BALANCE AT FEBRUARY 29, 2000................................................................................................................................................................ Net earnings........................................................................................................................................................................................ 45,564 Equity issuances, net ......................................................................................................................................................................... 950 $391,503 BALANCE AT FEBRUARY 28, 2001................................................................................................................................................................ See accompanying notes to Group financial statements. Carmax Group 75 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 79. Notes to CarMax Group Financial Statements 1. BASIS OF PRESENTATION Allocated debt of the CarMax Group consists of (i) Company debt, if any, that has been allocated in its entirety to the CarMax Group The common stock of Circuit City Stores, Inc. consists of two com- and (ii) a portion of the Company’s pooled debt, which is debt mon stock series, which are intended to reflect the performance of allocated between the Groups. The pooled debt bears interest at a the Company's two businesses. The Circuit City Group Common rate based on the average pooled debt balance. Expenses related Stock is intended to track the performance of the Circuit City to increases in pooled debt are reflected in the weighted average store-related operations, the Group’s retained interest in the interest rate of such pooled debt. CarMax Group and the Company’s investment in Digital Video (B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporate Express, which has been discontinued. The effects of this retained general and administrative costs and other shared services gen- interest on the Circuit City Group’s financial statements are identi- erally have been allocated to the CarMax Group based upon uti- fied by the term “Inter-Group.” The CarMax Group Common Stock lization of such services by the Group. Where determinations is intended to track the performance of the CarMax Group's oper- based on utilization alone have been impractical, other methods ations. The Inter-Group Interest is not considered outstanding and criteria are used that management believes are equitable and CarMax Group Common Stock. Therefore, any net earnings or loss provide a reasonable estimate of the costs attributable to the attributed to the Inter-Group Interest is not included in the Group. Costs allocated to the CarMax Group totaled approxi- CarMax Group’s per share calculations. The Circuit City Group mately $4.0 million for fiscal 2001, $5.6 million for fiscal 2000 held a 74.6 percent interest in the CarMax Group at February 28, and $7.5 million for fiscal 1999. 2001, a 74.7 percent interest in the CarMax Group at February 29, (C) INCOME TAXES: The CarMax Group is included in the con- 2000, and a 76.6 percent interest at February 28, 1999. The terms solidated federal income tax return and in certain state tax of each series of common stock are discussed in detail in the returns filed by the Company. Accordingly, the financial state- Company's Form 8-A registration statement on file with the SEC. ment provision and the related tax payments or refunds are Notwithstanding the attribution of the Company’s assets and reflected in each Group’s financial statements in accordance with liabilities, including contingent liabilities, and stockholders’ equity the Company’s tax allocation policy for such Groups. In general, between the CarMax Group and the Circuit City Group for the this policy provides that the consolidated tax provision and purposes of preparing the financial statements, holders of CarMax related tax payments or refunds are allocated between the Group Common Stock and holders of Circuit City Group Common Groups based principally upon the financial income, taxable Stock are shareholders of the Company and continue to be subject income, credits and other amounts directly related to each to all of the risks associated with an investment in the Company Group. Tax benefits that cannot be used by the Group generating and all of its businesses, assets and liabilities. Such attribution and such attributes, but can be utilized on a consolidated basis, are the equity structure of the Company do not affect title to the allocated to the Group that generated such benefits. As a result, assets or responsibility for the liabilities of the Company or any of the allocated Group amounts of taxes payable or refundable are its subsidiaries. The results of operations or financial condition of not necessarily comparable to those that would have resulted if one Group could affect the results of operations or financial con- the Groups had filed separate tax returns. dition of the other Group. Net losses of either Group, and divi- dends or distributions on, or repurchases of, Circuit City Group 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Common Stock or CarMax Group Common Stock will reduce (A) CASH AND CASH EQUIVALENTS: The CarMax Group had no funds legally available for dividends on, or repurchases of, both cash equivalents at February 28, 2001. Cash equivalents of stocks. Accordingly, the CarMax Group financial statements $1,770,000 at February 29, 2000, consist of highly liquid debt included herein should be read in conjunction with the Company’s securities with original maturities of three months or less. consolidated financial statements, the Circuit City Group financial (B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For trans- statements and the Company's SEC filings. fers of financial assets that qualify as sales, the Company may The CarMax Group’s financial statements reflect the applica- retain interest-only strips, one or more subordinated tranches, tion of the management and allocation policies adopted by the residual interests in a securitization trust, servicing rights and a board of directors. These policies may be modified or rescinded, cash reserve account, all of which are retained interests in the or new policies may be adopted, at the sole discretion of the securitized receivables. These retained interests are measured board of directors, although the board of directors has no pre- based on the fair value at the date of transfer. The Company sent plans to do so. These management and allocation policies determines fair value based on the present value of future include the following: expected cash flows using management’s best estimates of the (A) FINANCIAL ACTIVITIES: Most financial activities are managed key assumptions such as finance charge income, default rates, by the Company on a centralized basis. Such financial activities prepayment rates and discount rates appropriate for the type of include the investment of surplus cash and the issuance and asset and risk. Retained interests are included in net accounts repayment of short-term and long-term debt. Allocated invested receivable and are carried at fair value with changes in fair surplus cash of the CarMax Group consists of (i) Company cash value reflected in earnings. equivalents, if any, that have been allocated in their entirety to (C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company the CarMax Group and (ii) a portion of the Company’s cash enters into financial instruments on behalf of the CarMax Group. equivalents, if any, that are allocated between the Groups. 76 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 80. The carrying value of the Company's financial instruments, income tax purposes, measured by applying currently enacted excluding interest rate swaps held for hedging purposes, approxi- tax laws. A deferred tax asset is recognized if it is more likely mates fair value. Credit risk is the exposure created by the poten- than not that a benefit will be realized. tial nonperformance of another material party to an agreement (J) REVENUE RECOGNITION: The CarMax Group recognizes rev- because of changes in economic, industry or geographic factors. enue when the earnings process is complete, generally at either the The Company mitigates credit risk by dealing only with counter- time of sale to a customer or upon delivery to a customer. parties that are highly rated by several financial rating agencies. (K) DEFERRED REVENUE: The CarMax Group sells service con- Accordingly, the Company does not anticipate material loss for tracts on behalf of unrelated third parties and, prior to July 1997, nonperformance. The Company broadly diversifies all financial sold its own contracts at one location where third-party sales instruments along industry, product and geographic areas. were not permitted. Contracts usually have terms of coverage (D) INVENTORY: Inventory is stated at the lower of cost or mar- between 12 and 72 months. Commission revenue for the unre- ket. Vehicle inventory cost is determined by specific identification. lated third-party service contracts is recognized at the time of Parts and labor used to recondition vehicles, as well as transporta- sale, because the third parties are the primary obligors under tion and other incremental expenses associated with acquiring these contracts. Inasmuch as CarMax is the primary obligor on its vehicles, are included in inventory. own contracts, all revenue from the sale of these contracts was (E) PROPERTY AND EQUIPMENT: Property and equipment is deferred and amortized over the life of the contracts consistent stated at cost less accumulated depreciation. Depreciation is cal- with the pattern of repair experience of the industry. Incremental culated using the straight-line method over the assets’ estimated direct costs related to the sale of contracts were deferred and useful lives. charged to expense in proportion to the revenue recognized. (F) COMPUTER SOFTWARE COSTS: The Company accounts for (L) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating computer software costs in accordance with the American profits generated by the finance operation are recorded as a Institute of Certified Public Accountants Statement of Position reduction to selling, general and administrative expenses. 98-1, “Accounting for the Costs of Computer Software Developed (M) ADVERTISING EXPENSES: All advertising costs are expensed or Obtained for Internal Use.” Once the capitalization criteria of as incurred. SOP 98-1 have been met, external direct costs of materials and (N) STOCK-BASED COMPENSATION: The Company accounts for services used in the development of internal-use software and stock-based compensation in accordance with Accounting payroll and payroll-related costs for employees directly involved Principles Board Opinion No. 25, “Accounting For Stock Issued in the development of internal-use software are capitalized. to Employees,” and provides the pro forma disclosures of SFAS Amounts capitalized are amortized on a straight-line basis over No. 123, “Accounting for Stock-Based Compensation.” a period of three to five years. (O) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters (G) INTANGIBLE ASSETS: Amounts paid for acquired businesses into interest rate swap agreements to manage exposure to inter- in excess of the fair value of the net tangible assets acquired are est rates and to more closely match funding costs to the use of recorded as goodwill, which is amortized on a straight-line basis funding. Swaps entered into by a seller as part of a sale of finan- over 15 years, and covenants not to compete, which are amor- cial assets are considered proceeds at fair value in the determi- tized on a straight-line basis over the life of the covenant not to nation of the gain or loss on the sale. If such a swap were to be exceed five years. Both goodwill and covenants not to compete terminated, the impact on the fair value of the financial asset are included in other assets on the accompanying CarMax created by the sale of the related receivables would be estimated Group balance sheets. The carrying values of intangible assets and included in earnings. are periodically reviewed by the Company and impairments are (P) RISKS AND UNCERTAINTIES: The CarMax Group is a used- recognized when the expected future undiscounted operating and new-car retail business. The diversity of the CarMax Group’s cash flows expected from such intangible assets are less than customers and suppliers reduces the risk that a severe impact will the carrying values. occur in the near term as a result of changes in its customer base, (H) PRE-OPENING EXPENSES: Effective March 1, 1999, the competition or sources of supply. However, because of the CarMax Carmax Group Company adopted SOP 98-5, “Reporting on the Costs of Start-Up Group’s limited overall size, management cannot assure that Activities.” SOP 98-5 requires costs of start-up activities, includ- unanticipated events will not have a negative impact on the Group. ing organization and pre-opening costs, to be expensed as The preparation of financial statements in conformity with incurred. Prior to fiscal 2000, the Company capitalized pre-open- accounting principles generally accepted in the United States of ing costs for new store locations. Beginning in the month after America requires management to make estimates and assump- the store opened for business, the pre-opening costs were amor- tions that affect the reported amounts of assets, liabilities, rev- tized over the remainder of the fiscal year. enues and expenses and the disclosure of contingent assets and (I) INCOME TAXES: Income taxes are accounted for in accor- liabilities. Actual results could differ from those estimates. dance with SFAS No. 109, “Accounting for Income Taxes.” (Q) RECLASSIFICATIONS: Certain amounts in prior years have been Deferred income taxes reflect the impact of temporary differ- reclassified to conform to classifications adopted in fiscal 2001. ences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for 77 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 81. 3. BUSINESS ACQUISITIONS In July 1994, the Company entered into a seven-year, The CarMax Group acquired the franchise rights and the related $100,000,000 unsecured bank term loan. The loan was restruc- assets of one new-car dealership for an aggregate cost of $1.3 mil- tured in August 1996 as a $100,000,000, six-year unsecured lion in fiscal 2001, five new-car dealerships for an aggregate cost of bank term loan. Principal is due in full at maturity with interest $34.8 million in fiscal 2000 and four new-car dealerships for an payable periodically at LIBOR plus 0.40 percent. At February 28, aggregate cost of $49.6 million in fiscal year 1999. These acquisi- 2001, the interest rate on the term loan was 5.97 percent. tions were financed through available cash resources, including allo- In May 1995, the Company entered into a five-year, cated debt and, in fiscal 1999, the issuance of two promissory notes $175,000,000 unsecured bank term loan. As scheduled, the aggregating $8.0 million. Costs in excess of the fair value of the net Company used existing working capital to repay this term loan tangible assets acquired (primarily inventory) have been recorded as in May 2000. goodwill and covenants not to compete. These acquisitions were In June 1996, the Company entered into a five-year, accounted for under the purchase method and the results of the $130,000,000 unsecured bank term loan. Principal is due in full operations of each acquired franchise were included in the accompa- at maturity with interest payable periodically at LIBOR plus 0.35 nying CarMax Group financial statements since the dates of acquisi- percent. At February 28, 2001, the interest rate on the term loan tion. Unaudited pro forma information related to these acquisitions was 5.73 percent. This term loan is due in June 2001 and was is not included because the impact of these acquisitions on the classified as a current liability at February 28, 2001. Although accompanying CarMax Group financial statements is not material. the Company has the ability to refinance this loan, it intends to 4. PROPERTY AND EQUIPMENT repay the debt using existing working capital. Property and equipment, at cost, at February 28 or 29 is summa- The Company maintains a multi-year, $150,000,000 unsecured rized as follows: revolving credit agreement with four banks. The agreement calls for interest based on both committed rates and money market 2001 2000 (Amounts in thousands) rates and a commitment fee of 0.18 percent per annum. The Land and buildings (20 to 25 years) .............. $101,382 $ 81,885 agreement was entered into as of August 31, 1996, and terminates Land held for sale.............................................. 27,971 41,850 August 31, 2002. No amounts were outstanding under the revolv- Land held for development.............................. 4,285 17,697 ing credit agreement at February 28, 2001, or February 29, 2000. Construction in progress .................................. 14,324 18,010 In November 1998, the CarMax Group entered into a four- Furniture, fixtures and equipment year, unsecured $5,000,000 promissory note. Principal is due (3 to 8 years) ................................................ 64,866 60,225 annually with interest payable periodically at 8.25 percent. Leasehold improvements Under certain of the debt agreements, the Company must (10 to 15 years)............................................. 21,196 19,902 meet financial covenants relating to minimum tangible net 234,024 239,569 worth, current ratios and debt-to-capital ratios. The Company Less accumulated depreciation ....................... 41,866 27,713 was in compliance with all such covenants at February 28, 2001, Property and equipment, net........................... $192,158 $211,856 and February 29, 2000. Short-term debt of the Company is funded through commit- Land held for development is land owned for future sites ted lines of credit and informal credit arrangements, as well as that are scheduled to open more than one year beyond the fiscal the revolving credit agreement. Amounts outstanding and com- year reported. mitted lines of credit available are as follows: 5. DEBT Years Ended Long-term debt of the Company at February 28 or 29 is summa- February 28 or 29 2001 2000 (Amounts in thousands) rized as follows: Average short-term debt outstanding........ $ 56,065 $ 44,692 2001 2000 (Amounts in thousands) Maximum short-term debt outstanding .... $365,275 $411,791 Term loans ......................................................... $230,000 $405,000 Aggregate committed lines of credit......... $360,000 $370,000 Industrial Development Revenue Bonds due through 2006 at various prime-based rates The weighted average interest rate on the outstanding short- of interest ranging from 5.5% to 6.7%..... 4,400 5,419 term debt was 6.8 percent during fiscal 2001, 5.6 percent during Obligations under capital leases .................... 12,049 12,416 fiscal 2000 and 5.1 percent during fiscal 1999. Note payable ..................................................... 2,076 3,750 Interest expense allocated by the Company to the CarMax Group, excluding interest capitalized, was $12,110,000 in fiscal Total long-term debt........................................ 248,525 426,585 2001, $10,362,000 in fiscal 2000 and $6,393,000 in fiscal 1999. Less current installments................................. 132,388 177,344 The CarMax Group capitalizes interest in connection with the Long-term debt, excluding current construction of certain facilities. There was no interest capitalized installments ................................................. $116,137 $249,241 in fiscal 2001. Interest capitalized amounted to $1,254,000 in Portion of long-term debt allocated fiscal 2000 and $2,674,000 in fiscal 1999. to the CarMax Group ................................. $191,208 $212,866 78 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 82. 6. INCOME TAXES 7. ASSOCIATE BENEFIT AND STOCK INCENTIVE PLANS The components of the income tax provision (benefit) on net (A) 401(k) PLAN: Effective August 1, 1999, the Company began earnings (loss) are as follows: sponsoring a 401(k) Plan for all employees meeting certain eligi- bility criteria. Under the Plan, eligible employees can contribute Years Ended February 28 or 29 up to 15 percent of their salaries, and the Company matches a 2001 2000 1999 (Amounts in thousands) portion of those associate contributions. The Company's expense Current: for this plan for CarMax Group associates was $686,000 in fiscal Federal ..................................... $16,986 $(1,395) $(23,773) 2001 and $317,000 in fiscal 2000. State ......................................... 2,174 855 (2,546) (B) PREFERRED STOCK: In conjunction with the Company’s Shareholders Rights Plan as amended and restated, preferred stock 19,160 (540) (26,319) purchase rights were distributed as a dividend at the rate of one Deferred: right for each share of CarMax Group Common Stock. The rights Federal ..................................... 8,494 1,190 10,945 are exercisable only upon the attainment of, or the commence- State ......................................... 264 35 339 ment of a tender offer to attain, a specified ownership interest in 8,758 1,225 11,284 the Company by a person or group. When exercisable, each Income tax provision (benefit).... $27,918 $ 685 $(15,035) CarMax Group right would entitle shareholders to buy one four- hundredth of a share of Cumulative Participating Preferred Stock, Series F, $20 par value, at an exercise price of $100 per share sub- The effective income tax rate differed from the federal statu- ject to adjustment. A total of 500,000 shares of such preferred tory income tax rate as follows: stock, which have preferential dividend and liquidation rights, have been designated. No such shares are outstanding. In the Years Ended February 28 or 29 2001 2000 1999 event that an acquiring person or group acquires the specified Federal statutory income tax rate ........ 35% 35% 35% ownership percentage of the Company’s common stock (except State and local income taxes, pursuant to a cash tender offer for all outstanding shares deter- net of federal benefit ........................ 3% 3% 4% mined to be fair by the board of directors) or engages in certain transactions with the Company after the rights become exercis- Effective income tax rate....................... 38% 38% 39% able, each right will be converted into a right to purchase, for half the current market price at that time, shares of the related Group In accordance with SFAS No. 109, the tax effects of temporary stock valued at two times the exercise price. The Company also differences that give rise to a significant portion of the deferred has 1,000,000 shares of undesignated preferred stock authorized tax assets and liabilities at February 28 or 29 are as follows: of which no shares are outstanding and an additional 500,000 shares of preferred stock designated as Series E, which are related 2001 2000 (Amounts in thousands) to similar rights held by Circuit City Group shareholders. Deferred tax assets: (C) VOTING RIGHTS: The holders of both series of common Accrued expenses ........................................ $ 5,173 $ 5,510 stock and any series of preferred stock outstanding and entitled Other .............................................................. 235 309 to vote together with the holders of common stock will vote Total gross deferred tax assets............. 5,408 5,819 together as a single voting group on all matters on which com- mon shareholders generally are entitled to vote other than a Deferred tax liabilities: matter on which the common stock or either series thereof or Depreciation ................................................. 3,850 6,181 any series of preferred stock would be entitled to vote as a sepa- Securitized receivables................................ 15,262 4,919 rate voting group. On all matters on which both series of com- Inventory ...................................................... 6,449 4,655 mon stock would vote together as a single voting group, (i) each Prepaid expenses ......................................... 1,629 3,088 outstanding share of Circuit City Group Common Stock shall Total gross deferred tax liabilities....... 27,190 18,843 Carmax Group have one vote and (ii) each outstanding share of CarMax Group Net deferred tax liability.................................. $21,782 $13,024 Common Stock shall have a number of votes based on the weighted average ratio of the market value of a share of In assessing the realizability of deferred tax assets, manage- CarMax Group Common Stock to a share of Circuit City Group ment considers the scheduled reversal of deferred tax liabilities, Common Stock. If shares of only one series of common stock projected future taxable income and tax planning strategies. are outstanding, each share of that series shall be entitled to Based on these considerations, management believes that it is one vote. If either series of common stock is entitled to vote as more likely than not that the gross deferred tax assets at February a separate voting group with respect to any matter, each share 28, 2001, and February 29, 2000, will be realized by the CarMax of that series shall, for purposes of such vote, be entitled to one Group; therefore, no valuation allowance is necessary. vote on such matter. 79 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 83. (D) RESTRICTED STOCK: The Company has issued restricted maximum of $7,500 per year. At February 28, 2001, a total of stock under the provisions of the 1994 Stock Incentive Plan 581,599 shares remained available under the CarMax Group Plan. whereby management and key employees are granted restricted During fiscal 2001, 477,094 shares were issued to or purchased on shares of CarMax Group Common Stock. Shares are awarded in the open market on behalf of employees (580,000 in fiscal 2000 the name of the employee, who has all the rights of a share- and 268,532 in fiscal 1999). The average price per share purchased holder, subject to certain restrictions or forfeitures. Restrictions under the Plan was $4.18 in fiscal 2001, $3.68 in fiscal 2000 and on the awards generally expire four to five years from the date of $7.56 in fiscal 1999. The Company match or purchase price dis- grant. The market value at the date of grant of these shares has count for the CarMax Group totaled $247,000 in fiscal 2001, been recorded as unearned compensation and is a component of $221,500 in fiscal 2000 and $268,100 in fiscal 1999. Group equity. Unearned compensation is expensed over the (F) STOCK INCENTIVE PLANS: Under the Company’s stock incen- restriction periods. In fiscal 2001, a total of $153,500 was tive plans, nonqualified stock options may be granted to man- charged to operations ($447,200 in fiscal 2000 and $426,600 in agement, key employees and outside directors to purchase shares fiscal 1999). As of February 28, 2001, 56,667 restricted shares of CarMax Group Common Stock. The exercise price for non- were outstanding. qualified options is equal to, or greater than, the market value at (E) EMPLOYEE STOCK PURCHASE PLAN: The Company has the date of grant. Options generally are exercisable over various Employee Stock Purchase Plans for all employees meeting certain periods ranging from one to seven years from the date of grant. eligibility criteria. The CarMax Group Plan allows eligible employ- A summary of the status of the CarMax Group’s stock options ees to purchase shares of CarMax Group Common Stock, subject and changes during the years ended February 28, 2001, February to certain limitations. For each $1.00 contributed by employees 29, 2000, and February 28, 1999, are shown in Table 1. Table 2 under the Plan, the Company matches $0.15. Purchases are limited summarizes information about stock options outstanding as of to 10 percent of an employee’s eligible compensation, up to a February 28, 2001. TABLE 1 2001 2000 1999 Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price (Shares in thousands) Outstanding at beginning of year ................. 3,324 $3.87 4,380 $1.77 4,822 $ 1.49 Granted .............................................................. 1,281 1.70 1,132 5.89 205 8.63 Exercised............................................................ (56) 0.22 (2,027) 0.22 (543) 0.22 Cancelled ........................................................... (442) 4.67 (161) 6.94 (104) 10.54 Outstanding at end of year............................. 4,107 $3.16 3,324 $3.87 4,380 $ 1.77 Options exercisable at end of year ................ 1,943 $2.94 1,203 $2.54 1,566 $ 0.96 TABLE 2 Options Outstanding Options Exercisable Weighted Average Number Remaining Weighted Average Number Weighted Average (Shares in thousands) Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price $ 0.22 ............................................................... 1,578 1.0 $ 0.22 1,338 $ 0.22 1.63 ............................................................... 1,094 6.0 1.63 — — 3.22 to 6.25................................................ 1,011 4.7 5.89 305 6.07 8.68 to 16.31 ................................................ 424 3.4 11.55 300 11.91 Total.................................................................... 4,107 3.5 $ 3.16 1,943 $ 2.94 80 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 84. The CarMax Group applies APB Opinion No. 25 and related The following tables set forth the CarMax Group’s share of interpretations in accounting for its stock option plans. the Pension Plan’s financial status and amounts recognized in Accordingly, no compensation cost has been recognized. Had the balance sheets as of February 28 or 29: compensation cost been determined based on the fair value at the 2001 2000 (Amounts in thousands) grant date consistent with the methods of SFAS No. 123, the net Change in benefit obligation: earnings (loss) attributed to the CarMax Group would have Benefit obligation at beginning of year......... $ 4,443 $ 2,565 changed to the pro forma amounts indicated below. In accordance Service cost ........................................................ 1,525 1,250 with the transition provisions of SFAS No. 123, the pro forma Interest cost ........................................................ 355 173 amounts reflect options with grant dates subsequent to March 1, Actuarial loss ..................................................... 1,514 455 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro Benefit obligation at end of year.................... $ 7,837 $ 4,443 forma net earnings (loss) amounts presented below because com- Change in plan assets: pensation cost is reflected over the options’ vesting periods and Fair value of plan assets at beginning compensation cost of options granted prior to March 1, 1995, is of year ........................................................... $ 2,715 $ 1,553 not considered. The pro forma effect on fiscal year 2001 may not Actual return on plan assets............................ (271) 537 be representative of the pro forma effects on net earnings (loss) for Employer contributions.................................... 1,630 625 future years. Fair value of plan assets at end of year......... $ 4,074 $ 2,715 Reconciliation of funded status: Years Ended February 28 or 29 2001 2000 1999 (Amounts in thousands) Funded status..................................................... $(3,763) $(1,728) Net earnings (loss): Unrecognized actuarial loss............................. 3,039 1,062 As reported ............................... $11,555 $256 $(5,457) Unrecognized transition asset ......................... (3) (6) Pro forma.................................. 11,345 75 (5,537) Unrecognized prior service benefit................. (4) (6) Net amount recognized .................................... $ (731) $ (678) For the purpose of computing the pro forma amounts indi- cated above, the fair value of each option on the date of grant is The components of net pension expense are as follows: estimated using the Black-Scholes option-pricing model. The weighted average assumptions used in the model are as follows: Years Ended February 28 or 29 2001 2000 1999 (Amounts in thousands) 2001 2000 1999 Service cost............................................ $1,525 $1,250 $ 525 Expected dividend yield .................. – – – Interest cost............................................ 355 173 67 Expected stock volatility ................. 71% 62% 50% Expected return on plan assets........... (283) (159) (119) Risk-free interest rates..................... 7% 6% 6% Amortization of prior service cost ..... (2) (2) (1) Expected lives (in years).................. 4 4 3 Amortization of transitional asset ...... (3) (3) (3) Recognized actuarial loss..................... 91 77 — Using these assumptions in the Black-Scholes model, the Net pension expense............................. $1,683 $1,336 $ 469 weighted average fair value of options granted for the CarMax Group is $1 in fiscal 2001, $3 in fiscal 2000 and $3 in fiscal 1999. Assumptions used in the accounting for the Pension Plan were: 8. PENSION PLANS Years Ended February 28 or 29 The Company has a noncontributory defined benefit pension 2001 2000 1999 plan covering the majority of full-time employees who are at Weighted average discount rate................... 7.5% 8.0% 6.8% least age 21 and have completed one year of service. The cost of Rate of increase in compensation levels..... 6.0% 6.0% 5.0% the program is being funded currently. Plan benefits generally Carmax Group Expected rate of return on plan assets ....... 9.0% 9.0% 9.0% are based on years of service and average compensation. Plan assets consist primarily of equity securities and included 160,000 The Company also has an unfunded nonqualified plan that shares of Circuit City Group Common Stock at February 28, restores retirement benefits for certain senior executives who 2001, and February 29, 2000. Eligible employees of the CarMax are affected by Internal Revenue Code limitations on benefits Group participate in the Company’s plan. Pension costs for these provided under the Company's Pension Plan. The projected ben- employees have been allocated to the CarMax Group based on efit obligation under this plan and allocated to the CarMax its proportionate share of the projected benefit obligation. Group was $500,000 at February 28, 2001, and $300,000 at February 29, 2000. 81 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 85. 9. LEASE COMMITMENTS (B) WRITE-DOWN OF ASSETS AND LEASE TERMINATION COSTS: In the fourth quarter of fiscal 2001, CarMax recorded $8.7 million The CarMax Group conducts substantially all of its business in for the write-off of goodwill associated with two underperform- leased premises. The CarMax Group’s lease obligations are based ing stand-alone new-car franchises. In the fourth quarter of fis- upon contractual minimum rates. Rental expense for all operat- cal 2000, CarMax recorded $4.8 million in charges related to ing leases was $35,945,000 in fiscal 2001, $34,561,000 in fiscal lease termination costs on undeveloped property and a write- 2000 and $23,521,000 in fiscal 1999. In fiscal 2001, CarMax also down of assets associated with excess property for sale at several had sublease income of $91,000. Most leases provide that the locations. The loss related to operating leases was calculated CarMax Group pay taxes, maintenance, insurance and operating based on expected lease termination costs and costs associated expenses applicable to the premises. with subleasing the property. The initial term of most real property leases will expire within the next 20 years; however, most of the leases have options pro- 11. SECURITIZATIONS viding for additional lease terms of 10 to 20 years at terms simi- The Company has an asset securitization program, operated lar to the initial terms. through a special purpose subsidiary on behalf of the CarMax Future minimum fixed lease obligations, excluding taxes, Group, to finance the consumer installment credit receivables insurance and other costs payable directly by the CarMax Group, generated by its automobile loan finance operation. This auto- as of February 28, 2001, were: mobile loan securitization program had a total program capacity of $450 million as of February 28, 2001, with no recourse provi- Operating sions. In October 1999, the Company formed a second securitiza- Lease (Amounts in thousands) Fiscal Commitments tion facility that allowed for a $644 million securitization of automobile loan receivables in the public market. Because of the 2002 .................................................................................... $34,376 amortization of the automobile loan receivables and correspond- 2003 .................................................................................... 34,217 ing securities in this facility, the program had a capacity of $329 2004 .................................................................................... 33,636 million as of February 28, 2001, with no recourse provisions. In 2005 .................................................................................... 33,338 January 2001, the Company sold $655 million of receivables in 2006 .................................................................................... 32,606 the public market through an additional owner trust structure. After 2006 .......................................................................... 426,262 The program had a capacity of $655 million as of February 28, Total minimum lease payments...................................... $594,435 2001, with no recourse provisions. In these securitizations, the Company retains servicing rights and subordinated interests. The In fiscal 2001, the Company did not enter into any sale-lease- Company’s retained interests are subject to credit and prepay- back transactions on behalf of the CarMax Group with unrelated ment risks on the transferred financial assets. parties. The aggregate selling price of sale-leaseback transactions At February 28, 2001, the total principal amount of loans was $12,500,000 in fiscal 2000 and $131,750,000 in fiscal 1999. managed or securitized was $1,296 million. Of the total loans, the Neither the Company nor the CarMax Group has continuing principal amount of loans securitized was $1,284 million and the involvement under the sale-leaseback transactions. principal amount of loans held for sale or investment was $12 10. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION million. The principal amount of loans that were 31 days or more delinquent was $18.1 million at February 28, 2001. The credit (A) ADVERTISING EXPENSE: Advertising expense, which is losses net of recoveries were $7.2 million for fiscal 2001. included in selling, general and administrative expenses in the The Company receives annual servicing fees approximating accompanying statements of operations, amounted to 1 percent of the outstanding principal balance of the securitized $44,912,000 (1.8 percent of net sales and operating revenues) in automobile loans and rights to future cash flows arising after the fiscal 2001, $48,637,000 (2.4 percent of net sales and operating investors in the securitization trust have received the return for revenues) in fiscal 2000 and $50,042,000 (3.4 percent of net which they contracted. The servicing fee specified in the auto- sales and operating revenues) in fiscal 1999. mobile loan securitization agreements adequately compensates the finance operation for servicing the accounts. Accordingly, no servicing asset or liability has been recorded. 82 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 86. The table below summarizes certain cash flows received from 12. INTEREST RATE SWAPS and paid to securitization trusts: The Company enters into amortizing swaps relating to automo- bile loan receivable securitizations to convert variable-rate Year Ended financing costs to fixed-rate obligations to better match funding February 28, 2001 (Amounts in thousands) costs to the receivables being securitized. The Company entered Proceeds from new securitizations................................ $619,525 into nine 40-month amortizing swaps with notional amounts Proceeds from collections reinvested totaling approximately $735 million in fiscal 2001, four 40- in previous automobile loan securitizations.......... $313,827 month amortizing swaps with notional amounts totaling approx- Servicing fees received.................................................... $ 10,474 imately $344 million in fiscal 2000 and four 40-month Other cash flows received on retained interests*......... $ 39,265 amortizing swaps with notional amounts totaling approximately $387 million in fiscal 1999. These swaps were entered into as * This amount represents total cash flows received from retained interests by the transferor other than servicing fees, including cash flows from interest-only part of sales of receivables and are included in the gain or loss strips and cash above the minimum required level in cash collateral accounts. on sales of receivables. The remaining total notional amount of all swaps related to the automobile loan receivable securitiza- In determining the fair value of retained interests, the tions was approximately $299 million at February 28, 2001, Company estimates future cash flows using management's best $327 million at February 29, 2000, and $499 million at February estimates of key assumptions such as finance charge income, 28, 1999. The reduction in the total notional amount of the default rates, prepayment rates and discount rates. The Company CarMax interest rate swaps in fiscal 2001 and in fiscal 2000 employs a risk-based pricing strategy that increases the stated relates to the replacement of floating-rate securitizations with a annual percentage rate for accounts that have a higher predicted $655 million fixed-rate securitization in January 2001 and $644 risk of default. Accounts with a lower risk profile also may qual- million fixed-rate securitization in October 1999. ify for promotional financing. The market and credit risks associated with the interest rate Rights recorded for future finance income from serviced swaps are similar to those relating to other types of financial assets that exceed the contractually specified servicing fees are instruments. Market risk is the exposure created by potential carried at fair value and amounted to $42.0 million at February 28, fluctuations in interest rates and is directly related to the product 2001, and are included in net accounts receivable. Gains on sales type, agreement terms and transaction volume. The Company of $35.4 million were recorded in fiscal 2001. does not anticipate significant market risk from swaps, because The fair value of retained interests at February 28, 2001, was their use is to more closely match funding costs to the use of the $74.1 million with a weighted-average life ranging from 1.5 years funding. Credit risk is the exposure to nonperformance of to 1.8 years. The table below shows the key economic assumptions another party to an agreement. The Company mitigates credit used in measuring the fair value of retained interests at February risk by dealing with highly rated counterparties. 28, 2001, and a sensitivity analysis showing the hypothetical 13. CONTINGENT LIABILITIES effect on the fair value of those interests when there are unfavor- In the normal course of business, the Company is involved in able variations from the assumptions used. Key economic various legal proceedings. Based upon the CarMax Group’s eval- assumptions at February 28, 2001, are not materially different uation of the information presently available, management than assumptions used to measure the fair value of retained believes that the ultimate resolution of any such proceedings will interests at the time of securitization. These sensitivities are not have a material adverse effect on the CarMax Group’s finan- hypothetical and should be used with caution. In this table, the cial position, liquidity or results of operations. effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Impact on Impact on Carmax Group Assumptions Fair Value Fair Value Used of 10% of 20% (Dollar amounts (Annual) Adverse Change Adverse Change in thousands) Prepayment speed ......... 1.5 —1.6% $1,840 $3,864 Default rate..................... 1.0 —1.2% $1,471 $3,050 Discount rate.................. 12.0% $ 890 $1,786 83 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 87. 14. QUARTERLY FINANCIAL DATA (UNAUDITED) First Quarter Second Quarter Third Quarter Fourth Quarter Year 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 (Amounts in thousands) Net sales and operating revenues..... $625,741 $486,063 $673,561 $535,727 $561,693 $488,958 $639,996 $504,236 $2,500,991 $2,014,984 Gross profit............................................ $ 85,462 $ 61,996 $ 90,549 $ 63,780 $ 71,679 $ 52,728 $ 82,069 $ 61,861 $ 329,759 $ 240,365 Net earnings (loss) ............................... $ 13,944 $ 2,733 $ 16,271 $ 3,233 $ 7,568 $ (3,136) $ 7,781 $ (1,712) $ 45,564 $ 1,118 Net earnings (loss) attributed to CarMax Group Common Stock... $ 3,535 $ 646 $ 4,126 $ 775 $ 1,920 $ (757) $ 1,974 $ (408) $ 11,555 $ 256 Independent Auditors’ Report The Board of Directors and Stockholders of Circuit City Stores, Inc.: As more fully discussed in Note 1, the financial statements of We have audited the accompanying balance sheets of the the CarMax Group should be read in conjunction with the con- CarMax Group (as defined in Note 1) as of February 28, 2001 solidated financial statements of Circuit City Stores, Inc. and sub- and February 29, 2000 and the related statements of operations, sidiaries and the financial statements of the Circuit City Group. group equity and cash flows for each of the fiscal years in the In our opinion, the financial statements referred to above three-year period ended February 28, 2001. These financial state- present fairly, in all material respects, the financial position of ments are the responsibility of Circuit City Stores, Inc.’s manage- the CarMax Group as of February 28, 2001 and February 29, ment. Our responsibility is to express an opinion on these 2000 and the results of its operations and its cash flows for each financial statements based on our audits. of the fiscal years in the three-year period ended February 28, We conducted our audits in accordance with auditing standards 2001 in conformity with accounting principles generally generally accepted in the United States of America. Those standards accepted in the United States of America. require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evi- dence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting princi- Richmond, Virginia ples used and significant estimates made by management, as well as April 2, 2001 evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 84 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 88. Management’s Report The Board of Directors and Stockholders of Circuit City Stores, Inc.: Auditors’ Reports, which are based on audits made in accordance The consolidated financial statements of Circuit City Stores, Inc. with auditing standards generally accepted in the United States of and subsidiaries, as well as the financial statements of the Circuit America, express opinions as to the fair presentation of the financial City Group and the CarMax Group, have been prepared under the statements in conformity with accounting principles generally direction of management, which is responsible for their integrity accepted in the United States of America. In performing their audits, and objectivity. These financial statements have been prepared in KPMG LLP considers the Company’s internal control structure to the conformity with accounting principles generally accepted in the extent it deems necessary in order to issue its opinions on the United States of America except for the Circuit City Group, which Company’s and the Groups’ financial statements. has accounted for its interest in the CarMax Group in a manner The audit committee of the board of directors is composed solely similar to the equity method of accounting. Accounting principles of outside directors. The committee meets periodically with manage- generally accepted in the United States of America require that the ment, the internal auditors and the independent auditors to assure CarMax Group be consolidated with the Circuit City Group. each is properly discharging its responsibilities. KPMG LLP and the However, management feels the manner in which the Circuit City internal auditors have full and free access to meet privately with the Group is presented more clearly indicates the performance of the audit committee to discuss accounting controls, audit findings and Circuit City business. The financial statements include amounts that financial reporting matters. are the best estimates and judgments of management with consider- ation given to materiality. Management is responsible for maintaining an internal control structure designed to provide reasonable assurance that the W. Alan McCollough books and records reflect the transactions of the Company and that President and Chief Executive Officer the Company’s established policies and procedures are carefully fol- lowed. Because of inherent limitations in any system, there can be no absolute assurance that errors or irregularities will not occur. Nevertheless, management believes that the internal control struc- Michael T. Chalifoux ture provides reasonable assurance that assets are safeguarded and Executive Vice President, Chief Financial Officer that financial information is objective and reliable. and Corporate Secretary The Company’s and the Groups’ financial statements have been April 2, 2001 audited by KPMG LLP, independent auditors. Their Independent Board of Directors Richard L. Sharp James F. Hardymon (1,2) Mikael Salovaara (4,5) Chairman Retired, Chairman and Partner, Chief Executive Officer, Greycliff Partners; Alan L. Wurtzel (5) Textron, Inc.; Morristown, New Jersey Vice Chairman of the Board Providence, Rhode Island John W. Snow (1,2) W. Alan McCollough (3) Robert S. Jepson Jr. (1,2) Chairman, President and President and Chief Executive Officer Chairman and Chief Executive Officer, Chief Executive Officer, Michael T. Chalifoux (3) Jepson Associates, Inc.; CSX Corporation; Executive Vice President, Savannah, Georgia Richmond, Virginia Chief Financial Officer and Major General Hugh G. Robinson (Ret.),P.E.(2,4) (1) Compensation and Personnel Committee Member Corporate Secretary (2) Nominating and Governance Committee Member Chairman and Chief Executive Officer, Richard N. Cooper (4,5) (3) Executive Committee Member The Tetra Group; Professor of Economics, (4) Audit Committee Member Dallas, Texas Harvard University; (5) Pension Investment Committee Member Walter J. Salmon (1,2) Boston, Massachusetts Stanley Roth Senior Professor of Barbara S. Feigin (4,5) Retailing, Emeritus, Consultant; Harvard Business School; Retired, Executive Vice President, Boston, Massachusetts Worldwide Director of Strategic Services, Grey Advertising, Inc.; New York, New York 85 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 89. Company Officers W. Alan McCollough Joseph T. Cipolla Jay W. Bertagnoli David M. Urquidi President and Vice President Assistant Vice President Assistant Vice President Chief Executive Officer Management Information Systems Merchandising Western Division Richard S. Birnbaum Miles M. Circo Julie S. Bilodeau Robert T. Walker Executive Vice President Vice President and Assistant Vice President Assistant Vice President Operations Chief Technical Officer Consumer Insights Central Division Michael T. Chalifoux Ann M. Collier George T. Crowell III Executive Vice President, Vice President Assistant Vice President CARMAX OFFICERS Chief Financial Officer Financial and Public Relations Central Division and Corporate Secretary Benjamin B. Cummings Jr. Peter A. Douglas W. Austin Ligon John W. Froman Vice President Assistant Vice President President Executive Vice President Real Estate Southern Division Keith D. Browning Merchandising William C. Denney Sean K. Easter Executive Vice President and Ann-Marie Austin-Stephens Vice President Assistant Vice President Chief Financial Officer Senior Vice President General Merchandise Manager Construction Thomas J. Folliard Store Innovation and Development Douglas R. Drews Victor M. Engesser Executive Vice President Dennis J. Bowman Vice President Assistant Vice President Store Operations Senior Vice President and Distribution Merchandising Michael K. Dolan Chief Information Officer Neal N. Lappe Linda N. English Senior Vice President and W. Stephen Cannon Vice President Assistant Vice President and Chief Information Officer Senior Vice President and Product Service Assistant Controller Joseph S. Kunkel General Counsel Jerry L. Lawson Carol K. Fuller Senior Vice President Fiona P. Dias Vice President Assistant Vice President Marketing and Strategy Senior Vice President Central Division Marketing Edwin J. Hill Marketing Carl C. Liebert III Stanley L. Heller Vice President Philip J. Dunn Vice President Assistant Vice President Service Operations Senior Vice President, Corporate Operations Real Estate Scott A. Rivas Treasurer and Controller R. Bruce Lucas Henry Hewitt Vice President W. Austin Ligon Vice President Assistant Vice President Human Resources Senior Vice President Construction Merchandising Angela C. Schwarz Automotive William E. McCorey Eric A. Jonas Jr. Vice President Gary M. Mierenfeld Vice President Assistant Vice President CarMax Auto Finance Senior Vice President Management Information Systems Corporate Human Resource Services Fred S. Wilson Distribution and National Service Kim D. Orcutt Linda L. Lubecki Vice President Jeffrey S. Wells Vice President Assistant Vice President Store Administration Senior Vice President Merchandising Merchandising William C. Wood Jr. Human Resources Michael T. Ryan Janice A. McNee Vice President Edward J. Brett Vice President Assistant Vice President Merchandising Vice President and General Merchandise Manager Store Innovation and Development David D. Banks Northeast Division President Richard W. Souder Jr. Douglas T. Moore Assistant Vice President George D. Clark Jr. Vice President Assistant Vice President Management Information Systems Vice President and General Merchandise Manager Merchandising Laura R. Donahue Central Division President Paul D. Swenson John D. Nelms Assistant Vice President Michael K. Froning Vice President Assistant Vice President Advertising Vice President and Warranty Administration Management Information Systems Randall J. Harden Southern Division President James H. Wimmer Joseph E. Oren Assistant Vice President Mario Ramirez Vice President Assistant Vice President Marketing Vice President and Store Services Management Information Systems Barbara B. Harvill Western Division President Blaine Altaffer Kent E. Richardson Assistant Vice President Mark A. Arensmeyer Assistant Vice President Assistant Vice President Management Information Systems Vice President Merchandising Store Innovation and Development Robert W. Mitchell Superstore Human Resources Lisa J. Baldyga Elaine M. Schramm Assistant Vice President and Superstore Training Assistant Treasurer Assistant Vice President Consumer Finance Keith D. Browning Loss Prevention L. Dan Barzel K. Douglass Moyers Vice President Andrew P. Shulklapper Assistant Vice President Assistant Vice President David W. Cecil Merchandising Assistant Vice President Real Estate Vice President Merchandising Daniel M. Benning Richard M. Smith Merchandising Frank X. Smalara Assistant Vice President Assistant Vice President Southern Division Assistant Vice President Management Information Systems Management Information Systems 86 CIRCUIT CITY STORES, INC. 2001 ANNUAL REPORT
  • 90. Circuit City Stores, Inc. 9950 MAYLAND DRIVE RICHMOND, VIRGINIA 23233-1464