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Slide 1: CIRCUIT CITY STORES, INC. ANNUAL REPORT 2000 Circuit City MAKING IT EASIER. Slide 2: Making it easier. Easier to learn about new technologies through knowledgeable sales help and effective displays. Easier to find the real price of a car through low, no-haggle prices. Easier to buy any way the consumer wants to buy—in our stores and online. Serving the consumer by making it easier. 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, major appliances and entertainment software. At the end of ﬁscal year 2000, the Circuit City business included 571 Superstores in 155 markets and 45 Circuit City Express mall stores. The Circuit City Group also includes a retained interest in the equity value 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 2000, CarMax operated 40 locations, including 34 used-car superstores and 20 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 value 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. FO R WA R D - LO O K I N G S TAT E M E N T S : This report contains forward-looking statements, which are subject to risks and uncertainties, including, but not limited to, risks associated 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. Slide 3: FINANCIAL HIGHLIGHTS (Dollar amounts in thousands except per share data) CIRCUIT CITY STORES, INC. 2000 Years Ended February 29 or 28 1999 1998 Net Sales and Operating Revenues .......................................................................... Earnings from Continuing Operations.................................................................... Total Assets .............................................................................................................. Total Stockholders’ Equity........................................................................................ Working Capital....................................................................................................... CIRCUIT CITY GROUP $12,614,390 $ 327,830 $ 3,955,348 $ 2,142,174 $ 1,536,456 $10,810,468 $ 211,470 $ 3,445,266 $ 1,905,130 $ 1,430,710 $8,870,797 $ 124,947 $3,231,701 $1,730,039 $1,240,523 Net Sales and Operating Revenues .......................................................................... Earnings from Continuing Operations Before Inter-Group Interest in the CarMax Group............................................................................. Earnings from Continuing Operations.................................................................... Earnings per Share from Continuing Operations: Basic................................................................................................................... Diluted................................................................................................................ Number of Circuit City Superstores......................................................................... CARMAX GROUP $10,599,406 $ $ $ $ 326,712 327,574 1.63 1.60 571 $ 9,344,170 $ $ $ $ 234,984 216,927 1.09 1.08 537 $7,996,591 $ 159,170 $ 132,710 $ $ 0.68 0.67 500 Net Sales and Operating Revenues........................................................................... Net Earnings (Loss)................................................................................................. Net Earnings (Loss) per Share: Basic................................................................................................................... Diluted................................................................................................................ Number of CarMax Stores........................................................................................ $ 2,014,984 $ 1,118 $ $ 0.01 0.01 40 $ 1,466,298 $ (23,514) $ $ (0.24) (0.24) 31 $ 874,206 $ (34,223) $ $ (0.35) (0.35) 18 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. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 1 Slide 4: CHAIRMAN’S LETTER In fiscal 2000, we began to see the exciting potential that the digital product cycle brings to our Circuit City business. At CarMax, we produced marked operating improvement in our core business—the used-car superstores. RICHARD L. SHARP I am pleased to report that ﬁscal 2000 produced the most successful year ever for our Circuit City business and meaningful progress for our CarMax auto superstores. Circuit City Stores, Inc. reported consolidated sales growth of 17 percent,reaching $12.61 billion in total sales. Earnings from continuing operations rose 55 percent to $327.8 million. In our Circuit City business, total sales grew 13 percent to $10.60 billion, comparable store sales increased 8 percent and earnings rose 39 percent to $326.7 million. CarMax produced total sales of $2.01 billion, a 37 percent increase, while comparable store sales rose 2 percent. CarMax exceeded the ﬁnancial goals we established at the beginning of the year, producing a proﬁt of $1.1 million compared with a net loss of $23.5 million in ﬁscal 1999. Yet, the year was not without disappointments. In June, we discontinued Digital Video Express. Although this innovative system for watching movies was adopted enthusiastically by consumers, Divx did not obtain the studio support necessary for long-term success. Consolidated and Circuit City Group net earnings for ﬁscal 2000 include after-tax losses of $16.2 million from the discontinued Divx operations and $114.0 million on the disposal of the Divx business. CIRCUIT CITY: MAXIMIZING AN ENORMOUS SALES OPPORTUNITY growth was minimal, our ﬁnancial resources allowed us to continue our geographic expansion and maintain our commitment to outstanding customer service. As a result, we entered this new period as the only specialty retailer in our categories with a well-trained and knowledgeable sales force and a nationwide presence. Our investments in sales training have yielded an outstanding training program, which we will improve even further with programs to be delivered via the Internet. Our long history of successful consumer electronics product introductions and our national store base enabled us to establish alliances with America Online, Inc., the world’s leading interactive services company, and Sony Electronics Inc., the world’s leading consumer electronics company, to introduce their latest technologies beginning in ﬁscal 2001. In ﬁscal 2000,we undertook signiﬁcant initiatives to make it even easier for consumers to shop at Circuit City. We became the ﬁrst national brickand-mortar specialty retailer to sell consumer electronics on the Internet. We also enhanced our Superstore design to help ensure that we are maximizing the sales opportunity in all areas, adding displays for digital televisions, digital imaging and broadband Internet access. In all stores opened during the fall, we signiﬁcantly expanded the number of products that consumers can select and take directly to the cash register, if they choose. For Circuit City,the promise of the digital product cycle is becoming reality as new technologies continue to drive industry growth. This cycle is dominated by feature-rich products that offer new and often complicated functionality for the consumer—an ideal ﬁt for our high-service store format. We believe this new product cycle can last throughout the decade. We are also enjoying sales strength in more traditional products, as evidenced by a record year for VCR unit sales. As we enter the new decade, we are focused on maximizing the sales of new and existing products in our Circuit City Superstores. In ﬁscal 2000, personal computers remained our strongest product category, reﬂecting continued increases in household penetration, higher consumer use of the Internet and new capabilities such as digital imaging and recording. We saw high demand for related products, including digital still cameras, digital camcorders and MP3 audio products. In the consumer electronics categories, our DVD player sales rose rapidly, DIRECTV and wireless communications maintained their high growth rates and big-screen television sales remained healthy. In the fall, we introduced the ﬁrst digital televisions in our stores. Circuit City is poised for continued success in this exciting industry cycle. When industry 2 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 5: CIRCUIT CITY STORES, INC. In ﬁscal 2001, we will add or improve displays for the newer technologies in all stores nationwide. These improvements will help ensure that we are in the best position to capture the sales opportunity presented by the digital cycle. We also will remodel 30 to 35 stores in central and south Florida and in Richmond,Va., providing easier access to self-service products and expanding our assortments in key areas. CARMAX: A STEADY FOCUS AND STEADY PROGRESS also have proven to be strong trafﬁc drivers for new-car franchises. In south Florida, Texas and Chicago, we believe that we can further improve our results with increased consumer awareness and additional satellite stores, including two prototype stores opened late in ﬁscal 2000. We also are seeking appropriate opportunities to integrate new-car franchises with existing used-car superstores. CarMax is aggressively leveraging the opportunities of the Internet. At the end of ﬁscal 2000, we introduced a redesigned CarMax Web site that provides online access to all the vehicle information available at our stores. Consistent with our commitment to service, carmax.com offers dedicated Internet sales consultants for customers who want to buy online. Recognizing that consumers use a variety of well-known Internet resources to research purchases, CarMax also is testing relationships with the leading automotive sites. These services can be nationwide mechanisms for building CarMax’s consumer awareness. In ﬁscal 2001, we will focus on growing sales in existing markets. Signiﬁcant opportunities remain in these markets, and we believe that a continued focus on maximizing these opportunities should yield solid proﬁtability for CarMax. LEADERSHIP CHANGES merchandising,Alan gained extensive experience in the two principal operating components of our business—store operations and merchandising. He was named to his present position in March 1997. Alan’s experience,his intense commitment to customer service and the support he engenders among our Associates and our vendors will help him to ensure that the company maximizes the exciting opportunities ahead. Other management changes include the promotion last summer of Philip Dunn to senior vice president. Phil joined Circuit City in 1984. He was named treasurer in 1991, was promoted to vice president in 1992 and added the title of controller in 1996. As I conclude ﬁscal 2000 and my tenure as chief executive ofﬁcer of Circuit City Stores, I believe that the company is well positioned for the future. By focusing on the consumer and developing a truly outstanding team of Associates, we have built a company with the ﬁnancial strength to perform extraordinarily well in good times and to more than weather the down cycles. Our Circuit City and CarMax Associates are talented and enthusiastic. I would like to express my deepest appreciation to them and their families, our shareholders, our vendors and our customers for their support. Sincerely, At CarMax,we slowed geographic growth in ﬁscal 2000 to concentrate on improving operations and proﬁtability. With comparable store sales growth in our used-car business at year-end, our ﬁrst annual proﬁt and a strong ﬁnish, we surpassed our ﬁnancial goals for the year. The marked operating improvement is particularly signiﬁcant because it came from our core used-car superstores, including those with integrated new-car franchises. The improvement reﬂects: • ongoing productivity improvements in sales and operations; • better results from the proﬁt improvement plan initiated at the end of ﬁscal 1998; • our hub and satellite operating strategy; • the continued integration of new-car franchises with our used-car superstores; and, • the exit of a signiﬁcant competitor from the used-car superstore business. As we enter ﬁscal 2001, we continue to devote our energies to our existing markets. Transforming the car-buying experience to make it dramatically easier for the consumer remains the cornerstone of the CarMax concept. CarMax locations in single-store markets and in the Atlanta and Washington/Baltimore multi-store markets are producing outstanding results consistent with their history and our initial expectations for the CarMax concept. Our used-car locations In December, we announced a succession plan as we prepared for me to leave the day-to-day operations of the company. Effective in June 2000, Alan McCollough, currently president and chief operating ofﬁcer, will add the title of chief executive ofﬁcer. In his expanded role,Alan will lead our Circuit City and CarMax businesses. Alan is a 12-year Circuit City veteran. As general manager of corporate operations,president of our central operating division and senior vice president of CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Richard L. Sharp Chairman and Chief Executive Ofﬁcer Circuit City Stores, Inc. April 6, 2000 3 Slide 6: PRESIDENT’S LETTER The new digital cycle with its full-featured, often complex, technologies creates an ideal opportunity for Circuit City. A long history of sales training, a national store base and alliances with industry-leading vendors will help position us at the forefront of this cycle. W. ALAN MCCOLLOUGH Our company is entering an exciting period. At Circuit City, the focus is on the future. We are entering the new decade in a strong ﬁnancial position,with a long heritage of customer service and a continuing commitment to knowledgeable sales assistance. We will build on this foundation, introducing consumers to new products with new capabilities and revamping our merchandise presentations to display, explain and sell a full range of products and services. I am particularly pleased to face the future with talented Associates whose number one goal is providing consumers the best possible shopping experience. C I R C U I T C I T Y : T H E D I G I TA L AG E Fiscal 2000 was the second full year DVD players were available. With attractive entry prices as low as $159, the industry sold three times as many units in calendar 1999 as in 1998. As we introduce more brands and features, such as multi-disc changers that allow a single unit to serve as both a primary CD player and DVD player,consumer appeal will expand signiﬁcantly. DIRECTV sales continue rapid growth with household penetration of direct broadcast satellite signals still at only 13 percent. Access to local stations, high-deﬁnition programming and built-in features such as personal video recording technology and Internet access are further increasing the functionality of DIRECTV and should contribute to continued strong sales growth. Like DIRECTV, wireless communications exempliﬁes the marriage between hardware capability and service offerings. The consumer’s choices have exploded and now include numerous analog and digital options. Many rate plans and packages offer long-distance service and Internet access. With penetration at only about 30 percent, the growth opportunity in wireless remains enormous. Still in its infancy, broadband Internet access is another product and service combination that offers new capabilities. In ﬁscal 2000,Circuit City became one of the nation’s ﬁrst retailers to sell CableLabs-certiﬁed DOCSIS modems. These cable modems provide Internet access up to 50 times faster than the standard telephone modem. Similar capabilities using telephone-based digital subscriber lines are now available, and we expect broadband access via satellite in the near future. Once again,our customers will be faced with multiple digital product and service options, and our professional sales Associates will be available to assist. In ﬁscal 2000, personal computers remained our strongest major category despite difﬁcult yearover-year comparisons and continued erosion in average retail prices. Advances in technology— PIII, digital imaging, voice recognition, digital audio recording, to name a few—reinforce our belief that the home ofﬁce category will provide further sales and proﬁt increases in ﬁscal 2001. With advances in technology, digital audio recording capability is available in both the consumer electronics and personal computer categories. Audio CD recorders allow consumers to customize CD recordings for personal enjoyment. With a computer and Internet access, consumers can download compressed music for playback on a portable MP3 player. In major appliances, we are seeing signiﬁcant technological and competitive changes. Technology is creating ovens that cook faster; front-loading, super-efﬁcient washers; and refrigerators with digitally controlled temperature zones. Our sales remained healthy throughout Fiscal 2000 marked the real beginning of what I believe will be the most exciting time ever for Circuit City. Amazing new applications of digital technology had a positive impact on products throughout our stores, opening up new possibilities for consumers. And, I believe the best is yet to come. Last fall, consumers saw for the ﬁrst time the extraordinary picture delivered by digital televisions, and demand quickly exceeded the limited industry supply. As digital content increases and pricing becomes more attractive, we anticipate growing demand for both 4:3 and 16:9 wide-screen sets. Development of display technologies such as plasma and liquid crystal hybrids add to the industry’s television sales potential. 4 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 7: CIRCUIT CITY ﬁscal 2000, and we will test a new store concept that may help us build an even more distinctive consumer offer in the coming decade. CIRCUIT CITY: MAKING IT EASIER directly accessible by the customer in these areas. Yet even for the most basic products, help is available for customers who want it. This year, we will further expand self-service areas in all our new and remodeled stores. We will concentrate our ﬁscal 2001 full remodels in central and south Florida and in Richmond, Va. The Superstores in these markets will be dedicated to consumer electronics and personal computers, creating a high-energy environment for new technologies and permitting expanded assortments of video game hardware and software, entertainment and computer software, peripherals and accessories. All Superstores opened after the ﬁrst ﬁscal quarter will follow this exciting consumer electronics design. In addition, in the remodel markets, we will test a new selling strategy for appliances. In these markets, we will open a limited number of stand-alone major appliance stores, which we believe will increase consumer awareness of our appliance selection and provide an improved selling environment for these products. E-COMMERCE We are exceptionally pleased with our e-commerce performance, especially during our ﬁrst hightrafﬁc holiday season. And, we continue to enhance the site. Beginning in April, all sales counselors were able to access our Web store inventory from any point-of-sale terminal, and customers were able to conveniently access our site via our premiere position on AOL’s Shop@ locations. While no one can be certain what industry Web sales may be, we are committed to providing this option to our customers and to being the best on the Web in our categories. I look forward to the expanding opportunities in our Circuit City business and to working with the exceptional management team and all our Associates who can realize Circuit City’s full potential. OUTSTANDING PROGRES S AT CA R M A X The products are exciting; the opportunity is enormous. But, this explosion of new products, services and functionality can be confusing, and consumers will not tolerate confusion. Our job is to unravel the complexities of the developing technology. We start with our longstanding commitment to customer service and a knowledgeable sales team. In addition, we are introducing powerful store displays that we believe will maximize sales across all product lines. In ﬁscal 2001, our planned 25 new stores and all 571 existing Superstores will feature displays designed to highlight the latest advances in technology. These displays will include AOL Internet Centers, part of our strategic alliance with America Online, Inc.; a Sony Memory Stick Interactive Universe to introduce this portable digital memory device that extends across a family of products; signiﬁcantly expanded displays highlighting the latest in digital audio recording technology; redesigned wireless phone displays that help consumers compare products, features and services; enhanced DVD, DIRECTV and personal video recording areas to more prominently emphasize the latest video technology; and an expanded digital television display to accommodate DTV’s rapidly growing assortment. Even as we make it easier for consumers to understand what these complex new products and services can do for them, we recognize that some customers require less help with more familiar products. During the second half of ﬁscal 2000, we added self-service displays to our new stores. Telephony products, software,VCRs, portable audio products and accessories are I also am energized by our opportunities at CarMax. Austin Ligon and the CarMax Associates have made enormous strides as we have continued to revolutionize the auto industry. In a tough, competitive environment, they exceeded their ﬁnancial goals in ﬁscal 2000, producing a proﬁt for the year. Austin outlines CarMax’s ﬁscal 2000 accomplishments and objectives for the coming year in his letter. I thank all our Associates as we enter this new decade and focus on building value for shareholders in both the Circuit City and CarMax businesses. Sincerely, Consistent with our commitment to sell the way customers want to buy, in ﬁscal 2000, we became the ﬁrst national brick-and-mortar specialty retailer to sell consumer electronics over the Internet. Unlike many competitors, we have tightly integrated our e-Superstore,circuitcity.com, with our brick-and-mortar locations. We are delivering a combination of in-depth product comparison information, broad product selection and convenient purchase and delivery options, including immediate in-store pickup. Approximately 50 percent of our Internet shoppers choose the convenience of in-store pickup for products available in the store and on the Web. W. Alan McCollough President and Chief Operating Ofﬁcer Circuit City Stores,Inc. April 6, 2000 CITY STORES, INC. 2000 ANNUAL REPORT CIRCUIT 5 Slide 8: CARMAX PRESIDENT’S LETTER In fiscal 2000, CarMax made great strides in improving our operations and better understanding all aspects of the automotive market. In fiscal 2001, we will focus on solidifying this foundation in our existing markets. W. AUSTIN LIGON I am happy to report that CarMax exceeded its ﬁscal 2000 objectives. In February 1999, we announced plans to slow our rapid geographic growth so that we could concentrate on improving proﬁtability in under-performing markets and continue building on an already successful foundation in other markets. In ﬁscal 2000, with a balanced focus on adding revenues and improving margins, we: • increased our vehicle unit, service and accessory sales; • increased our ﬁnancing and extended warranty sales; and, • implemented productivity enhancements that improved efﬁciency and reduced costs. These accomplishments improved our pretax operating results by more than $40 million, bringing us to a proﬁtable position for the year. We believe our improved operating results and continued changes in the competitive landscape set the foundation for solid proﬁtability in ﬁscal 2001. EXPANSION HISTORY competitor who had committed to high-squarefootage,high-acreage locations. We moved too quickly, and the pace of our growth resulted in 10 signiﬁcantly overbuilt stores. At CarMax, we now know that most of our multi-store markets need more, but smaller, stores to properly serve their trade areas. We have adopted a hub and satellite strategy that is improving performance in Miami, Tampa, Houston, Dallas and Chicago. In these markets, we have converted a total of six CarMax superstores to satellite operations that share reconditioning, purchasing and business ofﬁce functions with a nearby hub store. While the satellite store presents exactly the same offer to the consumer, its annual operating costs are much lower, signiﬁcantly improving the profitability in these multi-store markets. The satellite prototype calls for a display capacity of 250 to 400 vehicles on a four- to six-acre site. A 12,000- to 14,000-square-foot building houses sales ofﬁces, a showroom and four to seven service bays for regular maintenance and warranty service. In the ﬁrst quarter of ﬁscal 2000,we grandopened a prototype satellite superstore, in Rockville, Md., enhancing the performance of the already strong Washington/Baltimore market. In addition, at the end of ﬁscal 2000, we constructed two prototype satellite stores, one in Dallas and one in Houston. While CarMax has continued to improve sales and proﬁtability, our major used-car superstore competitor was less successful with their effort to copy our store format. Our competitor exited the used-car superstore business completely at the end of calendar 1999. We believe their exit is already improving sales by eliminating consumer confusion over our competing store formats and allowing CarMax to clearly emerge as the successful used-car superstore standard. CONSUMER ENTHUSIASM The opportunities afforded by making it easier and more fun for consumers at every step of the car-buying process are what led us into the business. Our experience convinces us that CarMax continues to offer the best shopping experience for the automotive consumer. CarMax’s success in single-store markets and in the metropolitan multi-store markets of Atlanta, Washington and Baltimore and the rising volumes in our other metro markets is clear evidence of consumers’ enthusiasm for the CarMax offer. CarMax used-car superstores are the highest volume auto retailing locations in the industry. While the average new-car dealer sells 1,150 new and used vehicles per year, the average CarMax superstore sells more than 4,100 used vehicles alone per year. Our Laurel, Md., superstore produces the largest used-car sales volume in the nation, with used-car sales 20 times the used-car sales of the average dealer. When we initiated our aggressive national expansion plan in June 1996, we had just achieved impressive results in our Norcross, Ga., superstore—the largest store we had open at that time. We believed that this store model would be equally successful in other major metropolitan markets. We also were racing to gain ﬁrst-entry advantage over another superstore 6 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 9: CARMAX Market research further validates that CarMax customers like our unique approach. Ninety percent of customers are satisﬁed with their CarMax experience and would recommend CarMax to family and friends. We also are achieving success when we extend the ease of the CarMax buying process to new cars. We are uniformly successful in the sale of new cars when our franchises are integrated or co-located with CarMax used-car superstores. Within their ﬁrst year of operation, our integrated new-car franchises ranked among the leading locations for their brands in the markets they serve, and half are number one. Our Norcross, Ga., store in the Atlanta market remains the number one Chrysler-Plymouth dealer in the U.S. and has received the Five Star rating, DaimlerChrysler’s highest honor for customer service excellence, for two years in a row. We have been disappointed, however, with the performance of our stand-alone new-car franchises. Although their volumes have improved signiﬁcantly versus their levels prior to acquisition, sales remain below our expectations. We are actively pursuing opportunities to integrate or co-locate as many of these franchises with our used-car operations as possible. In January, we moved our Laurel, Md., Toyota franchise to a site adjacent to the CarMax Auto Superstore in Laurel. The new Laurel Toyota location is the ﬁrst facility CarMax has built exclusively to sell new cars. The move already has begun to generate dramatically higher sales volumes. With the popularity of the CarMax offer proven among CarMax customers, our challenge is to increase consumer awareness, exposing more consumers to The CarMax Way so that they fully understand and appreciate the beneﬁts of doing business with CarMax. We know that CarMax store sales are directly correlated with the number of consumer store visits. If we increase awareness and visits, we increase sales and proﬁts. In ﬁscal 2000, to increase consumer awareness in our markets, we launched a new television advertising campaign focused on the key reasons to shop at CarMax: • Low prices • No haggling • Hassle-free ﬁnancing • Broad selection • Certiﬁed high quality • On-site maintenance and repair service • Online prices and daily inventory updates CARMAX ONLINE it was producing 10 percent of our new-car sales transactions. In ﬁscal 2000, CarMax made great strides in laying the groundwork for sustaining proﬁtable growth. In ﬁscal 2001, our focus will remain on solidifying this foundation and securing our role as the nation’s leading specialty used-car retailer as well as a growing retailer of new cars. We plan to concentrate on our hub and satellite strategy in existing markets and to take advantage of appropriate opportunities to integrate or co-locate new-car franchises with existing used-car superstores. We believe this continued emphasis on revenue growth and operating margin enhancement will deliver solid proﬁtability in ﬁscal 2001 and allow us to resume moderate and proﬁtable geographic growth thereafter. I want to thank our CarMax Associates for all the hard work that made possible the extraordinary progress in ﬁscal 2000. Their continuing, enthusiastic commitment to The CarMax Way is critical to our success. Sincerely, At the end of ﬁscal 2000, we continued to enhance CarMax’s uniquely natural Internet integration. Since 1997, carmax.com has allowed consumers to search CarMax’s entire 10,000 new- and used-car inventory, which is updated daily, and see the price and basic description of each vehicle. With the enhancements, they now also can compare any new or used vehicles side-by-side, see photographs of each vehicle, compare pricing of used cars with Kelley Blue Book prices, see the MSRP and manufacturer’s invoice price for new cars, and estimate monthly payments. Earlier in the year, we launched our Insta-PriceSM Online New-Car Buying Service, the ﬁrst online service to offer ﬁrm prices on all new vehicles. In addition, we began testing alliances with popular online automotive sites that refer consumers to carmax.com. Our online buying service is staffed by dedicated Internet sales consultants, and by the end of the ﬁscal year, W. Austin Ligon President CarMax April 6, 2000 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 7 Slide 10: Making it easier to the benefits of new Slide 11: understand and enjoy technology. At Circuit City, we are making it easier for consumers to understand and add new consumer electronics and personal computing technologies to their lives. Knowledgeable sales assistance, compelling product and technology demonstrations and in-store informational displays help explain the amazing products and services emerging in today’s exciting environment of digital advances. And, we are offering consumers new ways to shop, with an expanded assortment of self-service products in many stores and a Web site that is fully integrated with our Superstores nationwide. Slide 12: Consumers are rapidly embracing the high quality and flexibility of digital camcorders. New video game platforms and digital audio recording products such as MP3 offer sales growth opportunities. Consumers can see the amazing picture quality of digital television at side-by-side displays. At Circuit City, consumers experience technology with interactive displays. 10 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Circuit City’s AOL Internet Centers demonstrate how the Internet becomes a part of everyday life through multiple connecting options. Slide 13: CIRCUIT CITY Circuit City is bringing the digital product revolution to consumers. We believe the result will be a strong, long-term growth cycle for shareholders. Circuit City has long led the way in sales of cutting-edge consumer electronics technologies. As the swift pace of technological advances adds complex products and services to our selection, Circuit City is making it easier for consumers to understand, purchase and incorporate the beneﬁts of these technologies into their lives. We achieve this objective by offering a full spectrum of merchandise, competitive prices and clear, but comprehensive, product information. Finally, we give consumers the ability to shop the way they want to shop— either in our stores or through the dynamic new medium, the Internet. Broad selection allows consumers to choose the products and services that ﬁt their particular circumstances. Within each product line, our buyers provide an array of brands, products and services that range from the most basic to the most feature-rich. We also introduce new technologies early in their cycle. We were one of the ﬁrst retailers, and are today the nation’s leading retailer, of DIRECTV. Price. To meet our growth goals, Circuit City must remain price-competitive. The American retail environment caters to a value-conscious consumer. In addition to comparing prices across brick-and-mortar retailers, consumers now can compare prices across a growing number of Internet retailers. The competitive nature of the consumer electronics industry means Circuit City customers often ﬁnd store prices that are lower than prices on a variety of Web sites. Information. Given selection and attractive prices, the key to making shopping easier is making it easy for consumers to get product information. We provide that information through a well-trained, knowledgeable sales force and displays that allow hands-on product demonstrations. To assure that Circuit City sales counselors are up to date with the newest product information, we emphasize continuous learning that covers product and service technologies, customer service and store operations. In ﬁscal 2001, we will begin to introduce state-of-the-art interactive Web-based training for store, service center and distribution Associates. By maintaining and delivering training programs on the Web, we can update training as rapidly as the product cycle develops. Integration with our existing store systems adds a quality-control element, ensuring that sales counselors have completed required training programs before interacting with customers. All sales training will take place online, saving the time and expense of off-site travel. Online access allows IN THE STORE Merchandise Selection. Customers have a variety of needs. Today, a couple may be choosing between an analog big-screen or a digital-ready television for their family room. Tomorrow, the same couple may select a 13-inch small-screen television for a child’s bedroom. Whatever the need, we want Circuit City to be their store of choice. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 11 Slide 14: Portable memory devices such as Memory Stick allow today’s products to offer ease of use in a compact size. New technology displays and increased self-service merchandise displays are features of our newest store design. Informative merchandise displays help consumers sort through complex choices. 12 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 15: CIRCUIT CITY sales counselors to easily and quickly retrieve information from training materials or online mentors. In short,Web-delivered training is faster, better and more effective. For new, complex technologies, a product demonstration and explanation of features and beneﬁts are the best way to help consumers understand which products and services best ﬁt their lifestyles. In ﬁscal 2000, new television displays gave side-by-side comparisons of big-screen analog televisions with the newer digital televisions. In markets where high-speed cable service is available, customers could see a demonstration of the features that broadband Internet access provides. And, digital imaging displays showed consumers how to edit vacation pictures and e-mail them to friends and family. Beginning in the summer of 2000, Circuit City Superstores will feature AOL Centers offering an array of interactive products and services. Circuit City will demonstrate for consumers everything they need for home connectivity, including Internet access via AOL. As broadband technologies become available through AOL, we expect to add these demonstrations to the AOL Centers. Also by the summer of 2000, every Circuit City Superstore will feature a Memory Stick Interactive Universe dedicated to introducing customers to Sony’s diverse line of Memory Stick products, including cameras,camcorders, printers, portable music players,VAIO personal computers and Memory Stick media. We also are enhancing our wireless communications, The key to making shopping easier is taking the mystery out of technology. Well-trained, knowledgeable sales counselors and hands-on product demonstrations help Circuit City customers understand and purchase the new technologies that are driving industry growth. digital video and digital audio displays to highlight expanding product selections and related services. In new and remodeled stores, we are adding “take-with” displays where customers easily can pick up products they know about right from the shelves. Today, some customers need less sales assistance when choosing items such as telephones, portable radios and VCRs, which have high household penetration and relatively low prices. And yet, even for these product lines, sales assistance is always available if customers prefer it. Service After the Sale. Circuit City’s commitment to satisﬁed customers does not end with the sale. Circuit City Associates deliver and install televisions, ranges, refrigerators, washers and dryers with the same high level of knowledge our customers experience in our stores and the same commitment to service. More than 95 percent of our home deliveries occur within one day of the product purchase. ON THE WEB We provide factory-authorized repairs at 35 service centers nationwide and through 1,700 trained technicians. Customers simply take the product requiring repair to their closest Circuit City Superstore, and we express ship it to our nearest service center. In-home repair service is available for big-screen televisions and major appliances, and a third-party warranty provider supplies in-home service for personal computer products. Customers can exchange their products and, if necessary, receive a refund at any Circuit City store, even if they have misplaced their receipt. Finally, if a customer has an issue that is not resolved through our stores or in our product service centers, he or she has toll-free access to customer service representatives who can usually quickly resolve the problem. In July 1999,Circuit City launched its e-commerce Web site, extending the Circuit City offer to Internet shoppers and delivering a combination of options that only a retailer with a national CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 13 Slide 16: Customers who order online have the option of Express Pickup at a convenient Circuit City Superstore. Circuitcity.com tightly integrates cyber-shopping with our nationwide brick-and-mortar presence. In our test lab, consumers provide valuable input into the development of circuitcity.com. Superior customer service is the number one goal of Associates throughout our organization. 14 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 17: CIRCUIT CITY store base can provide. We have tightly integrated circuitcity.com with our Circuit City Superstores, offering the best of cyber-shopping and traditional retailing. Our Web site provides the same commitment to selection, price, information and service found in Circuit City stores. Merchandise Selection. At the end of ﬁscal 2000, circuitcity.com offered more than 1,500 products for sale and information on more than 2,100 products. We continue to expand the product selection with plans to add wireless and broadband services, an expanded assortment of game hardware and a full assortment of game software in ﬁscal 2001. Circuit City gives Internet shoppers the ability to check the inventory of up to three Circuit City Superstores in their market, as well as the instock availability directly from the e-Superstore. The inventory information is updated every day and veriﬁed in real time when the customer chooses to purchase an item. The customer can choose to have the product shipped through the e-Superstore for normal shipping costs or can use the Express Pickup service and avoid shipping charges. When a customer chooses a product from local store inventory, he or she completes the purchase transaction online, and the purchased item is removed from store inventory and reserved for the customer to pick up. Using the Express Pickup feature, customers can cyber-shop at lunch time and pick up their purchases on their way home from work. Price. Customers who choose the Express Pickup option automatically receive the lower of the e-Superstore price on the day of their purchase or the in-store price at their selected We have tightly integrated circuitcity.com with our Circuit City Superstores. Customers can choose to pick up products at the store or have them shipped to their home. Our online customers shop with the confidence and knowledge that Circuit City stands behind every purchase. Superstore on the day of pickup. When the customer goes to the point-of-sale register, the transaction is automatically checked by the register system against the in-store price, and the customer receives the lower price. In addition, the e-Superstore offers Web-only specials on items that are not available in sufﬁcient quantity to supply our nearly 600 Superstores nationwide. Information. Consumers can ﬁnd in-depth product information on circuitcity.com, beginning with a basic overview of key features and model choices in each product line. In addition, the overview includes a glossary of terms, answers frequently asked questions and provides technical details. Consumers then can compare side-by-side the product features and prices of as many models as they wish to select. For example, at the end of the ﬁscal year, consumers could compare as many as 35 features of 25 camcorders, 16 features of 17 DVD players, or 38 features of 116 refrigerators. Service After the Sale. Circuit City’s online customers shop with the conﬁdence and knowledge that Circuit City stands behind every purchase. Customer service via e-mail is available seven days a week. If a product needs service, online customers can take the product to their local Superstore where it receives the same factory-authorized repair service available for in-store purchases. Customers can exchange or return an e-Superstore product at any Circuit City Superstore location, with refunds available immediately. Whether consumers choose to buy in the store or online, Circuit City is committed to being the retailer of choice for consumer electronics, personal computers and appliances. Making it easier to embrace new technology and to shop for all products will help bring our Circuit City customers and our shareholders the rewards of the digital product revolution. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 15 Slide 18: Making it easier at car-buying process. Slide 19: every step of the At CarMax, we are making it easier for consumers to buy the car that is right for them. The CarMax offer—low, no-haggle pricing; broad selection; certiﬁed quality and friendly service—lets our sales consultants focus on the customer,not “the deal.” And,these sales consultants help the customer throughout the transaction, extending our price commitment to trade-ins, ﬁnancing and warranties. Shopping for a car The CarMax Way is shopping for a car the consumer’s way. Slide 20: All CarMax customers receive low prices without having to negotiate. Browsing our extensive selection is easy with our customer-friendly online inventory system. The CarMax goal: make buying a car easy. 18 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 21: CARMAX CarMax has set new standards in automobile retailing. In pricing, in selection, in quality and in service, more and more consumers are finding their way is The CarMax Way. Making it easier for consumers at every step of the car-buying process is the core of the CarMax offer. Using what consumers have told us they want—in pricing, selection and service— CarMax has set new industry standards for the car-buying experience. every car we appraise, CarMax provides a written purchase offer that is good for seven days or 300 miles. Customers may apply their appraisal voucher to a purchase or simply receive a check. This process increases the trust between CarMax and the consumer, provides our most important source of used cars and allows us to match our PAYING THE RIGHT PRICE of subcompact, mid-size or luxury cars, sport utility vehicles, trucks and minivans. To assure that the selection reﬂects the preferences of consumers in the market, the majority of our vehicles are purchased locally, either from consumers in the market or at regional auctions. As a result, we are able to offer the brand names and vehicle models that are in high demand. CarMax used cars are less than six years old and have fewer than 60,000 miles. They generally range in price from $6,500 to $30,000. We also offer a selection of top-quality older cars for the most cost-conscious consumer. Called ValuMax®, these vehicles are either older than six years or have more than 60,000 miles. Their prices range from $4,000 to $19,000. In addition to selling used cars, CarMax operates 20 new-car franchises. Fifteen are integrated or co-located with CarMax used-car superstores. Five franchises operate as stand-alone new-car locations. As with used cars, CarMax employs its low-price, no-haggle selling process with new cars. At all new-car locations, the full selection of the manufacturer’s models is available. CarMax new-car franchises include Chrysler, Plymouth, inventory with the tastes of local purchasers. The same sales consultant who facilitates the car purchase also explains our no-haggle,competitively priced ﬁnancing and warranty programs. For ﬁnancing,the sales consultant simply enters basic credit information directly into the CarMax system. First North American Credit,CarMax’s ﬁnance operation,and Bank of America provide primary credit. Customers approved by both sources can see and select from the terms and rates offered. Sub-prime ﬁnancing is available from a variety of third-party lenders. Warranty terms and rates also are provided online,and the customer sees and selects from the available choices. Independent auto industry experts continue to ﬁnd that consumers believe negotiating the right price is the most difﬁcult and unpleasant part of buying a car. At CarMax, we have solved that problem with low, no-haggle prices at every stage of the transaction. On most cars, CarMax used-car prices average $1,300 below Kelley Blue Book prices; more than 80 percent of our new cars are priced below manufacturer’s invoice. For both new and used cars, all CarMax customers receive these competitively low prices without having to negotiate. Best of all, with low, no-haggle pricing, CarMax sales consultants can focus solely on helping customers ﬁnd the vehicles that meet their individual needs. FINDING THE RIGHT CAR As part of the no-haggle philosophy, trade-ins are handled as a separate transaction. In fact, consumers may sell their car to CarMax whether they are buying a car from us or not. On virtually CarMax superstores offer consumers the broadest selection in the used-car industry. Consumers may select from as many as 600 used cars on a single CarMax lot, choosing from a wide variety CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 19 Slide 22: On carmax.com, customers find comprehensive information and prices on each vehicle from the comfort of their home. The 10,000-vehicle inventory is updated daily. CarMax certifies the quality of each vehicle following a thorough inspection and reconditioning. CarMax Associates are setting a new industry standard by giving consumers what they have asked for in a car-buying experience. 20 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 23: CARMAX Dodge, Jeep, Mitsubishi, Nissan, Toyota, BMW, Chevrolet and Ford. Providing a full selection helps ensure that customers ﬁnd a vehicle that meets their needs. We make the selection process even easier with touch-screen online inventory kiosks. At in-store display terminals,customers quickly sort through the entire selection and compare makes, models, features, speciﬁcations and prices. Of course, customers also are free to walk through the selection on the lot. All information, including the low, no-haggle price, is clearly marked on each vehicle. A sales consultant will assist the customer when he or she is ready, answering questions or facilitating test drives. These sales consultants also can provide instant, online information on the entire 10,000-car inventory available from our 40 locations. Online inventory information is updated daily, and 2,000 to 3,000 vehicles are new to the inventory each week. And ﬁnally,our supervised For Kids Only play areas SM CarMax Associates are key to the execution of the CarMax offer. All Associates receive formal training in their job functions and in the CarMax customer service philosophy. with terms ranging from six months to 72 months. Warranty service is available at any CarMax location and at 14,000 independent service providers nationwide. Factory-authorized service also is provided at all new-car franchises. tomer work out all the purchase details from the comfort of home. The customer then simply goes to the store to pick up the new vehicle. In the Los Angeles market,CarMax is testing free home delivery as part of this online service. Trafﬁc on carmax.com grew rapidly throughout the year, and by year end, 10 percent of all CarMax new-car transactions were completed by CarMax online sales consultants. To assure the broadest possible exposure during ﬁscal 2000, we added the Web site to all CarMax advertising and began testing partnerships with most major online automotive sites. Consumers who directly access carmax.com remain by far our largest source of online sales. C A R M A X . C O M : U N I Q U E LY N AT U R A L I N T E R N E T I N T E G R AT I O N From day one, the CarMax concept was built around a proprietary, enterprise-wide, real-time information system. This information system and our no-haggle price commitment made early integration with the Internet a uniquely natural opportunity for CarMax. Consequently, since 1997, carmax.com has been a pioneer in extending complete inventory and pricing search capabilities into the consumer’s home 24 hours a day. In ﬁscal 2000, we updated the site to include provide entertainment for children so Mom and Dad can focus on their vehicle purchase. CARMAX ASSOCIATES OWNING A CARMAX CAR all the detailed vehicle information available at the store. At carmax.com, consumers can ﬁnd a picture of each vehicle, prices, features, speciﬁcations and the store location. Inventory information on the more than 10,000 available cars is updated daily. In ﬁscal 2000,we also launched our Insta-Price Online New-Car Buying Service. The service is available in 10 major cities. After browsing our selection and prices, a consumer interested in buying a new car can contact a dedicated CarMax Internet sales consultant by e-mail, telephone or fax and receive fast,individual attention. The Internet sales consultant will answer all questions, including ﬁnancing inquiries, and help the cusCIRCUIT CITY SM CarMax Associates are the key to the successful execution of the CarMax offer. All CarMax sales, service, appraisal and business ofﬁce Associates receive formal training in their disciplines and in The CarMax Way. In addition, following formal training, all store Associates are mentored by experienced CarMax employees as they gain job experience. More and more consumers are experiencing The CarMax Way. CarMax is continuing to strengthen its operations and enhance its marketing. CarMax is on its way to a successful, proﬁtable ﬁscal 2001. Customers purchasing a CarMax car are guaranteed a high-quality vehicle. Every CarMax used vehicle must pass the comprehensive CarMax Certiﬁed Quality Inspection . We conduct our SM own thorough reconditioning to assure that every vehicle meets CarMax’s mechanical, electrical, safety and cosmetic standards. ValuMax vehicles must meet the same CarMax mechanical,electrical and safety standards,ensuring the customer receives a quality vehicle at an economical price. A ﬁve-day, 250-mile return guarantee and a limited 30-day warranty back every used car. MaxCare® and ValuServ extended warranties SM provide comprehensive mechanical protection STORES, INC. 2000 ANNUAL REPORT 21 Slide 24: SELECTED FINANCIAL DATA 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 C O N S O L I D AT E D S U M M A R Y O F E A R N I N G S F R O M C O N T I N U I N G O P E R AT I O N S (Amounts in millions except per share data) Net sales and operating revenues................................................ Gross proﬁt...................................................................................... Selling, general and administrative expenses................................. Earnings from continuing operations before income taxes............ Earnings from continuing operations........................................ Earnings (loss) per share from continuing operations: Circuit City Group: Basic .................................................................................. Diluted............................................................................... CarMax Group: Basic .................................................................................. Diluted............................................................................... $12,614 $ 2,863 $ 2,310 $ 529 $ 328 $10,810 $ 2,456 $ 2,087 $ 341 $ 211 $8,871 $2,044 $1,815 $ 202 $ 125 $7,664 $1,761 $1,499 $ 233 $ 144 $7,029 $1,635 $1,315 $ 295 $ 184 $5,583 $1,385 $1,105 $ 270 $ 169 $4,130 $1,106 $ 892 $ 209 $ 132 $3,270 $ 924 $ 745 $ 175 $ 110 $2,790 $ 809 $ 676 $ 124 $ 78 $2,367 $ 690 $ 586 $ 91 $ 57 $ 1.63 $ 1.60 $ 0.01 $ 0.01 $ 1.09 $ 1.08 $ (0.24) $ (0.24) $ 0.68 $ 0.67 $(0.35) $(0.35) $ 0.74 $ 0.73 $(0.01) $(0.01) $ 0.95 $ 0.94 $ $ – – $ 0.88 $ 0.87 $ $ – – $ 0.70 $ 0.69 $ $ – – $ 0.59 $ 0.58 $ $ – – $ 0.43 $ 0.42 $ $ – – $ 0.31 $ 0.31 $ $ – – C O N S O L I D AT E D S U M M A R Y O F E A R N I N G S F R O M C O N T I N U I N G O P E R AT I O N S P E R C E N TAG E S (% to sales except effective tax rate) Gross proﬁt...................................................................................... Selling, general and administrative expenses................................. Earnings from continuing operations before income taxes............ Effective tax rate.............................................................................. Earnings from continuing operations............................................. 22.7 18.3 4.2 38.0 2.6 22.7 19.3 3.2 38.0 2.0 23.0 20.5 2.3 38.0 1.4 23.0 19.6 3.0 38.0 1.9 23.3 18.7 4.2 37.5 2.6 24.8 19.8 4.8 37.5 3.0 26.8 21.6 5.1 36.7 3.2 28.3 22.8 5.4 37.0 3.4 29.0 24.2 4.5 37.0 2.8 29.1 24.8 3.9 38.0 2.4 C O N S O L I DAT E D S U M M A R Y B A L A N C E S H E E T S (Amounts in millions) Total current assets ......................................................................... Property and equipment, net.......................................................... Deferred income taxes..................................................................... Other assets..................................................................................... Total assets..................................................................................... Total current liabilities.................................................................... Long-term debt, excluding current installments ............................ Deferred revenue and other liabilities............................................. Deferred income taxes .................................................................... Total liabilities............................................................................... Total stockholders’ equity............................................................. Total liabilities and stockholders’ equity.................................... $ $ $ $ $ $ $ $ $ $ $ $ 2,943 965 – 47 3,955 1,406 249 130 28 1,813 2,142 3,955 $ $ $ $ $ $ $ $ $ $ $ $ 2,394 1,006 – 45 3,445 964 426 112 38 1,540 1,905 3,445 $2,146 $1,049 $– $ 37 $3,232 $ 906 $ 424 $ 145 $ 27 $1,502 $1,730 $3,232 $2,163 $ 886 $– $ 32 $3,081 $ 837 $ 430 $ 166 $ 33 $1,466 $1,615 $3,081 $1,736 $ 774 $– $ 16 $2,526 $ 831 $ 399 $ 214 $ 18 $1,462 $1,064 $2,526 $1,387 $ 593 $6 $ 18 $2,004 $ 706 $ 179 $ 242 $– $1,127 $ 877 $2,004 $1,024 $ 438 $ 79 $ 14 $1,555 $ 546 $ 30 $ 268 $– $ 844 $ 711 $1,555 $ 791 $ 371 $ 88 $ 13 $1,263 $ 373 $ 82 $ 232 $– $ 687 $ 576 $1,263 $ $ $ $ $ $ $ $ $ $ $ $ 597 319 68 15 999 279 85 187 – 551 448 999 $ $ $ $ $ $ $ $ $ $ $ $ 450 355 51 18 874 261 94 152 – 507 367 874 C O N S O L I D AT E D S TAT E M E N T S O F CA S H F LOW S F R O M C O N T I N U I N G O P E R AT I O N S (Amounts in millions) Depreciation and amortization....................................................... $ Cash ﬂow from operating activities of continuing operations........ $ Capital expenditures ....................................................................... $ OT H E R DATA 148 593 222 $ $ $ 130 310 352 $ 115 $ 228 $ 576 $ 99 $ 23 $ 540 $ 80 $ (51) $ 517 $ 67 $ 48 $ 375 $ 55 $ 108 $ 252 $ 42 $ 150 $ 190 $ 36 $ 66 $ 110 $ 29 $ 53 $ 160 Cash dividends per share paid on Circuit City Group common stock............................................ $ 0.07 Return on average stockholders’ equity (%)................................... 9.8 Number of Associates at year-end................................................... 60,083 Number of Circuit City retail units at year-end .............................. 616 Number of CarMax retail units at year-end.................................... 40 $ 0.07 7.9 53,710 587 31 $ 0.07 6.2 46,691 556 18 $ 0.07 10.2 42,312 493 7 $ 0.06 18.5 37,086 419 4 $ 0.05 21.1 31,413 352 2 $ 0.04 20.6 23,625 294 1 $ 0.03 21.5 20,107 260 – $ 0.03 19.2 16,635 228 – $ 0.03 16.8 14,982 185 – Amounts for 1991 assume change in accounting for extended warranties is retroactively applied. All earnings per share and dividend 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 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 25: REPORTED HISTORICAL INFORMATION (Amounts in thousands except per share data) 2000 1999 1998 1997 1996 S T O R E S, I N C. Net sales and operating revenues................................................. Earnings from continuing operations.......................................... Loss from discontinued operations.............................................. Net earnings................................................................................. Net earnings (loss) per share: Circuit City Group: Basic: Continuing operations................................................ Discontinued operations............................................. Net earnings................................................................ Diluted: Continuing operations................................................ Discontinued operations............................................. Net earnings................................................................ CarMax Group: Basic.................................................................................. Diluted.............................................................................. Total assets ................................................................................... Long-term debt, excluding current installments.......................... Deferred revenue and other liabilities.......................................... Cash dividends per share paid on Circuit City Group common stock.......................................... See notes to consolidated ﬁnancial statements. $12,614,390 $ 327,830 $ (130,240) $ 197,590 $10,810,468 $ 211,470 $ (68,546) $ 142,924 $8,870,797 $ 124,947 $ (20,636) $ 104,311 $7,663,811 $ 144,234 $ (7,820) $ 136,414 $7,029,123 $ 184,184 $ (4,809) $ 179,375 $ $ $ 1.60 (0.64) 0.96 $ $ $ 1.08 (0.34) 0.74 $ $ $ 0.67 (0.10) 0.57 $ $ $ 0.73 (0.04) 0.69 $ $ $ 0.94 (0.02) 0.92 $ 0.01 $ 0.01 $ 3,955,348 $ 249,241 $ 130,020 $ 0.07 $ (0.24) $ (0.24) $ 3,445,266 $ 426,585 $ 112,085 $ 0.07 $ (0.35) $ (0.35) $3,231,701 $ 424,292 $ 145,107 $ 0.07 $ (0.01) $ (0.01) $3,081,173 $ 430,290 $ 166,295 $ 0.07 $ – $ – $2,526,022 $ 399,161 $ 214,001 $ 0.06 CIRCUIT CITY STORES, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The common stock of Circuit City Stores, Inc. consists of two common stock series, which are intended to reﬂect the performance of the Company’s two businesses. The Circuit City Group Common Stock is intended to track the performance of the Circuit City stores and related operations and the Group’s retained interest in the CarMax Group. The effects of the retained interest in the CarMax Group on the Circuit City Group’s ﬁnancial statements are identiﬁed by the term “Inter-Group.” Over the threeyear period discussed in this annual report, the ﬁnancial results for the Company and the Circuit City Group also have included the Company’s investment in Digital Video Express, which has been discontinued. The CarMax Group Common Stock is intended to track the performance of the CarMax stores and related operations. The Inter-Group Interest is not considered outstanding CarMax Group stock. Therefore, the net earnings or losses attributed to the Inter-Group Interest are not included in the CarMax Group’s per share calculations. The following discussion and analysis refers to Circuit City Stores, Inc., which includes the operations related to both Groups. For additional information, refer to the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for each Group. R E S U LT S O F O P E R AT I O N S Sales Growth Total sales for Circuit City Stores, Inc. increased 17 percent in ﬁscal 2000 to $12.61 billion. In ﬁscal 1999, total sales increased 22 percent to $10.81 billion from $8.87 billion in ﬁscal 1998. PERCENTAGE SALES CHANGE FROM PRIOR YEAR Circuit City Circuit City Stores, Inc. Group Fiscal Total Total Comparable CarMax Group Total Comparable 2000.............. 1999.............. 1998.............. 1997.............. 1996.............. 17% 22% 16% 9% 26% 13% 17% 12% 6% 23% 8)% 8)% (1)% (8)% 5)% 37% 68% 71% 85% 258% 2)% (2)% 6)% 23)% 12)% CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 23 CIRCUIT $ $ $ 1.63 (0.65) 0.98 $ $ $ 1.09 (0.34) 0.75 $ $ $ 0.68 (0.11) 0.57 $ $ $ 0.74 (0.04) 0.70 $ $ $ 0.95 (0.02) 0.93 CITY Slide 26: THE CIRCUIT CITY GROUP. During the past ﬁve years, industry growth, the addition of new product categories and geographic expansion of the Group’s Superstore base have made varying contributions to total sales growth. Early in the period, geographic expansion and the addition of product categories such as personal computers were the primary contributors to growth. In ﬁscal 1996, a 25 percent increase in Superstore square footage, which included entry into 19 markets, was a signiﬁcant contributor to the Group’s total sales growth. In that same year, home ofﬁce products rose to 26 percent of sales from 20 percent in the prior year. From mid ﬁscal 1996 through ﬁscal 1998, a lack of signiﬁcant consumer electronics product introductions resulted in weak industry sales. The industry began to emerge from this period of declining sales in ﬁscal 1999, and that trend continued in ﬁscal 2000. Management believes that this period of industry growth, driven by digital product technology, can last throughout the decade and will be the primary contributor to the Group’s total sales growth in the foreseeable future. Fiscal 2000 sales reﬂected strong consumer demand across all major product categories. Home ofﬁce was the strongest category, reﬂecting continued increases in household penetration of personal computers, increased consumer use of the Internet and new capabilities such as digital imaging and digital audio recording. In the consumer electronics categories, the Circuit City Group experienced signiﬁcant demand for better-featured products and new technologies, including DVD players, DIRECTV, digital camcorders, wireless communications and big-screen televisions. In most states, the Circuit City Group sells extended warranty programs on behalf of unrelated third parties who are the primary obligors. Under these third-party warranty programs, the Company has no contractual liability to the customer. In states where third-party warranty sales are not permitted, the Group sells a Circuit City extended warranty for which the Company is the primary obligor. Gross dollar sales from all extended warranty programs were 5.4 percent of the Group’s total sales in ﬁscal years 2000 and 1999, compared with 5.5 percent in ﬁscal 1998. Total extended warranty revenue, which is reported in the Group’s total sales, was 4.4 percent of sales in ﬁscal 2000 and 4.6 percent of sales in ﬁscal years 1999 and 1998. The gross proﬁt margins on products sold with extended warranties are higher than the gross proﬁt margins on products sold without extended warranties. Third-party extended warranty revenue was 4.1 percent of the Group’s total sales in ﬁscal years 2000 and 1999 and 3.6 percent of the Group’s total sales in ﬁscal 1998. The increase in third-party extended warranty revenue reﬂects the conversion of stores in 13 states to third-party warranty sales since early ﬁscal 1998. THE CARMAX GROUP. During the past ﬁve years, geographic expansion of the CarMax used-car superstore concept and the addition of new-car franchises have been the primary contributors to CarMax’s total sales growth. During the second half of ﬁscal 1998, the CarMax Group’s usedcar sales began to fall below management’s expectations. New-car sales remained strong. These trends continued through ﬁscal 1999 when strong comparable store sales growth in new cars was more than offset by the weak used-car sales trend. Late in ﬁscal 1999, CarMax adopted a hub and satellite operating strategy in existing multi-store markets. In ﬁscal 1999, ﬁve superstores were converted to satellite locations in the Miami, Houston, Dallas and Chicago markets. Under the hub and satellite operating process, a satellite store uses the reconditioning, purchasing and business ofﬁce operations of a nearby hub store. The display capacity and consumer offer are identical in both the hub and satellite stores. A prototypical satellite store operates on a four- to six-acre site with a 12,000- to 14,000-square-foot facility that houses sales ofﬁces, a showroom and four to seven service bays for regular maintenance and warranty service. At the end of ﬁscal 1999, CarMax classiﬁed two stores as prototype satellite stores. In ﬁscal 2000, CarMax limited its geographic expansion to focus on building sales and proﬁtability in existing markets. During the year, CarMax opened one used-car superstore in Nashville, Tenn., and one in Duarte, Calif. CarMax converted one existing store into a satellite operation. In the markets of Dallas/Fort Worth and Houston, CarMax added two prototypical satellite stores at year-end. The sales pace at CarMax’s used-car superstores, including those stores with integrated new-car franchises, improved, and the Group generated comparable store sales growth for the last two quarters and for the ﬁscal year. In ﬁscal 2000,CarMax also opened ﬁve stand-alone new-car stores,relocated its Laurel, Md., Toyota franchise next to its Laurel superstore and acquired a Nissan franchise that was added to an existing used-car superstore location in the Washington, D.C./Baltimore market.While the performance of the used-car superstores and integrated used- and new-car superstores exceeded expectations, management was disappointed in the performance of the stand-alone new-car stores during ﬁscal 2000. Although operations at these stores have improved signiﬁcantly versus their levels prior to acquisition, they remain below management’s expectations. CarMax is actively pursuing opportunities to integrate or co-locate as many of these franchises with existing used-car superstores as possible. Late in ﬁscal 2000, CarMax’s primary competitor exited the used-car superstore business. Management believes their exit from the Dallas/Fort Worth, Houston, San Antonio, Tampa and Miami markets, where the two companies competed, will help eliminate consumer confusion over the two offers and increase customer ﬂow for CarMax. In most states, CarMax sells extended warranties on behalf of an unrelated third party who is the primary obligor. Under this third-party warranty program, the Company has no contractual liability to the customer. In states where third-party warranty sales are not permitted, CarMax has sold its own extended warranty for which the Company is the primary obligor. Gross dollar sales from all extended warranty programs were 3.7 percent of the Group’s total sales in ﬁscal 2000, 4.3 percent in ﬁscal 1999 and 3.8 percent in ﬁscal 1998. The ﬁscal 2000 decrease reﬂects the increase in new-car sales as a percentage of the overall mix. The ﬁscal 1999 increase reﬂects pricing adjustments and a higher penetration rate achieved by extending warranty coverage to more vehicles. Total extended warranty revenue, which is reported in the Group’s total sales, was 1.6 percent of total sales in ﬁscal 2000, 2.0 percent in ﬁscal 1999 and 1.5 percent in ﬁscal 1998. Third-party extended warranty revenue was 24 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 27: 1.6 percent of total sales in ﬁscal 2000, 1.9 percent in ﬁscal 1999 and 1.4 percent in ﬁscal 1998. IMPACT OF INFLATION. Inﬂation has not been a signiﬁcant contributor to the Company’s results. For the Circuit City Group, average retail prices have declined in virtually all product categories during the past three years. Although product introductions could help reverse this trend in selected areas, management expects no signiﬁcant short-term change overall. Because the Group purchases substantially all products in U.S. dollars, prices are not directly impacted by the value of the dollar in relation to other foreign currencies, including the Japanese yen. For the CarMax Group, inﬂation has not been a signiﬁcant contributor to the Group’s results. The Group’s proﬁtability is based on achieving speciﬁc gross proﬁt dollars per unit rather than on average retail prices. Because the wholesale market generally adjusts to reﬂect retail price trends, management believes that if the stores meet inventory turn objectives, then changes in average retail prices will have only a short-term impact on the Group’s gross margin and thus proﬁtability. Cost of Sales, Buying and Warehousing Interest Expense Interest expense was 0.2 percent of sales in ﬁscal 2000, ﬁscal 1999 and ﬁscal 1998. Interest expense was incurred on debt used to fund store expansion and working capital, including inventory. Earnings from Continuing Operations The gross proﬁt margin was 22.7 percent of sales in ﬁscal 2000 and ﬁscal 1999 compared with 23.0 percent in ﬁscal 1998. The ﬁscal 2000 gross proﬁt margin includes higher gross proﬁt margins for both the Circuit City and CarMax businesses. The Circuit City improvement reﬂects a higher percentage of sales from better-featured products and newer technologies, which carry higher gross margins, partly offset by the strength in personal computer sales, which carry lower gross margins. Continued improvements in inventory management also contributed to the Circuit City Group’s gross margin increase. At the end of ﬁscal 1998, CarMax instituted a proﬁt improvement plan that included better inventory management, increased retail service sales, pricing adjustments and the addition of consumer electronic accessory sales. The success of this plan was the signiﬁcant contributor to improved gross proﬁt margins for that business in both ﬁscal 2000 and ﬁscal 1999. The signiﬁcant increase in newcar sales as a percentage of total sales partly offset the improvements since new vehicles carry lower gross proﬁt margins than used vehicles. Because the CarMax business produces lower gross margins than the Circuit City business, the increased sales contribution from CarMax reduces the Company’s overall gross proﬁt margin even though the CarMax Group’s gross proﬁt margin increased from ﬁscal 1999 to ﬁscal 2000. The Company’s ﬁscal 1999 gross proﬁt margin reﬂects, for the Circuit City Group, the strength of the personal computer business and the competitive price environment partly offset by better inventory management and increased sales of better-featured products and, for the CarMax Group, the impact of the proﬁt improvement plan partly offset by the increase in new-car sales as a percentage of total sales. Selling, General and Administrative Expenses Earnings from continuing operations for Circuit City Stores, Inc. increased 55 percent to $327.8 million in ﬁscal 2000. The increase reﬂects a 39 percent earnings increase achieved by the Circuit City business and a proﬁt achieved by the CarMax Group. In ﬁscal 1999, earnings from continuing operations were $211.5 million compared with earnings from continuing operations of $124.9 million in ﬁscal 1998. Loss from Discontinued Operations On June 16, 1999, Digital Video Express announced that it would cease marketing of the Divx home video system and discontinue operations, but existing, registered customers would be able to view discs during a two-year phase-out period. The operating results of Divx and the loss on disposal of the Divx business have been segregated from continuing operations and reported as separate line items, after tax, on the Company’s statements of earnings for the periods presented. For ﬁscal 2000, the loss from the discontinued operations of Divx totaled $16.2 million after an income tax beneﬁt of $9.9 million. The loss from the discontinued operations of Divx totaled $68.5 million after an income tax beneﬁt of $42.0 million in ﬁscal 1999 and $20.6 million after an income tax beneﬁt of $12.6 million in ﬁscal 1998. In ﬁscal 2000, the loss on the disposal of the Divx business totaled $114.0 million after an income tax beneﬁt of $69.9 million. The loss on the disposal includes a provision for operating losses to be incurred during the phase-out period. It also includes provisions for commitments under licensing agreements with motion picture distributors, the writedown of assets to net realizable value, lease termination costs, employee severance and beneﬁt costs and other contractual commitments. Net Earnings Selling, general and administrative expenses were 18.3 percent of sales in ﬁscal 2000, compared with 19.3 percent of sales in ﬁscal 1999 and 20.5 percent of sales in ﬁscal 1998. The ﬁscal 2000 expense ratio primarily reﬂects expense leverage from the comparable store sales increase for the Circuit City Group and expense leverage from the total and comparable store sales increases and productivity improvements resulting from the Net earnings for the Company increased 38 percent to $197.6 million in ﬁscal 2000. In ﬁscal 1999, net earnings rose 37 percent to $142.9 million from $104.3 million in ﬁscal 1998. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 25 CIRCUIT slower expansion rate, implementation of the hub and satellite operating strategy and operating expense controls for the CarMax Group. The improvement at CarMax was partly offset by $4.8 million in lease termination costs on undeveloped property and a write-down of assets associated with excess property for sale. The lower expense ratio in ﬁscal 1999 compared with ﬁscal 1998 primarily reﬂects the expense leverage generated by the Circuit City Group’s comparable store sales increase. CarMax’s expense ratio exceeded expectations in both years, reﬂecting the costs associated with expansion and below-plan sales in both years. Because CarMax operates with a lower expense structure, it reduces the Company’s overall expense-to-sales ratio. Operating proﬁts generated by the Company’s finance operations are recorded as a reduction to selling, general and administrative expenses. CITY S T O R E S, I N C. Slide 28: Operations Outlook FINANCIAL CONDITION For the Circuit City business, management expects that industry growth, primarily driven by the introduction of better-featured products and new technologies, will be the primary contributor to sales and earnings growth during the coming decade. Management anticipates that growth in the household penetration of products and services such as digital television, direct broadcast satellite systems, wireless communications, digital camcorders, DVD players, multi-function set-top boxes and broadband Internet access will contribute signiﬁcantly to overall sales and earnings growth. In ﬁscal 2001, the Circuit City Group will build on initiatives begun in ﬁscal 2000. The planned 25 new Superstores and all 571 existing Superstores will feature new displays designed to highlight the latest advances in technology. The Circuit City Group also will remodel 30 to 35 stores in the Richmond,Va., and the Miami,West Palm Beach, Tampa, Fort Myers and Orlando, Fla., markets. These remodeled Superstores will allow management to test a concept dedicated to consumer electronics and home ofﬁce products. Superstores opened after the ﬁrst ﬁscal quarter also will be dedicated to consumer electronics and home ofﬁce products. In the remodel markets, Circuit City will test approximately six standalone major appliance stores to create better selling space for the new technologies in the appliance business and to increase consumer awareness of Circuit City’s appliance offering. Management anticipates that the industry’s growth, geographic expansion of Circuit City’s Superstore concept, Superstore remodeling and continued strong operating controls will enable the Circuit City business to generate earnings growth of 20 percent to 25 percent in ﬁscal 2001. In ﬁscal 2001, CarMax’s management will continue to focus on revenue growth and operating margin enhancement in existing CarMax markets. Management will concentrate on the hub and satellite operating strategy for its used-car superstores and seek new-car franchises to integrate or colocate with used-car superstores. Management anticipates that in ﬁscal 2001 and beyond new stores will be smaller “A”stores or satellite locations. Management believes that continued sales and proﬁt improvement in the Group’s existing markets will result in solid proﬁtability in ﬁscal 2001 and allow the Group to resume moderate and proﬁtable geographic growth thereafter. RECENT ACCOUNTING PRONOUNCEMENTS Liquidity and Capital Resources In ﬁscal 2000, net cash provided by operating activities of continuing operations was $593.5 million compared with $309.5 million in ﬁscal 1999 and $228.2 million in ﬁscal 1998. The ﬁscal 2000 increase primarily reﬂects increased earnings from the Circuit City and CarMax businesses and increases in accounts payable for both Groups, partly offset by increases in inventory for both Groups. The ﬁscal 1999 increase primarily reﬂects a decrease in net accounts receivable and higher earnings for the Circuit City business, partly offset by increased inventory for both Circuit City and CarMax. Most ﬁnancial activities, including the investment of surplus cash and the issuance and repayment of short-term and long-term debt, are managed by the Company on a centralized basis. Interest-bearing loans, with terms determined by the board of directors, are used to manage cash between the Groups. These loans are reﬂected as inter-group receivables or payables on the ﬁnancial statements of each Group. During ﬁscal 2000, a term loan totaling $175 million and due in May 2000 was classiﬁed as a current liability. Although the Company has the ability to reﬁnance this loan, it intends to repay the debt using existing working capital. Capital expenditures have been funded through sale-leaseback transactions, landlord reimbursements, proceeds from the February 1997 CarMax Group equity offering and short- and long-term debt. Capital expenditures of $222.3 million in ﬁscal 2000 reﬂect construction for Circuit City and CarMax stores opened or remodeled during the year and a portion of the stores opening in ﬁscal 2001. The sale-leaseback and landlord reimbursement transactions in ﬁscal 2000 totaled $100.2 million. Capital expenditures of $352.4 million in ﬁscal 1999 and $575.9 million in ﬁscal 1998 were largely incurred in connection with the Company’s expansion programs. Sale-leaseback and landlord reimbursement transactions were $273.6 million in ﬁscal 1999 and $297.1 million in ﬁscal 1998. During ﬁscal 2000, the CarMax Group acquired the Chrysler-Plymouth-Jeep franchise rights and the related assets of Prince Chrysler-Plymouth-Jeep Company and the franchise rights and the related assets of LAX Dodge, Inc. in the Los Angeles market; the Jeep franchise rights and the related assets of Red Bird Jeep-Eagle and the franchise rights of Hilltop ChryslerPlymouth, Inc. in the Dallas market; the franchise rights and related assets of Fairway Chrysler-Plymouth-Jeep, Inc. in the Orlando market; and the Nissan franchise rights and related assets of Town & Country Pontiac Nissan, Inc. in the Washington D.C./Baltimore market for a total of $34.8 million. These acquisitions were ﬁnanced through cash resources. Costs in excess of the acquired net tangible assets, which are primarily inventory, have been recorded as goodwill and covenants not to compete. During ﬁscal 1999, the CarMax Group acquired the Toyota franchise rights and the related assets of Laurel Automotive Group, Inc. in the Washington D.C./Baltimore market; the franchise rights and the related assets of Mauro Auto Mall, Inc. in the Chicago market; the franchise rights and the related assets of Nissan of Greenville, Inc. in the Greenville, S.C., market; and the Mitsubishi franchise rights and the related assets of Boomershine In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended by SFAS No. 137, is effective for quarters for ﬁscal years beginning after June 15, 2000. SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and requires that an entity recognize those items as either assets or liabilities and measure them at fair value. The Company does not expect SFAS No. 133 to have a material impact on its ﬁnancial position, results of operations or cash ﬂows. 26 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 29: Receivables generated by the Company’s ﬁnance operations are funded through securitization transactions that allow the operations to sell their receivables while retaining a small interest in them. The Circuit City Group’s ﬁnance operation has a master trust securitization facility for its private-label credit card that allows the transfer of up to $1.85 billion in receivables through both private placement and the public market. A second master trust securitization program allows for the transfer of up to $1.75 billion in receivables related to the operation’s bank card programs. Receivables securitized under the master trust facilities totaled $2.79 billion at February 29, 2000. In ﬁscal 1996, Circuit City Stores, Inc. initiated an asset securitization program on behalf of the CarMax Group. At the end of ﬁscal 2000, that program allowed for the transfer of up to $500 million in automobile loan receivables. In October 1999, the Company formed a second securitization facility on behalf of the CarMax Group that allowed for a $644 million securitization of automobile loan receivables in the public market. At February 29, 2000, the program had a capacity of $559.5 million. Securitized receivables on behalf of the CarMax Group totaled $887.2 million at the end of ﬁscal 2000. Under the securitization programs, receivables are sold to an unafﬁliated third party with the servicing rights retained. Management expects that these securitization programs can be expanded to accommodate future receivables growth for both businesses. In ﬁscal 1999, CarMax entered into a one-year, renewable inventory ﬁnancing arrangement with an asset-backed commercial paper conduit. The arrangement had a total program capacity of $160 million at February 29, 2000, and was created to provide funding for the acquisition of vehicle inventory through the use of a non-afﬁliated special purpose company. During ﬁscal 2000 and ﬁscal 1999, the CarMax Group ﬁnanced no inventory under this arrangement. This ﬁnancing arrangement was terminated in the ﬁrst quarter of ﬁscal 2001. CAPITALIZATION Fiscal (Dollar amounts in millions) $ Over the past three years, expansion for the Groups has been funded with internally generated cash, sale-leaseback transactions, proceeds from the February 1997 CarMax equity offering, operating leases and short-term and long-term debt. Finance operation receivables have been funded through securitization transactions. From ﬁscal 1999 to ﬁscal 2000, stockholders’ equity increased 12 percent to $2.14 billion. Capitalization for the past ﬁve years is illustrated in the “Capitalization” table below. Higher earnings for the Circuit City business and the CarMax Group, partly offset by the loss on the discontinuance of the Divx business, produced a return on equity of 9.8 percent in ﬁscal 2000, compared with 7.9 percent in ﬁscal 1999. Management anticipates that in ﬁscal 2001 capital expenditures of approximately $275 million will be funded through a combination of internally generated cash, sale-leaseback transactions and operating leases and that securitization transactions will ﬁnance the growth in receivables. At the end of ﬁscal 2000, the Company maintained a multiyear, $150 million unsecured revolving credit agreement and $370 million in committed seasonal lines that are renewed annually with various banks. The Groups rely on the external debt of Circuit City Stores, Inc. to provide working capital needed to fund net assets not otherwise ﬁnanced through sale-leasebacks or the securitization of receivables. All signiﬁcant ﬁnancial activities of each Group are managed by the Company on a centralized basis and are dependent on the ﬁnancial condition of the Company. These ﬁnancial activities include the investment of surplus cash, issuance and repayment of debt, securitization of receivables, sale-leasebacks of real estate and inter-group loans. 2000 % $ 1999 % $ 1998 % $ 1997 % $ 1996 % Long-term debt, excluding current installments......................................... 249.2 Other long-term liabilities...................................... 157.8 Total stockholders’ equity....................................... 2,142.2 Total capitalization................................................. 2,549.2 10 6 84 100 426.6 149.7 1,905.1 2,481.4 17 6 77 100 424.3 171.5 1,730.0 2,325.8 18 7 75 100 430.3 199.4 1,614.8 2,244.5 19 9 72 100 399.2 231.8 1,063.9 1,694.9 23 14 63 100 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 27 CIRCUIT CITY S T O R E S, I N C. Automotive, Inc. in the Atlanta market for a total of $49.6 million. These acquisitions were ﬁnanced through cash payments totaling $41.6 million and the issuance of two promissory notes totaling $8.0 million. Costs in excess of the acquired net tangible assets, which are primarily inventory, were recorded as goodwill and covenants not to compete. Capital Structure Total assets at February 29, 2000, were $3.96 billion, up $510.1 million or 15 percent since February 28, 1999. A $378.1 million increase in cash and a $171.5 million increase in inventory contributed to the increase in total assets. Slide 30: MARKET RISK Financings at February 29, 2000, and February 28, 1999, were as follows: (Amounts in millions) 2000 1999 The Company manages the private-label and bank card revolving loan portfolios of the Circuit City Group’s ﬁnance operation and the automobile installment loan portfolio of the CarMax Group’s ﬁnance operation. Portions of these portfolios are securitized and, therefore, are not presented on the Company’s balance sheets. Interest rate exposure relating to these receivables represents a market risk exposure that the Company has managed with matched funding and interest rate swaps. Revolving Loans Interest rates charged on the accounts in the managed private-label and bank card portfolios are primarily indexed to the prime rate, adjustable on a monthly basis, with the balance at a ﬁxed annual percentage rate. Total principal outstanding at February 29, 2000, and February 28, 1999, had the following APR structure: (Amounts in millions) 2000 1999 Fixed-rate securitization.............................................. $559 Floating-rate securitizations synthetically altered to ﬁxed................................... 327 Floating-rate securitizations........................................ 1 Held by the Company: For investment* ....................................................... 22 For sale…............................................................... 23 Total.............................................................................. $932 * Held by a bankruptcy remote special purpose company $– 500 39 38 15 $592 Indexed to prime rate................................................ $2,631 Fixed APR.................................................................. 213 Total........................................................................... $2,844 $2,714 243 $2,957 Financing for the securitization programs is achieved primarily through the issuance of public market debt, which is issued either at ﬂoating rates based on LIBOR or at ﬁxed rates. Certain of the ﬁxed-rate issuances have been swapped to LIBOR. Receivables held by the Company for investment or sale are ﬁnanced with working capital. At February 29, 2000, and February 28, 1999, ﬁnancings were as follows: (Amounts in millions) 2000 1999 The Company has analyzed its interest rate exposure and has concluded that it did not represent a material market risk at February 29, 2000, or February 28, 1999. Because programs are in place to manage interest rate exposure relating to the consumer loan portfolios, the Company expects to experience relatively little impact if interest rates ﬂuctuate. The Company also has the ability to adjust ﬁxed-APR revolving cards and the index on ﬂoating-rate cards, subject to cardholder ratiﬁcation, but does not currently anticipate the need to do so. YEAR 2000 CONVERSION Floating-rate (including synthetic alteration) securitizations.................................... $2,544 Fixed-rate securitizations.......................................... 137 Held by the Company: For investment..................................................... 145 For sale ................................................................ 18 Total........................................................................... $2,844 $2,568 187 162 40 $2,957 Automobile Installment Loans Total principal outstanding for ﬁxed-rate automobile loans at February 29, 2000, and February 28, 1999, was as follows: (Amounts in millions) 2000 1999 In ﬁscal 1997, the Company began a Year 2000 date conversion project to address necessary code changes, testing and implementation for its systems. Since the project began, the Company has expensed $17.1 million in project costs, including $3.9 million in ﬁscal 2000. These costs were in addition to the normal budget for information systems and were funded through operating cash ﬂows. Because the CarMax computer systems were developed in recent years, they did not require signiﬁcant remediation; therefore, the CarMax Group did not incur any material costs related to the Year 2000 issue. To date, because of the extensive testing and remediation efforts undertaken by the Company prior to January 1, 2000, no material adverse consequences have been experienced by the Circuit City Group or the CarMax Group resulting from the Year 2000 date change, and none are anticipated. In addition, as part of the Company’s Year 2000 project, the Company identiﬁed its key third-party business partners and coordinated with them to address potential Year 2000 issues. To date, the Company has not experienced any material adverse consequences related to its key third-party business partners, and none are anticipated. FO R WA R D - LO O K I N G S TAT E M E N T S Fixed APR..................................................................... $932 $592 Financing for these receivables is achieved through asset securitization programs that, in turn, issue both ﬁxed- and ﬂoating-rate securities. Interest rate exposure is hedged through the use of interest rate swaps matched to projected payoffs. Receivables held by the Company for investment or sale are ﬁnanced with working capital. The provisions of the Private Securities Litigation Reform Act of 1995, which became law in December 1995, provide companies with a “safe harbor” when making forward-looking statements. This “safe harbor” encourages companies to provide prospective information about their companies without fear of litigation. The Company wishes to take advantage of the “safe harbor” provisions of the Act. Company statements that are not historical facts, including statements about management’s expectations for ﬁscal 2001 and beyond, are forward-looking statements and involve various risks and uncertainties. Factors that could cause the 28 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 31: (a) changes in the amount and degree of promotional intensity exerted by current competitors and potential new competition from both retail stores and alternative methods or channels of distribution such as online and telephone shopping services and mail order; (b) changes in general U.S. or regional U.S. economic conditions including, but not limited to, consumer credit availability, consumer credit delinquency and default rates, interest rates, inﬂation, personal discretionary spending levels and consumer sentiment about the economy in general; (c) the presence or absence of, or consumer acceptance of, new products or product features in the merchandise categories the Company sells and changes in the Company’s actual merchandise sales mix; (d) signiﬁcant changes in retail prices for products sold by any of the Company’s businesses, including changes in prices for new and used cars and the relative consumer demand for new or used cars; (e) lack of availability or access to sources of supply for appropriate Circuit City or CarMax inventory; (f) the ability to retain and grow an effective management team in a dynamic environment or changes in the cost or availability of a suitable work force to manage and support the Company’s service-driven operating strategies; (g) changes in availability or cost of capital expenditure and working capital ﬁnancing, including the availability of long-term ﬁnancing to support (h) changes in production or distribution costs or cost of materials for the Company’s advertising; (i) availability of appropriate real estate locations for expansion; (j) the imposition of new restrictions or regulations regarding the sale of products and/or services the Company sells, changes in tax rules and regulations applicable to the Company or its competitors, the imposition of new environmental restrictions, regulations or laws or the discovery of environmental conditions at current or future locations or any failure to comply with such laws or any adverse change in such laws; (k) adverse results in signiﬁcant litigation matters; (l) changes in levels of competition in the car business from either traditional competitors and/or new nontraditional competitors utilizing auto superstore or other formats; (m) the inability of the CarMax business to reach expected mature sales and earnings potential; and (n) limited or lack of availability of new-car franchises within a suitable radius of existing and proposed CarMax stores or limited manufacturer approval of franchise acquisitions. The United States retail industry and the specialty retail industry in particular are dynamic by nature and have undergone signiﬁcant changes over the past several years. The Company’s ability to anticipate and successfully respond to continuing challenges is key to achieving its expectations. COMMON STOCK The common stock of Circuit City Stores, Inc. includes two series: Circuit City Stores, Inc.—Circuit City Group Common Stock and Circuit City Stores, Inc.—CarMax Group Common Stock. Both Group stocks are traded on the New York Stock Exchange. The quarterly dividend data Circuit City Group* Market Price of Common Stock Fiscal Quarter HIGH 2000 LOW HIGH 1999 LOW 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. CarMax Group Dividends 2000 1999 Market Price of Common Stock 2000 HIGH LOW HIGH 1999 LOW 1st ................................................. 2nd................................................ 3rd................................................. 4th................................................. Total $39.19 $52.97 $53.88 $51.69 $25.94 $35.44 $35.00 $32.50 $24.82 $27.25 $19.78 $32.07 $18.78 $14.97 $14.41 $17.69 $.0175 $.0175 $.0175 $.0175 $.0700 $.0175 $.0175 $.0175 $.0175 $.0700 $5.50 $7.13 $4.00 $3.25 $3.69 $3.38 $1.75 $1.31 $13.50 $11.00 $ 8.00 $ 5.75 $8.63 $5.56 $3.63 $3.94 Circuit City Group stock prices and dividends per share have been adjusted to reﬂect a two-for-one stock split effective June 30, 1999. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 29 CIRCUIT CITY S T O R E S, I N C. Company’s actual results to differ materially from management’s projections, forecasts, estimates and expectations include, but are not limited to, the following: development of the Company’s businesses and the availability of securitization ﬁnancing for credit card and automobile installment loan receivables; Slide 32: CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands except per share data) NET SALES AND OPERATING REVENUES 2000 % Years Ended February 29 or 28 1999 % 1998 % .................. $12,614,390 Cost of sales, buying and warehousing................................................... 9,751,833 GROSS PROFIT 100.0 77.3 22.7 18.3 0.2 18.5 4.2 1.6 2.6 (0.1) (0.9) (1.0) 1.6 $10,810,468 8,354,230 2,456,238 2,086,838 28,319 2,115,157 341,081 129,611 211,470 (68,546) – (68,546) $ 142,924 100.0 77.3 22.7 19.3 0.2 19.5 3.2 1.2 2.0 (0.7) – (0.7) 1.3 $8,870,797 6,827,133 2,043,664 1,815,275 26,861 1,842,136 201,528 76,581 124,947 (20,636) – (20,636) $ 104,311 100.0 77.0 23.0 20.5 0.2 20.7 2.3 0.9 1.4 (0.2) – (0.2) 1.2 ............................................................................. 2,862,557 2,309,593 24,206 2,333,799 528,758 200,928 327,830 (16,215) (114,025) (130,240) $ 197,590 Selling, general and administrative expenses [NOTE 11] .......................... Interest expense [NOTE 5]......................................................................... T O T A L E X P E N S E S ....................................................................... Earnings from continuing operations before income taxes ................... Provision for income taxes [NOTE 6] ........................................................ E A R N I N G S F R O M C O N T I N U I N G O P E R A T I O N S ......... Discontinued operations [NOTE 15]: Loss from discontinued operations of Divx, less income tax beneﬁt .. Loss on disposal of Divx, including provision for losses during phase-out period, less income tax beneﬁt....................... Loss from discontinued operations ........................................................ N E T E A R N I N G S ............................................................................. Net earnings (loss) attributed to [NOTES 1 AND 2]: Circuit City Group common stock: Continuing operations ................................................................ $ 327,574 Discontinued operations............................................................. (130,240) CarMax Group common stock .......................................................... 256 $ Weighted average common shares [NOTES 2 AND 8]: Circuit City Group: Basic ............................................................................................ Diluted......................................................................................... CarMax Group: Basic ............................................................................................ Diluted......................................................................................... NET EARNINGS (LOSS) PER SHARE [NOTES 2 AND 8]: $ 216,927 (68,546) (5,457) 142,924 $ 132,710 (20,636) (7,763) $ 104,311 197,590 $ 201,345 204,321 23,778 25,788 198,304 200,812 22,604 22,604 196,054 198,408 22,001 22,001 Circuit City Group: Basic: Continuing operations ............................................................ $ Discontinued operations......................................................... Net earnings............................................................................ $ Diluted: Continuing operations ............................................................ $ Discontinued operations......................................................... Net earnings............................................................................ $ CarMax Group: Basic.............................................................................................. $ Diluted .......................................................................................... $ See accompanying notes to consolidated ﬁnancial statements. 1.63 (0.65) 0.98 1.60 (0.64) 0.96 0.01 0.01 $ $ $ $ $ $ 1.09 (0.34) 0.75 1.08 (0.34) 0.74 (0.24) (0.24) $ $ $ $ $ $ 0.68 (0.11) 0.57 0.67 (0.10) 0.57 (0.35) (0.35) 30 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 33: CONSOLIDATED BALANCE SHEETS At February 29 or 28 (Amounts in thousands except share data) ASSETS CURRENT ASSETS: 2000 1999 S T O R E S, I N C. T O T A L C U R R E N T A S S E T S................................................................................................................. Property and equipment, net [NOTES 4 AND 5] ..................................................................................................... Other assets........................................................................................................................................................ T O T A L A S S E T S ......................................................................................................................................... LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: $3,955,348 $3,445,266 Current installments of long-term debt [NOTES 5 AND 10] ................................................................................... $ 177,344 Accounts payable ............................................................................................................................................... 960,131 Short-term debt [NOTE 5].................................................................................................................................... 3,005 Accrued expenses and other current liabilities.................................................................................................. 204,561 Deferred income taxes [NOTE 6] .......................................................................................................................... 61,118 T O T A L C U R R E N T L I A B I L I T I E S...................................................................................................... $ 2,707 799,733 8,016 143,585 9,764 963,805 426,585 112,085 37,661 Long-term debt, excluding current installments [NOTES 5 AND 10]...................................................................... Deferred revenue and other liabilities................................................................................................................ Deferred income taxes [NOTE 6] .......................................................................................................................... T O T A L L I A B I L I T I E S.............................................................................................................................. STOCKHOLDERS’ EQUITY [NOTES 1 AND 7]: 1,406,159 249,241 130,020 27,754 1,813,174 1,540,136 Circuit City Group common stock, $0.50 par value; 350,000,000 shares authorized; 203,868,000 shares issued and outstanding (100,820,000 in 1999) ............................................................ CarMax Group common stock, $0.50 par value; 175,000,000 shares authorized; 25,614,000 shares issued and outstanding (23,116,000 in 1999) ................................................................ Capital in excess of par value............................................................................................................................. Retained earnings.............................................................................................................................................. T O T A L S T O C K H O L D E R S ’ E Q U I T Y................................................................................................. 101,934 12,807 576,574 1,450,859 2,142,174 $3,955,348 50,410 11,558 575,686 1,267,476 1,905,130 $3,445,266 Commitments and contingent liabilities [NOTES 1, 9, 10, 12, 13, 14 AND 15] T O T A L L I A B I L I T I E S A N D S T O C K H O L D E R S ’ E Q U I T Y...................................................... See accompanying notes to consolidated ﬁnancial statements. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 31 CIRCUIT 2,942,615 965,181 47,552 2,394,515 1,005,773 44,978 CITY Cash and cash equivalents................................................................................................................................. $ 643,933 Net accounts receivable [NOTE 12]....................................................................................................................... 593,276 Inventory............................................................................................................................................................ 1,689,209 Prepaid expenses and other current assets........................................................................................................ 16,197 $ 265,880 574,316 1,517,675 36,644 Slide 34: CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) OPERATING ACTIVITIES: 2000 Years Ended February 29 or 28 1999 1998 Net earnings............................................................................................................................. $ 197,590 Adjustments to reconcile net earnings to net cash provided by operating activities of continuing operations: Loss from discontinued operations [NOTE 15]..................................................................... 16,215 Loss on disposal of discontinued operations [NOTE 15] ...................................................... 114,025 Depreciation and amortization.......................................................................................... 148,164 Loss on disposition of property and equipment................................................................ 17 Provision for deferred income taxes................................................................................... 43,053 Changes in operating assets and liabilities, net of effects from business acquisitions: Decrease in deferred revenue and other liabilities....................................................... (15,565) (Increase) decrease in net accounts receivable ............................................................ (18,922) Increase in inventory.................................................................................................... (184,507) Decrease (increase) in prepaid expenses and other current assets.............................. 81,316 Decrease (increase) in other assets.............................................................................. 240 Increase in accounts payable, accrued expenses and other current liabilities........................................................................................... 211,850 NET CASH PROVIDED BY OPERATING ACTIVITIES O F C O N T I N U I N G O P E R A T I O N S ...................................................................... INVESTING ACTIVITIES: $ 142,924 $ 104,311 68,546 – 129,727 3,087 17,235 20,636 – 114,860 14,093 15,052 (33,022) 23,640 (97,597) 31,257 (607) 24,315 309,505 (23,024) (66,061) (18,182) (6,113) 10,359 62,276 228,207 593,476 Cash used in business acquisitions [NOTE 3] ............................................................................ Purchases of property and equipment..................................................................................... Proceeds from sales of property and equipment..................................................................... NET CASH USED IN INVESTING ACTIVITIES O F C O N T I N U I N G O P E R A T I O N S ...................................................................... FINANCING ACTIVITIES: (34,849) (222,268) 100,151 (156,966) (41,562) (352,384) 273,647 (120,299) – (575,860) 297,126 (278,734) (Payments on) proceeds from issuance of short-term debt, net ............................................. Principal payments on long-term debt.................................................................................... Issuances of Circuit City Group common stock, net................................................................ Issuances of CarMax Group common stock, net...................................................................... Dividends paid on Circuit City Group common stock............................................................. NET CASH PROVIDED BY FINANCING ACTIVITIES O F C O N T I N U I N G O P E R A T I O N S .................................................................... C A S H U S E D I N D I S C O N T I N U E D O P E R A T I O N S [NOTE 15] (5,011) (2,707) 50,205 3,456 (14,207) 31,736 (90,193) 378,053 265,880 (960) (1,301) 42,165 3,983 (13,981) 29,906 (69,844) 149,268 116,612 $ 265,880 5,629 (6,187) 22,311 2,353 (13,792) 10,314 (45,818) (86,031) 202,643 $ 116,612 .......................... Increase (decrease) in cash and cash equivalents ......................................................................... Cash and cash equivalents at beginning of year............................................................................ Cash and cash equivalents at end of year ...................................................................................... $ 643,933 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest..................................................................................................................................... $ 34,389 Income taxes............................................................................................................................ $ 14,908 See accompanying notes to consolidated ﬁnancial statements. $ 31,858 $ 53,528 $ 26,697 $ 47,936 32 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 35: CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Common Shares Outstanding Circuit City CarMax Group Common Stock Circuit City Group CarMax Group Capital In Excess of Par Value Retained Earnings Total S T O R E S, I N C. (Amounts in thousands except per share data) B A L A N C E A T M A R C H 1 , 1 9 9 7..................... Group 98,178 – 483 173 605 – (157) – – 99,282 – 1,004 429 360 – 32 (287) – – 100,820 21,860 – 273 51 20 – – – – 22,204 – 543 269 100 – – – – – 23,116 – – 2,027 506 30 – (65) – – 25,614 $ 49,089 – 241 87 302 – (78) – – 49,641 – 502 215 180 – 16 (144) – – 50,410 50,410 – 1,432 251 173 – (742) – – $101,934 $ 10,930 – 136 26 10 – – – – 11,102 – 272 134 50 – – – – – 11,558 – – 1,014 253 15 – (33) – – $12,807 $ 506,823 – 6,790 6,648 20,214 8,013 (4,470) (13,255) – 530,763 – 16,945 19,431 14,588 9,523 1,445 (14,239) (2,770) – 575,686 (50,410) – 34,232 21,547 13,996 32,459 (52,173) 1,237 – $576,574 $ 1,048,014 104,311 – – – – – – (13,792) 1,138,533 142,924 – – – – – – – (13,981) 1,267,476 – 197,590 – – – – – – (14,207) $1,450,859 $ 1,614,856 104,311 7,167 6,761 20,526 8,013 (4,548) (13,255) (13,792) 1,730,039 142,924 17,719 19,780 14,818 9,523 1,461 (14,383) (2,770) (13,981) 1,905,130 – 197,590 36,678 22,051 14,184 32,459 (52,948) 1,237 (14,207) $2,142,174 Net earnings.............................................................. Exercise of common stock options [NOTE 7].............. Shares issued under Employee Stock Purchase Plans [NOTE 7] ............................. Shares issued under the 1994 Stock Incentive Plan [NOTE 7] ........................................ Tax beneﬁt from stock issued ................................... Shares cancelled upon reacquisition by Company ... Unearned compensation-restricted stock ................ Cash dividends-Circuit City Group common stock ($0.14 per share)........................................ B A L A N C E A T F E B R U A R Y 2 8 , 1 9 9 8 ......... Net earnings.............................................................. Exercise of common stock options [NOTE 7].............. Shares issued under Employee Stock Purchase Plans [NOTE 7] ............................. Shares issued under the 1994 Stock Incentive Plan [NOTE 7] ........................................ Tax beneﬁt from stock issued ................................... Other......................................................................... Shares cancelled upon reacquisition by Company ... Unearned compensation-restricted stock ................ Cash dividends-Circuit City Group common stock ($0.14 per share)........................................ B A L A N C E A T F E B R U A R Y 2 8 , 1 9 9 9 ......... Effect of two-for-one stock split [NOTE 1] .................. 100,820 Net earnings.............................................................. – Exercise of common stock options [NOTE 7].............. 2,864 Shares issued under Employee Stock Purchase Plans [NOTE 7] ............................. 502 Shares issued under the 1994 Stock Incentive Plan [NOTE 7] ........................................ 346 Tax beneﬁt from stock issued ................................... – Shares cancelled upon reacquisition by Company.... (1,484) Unearned compensation-restricted stock ................ – Cash dividends-Circuit City Group common stock ($0.07 per share)........................................ – B A L A N C E A T F E B R U A R Y 2 9 , 2 0 0 0............ See accompanying notes to consolidated ﬁnancial statements. 203,868 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 33 CIRCUIT CITY Slide 36: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 . B A S I S O F P R E S E N TAT I O N The common stock of Circuit City Stores, Inc. consists of two common stock series, which are intended to reﬂect the performance of the Company’s two businesses. The Circuit City Group Common Stock is intended to track the performance of the Circuit City store-related operations, the Group’s retained interest in the CarMax Group and the Company’s investment in Digital Video Express, which has been discontinued (see Note 15). The CarMax Group Common Stock is intended to track the performance of the CarMax Group’s operations. The Circuit City Group held a 74.7 percent interest in the CarMax Group at February 29, 2000, a 76.6 percent interest at February 28, 1999, and a 77.3 percent interest at February 28, 1998. Notwithstanding the attribution of the Company’s assets and liabilities, including contingent liabilities, and stockholders’ equity between the Circuit City Group and the CarMax Group for the purposes of preparing their respective ﬁnancial statements, holders of Circuit City Group Stock and holders of CarMax Group Stock are shareholders of the Company and continue to be subject to all of the risks associated with an investment in the Company and all of its businesses, assets and liabilities. Such attribution and the change in the equity structure of the Company does not affect title to the assets or responsibility for the liabilities of the Company or any of its subsidiaries. The results of operations or ﬁnancial condition of one Group could affect the results of operations or ﬁnancial condition of the other Group. Accordingly, the Company’s consolidated ﬁnancial statements included herein should be read in conjunction with the ﬁnancial statements of each Group. On June 15, 1999, the board of directors declared a two-for-one split of the outstanding Circuit City Group Common Stock in the form of a 100 percent stock dividend. All share, earnings per share and dividends per share calculations for the Circuit City Group included in the accompanying consolidated ﬁnancial statements reﬂect this stock split. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION: The consolidated ﬁnancial statements the resulting cash ﬂow projections is calculated using a discount rate appropriate for the type of asset and risk. Retained interests (such as residual interests in a securitization trust, cash reserve accounts and rights to future interest from serviced assets that exceed contractually speciﬁed servicing fees) are included in net accounts receivable and are carried at fair value with changes in fair value reﬂected in earnings. Loan receivables held for sale are carried at the lower of cost or market, whereas loan receivables held for investment are carried at cost less an allowance for losses. At February 29, 2000, and February 28, 1999, cost approximates fair value. (D) FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of the Company’s ﬁnancial instruments, excluding interest rate swaps held for hedging purposes, approximates fair value. Credit risk is the exposure created by the potential nonperformance of another material party to an agreement because of changes in economic, industry or geographic factors. The Company mitigates credit risk by dealing only with counterparties that are highly rated by several ﬁnancial rating agencies. Accordingly, the Company does not anticipate material loss for nonperformance. The Company broadly diversiﬁes all ﬁnancial instruments along industry, product and geographic areas. (E) INVENTORY: Inventory is stated at the lower of cost or market. Cost is determined by the average cost method for the Circuit City Group’s inventory and by speciﬁc identiﬁcation for the CarMax Group’s vehicle inventory. Parts and labor used to recondition vehicles, as well as transportation and other incremental expenses associated with acquiring vehicles, are included in the CarMax Group’s inventory. (F) PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the assets’ estimated useful lives. include the accounts of the Circuit City Group and the CarMax Group, which combined comprise all accounts of the Company. All signiﬁcant intercompany balances and transactions have been eliminated in consolidation. (B) CASH AND CASH EQUIVALENTS: Cash equivalents of $583,506,000 at February 29, 2000, and $216,129,000 at February 28, 1999, consist of highly liquid debt securities with original maturities of three months or less. (C) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For transfers of ﬁnan- Property held under capital lease is stated at the lower of the present value of the minimum lease payments at the inception of the lease or market value and is amortized on a straight-line basis over the lease term or the estimated useful life of the asset, whichever is shorter. (G) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the Company adopted the American Institute of Certiﬁed Public Accountants Statement of Position 98-1,“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Once the capitalization criteria of the SOP have been met, external direct costs of materials and services used in the development of internal-use software and payroll and payroll-related costs for employees directly involved in the development of internal-use software are capitalized. Amounts capitalized are amortized on a straight-line basis over a period of three to ﬁve years. (H) INTANGIBLE ASSETS: Amounts paid for acquired businesses in excess of the fair value of the net tangible assets acquired are recorded as goodwill, which is amortized on a straight-line basis over 15 years, and covenants not to compete, which are amortized on a straight-line basis over the life of the covenant not to exceed ﬁve years. Both goodwill and covenants not to compete are included in other assets on the accompanying consolidated balance sheets. Based upon the ﬁnancial performance of the cial assets that qualify as sales, the Company recognizes gains or losses as a component of the Company’s ﬁnance operations. For transfers of ﬁnancial assets to qualify for sale accounting, control over the assets must be surrendered at the time of sale. Multiple estimates are used to calculate the gain or loss on sales of receivables under the provisions of SFAS No. 125,“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Finance charge income, default rates and payment rates are estimated using projections developed from the prior 12 months of operating history. These estimates are adjusted for any industry or portfolio trends that have been observed. The present value of 34 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 37: (J) INCOME TAXES: The Company accounts for income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes.” Deferred income taxes reﬂect the impact of temporary differences between the amounts of assets and liabilities recognized for ﬁnancial reporting purposes and the amounts recognized for income tax purposes, measured by applying currently enacted tax laws. The Company recognizes deferred tax assets if it is more likely than not that a beneﬁt will be realized. (K) DEFERRED REVENUE: The Circuit City Group sells its own extended warranty contracts and extended warranty contracts on behalf of unrelated third parties. The contracts extend beyond the normal manufacturer’s warranty period, usually with terms (including the manufacturer’s warranty period) between 12 and 60 months. Inasmuch as the Company is the primary obligor on these contracts, revenue from the sale of the Circuit City Group’s own extended warranty contracts is deferred and amortized on a straight-line basis over the life of the contracts. Incremental direct costs related to the sale of contracts are deferred and charged to expense in proportion to the revenue recognized. Commission revenue for the unrelated third-party extended warranty plans is recognized at the time of sale, since the third parties are the primary obligors under these contracts. Basic net earnings (loss) per share for CarMax Group Stock is computed by dividing net earnings (loss) attributed to CarMax Group Stock by the weighted average number of shares of CarMax Group Stock outstanding. Diluted net earnings per share for CarMax Group Stock is computed by dividing net earnings attributed to CarMax Group Stock by the weighted average number of shares of CarMax Group Stock outstanding and dilutive potential CarMax Group Stock. (O) STOCK-BASED COMPENSATION: The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25,“Accounting For Stock Issued to Employees,” and provides the pro forma disclosures of SFAS No. 123,“Accounting for Stock-Based Compensation.” (P) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into interest rate swap agreements to manage exposure to interest rates and to more closely match funding costs to the use of funding. Interest rate swaps relating to long-term debt are classiﬁed as held for purposes other than trading and are accounted for on a settlement basis. To qualify for this accounting treatment, the swap must synthetically alter the nature of a designated underlying ﬁnancial instrument. Under this method, payments or receipts due or owed under the swap agreement are accrued through each settlement date and recorded as a component of interest expense. If a swap designated as a synthetic alteration were to be terminated, any gain or loss on the termination would be deferred and recognized over the shorter of the original contractual life of the swap or the related life of the designated long-term debt. The CarMax Group sells service contracts on behalf of an unrelated third party and, prior to July 1997, sold its own contracts at one location where third-party warranty sales were not permitted. Contracts usually have terms of coverage between 12 and 72 months. Inasmuch as the Company is the primary obligor on these contracts, all revenue from the sale of the CarMax Group’s own service contracts was deferred and amortized over the life of the contracts consistent with the pattern of repair experience of the industry. Incremental direct costs related to the sale of contracts were deferred and charged to expense in proportion to the revenue recognized. Commission revenue for the unrelated third-party service contracts is recognized at the time of sale, since the third party is the primary obligor under these contracts. (L) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating proﬁts generated by the Company’s ﬁnance operations are recorded as a reduction to selling, general and administrative expenses. (M) ADVERTISING EXPENSES: All advertising costs are expensed as incurred. The Company also enters into interest rate swap agreements as part of its asset securitization programs. Swaps entered into by a seller as part of a sale of ﬁnancial assets are considered proceeds at fair value in the determination of the gain or loss on the sale. If such a swap were to be terminated, the impact on the fair value of the ﬁnancial asset created by the sale of the related receivables would be estimated and included in earnings. (Q) RISKS AND UNCERTAINTIES: The Circuit City Group is a leading national retailer of brand-name consumer electronics, personal computers, major appliances and entertainment software. The diversity of the Circuit City Group’s products, customers, suppliers and geographic operations signiﬁcantly reduces the risk that a severe impact will occur in the near term as a result of changes in its customer base, competition, sources of supply or markets. It is unlikely that any one event would have a severe impact on the Company’s operating results. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 35 CIRCUIT (I) PRE-OPENING EXPENSES: Effective March 1, 1999, the Company adopted SOP 98-5,“Reporting on the Costs of Start-Up Activities.” SOP 98-5 requires costs of start-up activities, including organization and preopening costs, to be expensed as incurred. Adoption of SOP 98-5 did not have a material impact on the Company’s ﬁnancial position, annual results of operations or liquidity. Prior to ﬁscal 2000, the Company capitalized pre-opening costs for new store locations. Beginning in the month after the store opened for business, the pre-opening costs were amortized over the remainder of the ﬁscal year. CITY S T O R E S, I N C. acquired businesses, the carrying values of intangible assets are periodically reviewed by the Company and impairments are recognized when the expected future undiscounted operating cash ﬂows derived from such intangible assets are less than the carrying values. (N) NET EARNINGS (LOSS) PER SHARE: The Company calculates earnings per share based upon SFAS No. 128,“Earnings per Share.” Basic net earnings per share for Circuit City Group Stock is computed by dividing net earnings attributed to Circuit City Group Stock, including the Circuit City Group’s retained interest in the CarMax Group, by the weighted average number of shares of Circuit City Group Stock outstanding. Diluted net earnings per share for Circuit City Group Stock is computed by dividing net earnings attributed to Circuit City Group Stock, which includes the Circuit City Group’s retained interest in the CarMax Group, by the weighted average number of shares of Circuit City Group Stock outstanding and dilutive potential Circuit City Group Stock. Slide 38: The CarMax Group is a used- and new-car retail business. The diversity of the CarMax Group’s customers and suppliers reduces the risk that a severe impact will occur in the near term as a result of changes in its customer base or sources of supply. However, because of the CarMax Group’s limited overall size, management cannot assure that unanticipated events will not have a negative impact on the Company. The preparation of ﬁnancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. (R) CORPORATE ALLOCATIONS: The Company manages corporate general and administrative costs and other shared services on a centralized basis. Allocations of these corporate activities and their related expenses to the Groups are based on methods that the Company believes to be reasonable. 4. PROPERTY AND EQUIPMENT Property and equipment, at cost, at February 29 or 28 is summarized as follows: (Amounts in thousands) 2000 1999 Land and buildings (20 to 25 years)............ $ 180,422 Land held for sale ........................................ 41,850 Land held for development ......................... 17,697 Construction in progress............................. 69,388 Furniture, ﬁxtures and equipment (3 to 8 years).......................................... 750,737 Leasehold improvements (10 to 15 years) ...................................... 586,005 Capital leases, primarily buildings (20 years)............................................... 12,471 1,658,570 Less accumulated depreciation and amortization.......................................... 693,389 $ 75,875 31,435 28,781 179,664 705,660 549,673 12,471 The provision for federal income taxes is determined on a consolidated basis. The ﬁnancial statement provision is reﬂected in each Group’s ﬁnancial statements in accordance with the Company’s tax allocation policy. In general, this policy provides that the consolidated tax provision is allocated between the Groups based principally upon the ﬁnancial income, taxable income, credits and other amounts directly related to each Group. Tax beneﬁts that cannot be used by the Group generating such attributes, but can be utilized on a consolidated basis, are allocated to the Group that generated such beneﬁts. (S) RECLASSIFICATIONS: Certain amounts in prior years have been reclassi- 1,583,559 577,786 $1,005,773 Property and equipment, net ...................... $ 965,181 Land held for development is land owned for future sites that are scheduled to open more than one year beyond the ﬁscal year reported. 5. DEBT Long-term debt at February 29 or 28 is summarized as follows: (Amounts in thousands) 2000 1999 ﬁed to conform to classiﬁcations adopted in ﬁscal 2000. 3. BUSINESS ACQUISITIONS The CarMax Group acquired the franchise rights and the related assets of six new-car dealerships for an aggregate cost of $34.8 million in ﬁscal 2000. These acquisitions were ﬁnanced through available cash resources. During ﬁscal 1999, CarMax acquired the franchise rights and the related assets for four new-car dealerships for an aggregate cost of $49.6 million. These acquisitions were ﬁnanced through available cash resources and the issuance of two promissory notes aggregating $8.0 million. Costs in excess of the fair value of the net tangible assets acquired (primarily inventory) have been recorded as goodwill and covenants not to compete. These acquisitions were accounted for under the purchase method and the results of the operations of the acquired franchises have been included in the accompanying consolidated ﬁnancial statements since the date of acquisition. Unaudited pro-forma information related to these acquisitions is not included as the impact of these acquisitions on the accompanying consolidated ﬁnancial statements is not material. Term loans...................................................... $405,000 Industrial Development Revenue Bonds due through 2006 at various prime-based rates of interest ranging from 5.0% to 7.0% ...................... 5,419 Obligations under capital leases [NOTE 10]...... 12,416 Note payable................................................... 3,750 Total long-term debt....................................... Less current installments............................... 426,585 177,344 $405,000 6,564 12,728 5,000 429,292 2,707 $426,585 Long-term debt, excluding current installments ................................. $249,241 In July 1994, the Company entered into a seven-year, $100,000,000, unsecured bank term loan. The loan was restructured in August 1996 as a $100,000,000, six-year unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.40 percent. At February 29, 2000, the interest rate on the term loan was 6.29 percent. In May 1995, the Company entered into a ﬁve-year, $175,000,000, unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate on the term loan was 6.23 percent. This term loan is due in May 2000 and has been classiﬁed as a current liability as of February 29, 36 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 39: 2000. Although the Company has the ability to reﬁnance this loan, it intends to repay the debt using existing working capital. In June 1996, the Company entered into a ﬁve-year, $130,000,000, unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate on the term loan was 6.23 percent. 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 revolving credit agreement at February 29, 2000, or February 28, 1999. The Industrial Development Revenue Bonds are collateralized by land, buildings and equipment with an aggregate carrying value of approximately $8,404,000 at February 29, 2000, and $10,740,000 at February 28, 1999. In November 1998, the CarMax Group entered into a four-year, unsecured $5,000,000 promissory note. Principal is due annually with interest payable periodically at 8.25 percent. In ﬁscal 1999, the CarMax Group entered into a one-year, renewable inventory ﬁnancing arrangement with an asset-backed commercial paper conduit. The arrangement had a total program capacity of $160 million at February 29, 2000, and was created to provide funding for the acquisition of vehicle inventory through the use of a non-afﬁliated special-purpose company. During ﬁscal years 2000 and 1999, no inventory was ﬁnanced by the CarMax Group under this arrangement. This ﬁnancing arrangement was terminated in the ﬁrst quarter of ﬁscal 2001. The scheduled aggregate annual principal payments on long-term obligations for the next ﬁve ﬁscal years are as follows: 2001 - $177,344,000; 2002 - $132,485,000; 2003 - $102,594,000; 2004 - $1,507,000; 2005 - $2,521,000. Under certain of the debt agreements, the Company must meet ﬁnancial covenants relating to minimum tangible net worth, current ratios and debt-to-capital ratios. The Company was in compliance with all such covenants at February 29, 2000, and February 28, 1999. Short-term debt is funded through committed lines of credit and informal credit arrangements, as well as the revolving agreement. Amounts outstanding and committed lines of credit available are as follows: (Amounts in thousands) Years Ended February 29 or 28 2000 1999 ﬁscal 2000, interest capitalized amounted to $3,420,000 ($5,423,000 in ﬁscal 1999 and $9,638,000 in ﬁscal 1998). 6. INCOME TAXES The Company ﬁles a consolidated federal income tax return. The components of the provision for income taxes from continuing operations are as follows: (Amounts in thousands) Years Ended February 29 or 28 2000 1999 1998 157,875 Deferred: Federal .................................. State ...................................... 41,762 1,291 43,053 Provision for income taxes ......... $200,928 112,376 16,718 517 17,235 $129,611 61,529 12,801 2,251 15,052 $76,581 The effective income tax rate differed from the Federal statutory income tax rate as follows: Years Ended February 29 or 28 2000 1999 1998 Federal statutory income tax rate......... 35.0% State and local income taxes, net of Federal beneﬁt ...................... 3.0 Effective income tax rate ...................... 38.0% 35.0% 3.0 38.0% 35.0% 3.0 38.0% In accordance with SFAS No. 109, the tax effects of temporary differences that give rise to a signiﬁcant portion of the deferred tax assets and liabilities at February 29 or 28 are as follows: (Amounts in thousands) 2000 1999 Deferred tax assets: Deferred revenue........................................... $ 1,146 Inventory capitalization ................................ 2,609 Accrued expenses.......................................... 33,484 Other.............................................................. 6,330 Total gross deferred tax assets................. Deferred tax liabilities: Depreciation and amortization..................... Deferred revenue........................................... Gain on sales of receivables........................... Other prepaid expenses................................. Other.............................................................. Total gross deferred tax liabilities............ 43,569 51,035 29,656 18,988 26,111 6,651 132,441 $ 8,332 2,578 27,080 5,430 43,420 48,035 6,903 14,990 20,210 707 90,845 $47,425 37 Average short-term debt outstanding....... $ 44,692 Maximum short-term debt outstanding.... $411,791 Aggregate committed lines of credit ........ $370,000 $ 54,505 $463,000 $370,000 The weighted average interest rate on the outstanding short-term debt was 5.6 percent during ﬁscal 2000, 5.1 percent during ﬁscal 1999 and 5.7 percent during ﬁscal 1998. The Company capitalizes interest in connection with the construction of certain facilities and software developed or obtained for internal use. In Net deferred tax liability...................................... $ 88,872 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT CIRCUIT Current: Federal .................................. $ 140,119 State ...................................... 17,756 $ 99,228 13,148 $58,453 3,076 CITY S T O R E S, I N C. Slide 40: Based on the Company’s historical and current pretax earnings,management believes the amount of gross deferred tax assets will be realized through future taxable income; therefore,no valuation allowance is necessary. 7. ASSOCIATE BENEFIT AND STOCK INCENTIVE PLANS (A) 401(K) PLAN: Effective August 1, 1999, the Company sponsors a 401(k) Plan for all employees meeting certain eligibility criteria. Under the Plan, eligible employees can contribute up to 15 percent of their salaries, and the Company matches a portion of those associate contributions. The Company’s contribution to this plan was $2,475,000 in ﬁscal 2000. (B) PREFERRED STOCK: In conjunction with the Company’s Shareholders Rights Plan as amended and restated, preferred stock purchase rights were distributed as a dividend at the rate of one right for each share of Circuit City Group Stock and CarMax Group Stock. The rights are exercisable only upon the attainment of, or the commencement of a tender offer to attain, a speciﬁed ownership interest in the Company by a person or group. When exercisable, each Circuit City right would entitle shareholders to buy one eight-hundredth of a share of Cumulative Participating Preferred Stock, Series E, $20 par value, at an exercise price of $125 per share subject to adjustment. Each CarMax right, when exercisable, 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 subject to adjustment. A total of 1,000,000 shares of such preferred stock, which have preferential dividend and liquidation rights, have been designated. No such shares are outstanding. In the event that an acquiring person or group acquires the speciﬁed ownership percentage of the Company’s common stock (except pursuant to a cash tender offer for all outstanding shares determined to be fair by the board of directors) or engages in certain transactions with the Company after the rights become exercisable, each right will be converted into a right to purchase, for half the current market price at that time, shares of the related Group stock valued at two times the exercise price. (D) RESTRICTED STOCK: The Company has issued restricted stock under the provisions of the 1994 Stock Incentive Plan whereby management and key employees are granted restricted shares of Circuit City Group Stock or CarMax Group Stock. Shares are awarded in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions or forfeitures. Restrictions on the awards generally expire three to seven years from the date of grant. Total restricted stock awards of 345,644 shares of Circuit City Group Stock and 30,000 shares of CarMax Group Stock were granted to eligible employees in ﬁscal 2000. The market value at the date of grant of these shares has been recorded as unearned compensation and is a component of stockholders’ equity. Unearned compensation is expensed over the restriction periods. In ﬁscal 2000, a total of $12,095,900 was charged to operations ($9,167,700 in ﬁscal 1999 and $5,073,100 in ﬁscal 1998). As of February 29, 2000, 1,559,966 restricted shares of Circuit City Group Stock and 110,833 restricted shares of CarMax Group Stock were outstanding. (E) EMPLOYEE STOCK PURCHASE PLANS: The Company has Employee Stock Purchase Plans for all employees meeting certain eligibility criteria. Under the Circuit City Group Plan and the CarMax Group Plan, eligible employees may purchase shares of Circuit City Group Stock or CarMax Group Stock, subject to certain limitations. For each $1.00 contributed by employees under the Plans, the Company matches $0.15. Purchases are limited to 10 percent of an employee’s eligible compensation, up to a maximum of $7,500 per year. At February 29, 2000, a total of 864,046 shares remained available under the Circuit City Group Plan and 1,058,693 shares remained available under the CarMax Group Plan. During ﬁscal 2000, 501,984 shares of Circuit City Group Stock were issued to or purchased on the open market for employees (858,710 shares in ﬁscal 1999 and 901,396 shares in ﬁscal 1998), and 580,000 shares of CarMax Group Stock were issued to or purchased on the open market on behalf of employees (268,532 in ﬁscal 1999 and 92,775 in ﬁscal 1998). The average price per share of Circuit City Group Stock purchased under the Plan was $41.70 in ﬁscal 2000, $21.69 in ﬁscal 1999 and $18.39 in ﬁscal 1998. The average price per share of CarMax Group Stock purchased under the Plan was $3.68 in ﬁscal 2000, $7.56 in ﬁscal 1999 and $12.73 in ﬁscal 1998. The Company match or purchase price discount charged to operations totaled $2,903,800 in ﬁscal 2000, $2,984,500 in ﬁscal 1999 and $2,670,400 in ﬁscal 1998. (F) STOCK INCENTIVE PLANS: Under the Company’s stock incentive plans, incentive and nonqualiﬁed stock options may be granted to management, key employees and outside directors to purchase shares of Circuit City Group Stock or CarMax Group Stock. The exercise price for incentive stock options for employees and nonqualiﬁed options for outside directors is equal to, or greater than, the market value at the date of grant; for nonqualiﬁed options granted under the 1988 Plan for employees, it is at least 85 percent of the market value at the date of grant (100 percent under the 1994 Plan). Options generally are exercisable over a period of from one to 10 years from the date of grant. The Company also has 1,000,000 shares of undesignated preferred stock authorized of which no shares are outstanding. (C) VOTING RIGHTS: The holders of both series of common stock and any series of preferred stock outstanding and entitled to vote together with the holders of common stock will vote together as a single voting group on all matters on which common shareholders generally are entitled to vote other than a matter on which the common stock or either series thereof or any series of preferred stock would be entitled to vote as a separate voting group. On all matters on which both series of common stock would vote together as a single voting group, (i) each outstanding share of Circuit City Group Stock shall have one vote and (ii) each outstanding share of CarMax Group Stock shall have a number of votes based on the weighted average ratio of the market value of a share of CarMax Group Stock to a share of Circuit City Group Stock. If shares of only one series of common stock are outstanding, each share of that series shall be entitled to one vote. If either series of common stock is entitled to vote as a separate voting group with respect to any matter, each share of that series shall, for purposes of such vote, be entitled to one vote on such matter. A summary of the status of the Company’s stock options and changes during the years ended February 29, 2000, and February 28, 1999 and 1998, are shown in Table 1. Table 2 summarizes information about stock options outstanding as of February 29, 2000. 38 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 41: TABLE 1 (Shares in thousands) Shares Circuit City Group: Outstanding at beginning of year .................. 8,894 Granted .......................................................... 1,564 Exercised........................................................ (2,864) Cancelled ....................................................... (214) Outstanding at end of year ............................ 7,380 Options exercisable at end of year ................. 1,258 CarMax Group: Outstanding at beginning of year .................. 4,380 Granted .......................................................... 1,132 Exercised........................................................ (2,027) Cancelled ....................................................... (161) Outstanding at end of year ............................ 3,324 Options exercisable at end of year ................. 1,203 $18.25 40.75 12.65 22.06 $25.07 $13.89 $ 1.77 5.89 0.22 6.94 $ 3.87 $ 2.54 9,988 1,080 (2,008) (166) 8,894 2,966 4,822 205 (543) (104) 4,380 1,566 $16.00 21.17 8.77 16.80 $18.25 $12.02 $ 1.49 8.63 0.22 10.54 $ 1.77 $ 0.96 9,656 1,452 (966) (154) 9,988 3,508 4,769 413 (273) (87) 4,822 762 $14.88 17.61 7.50 14.71 $16.00 $ 9.84 $ 0.51 13.04 0.22 6.36 $ 1.49 $ 0.37 TABLE 2 (Shares in thousands) Range of Exercise Prices Number Outstanding Options Outstanding Weighted Average Remaining Weighted Average Contractual Life Exercise Price Options Exercisable Number Exercisable Weighted Average Exercise Price Circuit City Group: $ 9.09 to 14.75 ........................................................... 15.18 to 18.00............................................................ 18.43 to 25.28............................................................ 29.50 ......................................................................... 34.63 to 47.53............................................................ 1,723 1,176 958 2,000 1,523 3.9 4.0 4.7 2.1 6.0 4.0 2.0 5.3 4.0 3.4 $13.51 17.31 21.12 29.50 40.81 $25.07 $ 0.22 5.89 10.29 $ 3.87 883 288 87 – – 1,258 934 19 250 1,203 $12.33 16.74 20.43 – – $13.89 $ 0.22 4.25 11.07 $ 2.54 Total ............................................................................. 7,380 CarMax Group: $ 0.22 ......................................................................... 1,638 3.90 to 6.06 ............................................................. 1,098 6.25 to 16.31 ........................................................... 588 Total ............................................................................. 3,324 The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant date consistent with the methods of SFAS No. 123, the Circuit City Group’s net earnings and net earnings per share and the CarMax Group’s net earnings (loss) and net earnings (loss) per share would have been changed to the pro forma amounts indicated in the chart that follows. In accordance with the transition provisions of SFAS No. 123, the pro forma amounts reﬂect options with grant dates subsequent to March 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reﬂected in the pro forma net earnings (loss) amounts presented because compensation cost is reﬂected over the options’ vesting periods and compensation cost of options granted prior to March 1, 1995, is not considered. The pro forma effect on ﬁscal year 2000 may not be representative of the pro forma effects on net earnings (loss) for future years. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 39 CIRCUIT CITY S T O R E S, I N C. 2000 Weighted Average Exercise Price Shares 1999 Weighted Average Exercise Price Shares 1998 Weighted Average Exercise Price Slide 42: (Amounts in thousands except per share data) Years Ended February 29 or 28 2000 1999 1998 Circuit City Group: Earnings from continuing operations: As reported.................................. Pro forma .................................... Net earnings: As reported.................................. Pro forma .................................... Earnings per share from continuing operations: Basic—as reported....................... Basic—pro forma......................... Diluted—as reported ................... Diluted—pro forma ..................... Net earnings per share: Basic—as reported....................... Basic—pro forma......................... Diluted—as reported ................... Diluted—pro forma ..................... Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted for the Circuit City Group is $17 in ﬁscal 2000, $8 in ﬁscal 1999 and $7 in ﬁscal 1998; and for the CarMax Group, $3 in ﬁscal 2000, $3 in ﬁscal 1999 and $6 in ﬁscal 1998. 8. NET EARNINGS (LOSS) PER SHARE $327,574 319,337 $197,334 189,097 $216,927 211,025 $148,381 142,479 $132,710 128,035 $112,074 107,399 Reconciliations of the numerator and denominator of basic and diluted net earnings (loss) per share are presented below. (Amounts in thousands except per share data) Years Ended February 29 or 28 2000 1999 1998 $ $ 1.63 1.59 1.60 1.56 0.98 0.94 0.96 0.93 $ $ 1.09 1.06 1.08 1.05 0.75 0.72 0.74 0.71 $ $ 0.68 0.65 0.67 0.65 0.57 0.55 0.57 0.54 Circuit City Group: Weighted average common shares .... Dilutive potential common shares: Options........................................ Restricted stock........................... Weighted average common shares and dilutive potential common shares ......................................... 201,345 2,145 831 198,304 1,700 808 196,054 1,684 670 $ $ $ $ $ $ 204,321 200,812 198,408 CarMax Group: Net earnings (loss): As reported.................................. $ Pro forma .................................... Net earnings (loss) per share: Basic—as reported....................... $ Basic—pro forma......................... Diluted—as reported ................... $ Diluted—pro forma ..................... Earnings from continuing operations available to common shareholders................................. $327,574 Basic earnings per share from continuing operations ................. $ Diluted earnings per share from continuing operations ................. $ CarMax Group: Weighted average common shares..... Dilutive potential common shares: Options........................................ Restricted stock........................... Weighted average common shares and dilutive potential common shares............................ Net earnings (loss) available to common shareholders................. $ Basic net earnings (loss) per share.... $ Diluted net earnings (loss) per share... $ 1.63 1.60 23,778 1,814 196 $216,927 $ $ 1.09 1.08 22,604 – – $132,710 $ $ 0.68 0.67 22,001 – – 256 75 0.01 0.00 0.01 0.00 $ (5,457) $ (7,763) (5,537) (7,824) $ (0.24) $ (0.35) (0.24) (0.36) $ (0.24) $ (0.35) (0.24) (0.36) For the purpose of computing the pro forma amounts indicated above, the fair value of each option on the date of grant is estimated using the Black-Scholes option-pricing model. The weighted average assumptions used in the model are as follows: 2000 1999 1998 25,788 256 0.01 0.01 22,604 22,001 Circuit City Group: Expected dividend yield ............................ 0.2% Expected stock volatility............................ 38% Risk-free interest rates............................... 6% Expected lives (in years)............................ 5 CarMax Group: Expected dividend yield ............................ – Expected stock volatility............................ 62% Risk-free interest rates............................... 6% Expected lives (in years)............................ 4 $ (5,457) $ (7,763) $ (0.24) $ (0.35) $ (0.24) $ (0.35) 0.4% 33% 6% 5 – 50% 6% 3 0.4% 33% 6% 4 – 50% 6% 3 Certain options were not included in the computation of diluted net earnings per share because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase 2,900 shares of Circuit City Group Stock ranging from $43.03 to $47.53 per share were outstanding and not included in the calculation at the end of ﬁscal 2000; 2,000,000 shares at $29.50 per share at the end of ﬁscal 1999; and 3,020,000 shares ranging from $17.74 to $29.50 per share at the end of ﬁscal 1998. Options to purchase 1,685,400 shares of CarMax Group Stock ranging from $3.90 to $16.31 per share were outstanding and not 40 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 43: (Amounts in thousands) 9. PENSION PLAN The Company has a noncontributory deﬁned beneﬁt pension plan covering the majority of full-time employees who are at least age 21 and have completed one year of service. The cost of the program is being funded currently. Plan beneﬁts generally are based on years of service and average compensation. Plan assets consist primarily of equity securities and included 160,000 shares of Circuit City Group Stock at February 29, 2000, and February 28, 1999. Contributions required were $12,123,000 in ﬁscal 2000, $10,306,000 in ﬁscal 1999 and $11,642,000 in ﬁscal 1998. The following tables set forth the Plan’s ﬁnancial status and amounts recognized in the consolidated balance sheets as of February 29 or 28: (Amounts in thousands) 2000 1999 Service cost ............................................. $14,678 $11,004 $ 8,584 Interest cost............................................. 7,557 6,202 5,260 Expected return on plan assets............... (9,078) (7,794) (5,133) Amortization of prior service cost .......... (202) (105) (105) Amortization of transitional asset .......... (134) (202) (202) Recognized actuarial loss........................ 87 – 17 Net pension expense ............................... $12,908 $ 9,105 $ 8,421 Assumptions used in the accounting for the pension plan were: Years Ended February 29 or 28 2000 1999 1998 Change in beneﬁt obligation: Beneﬁt obligation at beginning of year ................. $112,566 Service cost............................................................ 14,678 Interest cost ........................................................... 7,557 Actuarial (gain) loss .............................................. (16,870) Beneﬁts paid.......................................................... (4,151) Beneﬁt obligation at end of year............................ $113,780 $89,124 11,004 6,202 9,526 (3,290) $112,566 Weighted average discount rate.................. 8.0% Rate of increase in compensation levels..... 6.0% Expected rate of return on plan assets....... 9.0% 6.8% 5.0% 9.0% 7.0% 5.0% 9.0% 10. LEASE COMMITMENTS Change in plan assets: Fair value of plan assets at beginning of year ....... $ 95,678 $ 84,251 Actual return on plan assets.................................. 13,827 4,411 Employer contributions......................................... 12,123 10,306 Beneﬁts paid.......................................................... (4,151) (3,290) Fair value of plan assets at end of year.................. $117,477 $ 95,678 The Company conducts a substantial portion of its business in leased premises. The Company’s lease obligations are based upon contractual minimum rates. For certain locations, amounts in excess of these minimum rates are payable based upon speciﬁed percentages of sales. Rental expense and sublease income for all operating leases are summarized as follows: (Amounts in thousands) Years Ended February 29 or 28 2000 1999 1998 Reconciliation of funded status: Funded status ........................................................ $ 3,697 $ (16,888) Unrecognized actuarial (gain) loss ....................... (11,986) 9,720 Unrecognized transition asset............................... (404) (606) Unrecognized prior service beneﬁt ....................... (427) (560) Net amount recognized ......................................... $ (9,120) $ (8,334) Minimum rentals .............................. $322,598 $296,706 $248,383 Rentals based on sales volume.......... 1,327 1,247 730 Sublease income................................ (16,425) (14,857) (12,879) Net..................................................... $307,500 $283,096 $236,234 The Company computes rent based on a percentage of sales volumes in excess of deﬁned amounts in certain store locations. Most of the Company’s other leases are ﬁxed-dollar rental commitments, with many containing rent escalations based on the Consumer Price Index. Most provide that the Company pay taxes, maintenance, insurance and certain other operating expenses applicable to the premises. The initial term of most real property leases will expire within the next 22 years; however, most of the leases have options providing for additional lease terms of ﬁve years to 25 years at terms similar to the initial terms. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 41 CIRCUIT CITY S T O R E S, I N C. included in the calculation at the end of ﬁscal 2000. Prior to ﬁscal 2000, dilutive potential common shares of CarMax Group Stock were not included in the calculation of diluted net loss per share because the Group had a net loss for those periods. The components of net pension expense are as follows: Years Ended February 29 or 28 2000 1999 1998 Slide 44: Future minimum ﬁxed lease obligations, excluding taxes, insurance and other costs payable directly by the Company, as of February 29, 2000, were: (Amounts in thousands) Fiscal Capital Leases Operating Operating Lease Sublease Commitments Income Private-label credit card receivables are ﬁnanced through securitization programs employing a master trust structure. As of February 29, 2000, these securitization programs had a capacity of $1.85 billion. The agreement has no recourse provisions. During ﬁscal 1998, a bank card master trust securitization facility was established and issued two series from the trust. Provisions under the master trust agreement provide recourse to the Company for any cash ﬂow deﬁciencies on $229 million of the receivables sold. The ﬁnance charges from the transferred receivables are used to fund interest costs, charge-offs, servicing fees and other related costs. The Company believes that as of February 29, 2000, no liability existed under these recourse provisions. The bank card securitization program has a total program capacity of $1.75 billion. Rights recorded for future ﬁnance income from serviced assets that exceed the contractually speciﬁed servicing fees are carried at fair value and amounted to $37.3 million at February 29,2000,$27.3 million at February 28, 1999, and $25.0 million at February 28, 1998, and are included in net accounts receivable. Changes in these retained interests consisted of originated retained interests of $52.9 million for ﬁscal 2000, $37.3 million for ﬁscal 1999 and $33.3 million for ﬁscal 1998, less amortization of $42.9 million in ﬁscal 2000, $35.0 million in ﬁscal 1999 and $11.5 million in ﬁscal 1998. The servicing fees speciﬁed in the credit card securitization agreements adequately compensate the ﬁnance operation for servicing the accounts. Accordingly, no servicing asset or liability has been recorded. The ﬁnance operation’s servicing revenue totaled $213.1 million for ﬁscal 2000, $210.4 million for ﬁscal 1999 and $195.7 million for ﬁscal 1998. In determining the fair value of retained interests, the Company estimates future cash ﬂows from ﬁnance charge collections reduced by net defaults, servicing cost and interest cost. The Company employs a risk-based pricing strategy that increases the stated annual percentage rate for accounts that have a higher predicted risk of default. Accounts with a lower risk proﬁle also may qualify for promotional ﬁnancing. The APRs of the private-label card programs, excluding promotional balances, range from 22 percent to 24 percent, with default rates varying based on portfolio composition, but generally aggregating from 4 percent to 6 percent. Principal payment rates vary widely both seasonally and by credit terms but are in the range of 11 percent to 13 percent. The bank card APRs are based on the prime rate and generally range from 10 percent to 23 percent, with default rates varying by portfolio composition, but generally aggregating from 8 percent to 12 percent. Principal payment rates vary widely both seasonally and by credit terms but are in the range of 7 percent to 9 percent. Interest cost paid by the master trusts varies between series and, at February 29, 2000, ranged from 6.2 percent to 6.7 percent. (B) AUTOMOBILE LOAN SECURITIZATION: In ﬁscal 1996, the Company entered into a securitization agreement to ﬁnance the consumer installment credit receivables generated by its wholly owned automobile loan ﬁnance operation. A restructuring of the facility during ﬁscal 1997 resulted in the recourse provisions being eliminated. Proceeds from the automobile loan securitization transaction were $348 million during ﬁscal 2000,$271 million 2001.................................................. $ 1,681 2002.................................................. 1,725 2003.................................................. 1,726 2004.................................................. 1,768 2005.................................................. 1,798 After 2005......................................... 14,666 Total minimum lease payments ....... $23,364 Less amounts representing interest ... 10,948 Present value of net minimum capital lease payments [NOTE 5] .............. $12,416 $ 313,535 309,516 305,503 303,380 301,155 3,303,866 $4,836,955 $(13,042) (11,791) (10,801) (9,238) (8,664) (44,935) $(98,471) In ﬁscal 2000, the Company entered into sale-leaseback transactions with unrelated parties at an aggregate selling price of $36,795,000 ($235,500,000 in ﬁscal 1999 and $218,768,000 in ﬁscal 1998). The Company does not have continuing involvement under the sale-leaseback transactions. 1 1 . S U P P L E M E N TA R Y F I N A N C I A L S TAT E M E N T I N FO R M AT I O N Advertising expense from continuing operations, which is included in selling, general and administrative expenses in the accompanying consolidated statements of earnings, amounted to $438,781,000 (3.5 percent of net sales and operating revenues) in ﬁscal 2000, $426,359,000 (3.9 percent of net sales and operating revenues) in ﬁscal 1999 and $399,619,000 (4.5 percent of net sales and operating revenues) in ﬁscal 1998. 12. SECURITIZATIONS (A) CREDIT CARD SECURITIZATIONS: The Company enters into securitization transactions, which allow for the sale of credit card receivables to unrelated entities, to ﬁnance the consumer revolving credit receivables generated by its wholly owned ﬁnance operation. The reduction in the aggregate securitized amount was $63.8 million for ﬁscal 2000, and proceeds from securitization transactions were $224.6 million for ﬁscal 1999 and $331.4 million for ﬁscal 1998. Receivables relating to the securitization facilities consist of the following at February 29 or 28: (Amounts in thousands) 2000 1999 Managed receivables ....................................... $2,844,377 $2,957,132 Receivables/residual interests held by the Company: For sale....................................................... (18,288) (39,948) For investment........................................... (144,806) (161,996) Net receivables sold ......................................... $2,681,283 Net receivables sold with recourse .................. $ 229,000 Program capacity ............................................ $3,598,350 $2,755,188 $ 322,000 $3,127,000 42 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 45: during ﬁscal 1999 and $123 million during ﬁscal 1998. This auto loan securitization program has a total program capacity of $500 million. In October 1999, the Company formed a second securitization facility that allowed for a $644 million securitization of auto loan receivables in the public market. The program had a capacity of $559 million as of February 29, 2000, with no recourse provisions. Receivables relating to the securitization facilities consist of the following at February 29 or 28: (Amounts in thousands) 2000 1999 Managed receivables .......................................... $ 931,745 $589,032 Receivables held by the Company: For sale.......................................................... (23,477) (14,690) For investment............................................ (21,096) (35,342) Net receivables sold ............................................ $ 887,172 Program capacity ............................................... $1,059,500 Held by a bankruptcy remote special purpose company $539,000 $575,000 The ﬁnance charges from the transferred receivables are used to fund interest costs, charge-offs and servicing fees. Rights recorded for future ﬁnance income from serviced assets that exceed the contractually speciﬁed servicing fees are carried at fair value and amounted to $15.5 million at February 29, 2000, $14.7 million at February 28, 1999, and $6.8 million at February 28, 1998, and are included in net accounts receivable. Changes in these retained interests consisted of originated retained interests of $17.5 million in ﬁscal 2000, $16.6 million in ﬁscal 1999 and $7.3 million in ﬁscal 1998, less amortization of $16.7 million in ﬁscal 2000, $8.7 million in ﬁscal 1999 and $3.6 million in ﬁscal 1998. The ﬁnance operation’s servicing revenue totaled $36.9 million for ﬁscal 2000, $28.2 million for ﬁscal 1999 and $11.2 million for ﬁscal 1998. The servicing fee speciﬁed in the auto loan securitization agreements adequately compensates the ﬁnance operation for servicing the accounts. Accordingly, no servicing asset or liability has been recorded. In determining the fair value of retained interests, the Company estimates future cash ﬂows from ﬁnance charge collections, reduced by net defaults, servicing cost and interest cost. The Company employs a risk-based pricing strategy that increases the stated APR for accounts that have a higher predicted risk of default. Accounts with a lower risk proﬁle also may qualify for promotional ﬁnancing. The APRs range from 6 percent to 18 percent ﬁxed, with default rates varying based on credit quality, but generally aggregating 0.75 percent to 1.25 percent. The weighted average life of the receivables is expected to be in the 18 month to 20 month range. Interest cost depends on the time at which accounts were originated, but is in the range of 6.4 percent to 6.6 percent at February 29, 2000. 13. INTEREST RATE SWAPS Concurrent with the funding of the $175 million term loan facility in May 1995, the Company entered into ﬁve-year interest rate swaps with notional amounts aggregating $175 million. These swaps effectively converted the variable-rate obligation into a ﬁxed-rate obligation. The fair value of the swaps is the amount at which they could be settled. This value is based on estimates obtained from the counterparties, which are two banks highly rated by several ﬁnancial rating agencies. The swaps are held for hedging purposes and are not recorded at fair value. Recording the swaps at fair value at February 29, 2000, would result in a loss of $90,000, and at February 28, 1999, would result in a loss of $2.2 million. The Company enters into amortizing swaps relating to the auto loan receivable securitization to convert variable-rate ﬁnancing costs to ﬁxedrate obligations to better match funding costs to the receivables being securitized. In November 1995, the Company entered into a 50-month amortizing swap with a notional amount of $75 million and, in October 1996, entered into a 40-month amortizing swap with a notional amount of $64 million. The Company entered into four 40-month amortizing swaps with notional amounts totaling approximately $162 million during ﬁscal 1998, four 40-month amortizing swaps with notional amounts totaling approximately $387 million in ﬁscal 1999, and four 40-month amortizing swaps with notional amounts totaling approximately $344 million in ﬁscal 2000. These swaps were entered into as part of sales of receivables and are included in the gain on sales of receivables. The remaining total notional amount of all swaps related to the auto loan receivable securitization was approximately $327 million at February 29, 2000, $499 million at February 28, 1999, and $224 million at February 28, 1998. The reduction in the total notional amount of the CarMax interest rate swaps relates to the replacement of ﬂoating rate securitizations with a $644 million ﬁxed-rate securitization in October 1999. The market and credit risks associated with these interest rate swaps are similar to those relating to other types of ﬁnancial instruments. Market risk is the exposure created by potential ﬂuctuations in interest rates and is directly related to the product type, agreement terms and transaction volume. The Company does not anticipate signiﬁcant market risk from swaps, since their use is to match more closely funding costs to the use of the funding. Credit risk is the exposure to nonperformance of another party to an agreement. The Company mitigates credit risk by dealing with highly rated counterparties. In October 1994, the Company entered into ﬁve-year interest rate swap agreements with notional amounts totaling $300 million relating to a public issuance of securities by the master trust. As part of this issuance, CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 43 CIRCUIT $344 million of ﬁve-year, ﬁxed-rate certiﬁcates were issued to fund consumer credit receivables. The credit card ﬁnance operation is servicer for the accounts, and as such, receives its monthly cash portfolio yield after deducting interest, charge-offs and other related costs. The underlying receivables are based on a ﬂoating rate. The swaps were put in place to better match funding costs to the receivables being securitized. As a result, the master trust pays ﬁxed-rate interest, and the Company utilizes the swaps to convert the ﬁxed-rate obligation to a ﬂoating-rate, LIBORbased obligation. These swaps were entered into as part of the sales of receivables and are included in the gain on sales of receivables. In November 1999, these swaps terminated as the related securities in the master trust matured. CITY S T O R E S, I N C. Slide 46: 14. COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, the Company is involved in various legal proceedings. Based upon the Company’s evaluation of the information presently available, management believes that the ultimate resolution of any such proceedings will not have a material adverse effect on the Company’s ﬁnancial position, liquidity or results of operations. 15. DISCONTINUED OPERATIONS operating costs during the early stages of discontinuing the business. This increase was offset by reductions in the provisions for non-operating costs. The net liabilities or assets of the discontinued Divx operations reﬂected in the accompanying consolidated balance sheets at February 29 or 28 are comprised of the following: (Amounts in thousands) 2000 1999 On June 16, 1999, Digital Video Express announced that it would cease marketing the Divx home video system and discontinue operations, but existing, registered customers would be able to view discs during a two-year phase-out period. The operating results of Divx and the loss on disposal of the Divx business have been segregated from continuing operations and reported as separate line items, after tax, on the consolidated statements of earnings for the periods presented. Discontinued operations also have been segregated on the consolidated statements of cash ﬂows for the periods presented. The consolidated balance sheets, however, include Divx. The loss from the discontinued Divx operations totaled $16.2 million after an income tax beneﬁt of $9.9 million in ﬁscal 2000, $68.5 million after an income tax beneﬁt of $42.0 million in ﬁscal 1999 and $20.6 million after an income tax beneﬁt of $12.6 million in ﬁscal 1998. The loss on the disposal of the Divx business totaled $114.0 million after an income tax beneﬁt of $69.9 million in ﬁscal 2000. The loss on the disposal includes a provision for operating losses to be incurred during the phase-out period. It also includes provisions for commitments under licensing agreements with motion picture distributors, the write-down of assets to net realizable value, lease termination costs, employee severance and beneﬁt costs and other contractual commitments. At February 29, 2000, the provision for operating losses during the phase-out period increased to $6.2 million from the original estimate of $3.0 million because of higher than expected TABLE 3 2000 (Amounts in thousands) Current assets......................................................... $ 612 $ 25,630 Property and equipment, net ................................. 513 23,589 Other assets............................................................ – 7,895 Current liabilities ................................................... (32,650) (23,126) Other liabilities....................................................... (35,291) (3,397) Net (liabilities) assets of discontinued operations... $(66,816) $ 30,591 16. OPERATING SEGMENT INFORMATION The Company conducts business in two operating segments: the Circuit City Group and the CarMax Group. These segments are identiﬁed and managed by the Company based on the different products and services offered by each. The Circuit City Group refers to the retail operations bearing the Circuit City name and to all related operations, such as its ﬁnance operation. This segment is engaged in the business of selling brand-name consumer electronics, personal computers, major appliances and entertainment software. The CarMax Group refers to the used- and new-car retail locations bearing the CarMax name and to all related operations, such as its ﬁnance operation. Divx is no longer included as an operating segment because it was discontinued on June 16, 1999. Prior year ﬁnancial information has been adjusted to reﬂect this change. Financial information for these segments for ﬁscal 2000, 1999 and 1998 are shown in Table 3. Circuit City Group CarMax Group Total Segments Revenues from external customers ............................................................ $10,599,406 Interest expense.......................................................................................... 13,844 Depreciation and amortization .................................................................. 132,923 Earnings from continuing operations before income taxes ....................... 526,955 Income tax provision.................................................................................. 200,243 Earnings from continuing operations ........................................................ 326,712 Total assets ................................................................................................. $ 3,278,728 1999 (Amounts in thousands) Circuit City Group $2,014,984 10,362 15,241 1,803 685 1,118 $ 675,495 CarMax Group $12,614,390 24,206 148,164 528,758 200,928 327,830 $ 3,954,223 Total Segments Revenues from external customers ............................................................ $ 9,344,170 Interest expense.......................................................................................... 21,926 Depreciation and amortization .................................................................. 119,724 Earnings (loss) from continuing operations before income taxes ............ 379,630 Income tax provision (beneﬁt)................................................................... 144,646 Earnings (loss) from continuing operations .............................................. 234,984 Total assets ................................................................................................. $ 2,816,954 $1,466,298 6,393 10,003 (38,549) (15,035) (23,514) $ 571,198 $10,810,468 28,319 129,727 341,081 129,611 211,470 $ 3,388,152 44 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 47: TABLE 3 (continued) Circuit City Group CarMax Group S T O R E S, I N C. 1998 (Amounts in thousands) Total Segments Earnings from continuing operations and total assets for the Circuit City Group exclude: (1) the Inter-Group Interest in the CarMax Group and (2) the discontinued Divx operations as discussed in Note 15. 1 7 . Q U A R T E R LY F I N A N C I A L D ATA ( U N A U D I T E D ) (Amounts in thousands First Quarter Second Quarter except per share data) 2000 1999 2000 1999 Third Quarter 2000 1999 Fourth Quarter 2000 1999 Year 2000 1999 Net sales and operating revenues ...... Gross proﬁt......................................... Net earnings (loss) attributed to: Circuit City Group Stock: Continuing operations ............. Discontinued operations.......... CarMax Group Stock ..................... Net earnings (loss) per share: Circuit City Group Stock: Basic: Continuing operations ........ Discontinued operations..... Net (loss) earnings.............. Diluted: Continuing operations ........ Discontinued operations..... Net (loss) earnings.............. CarMax Group Stock Basic......................................... Diluted ..................................... $2,690,982 $ 602,727 $2,271,061 $ 504,908 $2,958,394 $ 668,283 $2,517,827 $ 572,824 $2,984,607 $ 670,910 $2,618,198 $ 593,148 $3,980,407 $ 920,637 $3,403,382 $ 785,358 $12,614,390 $ 2,862,557 $10,810,468 $ 2,456,238 $ 41,398 $ $ (130,240) $ $ 646 $ 21,339 $ (8,070) $ (736) $ 73,692 – 775 $ 43,773 $ $ (11,626) $ $ (685) $ 52,335 $ 32,710 $ 160,149 $ 119,105 $ 327,574 $ – $ (16,765) $ – $ (32,085) $ (130,240) $ (757) $ (1,701) $ (408) $ (2,335) $ 256 $ 216,927 (68,546) (5,457) $ $ $ $ $ $ $ $ 0.21 $ (0.65) $ (0.44) $ 0.20 $ (0.64) $ (0.44) $ 0.03 0.03 $ $ 0.11 $ (0.04) $ 0.07 $ 0.11 $ (0.04) $ 0.07 $ (0.03) $ (0.03) $ 0.37 – 0.37 0.36 – 0.36 0.03 0.03 $ $ $ $ $ $ $ $ 0.22 $ (0.06) $ 0.16 $ 0.22 $ (0.06) $ 0.16 $ (0.03) $ (0.03) $ 0.26 – 0.26 0.26 – 0.26 $ $ $ $ $ $ 0.16 $ (0.08) $ 0.08 $ 0.16 $ (0.08) $ 0.08 $ (0.07) $ (0.07) $ 0.79 – 0.79 0.78 – 0.78 $ $ $ $ $ $ 0.60 $ (0.16) $ 0.44 $ 0.59 $ (0.16) $ 0.43 $ (0.10) $ (0.10) $ 1.63 $ (0.65) $ 0.98 $ 1.60 $ (0.64) $ 0.96 $ 0.01 0.01 $ $ 1.09 (0.34) 0.75 1.08 (0.34) 0.74 (0.24) (0.24) (0.03) $ (0.03) $ (0.02) $ (0.02) $ INDEPENDENT AUDITORS’ REPORT The Board of Directors and Stockholders of Circuit City Stores, Inc.: We have audited the accompanying consolidated balance sheets of Circuit City Stores, Inc. and subsidiaries as of February 29, 2000 and February 28, 1999 and the related consolidated statements of earnings, stockholders’ equity and cash ﬂows for each of the ﬁscal years in the three-year period ended February 29, 2000. These consolidated ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements.An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation.We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated ﬁnancial statements referred to above present fairly, in all material respects, the ﬁnancial position of Circuit City Stores, Inc. and subsidiaries as of February 29, 2000 and February 28, 1999 and the results of their operations and their cash ﬂows for each of the ﬁscal years in the three-year period ended February 29, 2000 in conformity with generally accepted accounting principles. Richmond,Virginia April 4, 2000 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 45 CIRCUIT CITY Revenues from external customers ............................................................ $ 7,996,591 Interest expense.......................................................................................... 25,072 Depreciation and amortization .................................................................. 110,283 Earnings (loss) from continuing operations before income taxes ............. 257,632 Income tax provision (beneﬁt)................................................................... 98,462 Earnings (loss) from continuing operations .............................................. 159,170 Total assets ................................................................................................. $ 2,752,402 $ 874,206 1,789 4,577 (56,104) (21,881) (34,223) $ 448,322 $ 8,870,797 26,861 114,860 201,528 76,581 124,947 $ 3,200,724 Slide 48: CIRCUIT CITY GROUP MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF The common stock of Circuit City Stores, Inc. consists of two common stock series, which are intended to reﬂect the performance of the Company’s two businesses. The Circuit City Group Common Stock is intended to track the performance of the Circuit City stores and related operations and the Group’s retained interest in the CarMax Group. The effects of the retained interest in the CarMax Group on the Circuit City Group’s ﬁnancial statements are identiﬁed by the term “Inter-Group.” Over the threeyear period discussed in this annual report, the ﬁnancial results for the Company and the Circuit City Group also have included the Company’s investment in Digital Video Express, which has been discontinued. The CarMax Group Common Stock is intended to track the performance of the CarMax stores and related operations. The Inter-Group Interest is not considered outstanding CarMax Group stock. Therefore, the net earnings or losses attributed to the Inter-Group Interest are not included in the CarMax Group’s per share calculations. The following discussion and analysis relates to the Circuit City Group. The Circuit City Group held a 74.7 percent interest in the CarMax Group at February 29, 2000, a 76.6 percent interest at February 28, 1999, and a 77.3 percent interest at February 28, 1998. For additional information, refer to the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for Circuit City Stores, Inc. and for the CarMax Group. R E S U LT S O F O P E R AT I O N S the prior year. From mid ﬁscal 1996 through ﬁscal 1998, a lack of signiﬁcant consumer electronics product introductions resulted in weak industry sales. The industry began to emerge from this period of declining sales in ﬁscal 1999, and that trend continued in ﬁscal 2000. Management believes that this period of industry growth, driven by digital product technology, can last throughout the decade and will be the primary contributor to total sales growth in the foreseeable future. PERCENT MERCHANDISE SALES BY CATEGORY Fiscal 2000 1999 1998 1997 1996 TV .......................................... VCR/Camcorders .................... Audio ...................................... Home Ofﬁce ............................ Appliance................................ Other....................................... 18% 13% 15% 29% 14% 11% 18% 13% 16% 27% 15% 11% 100% 18% 13% 17% 25% 15% 12% 100% 18% 14% 18% 24% 15% 11% 100% 17% 13% 19% 26% 14% 11% 100% Total ........................................ 100% Sales Growth Total sales for the Circuit City Group increased 13 percent in ﬁscal 2000 to $10.60 billion. In ﬁscal 1999, total sales were $9.34 billion, a 17 percent increase from $8.00 billion in ﬁscal 1998. The ﬁscal 2000 total sales increase reﬂects an 8 percent increase in comparable store sales and the net addition of 34 Circuit City Superstores into new and existing Circuit City markets. PERCENTAGE SALES CHANGE FROM PRIOR YEAR Circuit City Group Fiscal Total Comparable Industry MERCHANDISE SALES BY CATEGORY. Fiscal 2000 sales reﬂected strong consumer demand across all major product categories. Home ofﬁce was the strongest category, reﬂecting continued increases in household penetration of personal computers, increased consumer use of the Internet and new capabilities such as digital imaging and digital audio recording. In the consumer electronics categories, the Group saw signiﬁcant demand for better-featured products and new technologies, including DVD players, DIRECTV, digital camcorders, wireless communications and bigscreen televisions. 2000 ................................................... 1999 ................................................... 1998 ................................................... 1997 ................................................... 1996 ................................................... 13% 17% 12% 6% 23% 8)% 8)% (1)% (8)% 5)% 6)% 5)% (3)% (8)% 6)% * The industry sales rates are derived from the Consumer Electronics Association, Recording Industry Association of America and Company estimates of audio, video, home ofﬁce, telecommunications, appliance and music software sales. PERCENTAGE SALES CHANGE FROM PRIOR YEAR. During the past ﬁve years, In most states, the Group sells extended warranty programs on behalf of unrelated third parties who are the primary obligors. Under these thirdparty warranty programs, the Company has no contractual liability to the customer. In states where third-party warranty sales are not permitted, the Group sells a Circuit City extended warranty for which the Company is the primary obligor. Gross dollar sales from all extended warranty programs were 5.4 percent of the Group’s total sales in ﬁscal 2000 and ﬁscal 1999, compared with 5.5 percent in ﬁscal 1998. Total extended warranty revenue, which is reported in the Group’s total sales, was 4.4 percent of sales in ﬁscal 2000 and 4.6 percent of sales in ﬁscal years 1999 and 1998. The gross proﬁt margins on products sold with extended warranties are higher than the gross proﬁt margins on products sold without extended warranties. Third-party extended warranty revenue was 4.1 percent of the Group’s total sales in ﬁscal 2000 and ﬁscal 1999 and 3.6 percent of the Group’s total sales in ﬁscal 1998. The increase in third-party extended warranty revenue reﬂects the conversion of stores in 13 states to thirdparty warranty sales since early ﬁscal 1998. SUPERSTORE SALES PER TOTAL SQUARE FOOT Fiscal industry growth, the addition of new product categories and geographic expansion of the Group’s Superstore base have made varying contributions to total sales growth. Early in the period, geographic expansion and the addition of product categories such as personal computers were the primary contributors to growth. In ﬁscal 1996, a 25 percent increase in Superstore square footage, which included entry into 19 markets, was a signiﬁcant contributor to the Group’s total sales growth. In that same year, home ofﬁce products rose to 26 percent of sales from 20 percent in 46 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 2000.................................................................................................... 1999.................................................................................................... 1998.................................................................................................... 1997.................................................................................................... 1996.................................................................................................... $555 $514 $478 $499 $577 Slide 49: SUPERSTORE SALES PER TOTAL SQUARE FOOT. The ﬁscal 2000 sales per square foot increase reﬂects the comparable store sales increase and management’s commitment to maximizing sales in existing stores. The decline in Superstore sales per total square foot from ﬁscal 1996 through ﬁscal 1998 reﬂects the impact of the larger-format “D” stores, which generate lower sales per square foot than smaller stores, declines in comparable store sales and declines in industry sales. STORE MIX Retail Units at Year-End Fiscal 2000 1999 1998 1997 1996 carry higher gross margins. The margin impact of these sales was partly offset by the strength in personal computer sales, which carry lower gross margins. Continued improvements in inventory management also contributed to the gross margin increase. Selling, General and Administrative Expenses Superstore “D” Superstore..................... 118 “C” Superstore ..................... 295 “B” Superstore ..................... 102 “A” Superstore..................... 56 Electronics-Only ....................... – Circuit City Express .................. 45 Total .......................................... 616 Selling, general and administrative expenses were 19.6 percent of sales in fiscal 2000 compared with 20.1 percent of sales in ﬁscal 1999 and 21.1 percent of sales in ﬁscal 1998. The improved expense ratio in both years primarily reﬂects the leverage gained from the comparable store sales increase. Operating proﬁts generated by the Group’s ﬁnance operation are recorded as a reduction to selling, general and administrative expenses. Interest Expense 118 294 82 43 2 48 587 114 289 72 25 4 52 556 95 278 54 16 5 45 493 61 259 46 12 5 36 419 Interest expense was 0.1 percent of sales in ﬁscal 2000, 0.2 percent of sales in ﬁscal 1999 and 0.3 percent of sales in ﬁscal 1998. Interest expense was incurred on allocated debt used to fund store expansion and working capital. Income Taxes STORE MIX. In ﬁscal 2000, the Group opened 38 Superstores. The openings The Group classiﬁes its Circuit City Superstores into four categories based on square footage. At the end of ﬁscal 2000, selling space for the “D”-format stores averaged about 23,000 square feet and total square footage for all “D” stores averaged 43,043. The “C” format constituted the largest percentage of the store base. At the end of ﬁscal 2000, selling space in the “C”-format stores averaged about 15,000 square feet, with total square footage for all “C” stores averaging 34,006; selling space in the “B” stores averaged approximately 13,000 square feet, with an average total square footage of 27,078; and selling space for all “A” stores averaged approximately 9,000 square feet with total square footage averaging 19,098. The Group also operates 45 mall-based Circuit City Express stores. These stores are located in regional malls and are approximately 2,000 to 3,000 square feet in size. IMPACT OF INFLATION. Inﬂation has not been a signiﬁcant contributor to the Group’s results. In fact, during the past two years, average retail prices have declined in virtually all of the Group’s product categories. Although product introductions could help reverse this trend in selected areas, management expects no signiﬁcant short-term change overall. Because the Group purchases substantially all products in U.S. dollars, prices are not directly impacted by the value of the dollar in relation to other foreign currencies, including the Japanese yen. Earnings from continuing operations before the Inter-Group Interest in the CarMax Group increased 39 percent to $326.7 million, or $1.60 per share, in ﬁscal 2000. In ﬁscal 1999, earnings from continuing operations before the Inter-Group Interest in the CarMax Group increased 48 percent to $235.0 million, or 1.17 per share, from $159.2 million, or 80 cents per share, in ﬁscal 1998. Net Earnings (Loss) Related to the Inter-Group Interest in the CarMax Group The net earnings attributed to the Circuit City Group’s Inter-Group Interest in the CarMax Group were $862,000 in ﬁscal 2000,compared with a net loss of $18.1 million in ﬁscal 1999 and a net loss of $26.5 million in ﬁscal 1998. Earnings from Continuing Operations Earnings from continuing operations for the Circuit City Group were $327.6 million, or $1.60 per share, in ﬁscal 2000, $216.9 million, or $1.08 per share, in ﬁscal 1999 and $132.7 million, or 67 cents per share, in ﬁscal 1998. The 51 percent earnings increase in ﬁscal 2000 reﬂects the strength in the Company’s Circuit City business and the proﬁt produced by the CarMax Group. The 63 percent increase in ﬁscal 1999 reﬂects the renewed strength of the Circuit City business, partly offset by the losses at CarMax. Loss from Discontinued Operations Cost of Sales, Buying and Warehousing The gross proﬁt margin was 24.7 percent of sales in ﬁscal 2000, 24.4 percent of sales in ﬁscal 1999 and 24.6 percent of sales in ﬁscal 1998. The improvement in the gross margin primarily reﬂected the higher percentage of sales from better-featured products and newer technologies, which On June 16, 1999, Digital Video Express announced that it would cease marketing of the Divx home video system and discontinue operations, but existing, registered customers would be able to view discs during a two-year phase-out period. The operating results of Divx and the loss on disposal of the Divx business have been segregated from continuing operations and reported as separate line items, after tax, on the Circuit City Group statements of earnings for the periods presented. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 47 CIRCUIT CITY include 32 Superstores in new and existing markets, the relocation of four existing Superstores and the replacement of the two remaining consumer electronics-only stores. Earnings from Continuing Operations Before the Inter-Group Interest in the CarMax Group GROUP The Group’s effective income tax rate was 38.0 percent in ﬁscal year 2000, 38.1 percent in ﬁscal year 1999 and 38.3 percent in ﬁscal 1998. The shifts in the tax rates reﬂect variations in state tax rates and the percentage of sales produced in each state. Slide 50: For ﬁscal 2000, the loss from the discontinued operations of Divx totaled $16.2 million after an income tax beneﬁt of $9.9 million. The loss from the discontinued operations of Divx totaled $68.5 million after an income tax beneﬁt of $42.0 million in ﬁscal 1999 and $20.6 million after an income tax beneﬁt of $12.6 million in ﬁscal 1998. In ﬁscal 2000, the loss on the disposal of the Divx business totaled $114.0 million after an income tax beneﬁt of $69.9 million. The loss on the disposal includes a provision for operating losses to be incurred during the phase-out period. It also includes provisions for commitments under licensing agreements with motion picture distributors, the write-down of assets to net realizable value, lease termination costs, employee severance and beneﬁt costs and other contractual commitments. Net Earnings will be added to all new stores and to a signiﬁcant percentage of existing stores. These enhancements will help ensure that Circuit City is in the best position to capture the sales opportunity presented by the digital cycle. The Group also will remodel 30 to 35 stores in the Richmond,Va., and the Miami,West Palm Beach, Tampa, Fort Myers and Orlando, Fla., markets. These remodeled Superstores will allow management to test a concept dedicated to consumer electronics and home ofﬁce products. These stores will feature the technology displays discussed above; expanded assortments of entertainment and computer software, peripherals and accessories; and additional self-service areas. Superstores opened after the ﬁrst ﬁscal quarter also will be dedicated to consumer electronics and home ofﬁce products. In the remodel markets, Circuit City will test approximately six stand-alone major appliance stores to create better selling space for the new technologies in the appliance business and to increase consumer awareness of Circuit City’s appliance offering. Circuit City has established its presence in virtually all of the nation’s top 100 markets and will continue adding to the existing store base as attractive market opportunities arise. Management believes that the Group has the opportunity to operate approximately 800 Superstores within the United States. In ﬁscal 2001, the Group will continue to expand its Superstore concept into new trade areas, adding approximately 25 stores that are either new-market entries or ﬁll-in locations in existing Circuit City markets. Management anticipates that the industry’s growth, geographic expansion, Superstore remodeling and continued strong operating controls will enable the Circuit City business to generate earnings growth of 20 percent to 25 percent in ﬁscal 2001. Management believes that continued emphasis on revenue growth and operating margin enhancements at CarMax will deliver solid proﬁtability in ﬁscal 2001. The Circuit City Group’s Inter-Group Interest in CarMax will partly reﬂect the CarMax results. RECENT ACCOUNTING PRONOUNCEMENTS Net earnings for the Circuit City Group rose 33 percent to $197.3 million, or 96 cents per share, in ﬁscal 2000. Net earnings for the Circuit City Group increased 32 percent to $148.4 million, or 74 cents per share, in ﬁscal 1999, from $112.1 million, or 57 cents per share, in ﬁscal 1998. Operations Outlook Management expects that industry growth, primarily driven by the introduction of better-featured products and new technologies, will be the primary contributor to sales and earnings growth for the Circuit City business during the coming decade. Management anticipates that growth in the household penetration of products and services such as digital television, direct broadcast satellite systems, wireless communications, digital camcorders, DVD players, multi-function set-top boxes and broadband Internet access will contribute signiﬁcantly to overall sales and earnings growth. During ﬁscal 2000, the Group undertook several signiﬁcant merchandising initiatives. Consistent with past practice, the Group added displays for new products, which in ﬁscal 2000 included digital televisions, digital imaging and high-speed broadband Internet access. The Group also announced two signiﬁcant vendor initiatives. Circuit City entered into a strategic alliance with America Online, Inc. to provide in-store promotion of AOL products and services and to increase Circuit City’s presence on the Internet by featuring Circuit City as an anchor tenant on key Shop@ online destinations across several America Online, Inc. brands. Circuit City and Sony Electronics Inc. also announced plans to co-promote Memory Stick media and hardware. In virtually all of the Circuit City Superstores opened since the fall, the Group signiﬁcantly expanded the number of self-service products. In July, the Group launched its electronic Superstore, circuitcity.com, and it has continued to develop the site. The Group’s e-commerce business is tightly integrated with its brick-and-mortar locations, allowing for product pickup, returns and exchanges at the store. In ﬁscal 2001, the Group will build on the initiatives begun in ﬁscal 2000. The planned 25 new Superstores and all 571 existing Superstores will feature new displays designed to highlight the latest advances in technology. These displays will include AOL Internet Centers; a Sony Memory Stick Interactive Universe; signiﬁcantly expanded displays highlighting digital audio recording technology; redesigned wireless phone displays; more prominent digital video displays; and additional digital television displays and assortment. A full selection of video game hardware and software 48 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Refer to the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for Circuit City Stores, Inc. for a review of recent accounting pronouncements. FINANCIAL CONDITION In ﬁscal 2000, net cash provided by operating activities of continuing operations was $618.6 million compared with $391.5 million in ﬁscal 1999 and $314.3 million in ﬁscal 1998. The ﬁscal 2000 increase reﬂects a 51 percent increase in earnings from continuing operations for the Circuit City Group and an increase in accounts payable, partly offset by an increase in inventory. The ﬁscal 1999 increase primarily reﬂects a decrease in net accounts receivable and improvements in net earnings for the Circuit City business. Most ﬁnancial activities, including the investment of surplus cash and the issuance and repayment of short-term and long-term debt, are managed by the Company on a centralized basis. Allocated debt of the Circuit City Group consists of (1) Company debt, if any, that has been allocated in its entirety to the Circuit City Group and (2) a portion of the Company’s debt that is allocated between the Groups. This pooled debt bears interest at a rate based on the average pooled debt balance. Expenses related to Slide 51: increases in pooled debt are reﬂected in the weighted average interest rate of the pooled debt. In addition to the allocation of cash and debt, interest-bearing loans, with terms determined by the board of directors, are used to manage cash between the Groups. These loans are reﬂected as inter-group payables or receivables on the ﬁnancial statements of each Group. During ﬁscal 1998, an inter-group note was issued by the Circuit City Group on behalf of the CarMax Group as a temporary ﬁnancing vehicle for CarMax inventory. At the end of ﬁscal 2000 and ﬁscal 1999, the Circuit City Group maintained no inter-group notes, payables or receivables with the CarMax Group. During ﬁscal 2000, a term loan totaling $175 million and due in May 2000 was classiﬁed as a current liability. Although the Company has the ability to reﬁnance this loan, it intends to repay the debt using existing working capital. Payment of corporate debt will not necessarily reduce Circuit City Group allocated debt. The Circuit City Group’s capital expenditures were $176.9 million in ﬁscal 2000, $214.1 million in ﬁscal 1999 and $341.6 million in ﬁscal 1998. Circuit City’s capital expenditures through ﬁscal 2000 primarily were related to Superstore expansion. Capital expenditures for the Circuit City Group have been funded through sale-leaseback transactions, landlord reimbursements and allocated short- and long-term debt. In ﬁscal 2001, the Group anticipates capital expenditures of approximately $245 million, primarily related to construction of new Superstores and the remodeling of 30 to 35 existing Superstores. Sale-leaseback and landlord reimbursement transactions totaled $74.8 million in ﬁscal 2000, $134.3 million in ﬁscal 1999 and $199.0 million in ﬁscal 1998. The Group’s ﬁnance operation primarily funds its credit card programs through securitization transactions that allow the operation to sell its receivables while retaining a small interest in them. The ﬁnance operation has a master trust securitization facility for its private-label credit card that allows the transfer of up to $1.85 billion in receivables through both private placement and the public market. A second master trust securitization program allows for the transfer of up to $1.75 billion in receivables related to the operation’s bank card programs. Securitized receivables totaled $2.79 billion at February 29, 2000. Under the securitization programs, receivables are sold to an unafﬁliated third party with the servicing rights retained. Management expects that both securitization programs can be expanded to accommodate future receivables growth. At the end of ﬁscal 2000, the Circuit City Group retained a 74.7 percent interest in the equity of the CarMax Group. As of February 29, 2000, the Circuit City Group’s equity in the CarMax Group was $257.5 million. Management believes that proceeds from sales of property and equipment and receivables, future increases in Circuit City Stores, Inc. debt allocated to the Circuit City Group and cash generated by operations will be sufﬁcient to fund the capital expenditures and operations of the Circuit City business. MARKET RISK sheets. Interest rate exposure relating to these receivables represents a market risk exposure that the Company has managed with matched funding and interest rate swaps. Interest rates charged on the accounts in the managed private-label and bank card portfolios are primarily indexed to the prime rate, adjustable on a monthly basis, with the balance at a ﬁxed annual percentage rate. Total principal outstanding at February 29, 2000, and February 28, 1999, had the following APR structure: (Amounts in millions) 2000 1999 Indexed to prime rate............................................. $2,631 Fixed APR............................................................... 213 Total ....................................................................... $2,844 $2,714 243 $2,957 (Amounts in millions) 2000 1999 162 40 $2,957 Total ....................................................................... $2,844 The Company has analyzed its interest rate exposure and has concluded that it did not represent a material market risk at February 29, 2000, or February 28, 1999. Because programs are in place to manage interest rate exposure relating to the consumer loan portfolios, the Company expects to experience relatively little impact if interest rates ﬂuctuate. The Company also has the ability to adjust ﬁxed-APR revolving cards and the index on ﬂoating-rate cards, subject to cardholder ratiﬁcation, but does not currently anticipate the need to do so. YEAR 2000 CONVERSION Refer to the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for Circuit City Stores, Inc. for a discussion of the Year 2000 issue and its impact on the Group’s ﬁnancial statements. FO R WA R D - LO O K I N G S TAT E M E N T S The Company manages the private-label and bank card revolving loan portfolios of the Group’s ﬁnance operation. Portions of these portfolios are securitized and, therefore, are not presented on the Group’s balance Company statements that are not historical facts, including statements about management’s expectations for ﬁscal year 2001 and beyond, are forward-looking statements and involve various risks and uncertainties. Refer to the “Circuit City Stores, Inc. Management’s Discussion and Analysis of Results of Operations and Financial Condition” for a review of possible risks and uncertainties. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 49 CIRCUIT Floating-rate (including synthetic alteration) securitizations ................................ $2,544 Fixed-rate securitizations ...................................... 137 Held by the Company: For investment ................................................. 145 For sale ............................................................. 18 $2,568 187 CITY GROUP Financing for the securitization programs is achieved primarily through the issuance of public market debt, which is issued either at ﬂoating rates based on LIBOR or at ﬁxed rates. Certain of the ﬁxed-rate issuances have been swapped to LIBOR. Receivables held by the Company for investment or sale are ﬁnanced with working capital. At February 29, 2000, and February 28, 1999, ﬁnancings were as follows: Slide 52: CIRCUIT CITY GROUP STATEMENTS OF EARNINGS (Amounts in thousands except per share data) N E T S A L E S A N D O P E R A T I N G R E V E N U E S ..................... 2000 % Years Ended February 29 or 28 1999 % 1998 % Cost of sales, buying and warehousing...................................................... G R O S S P R O F I T................................................................................. $10,599,406 7,977,214 2,622,192 2,081,393 13,844 2,095,237 526,955 200,243 100.0 75.3 24.7 19.6 0.1 19.7 5.0 1.9 $9,344,170 7,060,198 2,283,972 1,882,416 21,926 1,904,342 379,630 144,646 100.0 75.6 24.4 20.1 0.2 20.3 4.1 1.6 $7,996,591 6,026,434 1,970,157 1,687,453 25,072 1,712,525 257,632 98,462 100.0 75.4 24.6 21.1 0.3 21.4 3.2 1.2 Selling, general and administrative expenses [NOTES 3 AND 11].................. Interest expense [NOTES 3 AND 5] ................................................................ T O T A L E X P E N S E S.......................................................................... Earnings from continuing operations before income taxes and Inter-Group Interest in the CarMax Group.......................................... Provision for income taxes [NOTES 3 AND 6] ................................................ EARNINGS FROM CONTINUING OPERATIONS BEFORE INTER-GROUP INTEREST I N T H E C A R M A X G R O U P...................................................... 326,712 862 327,574 (16,215) (114,025) (130,240) $ 197,334 3.1 0.0 3.1 (0.1) (1.1) (1.2) 1.9 234,984 (18,057) 216,927 (68,546) – (68,546) $ 148,381 2.5 (0.2) 2.3 (0.7) – (0.7) 1.6 159,170 (26,460) 132,710 (20,636) – (20,636) $ 112,074 2.0 (0.3) 1.7 (0.3) – (0.3) 1.4 Net earnings (loss) related to Inter-Group Interest in the CarMax Group [NOTES 1 AND 2].............................................................. E A R N I N G S F R O M C O N T I N U I N G O P E R A T I O N S ........... Discontinued operations [NOTE 15]: Loss from discontinued operations of Divx, less income tax beneﬁt.... Loss on disposal of Divx, including provision for losses during phase-out period, less income tax beneﬁt ......................... Loss from discontinued operations........................................................... N E T E A R N I N G S................................................................................ Weighted average common shares [NOTES 2 AND 8]: Basic..................................................................................................... Diluted................................................................................................. NET EARNINGS (LOSS) PER SHARE [NOTES 2 AND 8]: 201,345 204,321 198,304 200,812 196,054 198,408 Basic: Continuing operations................................................................... $ Discontinued operations................................................................ Net earnings................................................................................... $ Diluted: Continuing operations................................................................... $ Discontinued operations................................................................ Net earnings................................................................................... $ See accompanying notes to group ﬁnancial statements. 1.63 (0.65) 0.98 1.60 (0.64) 0.96 $ $ $ $ 1.09 (0.34) 0.75 1.08 (0.34) 0.74 $ $ $ $ 0.68 (0.11) 0.57 0.67 (0.10) 0.57 50 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 53: CIRCUIT CITY GROUP BALANCE SHEETS At February 29 or 28 (Amounts in thousands) ASSETS CURRENT ASSETS: 2000 1999 Cash and cash equivalents ................................................................................................................................. $ 633,952 Net accounts receivable [NOTE 12] ....................................................................................................................... 464,023 Merchandise inventory....................................................................................................................................... 1,405,617 Prepaid expenses and other current assets........................................................................................................ 13,353 T O T A L C U R R E N T A S S E T S ................................................................................................................. $ 248,201 476,952 1,292,215 36,024 2,053,392 801,827 260,758 18,849 $3,134,826 2,516,945 753,325 257,535 9,583 $3,537,388 Property and equipment, net [NOTES 4 AND 5] ..................................................................................................... Inter-Group Interest in the CarMax Group [NOTE 2] ........................................................................................... Other assets........................................................................................................................................................ T O T A L A S S E T S ......................................................................................................................................... LIABILITIES AND GROUP EQUITY CURRENT LIABILITIES: T O T A L C U R R E N T L I A B I L I T I E S...................................................................................................... Long-term debt, excluding current installments [NOTES 5 AND 10]...................................................................... Deferred revenue and other liabilities................................................................................................................ Deferred income taxes [NOTE 6] .......................................................................................................................... T O T A L L I A B I L I T I E S .............................................................................................................................. G R O U P E Q U I T Y......................................................................................................................................... 1,482,668 2,054,720 1,309,353 1,825,473 Commitments and contingent liabilities [NOTES 1, 9, 10, 12, 13, 14 AND 15] T O T A L L I A B I L I T I E S A N D G R O U P E Q U I T Y ............................................................................. See accompanying notes to group ﬁnancial statements. $3,537,388 $3,134,826 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 51 CIRCUIT 1,210,036 127,984 122,771 21,877 881,882 286,865 107,070 33,536 CITY Current installments of long-term debt [NOTES 5 AND 10].................................................................................... $ 85,735 Accounts payable ............................................................................................................................................... 884,172 Short-term debt [NOTE 5] .................................................................................................................................... 1,453 Accrued expenses and other current liabilities.................................................................................................. 184,705 Deferred income taxes [NOTE 6] .......................................................................................................................... 53,971 $ 1,457 739,895 3,411 135,029 2,090 GROUP Slide 54: CIRCUIT CITY GROUP STATEMENTS OF CASH FLOWS (Amounts in thousands) OPERATING ACTIVITIES: 2000 Years Ended February 29 or 28 1999 1998 Net earnings............................................................................................................................. $ 197,334 Adjustments to reconcile net earnings to net cash provided by operating activities of continuing operations: Loss from discontinued operations [NOTE 15]..................................................................... 16,215 Loss on disposal of discontinued operations [NOTE 15]....................................................... 114,025 Net (earnings) loss related to Inter-Group Interest in the CarMax Group......................... (862) Depreciation and amortization.......................................................................................... 132,923 (Gain) loss on sales of property and equipment................................................................ (418) Provision for deferred income taxes................................................................................... 41,828 Decrease in deferred revenue and other liabilities............................................................. (17,799) Decrease (increase) in net accounts receivable.................................................................. 12,967 (Increase) decrease in merchandise inventory................................................................... (144,598) Decrease (increase) in prepaid expenses and other current assets..................................... 83,540 (Increase) decrease in other assets .................................................................................... (1,015) Increase in accounts payable, accrued expenses and other current liabilities................................................................................................. 184,429 NET CASH PROVIDED BY OPERATING ACTIVITIES O F C O N T I N U I N G O P E R A T I O N S ...................................................................... INVESTING ACTIVITIES: $ 148,381 $ 112,074 68,546 – 18,057 119,724 3,087 5,951 (32,771) 60,138 (16,107) 5,543 202 10,745 391,496 (214,085) 134,315 (79,770) (2,180) – (109,885) 42,165 (13,981) (83,881) (69,844) 158,001 90,200 $ 248,201 20,636 – 26,460 110,283 2,593 16,919 (23,859) (33,545) 43,528 (8,856) 10,296 37,804 314,333 (341,608) 199,028 (142,580) 5,244 (48,147) (33,573) 22,311 (13,792) (67,957) (45,818) 57,978 32,222 $ 90,200 618,569 (176,873) 74,811 (102,062) (1,958) – (74,603) 50,205 (14,207) (40,563) (90,193) 385,751 248,201 Purchases of property and equipment..................................................................................... Proceeds from sales of property and equipment..................................................................... NET CASH USED IN INVESTING ACTIVITIES O F C O N T I N U I N G O P E R A T I O N S ...................................................................... FINANCING ACTIVITIES: (Decrease) increase in allocated short-term debt, net............................................................. Decrease in inter-group payable.............................................................................................. Decrease in allocated long-term debt, net ............................................................................... Equity issuances, net................................................................................................................ Dividends paid......................................................................................................................... NET CASH USED IN FINANCING ACTIVITIES O F C O N T I N U I N G O P E R A T I O N S ...................................................................... C A S H U S E D I N D I S C O N T I N U E D O P E R A T I O N S [ N O T E 1 5 ] .......................... Increase in cash and cash equivalents........................................................................................... Cash and cash equivalents at beginning of year............................................................................ Cash and cash equivalents at end of year....................................................................................... $ 633,952 See accompanying notes to group ﬁnancial statements. 52 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 55: CIRCUIT CITY GROUP STATEMENTS OF GROUP EQUITY (Amounts in thousands) B A L A N C E A T M A R C H 1 , 1 9 9 7............................................................................................................................................................ $ 1,526,697 112,074 22,311 (13,792) 1,042 1,648,332 148,381 42,165 (13,981) 576 1,825,473 197,334 50,205 (14,207) (4,085) GROUP Net earnings..................................................................................................................................................................................................... Equity issuances, net ....................................................................................................................................................................................... Cash dividends ................................................................................................................................................................................................ Inter-Group Interest adjustment [NOTE 2] ........................................................................................................................................................ B A L A N C E A T F E B R U A R Y 2 8 , 1 9 9 8................................................................................................................................................ Net earnings .................................................................................................................................................................................................... Equity issuances, net ....................................................................................................................................................................................... Cash dividends ................................................................................................................................................................................................ Inter-Group Interest adjustment [NOTE 2] ........................................................................................................................................................ B A L A N C E A T F E B R U A R Y 2 8 , 1 9 9 9................................................................................................................................................ Net earnings..................................................................................................................................................................................................... Equity issuances, net ....................................................................................................................................................................................... Cash dividends ................................................................................................................................................................................................ Inter-Group Interest adjustment [NOTE 2] ........................................................................................................................................................ B A L A N C E A T F E B R U A R Y 2 9 , 2 0 0 0................................................................................................................................................ See accompanying notes to group ﬁnancial statements. $2,054,720 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 53 CIRCUIT CITY Slide 56: NOTES TO CIRCUIT CITY GROUP FINANCIAL STATEMENTS 1 . B A S I S O F P R E S E N TAT I O N The common stock of Circuit City Stores, Inc. consists of two common stock series, which are intended to reﬂect the performance of the Company’s two businesses. The Circuit City Group Common Stock is intended to track the performance of the Circuit City store-related operations, the Group’s retained interest in the CarMax Group and the Company’s investment in Digital Video Express, which has been discontinued (see Note 15). The effects of this retained interest on the Circuit City Group’s ﬁnancial statements are identiﬁed by the term “Inter-Group.” The CarMax Group Common Stock is intended to track the performance of the CarMax operations. The Inter-Group Interest is not considered outstanding CarMax Group Stock. Therefore, any net earnings or loss attributed to the InterGroup Interest is not included in the CarMax Group’s per share calculations. The Circuit City Group held a 74.7 percent interest in the CarMax Group at February 29, 2000, a 76.6 percent interest at February 28, 1999, and a 77.3 percent interest at February 28, 1998. Notwithstanding the attribution of the Company’s assets and liabilities, including contingent liabilities, and stockholders’ equity between the Circuit City Group and the CarMax Group for the purposes of preparing their respective ﬁnancial statements, holders of Circuit City Group Stock and holders of CarMax Group Stock are shareholders of the Company and continue to be subject to all of the risks associated with an investment in the Company and all of its businesses, assets and liabilities. Such attribution and the change in the equity structure of the Company does not affect title to the assets or responsibility for the liabilities of the Company or any of its subsidiaries. The results of operations or ﬁnancial condition of one Group could affect the results of operations or ﬁnancial condition of the other Group. Accordingly, the Circuit City Group ﬁnancial statements included herein should be read in conjunction with the Company’s consolidated ﬁnancial statements and the CarMax Group ﬁnancial statements. On June 15, 1999, the board of directors declared a two-for-one split of the outstanding Circuit City Group Common Stock in the form of a 100 percent stock dividend. All share, earnings per share and dividends per share calculations for the Circuit City Group included in the accompanying Group ﬁnancial statements reﬂect this stock split. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) CASH AND CASH EQUIVALENTS: Allocated cash equivalents of industry or portfolio trends that have been observed. The present value of the resulting cash ﬂow projections is calculated using a discount rate appropriate for the type of asset and risk. Retained interests (such as residual interests in a securitization trust, cash reserve accounts and rights to future interest from serviced assets that exceed contractually speciﬁed servicing fees) are included in net accounts receivable and are carried at fair value with changes in fair value reﬂected in earnings. Loan receivables held for sale are carried at the lower of cost or market, whereas loan receivables held for investment are carried at cost less an allowance for losses. At February 29, 2000, and February 28, 1999, cost approximates fair value. (C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company enters into ﬁnan- cial instruments on behalf of the Circuit City Group. The carrying value of the Circuit City Group’s ﬁnancial instruments, excluding interest rate swaps held for hedging purposes, approximates fair value. Credit risk is the exposure to the potential nonperformance of another material party to an agreement because of changes in economic, industry or geographic factors and is mitigated by dealing only with counterparties that are highly rated by several ﬁnancial rating agencies. Accordingly, the Circuit City Group does not anticipate material loss for nonperformance. All ﬁnancial instruments are broadly diversiﬁed along industry, product and geographic areas. (D) MERCHANDISE INVENTORY: Inventory is stated at the lower of cost or market. Cost is determined by the average cost method. (E) PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the assets’ estimated useful lives. Property held under capital lease is stated at the lower of the present value of the minimum lease payments at the inception of the lease or market value and is amortized on a straight-line basis over the lease term or the estimated useful life of the asset, whichever is shorter. (F) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the Company adopted the American Institute of Certiﬁed Public Accountants Statement of Position 98-1,“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Once the capitalization criteria of the SOP have been met, external direct costs of materials and services used in the development of internal-use software and payroll and payroll-related costs for employees directly involved in the development of internal-use software are capitalized. Amounts capitalized are amortized on a straight-line basis over a period of three to ﬁve years. (G) PRE-OPENING EXPENSES: Effective March 1, 1999, the Company adopted SOP 98-5,“Reporting on the Costs of Start-Up Activities.” SOP 98-5 requires costs of start-up activities, including organization and pre-opening costs, to be expensed as incurred. Adoption of SOP 98-5 did not have a material impact on the Group’s ﬁnancial position, annual results of operations or liquidity. Prior to ﬁscal 2000, the Company capitalized pre-opening costs for new store locations. Beginning in the month after the store opened for business, the pre-opening costs were amortized over the remainder of the ﬁscal year. $581,736,000 at February 29, 2000, and $201,379,000 at February 28, 1999, consist of highly liquid debt securities with original maturities of three months or less. (B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For transfers of ﬁnan- cial assets that qualify as sales, the Company recognizes gains or losses as a component of the Company’s ﬁnance operations. For transfers of ﬁnancial assets to qualify for sale accounting, control over the assets must be surrendered at the time of sale. Multiple estimates are used to calculate the gain or loss on sales of receivables under the provisions of SFAS No. 125,“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Finance charge income, default rates and payment rates are estimated using projections developed from the prior 12 months of operating history. These estimates are adjusted for any 54 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 57: (H) INCOME TAXES: Income taxes are accounted for in accordance with SFAS No. 109,“Accounting for Income Taxes.” Deferred income taxes reﬂect the impact of temporary differences between the amounts of assets and liabilities recognized for ﬁnancial reporting purposes and the amounts recognized for income tax purposes, measured by applying currently enacted tax laws. A deferred tax asset is recognized if it is more likely than not that a beneﬁt will be realized. (I) DEFERRED REVENUE: The Circuit City Group sells its own extended warranty contracts and extended warranty contracts on behalf of unrelated third parties. The contracts extend beyond the normal manufacturer’s warranty period, usually with terms (including the manufacturer’s warranty period) between 12 and 60 months. Inasmuch as the Company is the primary obligor on these contracts, revenue from the sale of the Circuit City Group’s own extended warranty contracts is deferred and amortized on a straight-line basis over the life of the contracts. Incremental direct costs related to the sale of contracts are deferred and charged to expense in proportion to the revenue recognized. Commission revenue for the unrelated third-party extended warranty plans is recognized at the time of sale, since the third parties are the primary obligors under these contracts. (J) INTER-GROUP INTEREST: The Circuit City Group held a 74.7 percent Inter-Group Interest in the CarMax Group at February 29, 2000, a 76.6 percent Inter-Group Interest at February 28, 1999, and a 77.3 percent Inter-Group Interest at February 28, 1998. For purposes of these group ﬁnancial statements, the Circuit City Group accounts for the Inter-Group Interest in a manner similar to the equity method of accounting. Accordingly, the Circuit City Group’s Inter-Group Interest in the Company’s equity value that is attributed to the CarMax Group is reﬂected as “InterGroup Interest in the CarMax Group” on the Circuit City Group balance sheets. Similarly, the net earnings (loss) of the CarMax Group attributed to the Circuit City Group’s Inter-Group Interest are reﬂected as “Net earnings (loss) related to Inter-Group Interest in the CarMax Group” on the Circuit City Group statements of earnings. All amounts corresponding to the Circuit City Group’s Inter-Group Interest in the CarMax Group in these group ﬁnancial statements represent the Circuit City Group’s proportional interest in the businesses, assets and liabilities and income and expenses of the CarMax Group. (M) NET EARNINGS PER SHARE: The Company calculates earnings per share based upon SFAS No. 128,“Earnings per Share.” Basic net earnings per share is computed by dividing net earnings attributed to Circuit City Group Stock, including the Circuit City Group’s retained interest in the CarMax Group, by the weighted average number of common shares outstanding. Diluted net earnings per share is computed by dividing net earnings attributed to Circuit City Group Stock, which includes the Circuit City Group’s retained interest in the CarMax Group, by the weighted average number of common shares outstanding and dilutive potential common shares. (N) STOCK-BASED COMPENSATION: The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” and provides the pro forma disclosures of SFAS No. 123,“Accounting for Stock-Based Compensation.” (O) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into interest rate swap agreements to manage exposure to interest rates and to more closely match funding costs to the use of funding. Interest rate swaps relating to long-term debt are classiﬁed as held for purposes other than trading and are accounted for on a settlement basis. To qualify for this accounting treatment, the swap must synthetically alter the nature of a designated underlying ﬁnancial instrument. Under this method, payments or receipts due or owed under the swap agreement are accrued through each settlement date and recorded as a component of interest expense. If a swap designated as a synthetic alteration were to be terminated, any gain or loss on the termination would be deferred and recognized over the shorter of the original contractual life of the swap or the related life of the designated long-term debt. The Company also enters into interest rate swap agreements as part of its asset securitization programs. Swaps entered into by a seller as part of a sale of ﬁnancial assets are considered proceeds at fair value in the determination of the gain or loss on the sale. If such a swap were to be terminated, the impact on the fair value of the ﬁnancial asset created by the sale of the related receivables would be estimated and included in earnings. (P) RISKS AND UNCERTAINTIES: The Circuit City Group is a leading national retailer of brand-name consumer electronics, personal computers, major appliances and entertainment software. The diversity of the Circuit City Group’s products, customers, suppliers and geographic operations signiﬁcantly reduces the risk that a severe impact will occur in the near term as a result of changes in its customer base, competition, sources of supply or markets. It is unlikely that any one event would have a severe impact on the Circuit City Group’s operating results. The carrying value of the Circuit City Group’s Inter-Group Interest in the CarMax Group has been adjusted proportionally for the net earnings (loss) of the CarMax Group. In addition, in the event of any dividend or other distribution on CarMax Group Stock, an amount that is proportionate to the aggregate amount paid in respect to shares of CarMax Group Stock would be transferred to the Circuit City Group from the CarMax Group with respect to its Inter-Group Interest and would reduce the related book value. (K) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating proﬁts generated by the ﬁnance operation are recorded as a reduction to selling, general and administrative expenses. (L) ADVERTISING EXPENSES: All advertising costs are expensed as incurred. Because of the Inter-Group Interest, the Circuit City Group also is subject to risks and uncertainties related to the CarMax Group. The CarMax Group is a used- and new-car retail business. The diversity of the CarMax Group’s customers and suppliers reduces the risk that a severe impact will occur in the near term as a result of changes in its customer base or sources of supply. However, because of the CarMax Group’s limited overall size, management cannot assure that unanticipated events will not have a negative impact on the Circuit City Group. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 55 CIRCUIT CITY GROUP Slide 58: The preparation of ﬁnancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. (Q) RECLASSIFICATIONS: Certain amounts in prior years have been reclassi- 4. PROPERTY AND EQUIPMENT Property and equipment, at cost, at February 29 or 28 is summarized as follows: (Amounts in thousands) 2000 1999 ﬁed to conform to classiﬁcations adopted in ﬁscal 2000. 3. CORPORATE ACTIVITIES The Circuit City Group’s ﬁnancial statements reﬂect the application of the management and allocation policies adopted by the board of directors to various corporate activities, as described below: (A) FINANCIAL ACTIVITIES: Most ﬁnancial activities are managed by the Land and buildings (20 to 25 years)............ $ 98,537 Construction in progress............................. 51,378 Furniture, ﬁxtures and equipment (3 to 8 years).......................................... 690,512 Leasehold improvements (10 to 15 years) ...................................... 566,103 Capital leases, primarily buildings (20 years)............................................... 12,471 1,419,001 Less accumulated depreciation and amortization.......................................... 665,676 $ 59,823 103,309 654,156 534,015 12,471 Company on a centralized basis. Such ﬁnancial activities include the investment of surplus cash and the issuance and repayment of short-term and long-term debt. Allocated invested surplus cash of the Circuit City Group consists of (i) Company cash equivalents, if any, that have been allocated in their entirety to the Circuit City Group and (ii) a portion of the Company’s cash equivalents that are allocated between the Groups. Allocated debt of the Circuit City Group consists of (i) Company debt, if any, that has been allocated in its entirety to the Circuit City Group and (ii) a portion of the Company’s pooled debt, which is debt allocated between the Groups. The pooled debt bears interest at a rate based on the average pooled debt balance. Expenses related to increases in pooled debt are reﬂected in the weighted average interest rate of such pooled debt as a whole. (B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporate general and administrative costs and other shared services generally have been allocated to the Circuit City Group based upon utilization of such services by the Group. Where determinations based on utilization alone have been impractical, other methods and criteria were used that management believes are equitable and provide a reasonable estimate of the costs attributable to the Group. (C) INCOME TAXES: The Circuit City Group is included in the consolidated federal income tax return and certain state tax returns ﬁled by the Company. Accordingly, the provision for federal income taxes and related payments of tax are determined on a consolidated basis. The ﬁnancial statement provision and the related tax payments or refunds are reﬂected in each Group’s ﬁnancial statements in accordance with the Company’s tax allocation policy for such Groups. In general, this policy provides that the consolidated tax provision and related tax payments or refunds will be allocated between the Groups based principally upon the ﬁnancial income, taxable income, credits and other amounts directly related to each Group. Tax beneﬁts that cannot be used by the Group generating such attributes, but can be utilized on a consolidated basis, are allocated to the Group that generated such beneﬁts. As a result, the allocated Group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the Groups had ﬁled separate tax returns. 1,363,774 561,947 $ 801,827 Property and equipment, net ...................... $ 753,325 5. DEBT Long-term debt of the Company at February 29 or 28 is summarized as follows: (Amounts in thousands) 2000 1999 Term loans...................................................... $405,000 Industrial Development Revenue Bonds due through 2006 at various prime-based rates of interest ranging from 5.0% to 7.0%.................................... 5,419 Obligations under capital leases [NOTE 10].......................................... 12,416 Note payable................................................... 3,750 Total long-term debt....................................... Less current installments............................... Long-term debt, excluding current installments ................................. 426,585 177,344 249,241 $405,000 6,564 12,728 5,000 429,292 2,707 426,585 $288,322 Portion of long-term debt allocated to the Circuit City Group........................... $213,719 In July 1994, the Company entered into a seven-year, $100,000,000, unsecured bank term loan. The loan was restructured in August 1996 as a $100,000,000, six-year unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.40 percent. At February 29, 2000, the interest rate on the term loan was 6.29 percent. In May 1995, the Company entered into a ﬁve-year, $175,000,000, unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate on the term loan was 6.23 percent. This term loan is due in May 2000 and has been classiﬁed as a current liability as of February 29, 56 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 59: 2000. Although the Company has the ability to reﬁnance this loan, it intends to repay the debt using existing working capital. In June 1996, the Company entered into a ﬁve-year, $130,000,000, unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate on the term loan was 6.23 percent. 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 revolving credit agreement at February 29, 2000, or February 28, 1999. The Industrial Development Revenue Bonds are collateralized by land, buildings and equipment with an aggregate carrying value of approximately $8,404,000 at February 29, 2000, and $10,740,000 at February 28, 1999. 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 29, 2000, and February 28, 1999. Short-term debt of the Company is funded through committed lines of credit and informal credit arrangements, as well as the revolving credit agreement. Amounts outstanding and committed lines of credit available are as follows: (Amounts in thousands) Years Ended February 29 or 28 2000 1999 6. INCOME TAXES The components of the provision for income taxes on earnings from continuing operations before income taxes and Inter-Group Interest in the CarMax Group are as follows: (Amounts in thousands) Years Ended February 29 or 28 2000 1999 1998 Current: Federal ................................ $141,514 State..................................... 16,901 158,415 Deferred: Federal ................................ State..................................... 40,572 1,256 41,828 Provision for income taxes........ $200,243 $123,001 15,694 138,695 5,773 178 5,951 $144,646 $75,554 5,989 81,543 14,060 2,859 16,919 $98,462 Years Ended February 29 or 28 2000 1999 1998 Effective income tax rate ...................... 38.0% 38.1% 38.3% Average short-term debt outstanding ...... $ 44,692 Maximum short-term debt outstanding .. $411,791 Aggregate committed lines of credit ........ $370,000 $ 54,505 $463,000 $370,000 In accordance with SFAS No. 109, the tax effects of temporary differences that give rise to a signiﬁcant portion of the deferred tax assets and liabilities at February 29 or 28 are as follows: (Amounts in thousands) 2000 1999 The weighted average interest rate on the outstanding short-term debt was 5.6 percent during ﬁscal 2000, 5.1 percent during ﬁscal 1999 and 5.7 percent during ﬁscal 1998. Interest expense allocated by the Company to the Circuit City Group, excluding interest capitalized, was $13,844,000 in ﬁscal 2000, $21,926,000 in ﬁscal 1999 and $25,072,000 in ﬁscal 1998. The Circuit City Group capitalizes interest in connection with the construction of certain facilities and the development or purchase of software for internal use. In ﬁscal 2000, interest capitalized amounted to $2,166,000 ($2,749,000 in ﬁscal 1999 and $4,759,000 in ﬁscal 1998). Deferred tax assets: Deferred revenue........................................... $ 1,055 Inventory capitalization ................................ 7,264 Accrued expenses.......................................... 27,974 Other ............................................................. 6,112 Total gross deferred tax assets................. Deferred tax liabilities: Depreciation and amortization..................... Deferred revenue........................................... Gain on sales of receivables........................... Other prepaid expenses................................. Other ............................................................. Total gross deferred tax liabilities ........... 42,405 44,854 29,656 14,069 23,023 6,651 118,253 $ 8,202 7,198 24,110 5,246 44,756 43,600 6,903 10,337 18,835 707 80,382 $35,626 Net deferred tax liability ..................................... $ 75,848 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 57 CIRCUIT Federal statutory income tax rate......... 35.0% State and local income taxes, net of Federal beneﬁt ...................... 3.0 35.0% 3.1 35.0% 3.3 CITY GROUP The effective income tax rate differed from the Federal statutory income tax rate as follows: Slide 60: Based on the Company’s historical and current pretax earnings, management believes the amount of gross deferred tax assets will be realized through future taxable income; therefore,no valuation allowance is necessary. 7. ASSOCIATE BENEFIT AND STOCK INCENTIVE PLANS (A) 401(K) PLAN: Effective August 1, 1999, the Company sponsors a 401(k) Plan for all employees meeting certain eligibility criteria. Under the Plan, eligible employees can contribute up to 15 percent of their salaries, and the Company matches a portion of those associate contributions. The Company’s contributions to this plan for Circuit City Group associates was $2,158,000 in ﬁscal 2000. (B) PREFERRED STOCK: In conjunction with the Company’s Shareholders Rights Plan as amended and restated, preferred stock purchase rights were distributed as a dividend at the rate of one right for each share of Circuit City Group Stock. The rights are exercisable only upon the attainment of, or the commencement of a tender offer to attain, a speciﬁed ownership interest in the Company by a person or group. When exercisable, each Circuit City Group right would entitle shareholders to buy one eight-hundredth of a share of Cumulative Participating Preferred Stock, Series E, $20 par value, at an exercise price of $125 per share subject to adjustment. A total of 500,000 shares of such preferred stock, which have preferential dividend and liquidation rights, have been designated. No such shares are outstanding. In the event that an acquiring person or group acquires the speciﬁed ownership percentage of the Company’s common stock (except pursuant to a cash tender offer for all outstanding shares determined to be fair by the board of directors) or engages in certain transactions with the Company after the rights become exercisable, each right will be converted into a right to purchase, for half the current market price at that time, shares of the related Group stock valued at two times the exercise price. (D) RESTRICTED STOCK: The Company has issued restricted stock under the provisions of the 1994 Stock Incentive Plan whereby management and key employees are granted restricted shares of Circuit City Group Stock. Shares are awarded in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions or forfeitures. Restrictions on the awards generally expire three to seven years from the date of grant. Total restricted stock awards of 345,644 shares of Circuit City Group Stock were granted to eligible employees in ﬁscal 2000. The market value at the date of grant of these shares has been recorded as unearned compensation and is a component of group equity. Unearned compensation is expensed over the restriction periods. In ﬁscal 2000, a total of $11,648,700 was charged to operations ($8,741,100 in ﬁscal 1999 and $4,995,400 in ﬁscal 1998). As of February 29, 2000, 1,559,966 restricted shares of Circuit City Group Stock were outstanding. (E) EMPLOYEE STOCK PURCHASE PLAN: The Company has Employee Stock Purchase Plans for all employees meeting certain eligibility criteria. Under the Circuit City Group Plan, eligible employees may purchase shares of Circuit City Group Stock, subject to certain limitations. For each $1.00 contributed by employees under the Plan, the Company matches $0.15. Purchases are limited to 10 percent of an employee’s eligible compensation, up to a maximum of $7,500 per year. At February 29, 2000, a total of 864,046 shares remained available under the Circuit City Group Plan. During ﬁscal 2000, 501,984 shares were issued to or purchased on the open market for employees (858,710 shares in ﬁscal 1999 and 901,396 in ﬁscal 1998). The average price per share purchased under the Plan was $41.70 in ﬁscal 2000, $21.69 in ﬁscal 1999 and $18.39 in ﬁscal 1998. The Company match or purchase price discount charged to Circuit City Group operations totaled $2,682,300 in ﬁscal 2000, $2,716,400 in ﬁscal 1999 and $2,509,500 in ﬁscal 1998. (F) STOCK INCENTIVE PLANS: Under the Company’s stock incentive plans, incentive and nonqualiﬁed stock options may be granted to management, key employees and outside directors to purchase shares of Circuit City Group Stock. The exercise price for incentive stock options for employees and nonqualiﬁed options for outside directors is equal to, or greater than, the market value at the date of grant; for nonqualiﬁed options granted under the 1988 Plan for employees, it is at least 85 percent of the market value at the date of grant (100 percent under the 1994 Plan). Options generally are exercisable over a period of from one to 10 years from the date of grant. The Company also has 1,000,000 shares of undesignated preferred stock authorized of which no shares are outstanding and an additional 500,000 shares of preferred stock designated as Series F which are related to similar rights held by CarMax Group shareholders. (C) VOTING RIGHTS: The holders of both series of common stock and any series of preferred stock outstanding and entitled to vote together with the holders of common stock will vote together as a single voting group on all matters on which common shareholders generally are entitled to vote other than a matter on which the common stock or either series thereof or any series of preferred stock would be entitled to vote as a separate voting group. On all matters on which both series of common stock would vote together as a single voting group, (i) each outstanding share of Circuit City Group Stock shall have one vote and (ii) each outstanding share of CarMax Group Stock shall have a number of votes based on the weighted average ratio of the market value of a share of CarMax Group Stock to a share of Circuit City Group Stock. If shares of only one series of common stock are outstanding, each share of that series shall be entitled to one vote. If either series of common stock is entitled to vote as a separate voting group with respect to any matter, each share of that series shall, for purposes of such vote, be entitled to one vote on such matter. A summary of the status of the Circuit City Group’s stock options and changes during the years ended February 29, 2000, and February 28, 1999 and 1998, are shown in Table 1. Table 2 summarizes information about stock options outstanding as of February 29, 2000. 58 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 61: TABLE 1 (Shares in thousands) Shares 2000 Weighted Average Exercise Price Shares 1999 Weighted Average Exercise Price Shares 1998 Weighted Average Exercise Price Outstanding at beginning of year .................. 8,894 Granted .......................................................... 1,564 Exercised........................................................ (2,864) Cancelled ....................................................... (214) Outstanding at end of year ............................ 7,380 Options exercisable at end of year ................. 1,258 TABLE 2 (Shares in thousands) Range of Exercise Prices $18.25 40.75 12.65 22.06 $25.07 $13.89 9,988 1,080 (2,008) (166) 8,894 2,966 $16.00 21.17 8.77 16.80 $18.25 $12.02 9,656 1,452 (966) (154) 9,988 3,508 $14.88 17.61 7.50 14.71 $16.00 $ 9.84 Number Outstanding Options Outstanding Weighted Average Remaining Weighted Average Contractual Life Exercise Price Options Exercisable Number Exercisable Weighted Average Exercise Price $ 9.09 to 14.75 ........................................................... 15.18 to 18.00............................................................ 18.43 to 25.28............................................................ 29.50 ......................................................................... 34.63 to 47.53............................................................ 1,723 1,176 958 2,000 1,523 3.9 4.0 4.7 2.1 6.0 4.0 $13.51 17.31 21.12 29.50 40.81 $25.07 883 288 87 – – 1,258 $12.33 16.74 20.43 – – $13.89 GROUP Total ............................................................................. 7,380 The Circuit City Group applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant date consistent with the methods of SFAS No. 123, the Circuit City Group’s net earnings and net earnings per share would have been reduced to the pro forma amounts indicated in the following table. In accordance with the transition provisions of SFAS No. 123, the pro forma amounts reﬂect options with grant dates subsequent to March 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reﬂected in the pro forma net earnings amounts presented because compensation cost is reﬂected over the options’ vesting periods and compensation cost of options granted prior to March 1, 1995, is not considered. The pro forma effect on ﬁscal year 2000 may not be representative of the pro forma effects on net earnings for future years. (Amounts in thousands except per share data) Years Ended February 29 or 28 2000 1999 1998 Earnings from continuing operations: As reported.................................. $327,574 Pro forma .................................... 319,337 Net earnings: As reported.................................. $197,334 Pro forma .................................... 189,097 Earnings per share from continuing operations: Basic—as reported....................... $ 1.63 Basic—pro forma......................... 1.59 Diluted—as reported ................... $ 1.60 Diluted—pro forma ..................... 1.56 Net earnings per share: Basic—as reported....................... $ 0.98 Basic—pro forma......................... 0.94 Diluted—as reported ................... $ 0.96 Diluted—pro forma ..................... 0.93 $216,927 211,025 $148,381 142,479 $132,710 128,035 $112,074 107,399 $ $ 1.09 1.06 1.08 1.05 0.75 0.72 0.74 0.71 $ $ 0.68 0.65 0.67 0.65 0.57 0.55 0.57 0.54 $ $ $ $ CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 59 CIRCUIT CITY Slide 62: For the purpose of computing the pro forma amounts indicated, the fair value of each option on the date of grant is estimated using the BlackScholes option-pricing model. The weighted average assumptions used in the model are as follows: 2000 1999 1998 included 160,000 shares of Circuit City Stock at February 29,2000,and February 28,1999. Eligible employees of the Circuit City Group participate in the Company’s plan. Pension costs for these employees have been allocated to the Circuit City Group based on its proportionate share of the projected beneﬁt obligation. The following tables set forth the Circuit City Group’s share of the Plan’s ﬁnancial status and amounts recognized in the balance sheets as of February 29 or 28: (Amounts in thousands) 2000 1999 Expected dividend yield ............................ 0.2% Expected stock volatility............................ 38% Risk-free interest rates............................... 6% Expected lives (in years)............................ 5 0.4% 33% 6% 5 0.4% 33% 6% 4 Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted for the Circuit City Group is $17 in ﬁscal 2000, $8 in ﬁscal 1999 and $7 in ﬁscal 1998. 8. EARNINGS PER SHARE Reconciliations of the numerator and denominator of basic and diluted earnings per share from continuing operations are presented below. (Amounts in thousands except per share data) Years Ended February 29 or 28 2000 1999 1998 Change in beneﬁt obligation: Beneﬁt obligation at beginning of year ................. $110,001 $ 88,166 Service cost............................................................ 13,428 10,479 Interest cost ........................................................... 7,384 6,135 Actuarial (gain) loss .............................................. (17,325) 8,511 Beneﬁts paid.......................................................... (4,151) (3,290) Beneﬁt obligation at end of year............................ $109,337 $110,001 Weighted average common shares .... Dilutive potential common shares: Options........................................ Restricted stock........................... Weighted average common shares and dilutive potential common shares ........................... 201,345 2,145 831 198,304 1,700 808 196,054 1,684 670 Change in plan assets: Fair value of plan assets at beginning of year ....... $ 94,125 $ 83,009 Actual return on plan assets.................................. 13,568 4,342 Employer contributions......................................... 11,498 10,064 Beneﬁts paid.......................................................... (4,151) (3,290) Fair value of plan assets at end of year.................. $115,040 $ 94,125 204,321 200,812 198,408 Earnings from continuing operations available to common shareholders ................................ $327,574 Basic earnings per share from from continuing operations ........ $ Diluted earnings per share from continuing operations ................. $ 1.63 1.60 Reconciliation of funded status: Funded status ........................................................ $ 5,703 $(15,876) Unrecognized actuarial (gain) loss ....................... (13,326) 8,657 Unrecognized transition asset............................... (398) (598) Unrecognized prior service beneﬁt ....................... (421) (552) Net amount recognized ......................................... $ (8,442) $ (8,369) $216,927 $ $ 1.09 1.08 $132,710 $ $ 0.68 0.67 The components of net pension expense are as follows: (Amounts in thousands) Years Ended February 29 or 28 2000 1999 1998 Certain options were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase 2,900 shares of Circuit City Group Stock ranging from $43.03 to $47.53 per share were outstanding and not included in the calculation at the end of ﬁscal 2000; 2,000,000 shares at $29.50 per share at the end of ﬁscal 1999; and 3,020,000 shares ranging from $17.74 to $29.50 per share at the end of ﬁscal 1998. 9. PENSION PLAN Service cost ............................................. $13,428 $10,479 $ 8,365 Interest cost............................................. 7,384 6,135 5,221 Expected return on plan assets............... (8,919) (7,675) (5,060) Amortization of prior service cost .......... (199) (104) (104) Amortization of transitional asset .......... (132) (199) (199) Recognized actuarial loss........................ 10 – – Net pension expense ............................... $11,572 $ 8,636 $ 8,223 The Company has a noncontributory deﬁned beneﬁt pension plan covering the majority of full-time employees who are at least age 21 and have completed one year of service. The cost of the program is being funded currently. Plan beneﬁts generally are based on years of service and average compensation. Plan assets consist primarily of equity securities and Assumptions used in the accounting for the pension plan were: Years Ended February 29 or 28 2000 1999 1998 Weighted average discount rate ................. 8.0% Rate of increase in compensation levels .... 6.0% Expected rate of return on plan assets ...... 9.0% 6.8% 5.0% 9.0% 7.0% 5.0% 9.0% 60 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 63: 10. LEASE COMMITMENTS The Circuit City Group conducts a substantial portion of its business in leased premises. The Circuit City Group’s lease obligations are based upon contractual minimum rates. For certain locations, amounts in excess of these minimum rates are payable based upon speciﬁed percentages of sales. Rental expense and sublease income for all operating leases are summarized as follows: (Amounts in thousands) Years Ended February 29 or 28 2000 1999 1998 ments of earnings, amounted to $390,144,000 (3.7 percent of net sales and operating revenues) in ﬁscal 2000, $376,316,000 (4.0 percent of net sales and operating revenues) in ﬁscal 1999 and $369,998,000 (4.6 percent of net sales and operating revenues) in ﬁscal 1998. 12. SECURITIZATIONS Minimum rentals .............................. $288,037 $273,185 $236,962 Rentals based on sales volume.......... 1,327 1,247 730 Sublease income................................ (16,425) (14,857) (12,879) Net..................................................... $272,939 $259,575 $224,813 On behalf of the Circuit City Group, the Company enters into securitization transactions, which allow for the sale of credit card receivables to unrelated entities, to ﬁnance the consumer revolving credit receivables generated by its wholly owned ﬁnance operation. The reduction in the aggregate securitized amount was $63.8 million for ﬁscal 2000, and proceeds from securitization transactions were $224.6 million for ﬁscal 1999 and $331.4 million for ﬁscal 1998. Receivables relating to the securitization facilities consist of the following at February 29 or 28: (Amounts in thousands) 2000 1999 Net receivables sold with recourse .................. $ 229,000 Program capacity ............................................ $3,598,350 $ 322,000 $3,127,000 (Amounts in thousands) Fiscal Capital Leases Operating Operating Lease Sublease Commitments Income 2001.................................................. $ 1,681 2002.................................................. 1,725 2003.................................................. 1,726 2004.................................................. 1,768 2005.................................................. 1,798 After 2005......................................... 14,666 Total minimum lease payments ....... $23,364 Less amounts representing interest... 10,948 Present value of net minimum capital lease payments [NOTE 5] .............. $12,416 $ 279,204 276,428 272,626 271,123 269,236 2,845,835 $4,214,452 $(13,042) (11,791) (10,801) (9,238) (8,664) (44,935) $(98,471) Private-label credit card receivables are ﬁnanced through securitization programs employing a master trust structure. As of February 29, 2000, these securitization programs had a capacity of $1.85 billion. The agreement has no recourse provisions. During ﬁscal 1998,a bank card master trust securitization facility was established and issued two series from the trust. Provisions under the master trust agreement provide recourse to the Company for any cash ﬂow deﬁciencies on $229 million of the receivables sold. The ﬁnance charges from the transferred receivables are used to fund interest costs,charge-offs,servicing fees and other related costs. The Company believes that as of February 29, 2000,no liability existed under these recourse provisions. The bank card securitization program has a total program capacity of $1.75 billion. Rights recorded for future ﬁnance income from serviced assets that exceed the contractually speciﬁed servicing fees are carried at fair value and amounted to $37.3 million at February 29,2000,$27.3 million at February 28, 1999, and $25.0 million at February 28, 1998, and are included in net accounts receivable. Changes in these retained interests consisted of originated retained interests of $52.9 million for ﬁscal 2000, $37.3 million for ﬁscal 1999 and $33.3 million for ﬁscal 1998, less amortization of $42.9 million in ﬁscal 2000, $35.0 million in ﬁscal 1999 and $11.5 million in ﬁscal 1998. The servicing fees speciﬁed in the credit card securitization agreements adequately compensate the ﬁnance operation for servicing the accounts. Accordingly, no servicing asset or liability has been recorded. The ﬁnance operation’s servicing revenue totaled $213.1 million for ﬁscal 2000, $210.4 million for ﬁscal 1999 and $195.7 million for ﬁscal 1998. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT In ﬁscal 2000, the Company entered into sale-leaseback transactions with unrelated parties on behalf of the Circuit City Group at an aggregate selling price of $24,295,000 ($103,750,000 in ﬁscal 1999 and $120,670,000 in ﬁscal 1998). Neither the Company nor the Circuit City Group has continuing involvement under the sale-leaseback transactions. 1 1 . S U P P L E M E N TA R Y F I N A N C I A L S TAT E M E N T I N FO R M AT I O N Advertising expense from continuing operations, which is included in selling, general and administrative expenses in the accompanying state- 61 CIRCUIT Future minimum ﬁxed lease obligations,excluding taxes,insurance and other costs payable directly by the Circuit City Group,as of February 29,2000,were: CITY The initial term of most real property leases will expire within the next 22 years; however, most of the leases have options providing for additional lease terms of ﬁve years to 25 years at terms similar to the initial terms. Net receivables sold ......................................... $2,681,283 $2,755,188 GROUP The Circuit City Group computes rent based on a percentage of sales volumes in excess of deﬁned amounts in certain store locations. Most of the Circuit City Group’s other leases are ﬁxed-dollar rental commitments, with many containing rent escalations based on the Consumer Price Index. Most provide that the Circuit City Group pay taxes, maintenance, insurance and certain other operating expenses applicable to the premises. Managed receivables ....................................... $2,844,377 $2,957,132 Receivables/residual interests held by the Circuit City Group: For sale....................................................... (18,288) (39,948) For investment........................................... (144,806) (161,996) Slide 64: In determining the fair value of retained interests, the Company estimates future cash ﬂows from ﬁnance charge collections, reduced by net defaults, servicing cost and interest cost. The Company employs a risk-based pricing strategy that increases the stated annual percentage rate for accounts that have a higher predicted risk of default. Accounts with a lower risk proﬁle also may qualify for promotional ﬁnancing. The APRs of the private-label card programs, excluding promotional balances, range from 22 percent to 24 percent, with default rates varying based on portfolio composition, but generally aggregating from 4 percent to 6 percent. Principal payment rates vary widely both seasonally and by credit terms but are in the range of 11 percent to 13 percent. The bank card APRs are based on the prime rate and generally range from 10 percent to 23 percent, with default rates varying by portfolio composition, but generally aggregating from 8 percent to 12 percent. Principal payment rates vary widely both seasonally and by credit terms but are in the range of 7 percent to 9 percent. Interest cost paid by the master trusts varies between series and, at February 29, 2000, ranged from 6.2 percent to 6.7 percent. 13. INTEREST RATE SWAPS swaps, since their use is to match more closely funding costs to the use of the funding. Credit risk is the exposure to nonperformance of another party to an agreement. Credit risk is mitigated by dealing with highly rated counterparties. 14. COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, the Company is involved in various legal proceedings. Based upon the Circuit City Group’s evaluation of the information presently available, management believes that the ultimate resolution of any such proceedings will not have a material adverse effect on the Circuit City Group’s ﬁnancial position, liquidity or results of operations. 15. DISCONTINUED OPERATIONS In October 1994, the Company entered into ﬁve-year interest rate swap agreements with notional amounts totaling $300 million relating to a public issuance of securities by the master trust. As part of this issuance, $344 million of ﬁve-year, ﬁxed-rate certiﬁcates were issued to fund consumer credit receivables. The ﬁnance operation is servicer for the accounts, and as such, receives its monthly cash portfolio yield after deducting interest, charge-offs and other related costs. The underlying receivables are based on a ﬂoating rate. The swaps were put in place to better match funding costs to the receivables being securitized. As a result, the master trust pays ﬁxed-rate interest, and the Company utilizes the swaps to convert the ﬁxed-rate obligation to a ﬂoating-rate, LIBORbased obligation. These swaps were entered into as part of the sales of receivables and are included in the gain on sales of receivables. In November 1999, these swaps terminated as the related securities in the master trust matured. Concurrent with the funding of the $175 million term loan facility in May 1995, the Company entered into ﬁve-year interest rate swaps with notional amounts aggregating $175 million. These swaps effectively converted the variable-rate obligation into a ﬁxed-rate obligation. The fair value of the swaps is the amount at which they could be settled. This value is based on estimates obtained from the counterparties, which are two banks highly rated by several ﬁnancial rating agencies. The swaps are held for hedging purposes and are not recorded at fair value. Recording the swaps at fair value at February 29, 2000, would result in a loss of $90,000, and at February 28, 1999, would result in a loss of $2.2 million. The market and credit risks associated with these interest rate swaps are similar to those relating to other types of ﬁnancial instruments. Market risk is the exposure created by potential ﬂuctuations in interest rates and is directly related to the product type, agreement terms and transaction volume. The Company does not anticipate signiﬁcant market risk from On June 16, 1999, Digital Video Express announced that it would cease marketing the Divx home video system and discontinue operations, but existing, registered customers would be able to view discs during a twoyear phase-out period. The operating results of Divx and the loss on disposal of the Divx business have been segregated from continuing operations and reported as separate line items, after tax, on the Circuit City Group statements of earnings for the periods presented. Discontinued operations also have been segregated on the Circuit City Group statements of cash ﬂows for the periods presented. The Circuit City Group balance sheets, however, include Divx. The loss from the discontinued Divx operations totaled $16.2 million after an income tax beneﬁt of $9.9 million in ﬁscal 2000, $68.5 million after an income tax beneﬁt of $42.0 million in ﬁscal 1999 and $20.6 million after an income tax beneﬁt of $12.6 million in ﬁscal 1998. The loss on the disposal of the Divx business totaled $114.0 million after an income tax beneﬁt of $69.9 million in ﬁscal 2000. The loss on the disposal includes a provision for operating losses to be incurred during the phaseout period. It also includes provisions for commitments under licensing agreements with motion picture distributors, the write-down of assets to net realizable value, lease termination costs, employee severance and beneﬁt costs and other contractual commitments. At February 29, 2000, the provision for operating losses during the phase-out period increased to $6.2 million from the original estimate of $3.0 million because of higher than expected operating costs during the early stages of discontinuing the business. This increase was offset by reductions in the provisions for nonoperating costs. The net liabilities or assets of the discontinued Divx operations reﬂected in the accompanying Group balance sheets at February 29 or 28 are comprised of the following: (Amounts in thousands) 2000 1999 Current assets......................................................... $ 612 $ 25,630 Property and equipment, net ................................. 513 23,589 Other assets............................................................ – 7,895 Current liabilities ................................................... (32,650) (23,126) Other liabilities....................................................... (35,291) (3,397) Net (liabilities) assets of discontinued operations... $(66,816) $ 30,591 62 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 65: 1 6 . Q U A R T E R LY F I N A N C I A L D ATA ( U N A U D I T E D ) (Amounts in thousands First Quarter Second Quarter except per share data) 2000 1999 2000 1999 Third Quarter 2000 1999 Fourth Quarter 2000 1999 Year 2000 1999 Net sales and operating revenues....... Gross proﬁt......................................... Earnings from continuing operations before Inter-Group Interest in the CarMax Group........ Earnings from continuing operations Loss from discontinued operations.... Net (loss) earnings ............................. Net (loss) earnings per share: Basic: Continuing operations ............. Discontinued operations.......... Net (loss) earnings................... Diluted: Continuing operations ............. Discontinued operations.......... Net (loss) earnings................... $2,204,919 $ 540,731 $1,924,698 $ 465,012 $2,422,667 $ 604,503 $2,117,796 $ 526,622 $2,495,649 $ 618,182 $2,272,258 $ 553,388 $3,476,171 $ 858,776 $3,029,418 $ 738,950 $10,599,406 $ 2,622,192 $9,344,170 $2,283,972 $ 39,311 $ $ 41,398 $ $ (130,240) $ $ (88,842) $ 23,818 21,339 (8,070) 13,269 $ $ $ $ 71,234 73,692 – 73,692 $ 46,053 $ $ 43,773 $ $ (11,626) $ $ 32,147 $ 54,714 52,335 – 52,335 $ 38,340 $ 161,453 $ 32,710 $ 160,149 $ (16,765) $ – $ 15,945 $ 160,149 $ 126,773 $ 119,105 $ (32,085) $ 87,020 $ 326,712 $ 327,574 $ (130,240) $ 197,334 $ $ $ $ 234,984 216,927 (68,546) 148,381 $ $ $ $ $ $ 0.21 $ (0.65) $ (0.44) $ 0.20 $ (0.64) $ (0.44) $ 0.11 $ (0.04) $ 0.07 $ 0.37 – 0.37 0.36 – 0.36 $ $ $ $ $ $ 0.22 $ (0.06) $ 0.16 $ 0.26 – 0.26 0.26 – 0.26 $ $ $ $ $ $ 0.16 $ (0.08) $ 0.08 $ 0.79 – 0.79 0.78 – 0.78 $ $ $ $ $ $ 0.60 $ (0.16) $ 0.44 $ 1.63 (0.65) 0.98 1.60 (0.64) 0.96 $ $ $ $ $ $ 1.09 (0.34) 0.75 1.08 (0.34) 0.74 GROUP 0.11 $ (0.04) $ 0.07 $ 0.22 $ (0.06) $ 0.16 $ 0.16 $ (0.08) $ 0.08 $ 0.59 $ (0.16) $ 0.44 $ INDEPENDENT AUDITORS’ REPORT We have audited the accompanying balance sheets of the Circuit City Group (as deﬁned in Note 1) as of February 29, 2000 and February 28, 1999 and the related statements of earnings, group equity and cash ﬂows for each of the ﬁscal years in the three-year period ended February 29, 2000. These ﬁnancial statements are the responsibility of Circuit City Stores, Inc.’s management. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements.An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation.We believe that our audits provide a reasonable basis for our opinion. As more fully discussed in Note 1, the ﬁnancial statements of the Circuit City Group should be read in conjunction with the consolidated ﬁnancial statements of Circuit City Stores, Inc. and subsidiaries and the ﬁnancial statements of the CarMax Group. The Circuit City Group has accounted for its interest in the CarMax Group in a manner similar to the equity method of accounting. Generally accepted accounting principles require that the CarMax Group be consolidated with the Circuit City Group. In our opinion, except for the effects of not consolidating the CarMax Group with the Circuit City Group as discussed in the preceding paragraph, the ﬁnancial statements referred to above present fairly, in all material respects, the ﬁnancial position of the Circuit City Group as of February 29, 2000 and February 28, 1999 and the results of its operations and its cash ﬂows for each of the ﬁscal years in the three-year period ended February 29, 2000 in conformity with generally accepted accounting principles. Richmond,Virginia April 4, 2000 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 63 CIRCUIT The Board of Directors and Stockholders of Circuit City Stores, Inc.: CITY Slide 66: CARMAX GROUP MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION OF RESULTS The common stock of Circuit City Stores, Inc. consists of two common stock series, which are intended to reﬂect the performance of the Company’s two businesses. The CarMax Group Common Stock is intended to track the performance of the CarMax stores and related operations. The Circuit City Group Common Stock is intended to track the performance of the Circuit City stores and related operations and the Group’s retained interest in the CarMax Group. The effects of the retained interest held by the Circuit City Group on the CarMax Group’s ﬁnancial statements are identiﬁed by the term “Inter-Group.” The Inter-Group Interest is not considered outstanding CarMax Group stock. Therefore, the net earnings or losses attributed to the Inter-Group Interest are not included in the CarMax Group’s per share calculations. The following discussion and analysis relates to the CarMax Group. Reported earnings and losses attributed to the CarMax Group Common Stock exclude the earnings and losses attributed to the Circuit City Group’s Inter-Group Interest, which was 74.7 percent at February 29, 2000, 76.6 percent at February 28, 1999, and 77.3 percent at February 28, 1998. For additional information, refer to the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for Circuit City Stores, Inc. and for the Circuit City Group. R E S U LT S O F O P E R AT I O N S Late in ﬁscal 1999, CarMax adopted a hub and satellite operating strategy in existing multi-store markets. In ﬁscal 1999, ﬁve superstores were converted to satellite locations in the Miami, Houston, Dallas and Chicago markets. Under the hub and satellite operating process, a satellite store uses the reconditioning, purchasing and business ofﬁce operations of a nearby hub store. The display capacity and consumer offer are identical in both the hub and satellite stores. A prototypical satellite store operates on a four- to six-acre site with a 12,000- to 14,000-square-foot facility that houses sales ofﬁces, a showroom and four to seven service bays for regular maintenance and warranty service. At the end of ﬁscal 1999, CarMax classiﬁed two stores as prototype satellite stores. In ﬁscal 2000, CarMax limited its geographic expansion to focus on building sales and proﬁtability in existing markets. During the year, CarMax opened one used-car superstore in Nashville, Tenn., and one in Duarte, Calif. CarMax converted one existing store into a satellite operation. In the markets of Dallas/Fort Worth and Houston, CarMax added two prototypical satellite stores that opened at year-end. The sales pace at CarMax’s used-car superstores, including those stores with integrated new-car franchises, improved, and the Group generated comparable store sales growth for the last two quarters and for the ﬁscal year. In ﬁscal 2000, CarMax also opened ﬁve stand-alone new-car stores, relocated its Laurel, Md., Toyota franchise next to its Laurel superstore and acquired a Nissan franchise that was added to an existing used-car superstore location in the Washington, D.C./Baltimore market.While the performance of the used-car superstores and integrated used- and new-car superstores exceeded expectations, management was disappointed in the performance of the stand-alone new-car stores during ﬁscal 2000. Although operations at these stores have improved signiﬁcantly versus their levels prior to acquisition, they remain below management’s expectations. CarMax is actively pursuing opportunities to integrate or co-locate as many of these franchises with existing used-car superstores as possible. Late in ﬁscal 2000, CarMax’s primary competitor exited the used-car superstore business. Management believes their exit from the Dallas/Fort Worth, Houston, San Antonio, Tampa and Miami markets, where the two companies competed, will help eliminate consumer confusion over the two offers and increase customer ﬂow for CarMax. STORE MIX* Fiscal 2000 Retail Units at Year-End 1999 1998 1997 1996 Sales Growth Total sales for the CarMax Group increased 37 percent in ﬁscal 2000 to $2.01 billion. In ﬁscal 1999, total sales increased 68 percent to $1.47 billion from $874.2 million in ﬁscal 1998. The ﬁscal 2000 total sales increase reﬂects a 2 percent increase in comparable store sales and the addition of superstores and new-car franchises. PERCENTAGE SALES CHANGE FROM PRIOR YEAR Fiscal Total Comparable 2000...................................................................... 37% 1999...................................................................... 68% 1998...................................................................... 71% 1997...................................................................... 85% 1996...................................................................... 258% PERCENT VEHICLE SALES BY CATEGORY 2000 2)% (2)% 6)% 23)% 12)% 1999 1998 1997 1996 Vehicle Dollars: Used Vehicles ........................... New Vehicles ............................ Vehicle Units: Used Vehicles ........................... New Vehicles ............................ 79% 21% 86% 14% 90% 10% 94% 6% 89% 11% 93% 7% 88% 12% 92% 8% 100% 0% 100% 0% “C” and “B” Stores ................. 14 “A” Store................................. 17 Satellite Prototype Store........ 4 Stand-Alone New-Car Store... 5 Total ...................................... 40 13 16 2 – 31 8 10 – – 18 2 5 – – 7 1 3 – – 4 During the past ﬁve years, geographic expansion of the CarMax used-car superstore concept and the addition of new-car franchises have been the primary contributors to CarMax’s total sales growth. During the second half of ﬁscal 1998, the Group’s used-car sales began to fall below management’s expectations. New-car sales remained strong. These trends continued through ﬁscal 1999 when strong comparable store sales growth in new cars was more than offset by the weak used-car sales trend. 64 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT * CarMax opened two prototypical satellite stores in late ﬁscal 1999 and two prototypical satellite stores in ﬁscal 2000. In addition to the four satellite prototype stores in operation, six “A,” “B” or “C” stores have been converted to satellite operations.“C” stores represent the largest format. In ﬁscal 2000, CarMax reclassiﬁed certain stores on the basis of square footage. Prior year information has been reclassiﬁed to reﬂect this change. Slide 67: NEW-CAR FRANCHISES* Fiscal 2000 New-Car Franchises 1999 1998 1997 1996 Integrated/Co-Located New-Car Franchises ........ 15 Stand-Alone New-Car Franchises ....................... 5 Total New-Car Franchises ..... 20 16 – 16 2 – 2 1 – 1 – – – * In ﬁscal 2000, CarMax reclassiﬁed certain franchises as “co-located.” Prior period information has been reclassiﬁed to reﬂect this change. In most states, CarMax sells extended warranties on behalf of an unrelated third party who is the primary obligor. Under this third-party warranty program, the Company has no contractual liability to the customer. In states where third-party warranty sales are not permitted, CarMax has sold its own extended warranty for which the Company is the primary obligor. Gross dollar sales from all extended warranty programs were 3.7 percent of the Group’s total sales in ﬁscal 2000, 4.3 percent in ﬁscal 1999 and 3.8 percent in ﬁscal 1998. The ﬁscal 2000 decrease reﬂects the increase in new-car sales as a percentage of the overall mix. The ﬁscal 1999 increase reﬂects pricing adjustments and a higher penetration rate achieved by extending warranty coverage to more vehicles. Total extended warranty revenue, which is reported in the Group’s total sales, was 1.6 percent of total sales in ﬁscal 2000, 2.0 percent in ﬁscal 1999 and 1.5 percent in ﬁscal 1998. Third-party extended warranty revenue was 1.6 percent of total sales in ﬁscal 2000, 1.9 percent in ﬁscal 1999 and 1.4 percent in ﬁscal 1998. IMPACT OF INFLATION. Inﬂation has not been a signiﬁcant contributor to the Group’s results. The Group’s proﬁtability is based on achieving speciﬁc gross proﬁt dollars per unit rather than on average retail prices. Because the wholesale market generally adjusts to reﬂect retail price trends, management believes that if the stores meet inventory turn objectives then changes in average retail prices will have only a short-term impact on the Group’s gross margin and thus proﬁtability. store sales increases and productivity improvements resulting from the slower expansion rate, implementation of the hub and satellite operating strategy, and operating expense controls. The improvements were partly offset by $4.8 million in charges related to lease termination costs on undeveloped property and a write-down of assets associated with excess property for sale. Excluding these costs, the ﬁscal 2000 expense ratio would have been 11.1 percent of sales. The higher ratios in ﬁscal 1999 and ﬁscal 1998 reﬂect the costs associated with the expansion of CarMax superstores and the below-plan sales in a number of multi-store metropolitan markets. The ﬁscal 1998 ratio also includes an $11.5 million write-down of assets associated with the closure and disposal of the Group’s centralized reconditioning facilities and excess property at some locations. Excluding the write-down of assets, the selling, general and administrative expense ratio would have been 13.3 percent of sales in ﬁscal 1998. Proﬁts generated by CarMax’s ﬁnance operation and fees received for arranging ﬁnancing through third parties are recorded as a reduction to selling, general and administrative expenses. Interest Expense Interest expense was 0.5 percent of sales in ﬁscal 2000, 0.4 percent of sales in ﬁscal 1999 and 0.2 percent of sales in ﬁscal 1998. During ﬁscal 2000 and ﬁscal 1999, interest expense was incurred primarily on allocated debt to fund new store growth, franchise acquisitions and working capital, including inventory. In ﬁscal 1998, interest expense was incurred primarily on an inter-group note used to ﬁnance inventory for much of the year. Earnings (Loss) Before Income Taxes Earnings before income taxes were $1.8 million in ﬁscal 2000. The ﬁscal 2000 pretax earnings exceeded management’s expectations. At the end of ﬁscal 2000, CarMax recorded a pretax charge of $4.8 million relating to lease termination costs on undeveloped property and the write-down of assets associated with excess property for sale. Excluding these charges, earnings before income taxes were $6.6 million. For ﬁscal 1999, CarMax recorded a pretax loss of $38.5 million. This loss exceeded management’s expectations and reﬂected the underperformance of stores in some multi-store metropolitan markets. The ﬁscal 1998 pretax loss, which includes an $11.5 million write-down of assets, was $56.1 million. Excluding the write-down, the ﬁscal 1998 pretax loss was $44.6 million. Income Taxes Cost of Sales The gross proﬁt margin was 11.9 percent in ﬁscal 2000, 11.7 percent in fiscal 1999 and 8.4 percent in ﬁscal 1998. At the end of ﬁscal 1998, CarMax instituted a proﬁt improvement plan that included better inventory management, increased retail service sales, pricing adjustments and the addition of consumer electronic accessory sales. The success of this plan was the signiﬁcant contributor to the improved gross proﬁt margins in ﬁscal 2000 and ﬁscal 1999. The signiﬁcant increase in new-car sales as a percentage of total sales partly offset the ﬁscal 2000 and ﬁscal 1999 improvements since new vehicles carry lower gross proﬁt margins than used vehicles. Selling, General and Administrative Expenses The Group’s effective income tax rate was 38.0 percent in ﬁscal 2000, compared with 39.0 percent in ﬁscal 1999 and ﬁscal 1998. In ﬁscal 1999 and ﬁscal 1998, the CarMax Group generated losses and as a result recorded related income tax beneﬁts. Net Earnings (Loss) Selling, general and administrative expenses were 11.3 percent of sales in ﬁscal 2000, 13.9 percent of sales in ﬁscal 1999 and 14.6 percent of sales in fiscal 1998. The improved selling, general and administrative expense ratio in ﬁscal 2000 reﬂects expense leverage from the total and comparable Net earnings were $1.1 million in ﬁscal 2000. Excluding the lease termination costs and the write-down of assets, net earnings would have been $4.1 million compared with a net loss of $23.5 million in ﬁscal 1999. In ﬁscal 1998, the net loss was $34.2 million. Excluding the impact of the write-down of assets, the ﬁscal 1998 net loss was $27.2 million. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 65 CARMAX GROUP Slide 68: Earnings attributed to the CarMax Group common stock were $256,000, or 1 cent per share, in ﬁscal 2000, compared with a net loss of $5.5 million, or 24 cents per share, in ﬁscal 1999 and a net loss of $7.8 million, or 35 cents per share in ﬁscal 1998. Operations Outlook February 1997 CarMax Group equity offering and allocated short- and long-term debt. In ﬁscal 2001, the Group anticipates capital expenditures of approximately $30 million. Sale-leaseback and landlord reimbursement transactions totaled $25.3 million in ﬁscal 2000, $139.3 million in ﬁscal 1999 and $98.1 million in ﬁscal 1998. During ﬁscal 2000, the CarMax Group acquired the Chrysler-PlymouthJeep franchise rights and the related assets of Prince Chrysler-PlymouthJeep Company and the franchise rights and the related assets of LAX Dodge, Inc. in the Los Angeles market; the Jeep franchise rights and the related assets of Red Bird Jeep-Eagle and the franchise rights of Hilltop Chrysler-Plymouth, Inc. in the Dallas market; the franchise rights and related assets of Fairway Chrysler-Plymouth-Jeep, Inc. in the Orlando market; and the Nissan franchise rights and related assets of Town & Country Pontiac Nissan, Inc. in the Washington D.C./Baltimore market for a total of $34.8 million. These acquisitions were ﬁnanced through cash resources. Costs in excess of the acquired net tangible assets, which are primarily inventory, have been recorded as goodwill and covenants not to compete. During ﬁscal 1999, the CarMax Group acquired the Toyota franchise rights and the related assets of Laurel Automotive Group, Inc. in the Washington, D.C./Baltimore market; the franchise rights and the related assets of Mauro Auto Mall, Inc. in the Chicago market; the franchise rights and the related assets of Nissan of Greenville, Inc. in the Greenville, S.C., market; and the Mitsubishi franchise rights and the related assets of Boomershine Automotive, Inc. in the Atlanta market for a total of $49.6 million. The acquisitions were ﬁnanced through cash payments totaling $41.6 million and the issuance of two promissory notes totaling $8.0 million. Costs in excess of the acquired net tangible assets, which are primarily inventory, were recorded as goodwill and covenants not to compete. In ﬁscal 1996, Circuit City Stores, Inc. initiated an asset securitization program on behalf of the CarMax Group. At the end of ﬁscal 2000, that program allowed the transfer of up to $500 million in automobile loan receivables. In October 1999, the Company formed a second securitization facility on behalf of the CarMax Group that allowed for a $644 million securitization of automobile loan receivables in the public market. At February 29, 2000, the program had a capacity of $559.5 million. Securitized receivables on behalf of the CarMax Group totaled $887.2 million at the end of ﬁscal 2000. The receivables are sold to an unafﬁliated third party with the servicing rights retained. Management expects that securitization programs which allow for the transfer of receivables through both private placement and the public market can be used to fund increases in receivables resulting from CarMax’s continued growth. In ﬁscal 1999, CarMax entered into a one-year, renewable inventory ﬁnancing arrangement with an asset-backed commercial paper conduit. The arrangement had a total program capacity of $160 million at February 29, 2000, and was created to provide funding for the acquisition of vehicle inventory through the use of a non-afﬁliated special purpose company. During ﬁscal 2000 and ﬁscal 1999, the CarMax Group ﬁnanced no inventory under this arrangement. This ﬁnancing arrangement was terminated in the ﬁrst quarter of ﬁscal 2001. In ﬁscal 2001, management will continue to focus on revenue growth and operating margin enhancement in existing CarMax markets. Management will concentrate on the hub and satellite operating strategy for its used-car superstores and seek new-car franchises to integrate or co-locate with used-car superstores. Management anticipates that in ﬁscal 2001 and beyond new stores will be smaller “A” stores or satellite locations. Management also remains focused on building consumer awareness of the CarMax offer. In ﬁscal 2000, CarMax began a new advertising campaign; enhanced its Web site, carmax.com; and launched an online buying service that provides ﬁrm prices on new vehicles. Management believes that continued sales and profit improvement in the Group’s existing markets will result in solid profitability in fiscal 2001 and allow the Group to resume moderate and proﬁtable geographic growth thereafter. RECENT ACCOUNTING PRONOUNCEMENTS Refer to the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for Circuit City Stores, Inc. for a review of recent accounting pronouncements. FINANCIAL CONDITION Net cash used in operating activities was $25.1 million in ﬁscal 2000, $82.0 million in ﬁscal 1999 and $86.1 million in ﬁscal 1998. For the threeyear period, cash primarily was used to purchase inventory for store openings and additional new-car franchises. In ﬁscal 1999 and ﬁscal 1998, cash also was used to fund net losses. Most ﬁnancial activities, including the investment of surplus cash and the issuance and repayment of short-term and long-term debt, are managed by the Company on a centralized basis. Investment of surplus cash from the February 1997 equity offering has been allocated to the CarMax Group. Allocated debt of the CarMax Group consists of (1) Company debt, if any, that has been allocated in its entirety to the CarMax Group and (2) a portion of the Company’s debt that is allocated between the Circuit City Group and the CarMax Group. This pooled debt bears interest at a rate based on the average pooled debt balance. Expenses related to increases in pooled debt are reﬂected in the weighted average interest rate of the pooled debt. During ﬁscal 2000, a term loan totaling $175 million and due in May 2000 was classiﬁed as a current liability. Although the Company has the ability to reﬁnance this loan, it intends to repay the debt using existing working capital. Payment of corporate debt will not necessarily reduce CarMax Group allocated debt. The CarMax Group’s capital expenditures were $45.4 million in ﬁscal 2000, $138.3 million in ﬁscal 1999 and $234.3 million in ﬁscal 1998. CarMax’s capital expenditures through ﬁscal 2000 primarily were related to store expansion. Capital expenditures have been funded through saleleaseback transactions, landlord reimbursements, proceeds from the 66 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 69: Management believes that the proceeds from sales of property and equipment and receivables, future increases in the Company’s debt allocated to the CarMax Group, inter-group loans and cash generated by operations will be sufﬁcient to fund the CarMax Group’s capital expenditures and operations. MARKET RISK The Company has analyzed its interest rate exposure and has concluded that it did not represent a material market risk at February 29, 2000, or February 28, 1999. Because it has a program in place to manage interest rate exposure relating to its installment loan portfolio, the Company expects to experience relatively little impact if interest rates ﬂuctuate. YEAR 2000 CONVERSION The Company manages the automobile installment loan portfolio of the Group’s ﬁnance operation. A portion of this portfolio is securitized and, therefore, is not presented on the Group’s balance sheets. Interest rate exposure relating to these receivables represents a market risk exposure that the Company has managed with matched funding and interest rate swaps. Total principal outstanding for ﬁxed-rate automobile loans at February 29, 2000, and February 28, 1999, was as follows: (Amounts in millions) 2000 1999 Refer to the “Management’s Discussion and Analysis of Results of Operations and Financial Condition” for Circuit City Stores, Inc. for a complete discussion of the Year 2000 issue and its impact on the Group’s ﬁnancial statements. FO R WA R D - LO O K I N G S TAT E M E N T S Fixed APR..................................................................... $932 $592 Company statements that are not historical facts, including statements about management’s expectations for ﬁscal year 2001 and beyond, are forward-looking statements and involve various risks and uncertainties. Refer to the “Circuit City Stores, Inc. Management’s Discussion and Analysis of Results of Operations and Financial Condition” for a review of possible risks and uncertainties. Financing for these receivables is achieved through asset securitization programs that, in turn, issue both ﬁxed- and ﬂoating-rate securities. Interest rate exposure is hedged through the use of interest rate swaps matched to projected payoffs. Receivables held by the Company for investment or sale are ﬁnanced with working capital. Financings at February 29, 2000, and February 28, 1999, were as follows: (Amounts in millions) 2000 1999 Fixed-rate securitizations ............................................ $559 Floating-rate securitizations synthetically altered to ﬁxed .................................. 327 Floating-rate securitizations........................................ 1 Held by the Company: For investment* ..................................................... 22 For sale ................................................................... 23 Total ............................................................................. $932 * Held by a bankruptcy remote special purpose company $– 500 39 38 15 $592 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 67 CARMAX GROUP Slide 70: CARMAX GROUP STATEMENTS OF OPERATIONS (Amounts in thousands except per share data) N E T S A L E S A N D O P E R A T I N G R E V E N U E S .......................... 2000 % Years Ended February 29 or 28 1999 % 1998 % Cost of sales.................................................................................................... G R O S S P R O F I T...................................................................................... $2,014,984 1,774,619 240,365 228,200 10,362 238,562 1,803 685 $ 1,118 862 256 1,118 23,778 25,788 100.0 88.1 11.9 11.3 0.5 11.8 0.1 0.0 0.1 $1,466,298 1,294,032 172,266 204,422 6,393 210,815 (38,549) (15,035) $ (23,514) $ (18,057) (5,457) $ (23,514) 22,604 22,604 100.0 88.3 11.7 13.9 0.4 14.3 (2.6) (1.0) (1.6) $874,206 800,699 73,507 127,822 1,789 129,611 (56,104) (21,881) $ (34,223) $ (26,460) (7,763) $ (34,223) 22,001 22,001 100.0 91.6 8.4 14.6 0.2 14.8 (6.4) (2.5) (3.9) Selling, general and administrative expenses [NOTES 3 AND 13]....................... Interest expense [NOTES 3 AND 7] ..................................................................... T O T A L E X P E N S E S............................................................................... Earnings (loss) before income taxes .............................................................. Income tax provision (beneﬁt) [NOTES 3 AND 8] .............................................. N E T E A R N I N G S ( L O S S ) .................................................................. Net earnings (loss) attributed to [NOTE 1]: Circuit City Group common stock............................................................ $ CarMax Group common stock.................................................................. $ Weighted average common shares [NOTES 2 AND 10]: Basic ......................................................................................................... Diluted...................................................................................................... N E T E A R N I N G S ( LO S S ) P E R S H A R E [NOTES 2 AND 10]: Basic ......................................................................................................... $ Diluted...................................................................................................... $ See accompanying notes to group ﬁnancial statements. 0.01 0.01 $ $ (0.24) (0.24) $ (0.35) $ (0.35) 68 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 71: CARMAX GROUP BALANCE SHEETS At February 29 or 28 (Amounts in thousands) ASSETS CURRENT ASSETS: 2000 1999 Cash and cash equivalents....................................................................................................................................... $ 9,981 Net accounts receivable [NOTE 5] .............................................................................................................................. 129,253 Inventory.................................................................................................................................................................. 283,592 Prepaid expenses and other current assets.............................................................................................................. 2,844 T O T A L C U R R E N T A S S E T S....................................................................................................................... $ 17,679 97,364 225,460 620 341,123 203,946 26,129 $571,198 Property and equipment, net [NOTES 6 AND 7] ........................................................................................................... Other assets.............................................................................................................................................................. T O T A L A S S E T S ............................................................................................................................................... LIABILITIES AND GROUP EQUITY CURRENT LIABILITIES: 425,670 211,856 37,969 $675,495 Current installments of long-term debt [NOTE 7]...................................................................................................... $ 91,609 Accounts payable ..................................................................................................................................................... 75,959 Short-term debt [NOTE 7].......................................................................................................................................... 1,552 Accrued expenses and other current liabilities........................................................................................................ 19,856 Deferred income taxes [NOTE 8]................................................................................................................................ 7,147 T O T A L C U R R E N T L I A B I L I T I E S............................................................................................................ $ 1,250 59,838 4,605 8,556 7,674 81,923 139,720 5,015 4,125 230,783 340,415 $571,198 Long-term debt, excluding current installments [NOTE 7]........................................................................................ Deferred revenue and other liabilities ..................................................................................................................... Deferred income taxes [NOTE 8]................................................................................................................................ T O T A L L I A B I L I T I E S.................................................................................................................................... G R O U P E Q U I T Y............................................................................................................................................... 196,123 121,257 7,249 5,877 330,506 344,989 $675,495 Commitments and contingent liabilities [NOTES 1, 5, 11, 12, 14 AND 15] T O T A L L I A B I L I T I E S A N D G R O U P E Q U I T Y................................................................................... See accompanying notes to group ﬁnancial statements. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 69 CARMAX GROUP Slide 72: CARMAX GROUP STATEMENTS OF CASH FLOWS (Amounts in thousands) OPERATING ACTIVITIES: 2000 Years Ended February 29 or 28 1999 1998 Net earnings (loss)..................................................................................................................... $ 1,118 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization............................................................................................ 15,241 Gain on disposition of property and equipment.................................................................. (820) Lease termination costs and write-down of assets [NOTE 13] ............................................... 4,755 Provision for deferred income taxes..................................................................................... 1,225 Changes in operating assets and liabilities, net of effects from business acquisitions: Increase (decrease) in deferred revenue and other liabilities......................................... 2,234 Increase in net accounts receivable ................................................................................ (31,889) Increase in inventory...................................................................................................... (39,909) (Increase) decrease in prepaid expenses and other current assets................................ (2,224) Decrease (increase) in other assets ................................................................................ 1,255 Increase in accounts payable, accrued expenses and other current liabilities............................................................................................. 23,921 N E T C A S H U S E D I N O P E R A T I N G A C T I V I T I E S............................................. INVESTING ACTIVITIES: $ (23,514) 10,003 – – 11,284 $ (34,223) 4,577 – 11,500 (1,867) (251) (36,498) (81,490) 25,714 (809) 13,570 (81,991) 835 (32,516) (61,710) 2,743 63 24,472 (86,126) (25,093) Cash used in business acquisitions [NOTE 4]............................................................................... Purchases of property and equipment....................................................................................... Proceeds from sales of property and equipment....................................................................... Decrease in inter-group receivable, net...................................................................................... N E T C A S H U S E D I N I N V E S T I N G A C T I V I T I E S.............................................. FINANCING ACTIVITIES: (34,849) (45,395) 25,340 – (54,904) (41,562) (138,299) 139,332 – (40,529) – (234,252) 98,098 48,147 (88,007) (Decrease) increase in allocated short-term debt, net............................................................... Increase in allocated long-term debt, net .................................................................................. Equity issuances, net.................................................................................................................. NET CASH PROVIDED BY FINANCING ACTIVITIES (3,053) 71,896 3,456 72,299 (7,698) 17,679 1,220 108,584 3,983 113,787 (8,733) 26,412 $ 17,679 385 27,386 2,353 30,124 (144,009) 170,421 $ 26,412 ................................ Decrease in cash and cash equivalents............................................................................................ Cash and cash equivalents at beginning of year.............................................................................. Cash and cash equivalents at end of year......................................................................................... $ 9,981 See accompanying notes to group ﬁnancial statements. 70 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 73: CARMAX GROUP STATEMENTS OF GROUP EQUITY (Amounts in thousands) B A L A N C E A T M A R C H 1 , 1 9 9 7............................................................................................................................................................... $ 391,816 (34,223) 2,353 359,946 (23,514) 3,983 340,415 1,118 3,456 $344,989 Net loss............................................................................................................................................................................................................... Equity issuances, net.......................................................................................................................................................................................... B A L A N C E A T F E B R U A R Y 2 8 , 1 9 9 8................................................................................................................................................... Net loss............................................................................................................................................................................................................... Equity issuances, net.......................................................................................................................................................................................... B A L A N C E A T F E B R U A R Y 2 8 , 1 9 9 9................................................................................................................................................... Net earnings ....................................................................................................................................................................................................... Equity issuances, net.......................................................................................................................................................................................... B A L A N C E A T F E B R U A R Y 2 9 , 2 0 0 0................................................................................................................................................... See accompanying notes to group ﬁnancial statements. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 71 CARMAX GROUP Slide 74: NOTES TO CARMAX GROUP FINANCIAL STATEMENTS 1 . B A S I S O F P R E S E N TAT I O N The common stock of Circuit City Stores, Inc. consists of two common stock series, which are intended to reﬂect the performance of the Company’s two businesses. The Circuit City Group Common Stock is intended to track the performance of the Circuit City store-related operations, the Group’s retained interest in the CarMax Group and the Company’s investment in Digital Video Express, which has been discontinued. The effects of this retained interest on the Circuit City Group’s ﬁnancial statements are identiﬁed by the term “Inter-Group.” The CarMax Group Common Stock is intended to track the performance of the CarMax Group’s operations. The Inter-Group Interest is not considered outstanding CarMax Group Stock. Therefore, any net earnings or loss attributed to the InterGroup Interest is not included in the CarMax Group’s per share calculations. The Circuit City Group held a 74.7 percent interest in the CarMax Group at February 29, 2000, 76.6 percent interest at February 28, 1999, and a 77.3 percent interest at February 28, 1998. Notwithstanding the attribution of the Company’s assets and liabilities, including contingent liabilities, and stockholders’ equity between the CarMax Group and the Circuit City Group for the purposes of preparing their respective ﬁnancial statements, holders of CarMax Group Stock and holders of Circuit City Group Stock are shareholders of the Company and continue to be subject to all of the risks associated with an investment in the Company and all of its businesses, assets and liabilities. Such attribution and the change in the equity structure of the Company does not affect title to the assets or responsibility for the liabilities of the Company or any of its subsidiaries. The results of operations or ﬁnancial condition of one Group could affect the results of operations or ﬁnancial condition of the other Group. Accordingly, the CarMax Group ﬁnancial statements included herein should be read in conjunction with the Company’s consolidated ﬁnancial statements and the Circuit City Group ﬁnancial statements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES receivables held for sale are carried at the lower of cost or market, whereas loan receivables held for investment are carried at cost less an allowance for losses. At February 29, 2000, and February 28, 1999, cost approximates fair value. (C) FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company enters into ﬁnan- cial instruments on behalf of the CarMax Group. The carrying value of the CarMax Group’s ﬁnancial instruments approximates fair value. Credit risk is the exposure to the potential nonperformance of another material party to an agreement because of changes in economic, industry or geographic factors and is mitigated by dealing only with counterparties that are highly rated by several ﬁnancial rating agencies. Accordingly, the CarMax Group does not anticipate material loss for nonperformance. All ﬁnancial instruments are broadly diversiﬁed along industry, product and geographic areas. (D) INVENTORY: Inventory is stated at the lower of cost or market. Vehicle inventory cost is determined by speciﬁc identiﬁcation. Parts and labor used to recondition vehicles, as well as transportation and other incremental expenses associated with acquiring vehicles, are included in inventory. (E) PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the assets’ estimated useful lives. (F) COMPUTER SOFTWARE COSTS: Effective March 1, 1998, the Company adopted the American Institute of Certiﬁed Public Accountants Statement of Position 98-1,“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Once the capitalization criteria of the SOP have been met, external direct costs of materials and services used in the development of internal-use software and payroll and payroll-related costs for employees directly involved in the development of internal-use software are capitalized. Amounts capitalized are amortized on a straight-line basis over a period of three to ﬁve years. (G) INTANGIBLE ASSETS: Amounts paid for acquired businesses in excess of the fair value of the net tangible assets acquired are recorded as goodwill, which is amortized on a straight-line basis over 15 years, and covenants not to compete, which are amortized on a straight-line basis over the life of the covenant not to exceed ﬁve years. Both goodwill and covenants not to compete are included in other assets on the accompanying CarMax Group balance sheets. Based upon the ﬁnancial performance of the acquired businesses, the carrying values of intangible assets are periodically reviewed by the Company and impairments are recognized when the expected future undiscounted operating cash ﬂows derived from such intangible assets are less than the carrying values. (H) PRE-OPENING EXPENSES: Effective March 1, 1999, the Company adopted SOP 98-5,“Reporting on the Costs of Start-Up Activities.” SOP 98-5 requires costs of start-up activities, including organization and preopening costs, to be expensed as incurred. Adoption of SOP 98-5 did not have a material impact on the Group’s ﬁnancial position, annual results of operation or liquidity. Prior to ﬁscal 2000, the Company capitalized pre-opening costs for new store locations. Beginning in the month after the store opened for business, the pre-opening costs were amortized over the remainder of the ﬁscal year. Allocated cash equivalents of $1,770,000 at February 29, 2000, and $14,750,000 at February 28, 1999, consist of highly liquid debt securities with original maturities of three months or less. (A) CASH AND CASH EQUIVALENTS: (B) TRANSFERS AND SERVICING OF FINANCIAL ASSETS: For transfers of ﬁnan- cial assets that qualify as sales, the Company recognizes gains or losses as a component of the Company’s ﬁnance operations. For transfers of ﬁnancial assets to qualify for sale accounting, control over the assets must be surrendered at the time of sale. Multiple estimates are used to calculate the gain or loss on sales of receivables under the provisions of SFAS No. 125,“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Finance charge income, default rates and payment rates are estimated using projections developed from the prior 12 months of operating history. These estimates are adjusted for any industry or portfolio trends that have been observed. The present value of the resulting cash ﬂow projections is calculated using a discount rate appropriate for the type of asset and risk. Retained interests (such as residual interests in a securitization trust, cash reserve accounts and rights to future interest from serviced assets that exceed contractually speciﬁed servicing fees) are included in net accounts receivable and are carried at fair value with changes in fair value reﬂected in earnings. Loan 72 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 75: (I) INCOME TAXES: Income taxes are accounted for in accordance with SFAS No. 109,“Accounting for Income Taxes.” Deferred income taxes reﬂect the impact of temporary differences between the amounts of assets and liabilities recognized for ﬁnancial reporting purposes and the amounts recognized for income tax purposes, measured by applying currently enacted tax laws. A deferred tax asset is recognized if it is more likely than not that a beneﬁt will be realized. (J) DEFERRED REVENUE: The CarMax Group sells service contracts on behalf The Company also enters into interest rate swap agreements as part of its asset securitization programs. Swaps entered into by a seller as part of a sale of ﬁnancial assets are considered proceeds at fair value in the determination of the gain or loss on the sale. If such a swap were to be terminated, the impact on the fair value of the ﬁnancial asset created by the sale of the related receivables would be estimated and included in earnings. (P) RISKS AND UNCERTAINTIES:The CarMax Group is a used- and new-car retail business. The diversity of the CarMax Group’s customers and suppliers reduces the risk that a severe impact will occur in the near term as a result of changes in its customer base or sources of supply. However, because of the CarMax Group’s limited overall size, management cannot assure that unanticipated events will not have a negative impact on the Group. of an unrelated third party and, prior to July 1997, sold its own contracts at one location where third-party warranty sales were not permitted. Contracts usually have terms of coverage between 12 and 72 months. Inasmuch as the Company is the primary obligor on these contracts, revenue from the sale of the CarMax Group’s own service contracts was deferred and amortized over the life of the contracts consistent with the pattern of repair experience of the industry. Incremental direct costs related to the sale of contracts were deferred and charged to expense in proportion to the revenue recognized. Commission revenue for the unrelated third-party service contracts is recognized at the time of sale, since the third party is the primary obligor under these contracts. (K) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating proﬁts The preparation of ﬁnancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. (Q) RECLASSIFICATIONS: Certain amounts in prior years have been reclassiﬁed to conform to classiﬁcations adopted in ﬁscal 2000. 3. CORPORATE ACTIVITIES generated by the ﬁnance operation are recorded as a reduction to selling, general and administrative expenses. (L) ADVERTISING EXPENSES: All advertising costs are expensed as incurred. (M) NET EARNINGS (LOSS) PER SHARE: The Company calculates earnings per The CarMax Group’s ﬁnancial statements reﬂect the application of the management and allocation policies adopted by the board of directors to various corporate activities, as described below: (A) FINANCIAL ACTIVITIES: Most ﬁnancial activities are managed by the Company on a centralized basis. Such ﬁnancial activities include the investment of surplus cash and the issuance and repayment of short-term and long-term debt. Allocated invested surplus cash of the CarMax Group consists of (i) Company cash equivalents, if any, that have been allocated in their entirety to the CarMax Group and (ii) a portion of the Company’s cash equivalents that are allocated between the Groups. Investment of surplus cash from the February 1997 CarMax Group equity offering has been allocated to the CarMax Group. Allocated debt of the CarMax Group consists of (i) Company debt, if any, that has been allocated in its entirety to the CarMax Group and (ii) a portion of the Company’s pooled debt, which is debt allocated between the Groups. The pooled debt bears interest at a rate based on the average pooled debt balance. Expenses related to increases in pooled debt are reﬂected in the weighted average interest rate of such pooled debt as a whole. (B) CORPORATE GENERAL AND ADMINISTRATIVE COSTS: Corporate general and administrative costs and other shared services generally have been allocated to the CarMax Group based upon utilization of such services by the Group. Where determinations based on utilization alone have been impractical, other methods and criteria were used that management believes are equitable and provide a reasonable estimate of the costs attributable to the Group. Costs allocated to the CarMax Group totaled approximately $5.6 million for ﬁscal 2000, $7.5 million for ﬁscal 1999 and $6.2 million for ﬁscal 1998. share based upon SFAS No. 128,“Earnings per Share.” Basic net earnings (loss) per share for CarMax Group Stock is computed by dividing net earnings (loss) attributed to CarMax Group Stock by the weighted average number of shares of CarMax Group Stock outstanding. Diluted net earnings per share for CarMax Group Stock is computed by dividing net earnings attributed to CarMax Group Stock by the weighted average number of shares of CarMax Group Stock outstanding and dilutive potential CarMax Group Stock. (N) STOCK-BASED COMPENSATION: The Company accounts for stock-based (O) DERIVATIVE FINANCIAL INSTRUMENTS: The Company enters into interest rate swap agreements to manage exposure to interest rates and to more closely match funding costs to the use of funding. Interest rate swaps relating to long-term debt are classiﬁed as held for purposes other than trading and are accounted for on a settlement basis. To qualify for this accounting treatment, the swap must synthetically alter the nature of a designated underlying ﬁnancial instrument. Under this method, payments or receipts due or owed under the swap agreement are accrued through each settlement date and recorded as a component of interest expense. If a swap designated as a synthetic alteration were to be terminated, any gain or loss on the termination would be deferred and recognized over the shorter of the original contractual life of the swap or the related life of the designated long-term debt. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 73 CARMAX GROUP compensation in accordance with Accounting Principles Board Opinion No. 25,“Accounting For Stock Issued to Employees,” and provides the pro forma disclosures of SFAS No. 123,“Accounting for Stock-Based Compensation.” Slide 76: (C) INCOME TAXES: The CarMax Group is included in the consolidated federal income tax return and in certain state tax returns ﬁled by the Company. Accordingly, the provision for federal income taxes and related payments of tax are determined on a consolidated basis. The ﬁnancial statement provision and the related tax payments or refunds are reﬂected in each Group’s ﬁnancial statements in accordance with the Company’s tax allocation policy for such Groups. In general, this policy provides that the consolidated tax provision and related tax payments or refunds will be allocated between the Groups based principally upon the ﬁnancial income, taxable income, credits and other amounts directly related to each Group. Tax beneﬁts that cannot be used by the Group generating such attributes, but can be utilized on a consolidated basis, are allocated to the Group that generated such beneﬁts. As a result, the allocated Group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the Groups had ﬁled separate tax returns. 4. BUSINESS ACQUISITIONS $348 million during ﬁscal 2000, $271 million during ﬁscal 1999 and $123 million during ﬁscal 1998. This auto loan securitization program has a total program capacity of $500 million. In October 1999, the Company formed a second securitization facility that allowed for a $644 million securitization of auto loan receivables in the public market. The program had a capacity of $559 million as of February 29, 2000, with no recourse provisions. Receivables relating to the securitization facilities consist of the following at February 29 or 28: (Amounts in thousands) 2000 1999 Managed receivables.................................. $ 931,745 Receivables held by the CarMax Group: For sale ................................................. (23,477) For investment* ................................... (21,096) Net receivables sold.................................... $ 887,172 Program capacity....................................... $1,059,500 Held by a bankruptcy remote special purpose company $589,032 (14,690) (35,342) $539,000 $575,000 The CarMax Group acquired the franchise rights and the related assets of six new-car dealerships for an aggregate cost of $34.8 million in ﬁscal 2000. The acquisitions were ﬁnanced through available cash resources. During ﬁscal 1999, CarMax acquired the franchise rights and the related assets for four new-car dealerships for an aggregate cost of $49.6 million. These acquisitions were ﬁnanced through available cash resources and the issuance of two promissory notes aggregating $8.0 million. Costs in excess of the fair value of the net tangible assets acquired (primarily inventory) have been recorded as goodwill and covenants not to compete. These acquisitions were accounted for under the purchase method and the results of the operations of the acquired franchises have been included in the accompanying CarMax Group ﬁnancial statements since the date of acquisition. Unaudited pro forma information related to these acquisitions is not included as the impact of these acquisitions on the accompanying CarMax Group ﬁnancial statements is not material. 5. ACCOUNTS RECEIVABLE AND SECURITIZATION TRANSACTIONS Accounts receivable consist of the following at February 29 or 28: (Amounts in thousands) 2000 1999 The ﬁnance charges from the transferred receivables are used to fund interest costs, charge-offs and servicing fees. Rights recorded for future ﬁnance income from serviced assets that exceed the contractually speciﬁed servicing fees are carried at fair value and amounted to $15.5 million at February 29, 2000, $14.7 million at February 28, 1999, and $6.8 million at February 28, 1998, and are included in net accounts receivable. Changes in these retained interests consisted of originated retained interests of $17.5 million in ﬁscal 2000, $16.6 million in ﬁscal 1999 and $7.3 million in ﬁscal 1998, less amortization of $16.7 million in ﬁscal 2000, $8.7 million in ﬁscal 1999 and $3.6 million in ﬁscal 1998. The ﬁnance operation’s servicing revenue totaled $36.9 million for ﬁscal 2000, $28.2 million for ﬁscal 1999 and $11.2 million for ﬁscal 1998. The servicing fee speciﬁed in the auto loan securitization agreements adequately compensates the ﬁnance operation for servicing the accounts. Accordingly, no servicing asset or liability has been recorded. In determining the fair value of retained interests, the Company estimates future cash ﬂows from ﬁnance charge collections, reduced by net defaults, servicing cost and interest cost. The Company employs a risk-based pricing strategy that increases the stated annual percentage rate for accounts that have a higher predicted risk of default. Accounts with a lower risk proﬁle also may qualify for promotional ﬁnancing. The APRs range from 6 percent to 18 percent ﬁxed, with default rates varying based on credit quality, but generally aggregating 0.75 percent to 1.25 percent. The weighted average life of the receivables is expected to be in the 18 month to 20 month range. Interest cost depends on the time at which accounts were originated, but is in the range of 6.4 percent to 6.6 percent at February 29, 2000. Trade receivables ............................................ $ 70,763 Installment receivables: Held for sale.............................................. 23,477 Held for investment .................................. 22,088 Retained interests..................................... 18,743 Total accounts receivable................................ Less allowance for doubtful accounts ............ 135,071 5,818 $ 23,649 14,690 38,093 26,145 102,577 5,213 $ 97,364 Net accounts receivable .................................. $129,253 In ﬁscal 1996, the Company entered into a securitization transaction on behalf of the CarMax Group to ﬁnance the installment receivables generated by the Group’s wholly owned ﬁnance operation. A restructuring of the facility during ﬁscal 1997 resulted in the recourse provisions being eliminated. Proceeds from the auto loan securitization transaction were 74 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 77: 6. PROPERTY AND EQUIPMENT Property and equipment, at cost, at February 29 or 28 is summarized as follows: (Amounts in thousands) 2000 1999 2000. Although the Company has the ability to reﬁnance this loan, it intends to repay the debt using existing working capital. In June 1996, the Company entered into a ﬁve-year, $130,000,000, unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate on the term loan was 6.23 percent. 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 revolving credit agreement at February 29, 2000, or February 28, 1999. 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 29, 2000, and February 28, 1999. In November 1998, the CarMax Group entered into a four-year, unsecured $5,000,000 promissory note. Principal is due annually with interest payable periodically at 8.25 percent. In ﬁscal 1999, the CarMax Group entered into a one-year, renewable inventory ﬁnancing arrangement with an asset-backed commercial paper conduit. The arrangement had a total program capacity of $160 million at February 29, 2000, and was created to provide funding for the acquisition of vehicle inventory through the use of a non-afﬁliated special-purpose company. During ﬁscal years 2000 and 1999, no inventory was ﬁnanced by the CarMax Group under this arrangement. This ﬁnancing arrangement was terminated in the ﬁrst quarter of ﬁscal 2001. Short-term debt of the Company is funded through committed lines of credit and informal credit arrangements, as well as the revolving credit agreement. Amounts outstanding and committed lines of credit available are as follows: (Amounts in thousands) Years Ended February 29 or 28 2000 1999 GROUP Land and buildings (20 to 25 years)............... $ 81,885 Land held for sale ........................................... 41,850 Land held for development............................. 17,697 Construction in progress................................ 18,010 Furniture, ﬁxtures and equipment (3 to 8 years) ............................................. 60,225 Leasehold improvements (10 to 15 years) ......................................... 19,902 Less accumulated depreciation ...................... 239,569 27,713 $ 16,052 31,435 28,781 76,355 51,504 15,658 219,785 15,839 $203,946 Property and equipment, net.......................... $211,856 Land held for development is land owned for future sites that are scheduled to open more than one year beyond the ﬁscal year reported. 7. DEBT Long-term debt of the Company at February 29 or 28 is summarized as follows: (Amounts in thousands) 2000 1999 Term loans...................................................... $405,000 Industrial Development Revenue Bonds due through 2006 at various prime-based rates of interest ranging from 5.0% to 7.0%....................... 5,419 Obligations under capital leases..................... 12,416 Note payable ................................................... 3,750 Total long-term debt....................................... Less current installments ............................... 426,585 177,344 $405,000 6,564 12,728 5,000 429,292 2,707 $426,585 $140,970 Long-term debt, excluding current installments ................................. $249,241 Portion of long-term debt allocated to the CarMax Group ................................ $212,866 Average short-term debt outstanding ...... $ 44,692 Maximum short-term debt outstanding .. $411,791 Aggregate committed lines of credit ........ $370,000 $ 54,505 $463,000 $370,000 In July 1994, the Company entered into a seven-year, $100,000,000, unsecured bank term loan. The loan was restructured in August 1996 as a $100,000,000, six-year unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.40 percent. At February 29, 2000, the interest rate on the term loan was 6.29 percent. In May 1995, the Company entered into a ﬁve-year, $175,000,000, unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.35 percent. At February 29, 2000, the interest rate on the term loan was 6.23 percent. This term loan is due in May 2000 and has been classiﬁed as a current liability as of February 29, The weighted average interest rate on the outstanding short-term debt was 5.6 percent during ﬁscal 2000, 5.1 percent during ﬁscal 1999 and 5.7 percent during ﬁscal 1998. Interest expense allocated by the Company to the CarMax Group, excluding interest capitalized, was $10,362,000 in ﬁscal 2000, $6,393,000 in ﬁscal 1999 and $1,789,000 in ﬁscal 1998. The CarMax Group capitalizes interest in connection with the construction of certain facilities. In ﬁscal 2000, interest capitalized amounted to $1,254,000 ($2,674,000 in ﬁscal 1999 and $4,879,000 in ﬁscal 1998). CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 75 CARMAX Slide 78: 8. INCOME TAXES The components of the income tax provision (beneﬁt) are as follows: (Amounts in thousands) Years Ended February 29 or 28 2000 1999 1998 deferred tax assets at February 29, 2000, and February 28, 1999, will be realized by the CarMax Group; therefore,no valuation allowance is necessary. 9. ASSOCIATE BENEFIT AND STOCK INCENTIVE PLANS (A) 401(K) PLAN: Effective August 1, 1999, the Company sponsors a 401(k) Current: Federal ................................ $(1,395) State .................................... 855 (540) Deferred: Federal ................................ State .................................... 1,190 35 1,225 Income tax provision (beneﬁt)... $ 685 $(23,773) (2,546) (26,319) 10,945 339 11,284 $(15,035) $(17,101) (2,913) (20,014) (1,259) (608) (1,867) $(21,881) Plan for all employees meeting certain eligibility criteria. Under the Plan, eligible employees can contribute up to 15 percent of their salaries, and the Company matches a portion of those associate contributions. The Company’s contribution to this plan for CarMax Group associates was $317,000 in ﬁscal 2000. (B) PREFERRED STOCK: In conjunction with the Company’s Shareholders Rights Plan as amended and restated, preferred stock purchase rights were distributed as a dividend at the rate of one right for each share of CarMax Group Stock. The rights are exercisable only upon the attainment of, or the commencement of a tender offer to attain, a speciﬁed ownership interest in the Company by a person or group. When exercisable, each CarMax Group right would entitle 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 subject to adjustment. A total of 500,000 shares of such preferred stock, which have preferential dividend and liquidation rights, have been designated and reserved. No such shares are outstanding. In the event that an acquiring person or group acquires the speciﬁed ownership percentage of the Company’s common stock (except pursuant to a cash tender offer for all outstanding shares determined to be fair by the board of directors) or engages in certain transactions with the Company after the rights become exercisable, each right will be converted into a right to purchase, for half the current market price at that time, shares of the related Group stock valued at two times the exercise price. The effective income tax rate differed from the Federal statutory income tax rate as follows: Years Ended February 29 or 28 2000 1999 1998 Federal statutory income tax rate......... 35.0% State and local income taxes, net of Federal beneﬁt ...................... 3.0 Effective income tax rate...................... 38.0% 35.0% 4.0 39.0% 35.0% 4.0 39.0% In accordance with SFAS No. 109, the tax effects of temporary differences that give rise to a signiﬁcant portion of the deferred tax assets and liabilities at February 29 or 28 are as follows: (Amounts in thousands) 2000 1999 Deferred tax assets: Deferred revenue............................................. $ 91 Accrued expenses ........................................... 5,510 Other ............................................................... 218 Total gross deferred tax assets .................. Deferred tax liabilities: Depreciation.................................................... Inventory capitalization .................................. Gain on sales of receivables ............................ Prepaid expenses ............................................ Total gross deferred tax liabilities ............. 5,819 6,181 4,655 4,919 3,088 18,843 $ 130 2,970 184 3,284 4,435 4,620 4,653 1,375 15,083 The Company also has 1,000,000 shares of undesignated preferred stock authorized of which no shares are outstanding and an additional 500,000 shares of preferred stock designated as Series E which are related to similar rights held by Circuit City Group shareholders. (C) VOTING RIGHTS: The holders of both series of common stock and any Net deferred tax liability ....................................... $13,024 $11,799 In assessing the realizability of deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Based on these considerations, management believes that it is more likely than not that the gross series of preferred stock outstanding and entitled to vote together with the holders of common stock will vote together as a single voting group on all matters on which common shareholders generally are entitled to vote other than a matter on which the common stock or either series thereof or any series of preferred stock would be entitled to vote as a separate voting group. On all matters on which both series of common stock would vote together as a single voting group, (i) each outstanding share of Circuit City Group Stock shall have one vote and (ii) each outstanding share of CarMax Group Stock shall have a number of votes based on the weighted average ratio of the market value of a share of CarMax Group Stock to a share of Circuit City Group Stock. If shares of only one series of common stock are outstanding, each share of that series shall be entitled to one vote. If either series of common stock is entitled to vote as a separate voting group with respect to any matter, each share of that series shall, for purposes of such vote, be entitled to one vote on such matter. (D) RESTRICTED STOCK: The Company has issued restricted stock under the provisions of the 1994 Stock Incentive Plan whereby management and 76 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 79: TABLE 1 (Shares in thousands) Shares 2000 Weighted Average Exercise Price Shares 1999 Weighted Average Exercise Price Shares 1998 Weighted Average Exercise Price Outstanding at beginning of year .................. 4,380 Granted .......................................................... 1,132 Exercised........................................................ (2,027) Cancelled ....................................................... (161) Outstanding at end of year ............................ 3,324 Options exercisable at end of year ................. 1,203 TABLE 2 (Shares in thousands) Range of Exercise Prices $1.77 5.89 0.22 6.94 $3.87 $2.54 4,822 205 (543) (104) 4,380 1,566 $ 1.49 8.63 0.22 10.54 $ 1.77 $ 0.96 4,769 413 (273) (87) 4,822 762 $ 0.51 13.04 0.22 6.36 $ 1.49 $ 0.37 Number Outstanding Options Outstanding Weighted Average Remaining Weighted Average Contractual Life Exercise Price Options Exercisable Number Exercisable Weighted Average Exercise Price $ 0.22 ........................................................................... 1,638 3.90 to 6.06................................................................ 1,098 6.25 to 16.31.............................................................. 588 Total ............................................................................. 3,324 key employees are granted restricted shares of CarMax Group Stock. Shares are awarded in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions or forfeitures. Restrictions on the awards generally expire ﬁve years from the date of grant. In ﬁscal 2000, restricted stock awards for 30,000 shares were granted to eligible employees. The market value at the date of grant of these shares has been recorded as unearned compensation and is a component of Group equity. Unearned compensation is expensed over the restriction periods. In ﬁscal 2000, a total of $447,200 was charged to CarMax Group operations ($426,600 in ﬁscal 1999 and $77,700 in ﬁscal 1998). As of February 29, 2000, 110,833 restricted shares were outstanding. (E) EMPLOYEE STOCK PURCHASE PLAN: The Company has Employee Stock Purchase Plans for all employees meeting certain eligibility criteria. The CarMax Group Plan allows eligible employees to purchase shares of CarMax Group Stock, subject to certain limitations. For each $1.00 contributed by employees under the Plan, the Company matches $0.15. Purchases are limited to 10 percent of an employee’s eligible compensation, up to a maximum of $7,500 per year. At February 29, 2000, a total of 1,058,693 shares remained available under the CarMax Group Plan. During ﬁscal 2000, 580,000 shares were issued to or purchased on the open market on behalf of the employees (268,532 in ﬁscal 1999 and 92,775 in ﬁscal 1998). The average price per share purchased under the Plan was $3.68 in ﬁscal 2000, $7.56 in ﬁscal 1999 and $12.73 in ﬁscal 1998. The Company match or purchase price discount charged to CarMax Group operations totaled $221,500 in ﬁscal 2000, $268,100 in ﬁscal 1999 and $160,900 in ﬁscal 1998. (F) STOCK INCENTIVE PLANS: Under the Company’s stock incentive plans, incentive and nonqualiﬁed stock options may be granted to management, key employees and outside directors to purchase shares of CarMax Group Stock. The exercise price for nonqualiﬁed options granted under the 1994 plan is equal to, or greater than, the market value at the date of grant. 2.0 5.3 4.0 3.4 $ 0.22 5.89 10.29 $ 3.87 934 19 250 1,203 $ 0.22 4.25 11.07 $ 2.54 Options generally are exercisable over various periods ranging from one to seven years from the date of grant. A summary of the status of the CarMax Group’s stock options and changes during the years ended February 29, 2000, and February 28, 1999 and 1998, are shown in Table 1. Table 2 summarizes information about stock options outstanding as of February 29, 2000. The CarMax Group applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant date consistent with the methods of SFAS No. 123, the CarMax Group’s net earnings (loss) and net earnings (loss) per share would have changed to the pro forma amounts indicated below. In accordance with the transition provisions of SFAS No. 123, the pro forma amounts reﬂect options with grant dates subsequent to March 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reﬂected in the pro forma net earnings (loss) amounts presented below because compensation cost is reﬂected over the options’ vesting periods and compensation cost of options granted prior to March 1, 1995, is not considered. The pro forma effect on ﬁscal year 2000 may not be representative of the pro forma effects on net earnings (loss) for future years. (Amounts in thousands except per share data) Years Ended February 29 or 28 2000 1999 1998 Net earnings (loss): As reported ............................................ $ 256 Pro forma............................................... 75 Net earnings (loss) per share: Basic—as reported ................................. $0.01 Basic—pro forma ................................... 0.00 Diluted—as reported.............................. $0.01 Diluted—pro forma................................ 0.00 CIRCUIT CITY STORES, INC. 2000 $(5,457) $(7,763) (5,537) (7,824) $ (0.24) $ (0.35) (0.24) (0.36) $ (0.24) $ (0.35) (0.24) (0.36) ANNUAL REPORT 77 CARMAX GROUP Slide 80: For the purpose of computing the pro forma amounts indicated, the fair value of each option on the date of grant is estimated using the BlackScholes option-pricing model. The weighted average assumptions used in the model are as follows: 2000 1999 1998 Eligible employees of the CarMax Group participate in the Company’s plan. Pension costs for these employees have been allocated to the CarMax Group based on its proportionate share of the projected beneﬁt obligation. The following tables set forth the CarMax Group’s share of the Plan’s ﬁnancial status and amounts recognized in the balance sheets as of February 29 or 28: (Amounts in thousands) 2000 1999 Expected dividend yield....................................... – Expected stock volatility ...................................... 62% Risk-free interest rates ......................................... 6% Expected lives (in years) ...................................... 4 – 50% 6% 3 – 50% 6% 3 Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted for the CarMax Group is $3 in ﬁscal 2000, $3 in ﬁscal 1999 and $6 in ﬁscal 1998. 10. NET EARNINGS (LOSS) PER SHARE Change in beneﬁt obligation: Beneﬁt obligation at beginning of year...................... $ 2,565 Service cost ................................................................ 1,250 Interest cost................................................................ 173 Actuarial loss ............................................................. 455 Beneﬁt obligation at end of year ................................ $ 4,443 Change in plan assets: Fair value of plan assets at beginning of year ............ $ 1,553 Actual return on plan assets ...................................... 259 Employer contributions ............................................. 625 Fair value of plan assets at end of year ...................... $ 2,437 $ 958 525 67 1,015 $ 2,565 The calculation of net earnings (loss) per share is presented below: (Amounts in thousands except per share data) Years Ended February 29 or 28 2000 1999 1998 $ 1,242 69 242 $ 1,553 Weighted average common shares............. 23,778 Dilutive potential common shares: Options ................................................ 1,814 Restricted stock ................................... 196 Weighted average common shares and dilutive potential common shares.................................... 25,788 Net earnings (loss) available to common shareholders......................................... Basic net earnings (loss) per share............ Diluted net earnings (loss) per share ........ $ 256 $0.01 $0.01 22,604 – – 22,001 – – Reconciliation of funded status: Funded status............................................................. $(2,006) $(1,012) Unrecognized actuarial loss ...................................... 1,340 1,063 Unrecognized transition asset ................................... (6) (8) Unrecognized prior service beneﬁt............................ (6) (8) Net amount recognized.............................................. $ (678) $ The components of net pension expense are as follows: (Amounts in thousands) Years Ended February 29 or 28 2000 1999 1998 22,604 22,001 35 $(5,457) $(7,763) $ (0.24) $ (0.35) $ (0.24) $ (0.35) Certain options were not included in the computation of diluted net earnings per share because the options’ exercise prices were greater than the average market price of the common shares.Options to purchase 1,685,400 shares of CarMax Group Stock ranging from $3.90 to $16.31 per share were outstanding and not included in the calculation at the end of ﬁscal 2000. Prior to ﬁscal 2000,dilutive potential common shares of CarMax Group Stock were not included in the calculation of diluted net loss per share because the Group had a net loss for those periods. 11. PENSION PLAN Service cost............................................ $1,250 Interest cost ........................................... 173 Expected return on plan assets ............. (159) Amortization of prior service cost ........ (3) Amortization of transitional asset ........ (2) Recognized actuarial loss ...................... 77 Net pension expense.............................. $1,336 $ 525 67 (119) (1) (3) – $ 469 $219 39 (73) (1) (3) 17 $198 Assumptions used in the accounting for the pension plan were: Years Ended February 29 or 28 2000 1999 1998 The Company has a noncontributory deﬁned beneﬁt pension plan covering the majority of full-time employees who are at least age 21 and have completed one year of service. The cost of the program is being funded currently. Plan beneﬁts generally are based on years of service and average compensation. Plan assets consist primarily of equity securities and included 160,000 shares of Circuit City Group Stock at February 29, 2000 and February 28, 1999. Weighted average discount rate ................. 8.0% Rate of increase in compensation levels .... 6.0% Expected rate of return on plan assets ...... 9.0% 6.8% 5.0% 9.0% 7.0% 5.0% 9.0% 78 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 81: 12. LEASE COMMITMENTS The CarMax Group conducts substantially all of its business in leased premises. The CarMax Group’s lease obligations are based upon contractual minimum rates. Rental expense for all operating leases were $34,561,000 in ﬁscal 2000, $23,521,000 in ﬁscal 1999 and $11,421,000 in ﬁscal 1998. Most leases provide that the CarMax Group pay taxes, maintenance, insurance and certain other operating expenses applicable to the premises. The initial term of most real property leases will expire within the next 22 years; however, most of the leases have options providing for additional lease terms of 10 years to 20 years at terms similar to the initial terms. Future minimum ﬁxed lease obligations, excluding taxes, insurance and other costs payable directly by the CarMax Group, as of February 29, 2000, were: (Amounts in thousands) Fiscal Operating Lease Commitments carrying value and the estimated fair value of the assets less any disposal costs. The estimated fair value is based on sales prices for comparable assets or expected future cash ﬂows. The loss related to operating leases in ﬁscal 1998 was calculated as the difference between the present value of the required rental payments on the original lease obligations and the present value of the future rental receipts that are expected from subleasing the property. 14. INTEREST RATE SWAPS 2001......................................................................................... $ 34,331 2002......................................................................................... 33,088 2003......................................................................................... 32,877 2004......................................................................................... 32,257 2005......................................................................................... 31,919 After 2005................................................................................ 458,031 Total minimum lease payments.............................................. $622,503 In ﬁscal 2000, the Company entered into sale-leaseback transactions on behalf of the CarMax Group with unrelated parties at an aggregate selling price of $12,500,000 ($131,750,000 in ﬁscal 1999 and $98,098,000 in ﬁscal 1998). Neither the Company nor the CarMax Group has continuing involvement under the sale-leaseback transactions. 1 3 . S U P P L E M E N TA R Y F I N A N C I A L S TAT E M E N T I N FO R M AT I O N (A) ADVERTISING EXPENSE: Advertising expense, which is included in sell- The Company enters into amortizing swaps relating to the auto loan receivable securitization to convert variable-rate ﬁnancing costs to ﬁxedrate obligations to better match funding costs to the receivables being securitized. In November 1995, the Company entered into a 50-month amortizing swap with a notional amount of $75 million and, in October 1996, entered into a 40-month amortizing swap with a notional amount of $64 million. The Company entered into four 40-month amortizing swaps with notional amounts totaling approximately $162 million in ﬁscal 1998, four 40-month amortizing swaps with notional amounts totaling approximately $387 million in ﬁscal 1999, and four 40-month amortizing swaps with notional amounts totaling approximately $344 million in ﬁscal 2000. These swaps were entered into as part of sales of receivables and are included in the gain on sales of receivables. The remaining total notional amount of all swaps related to the auto loan receivable securitization was approximately $327 million at February 29, 2000, $499 million at February 28, 1999, and $224 million at February 28, 1998. The reduction in the total notional amount of the CarMax interest rate swaps relates to the replacement of ﬂoating rate securitizations with a $644 million ﬁxed-rate securitization in October 1999. Concurrent with the funding of the $175 million term loan facility in May 1995, the Company entered into ﬁve-year interest rate swaps with notional amounts aggregating $175 million. These swaps effectively converted the variable-rate obligation into a ﬁxed-rate obligation. The fair value of the swaps is the amount at which they could be settled. This value is based on estimates obtained from the counterparties, which are two banks highly rated by several ﬁnancial rating agencies. The swaps are held for hedging purposes and are not recorded at fair value. Recording the swaps at fair value at February 29, 2000, would result in a loss of $90,000 and at February 28, 1999, would result in a loss of $2.2 million. The market and credit risks associated with these interest rate swaps are similar to those relating to other types of ﬁnancial instruments. Market risk is the exposure created by potential ﬂuctuations in interest rates and is directly related to the product type, agreement terms and transaction volume. The Company does not anticipate signiﬁcant market risk from swaps, since their use is to match more closely funding costs to the use of the funding. Credit risk is the exposure to nonperformance of another party to an agreement. Credit risk is mitigated by dealing with highly rated counterparties. 15. CONTINGENT LIABILITIES GROUP ing, general and administrative expenses in the accompanying statements of operations, amounted to $48,637,000 (2.4 percent of net sales and operating revenues) in ﬁscal 2000, $50,042,000 (3.4 percent of net sales and operating revenues) in ﬁscal 1999 and $29,621,000 (3.4 percent of net sales and operating revenues) in ﬁscal 1998. (B) LEASE TERMINATION COSTS AND WRITE-DOWN OF ASSETS: In the fourth quarter of ﬁscal 2000, CarMax recorded $4.8 million in charges related to lease termination costs on undeveloped property and a write-down of assets associated with excess property for sale at several locations. The loss related to operating leases was calculated based on expected lease termination costs and costs associated with subleasing the property. In ﬁscal 1998, CarMax recorded a loss of $11.5 million related to the closure and disposal of its centralized reconditioning facilities and costs associated with excess property at some locations. The reconditioning facilities and the excess property were disposed of in ﬁscal 1999 and 2000. Of the total loss for ﬁscal 1998, $9.7 million was for the write-down of assets and $1.8 million was for a liability for operating leases. The loss related to a write-down of assets represents the difference between the In the normal course of business, the Company is involved in various legal proceedings. Based upon the CarMax Group’s evaluation of the information presently available, management believes that the ultimate resolution of any such proceedings will not have a material adverse effect on the CarMax Group’s ﬁnancial position, liquidity or results of operations. CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 79 CARMAX Slide 82: 1 6 . Q U A R T E R LY F I N A N C I A L D ATA ( U N A U D I T E D ) (Amounts in thousands First Quarter Second Quarter except per share data) 2000 1999 2000 1999 Third Quarter 2000 1999 Fourth Quarter 2000 1999 Year 2000 1999 Net sales and operating revenues .................................. Gross proﬁt .................................................................... Net earnings (loss) ........................................................ Net earnings (loss) attributed to CarMax Group Stock........................................... Net earnings (loss) per share: Basic ....................................................................... Diluted .................................................................... $486,063 $ 61,996 $ 2,733 $ $ $ 646 0.03 0.03 $346,363 $535,727 $ 39,896 $ 63,780 $ (3,215) $ 3,233 $ (736) $ 775 0.03 0.03 $400,031 $488,958 $345,940 $504,236 $373,964 $2,014,984 $ 46,202 $ 52,728 $ 39,760 $ 61,861 $ 46,408 $ 240,365 $ (2,965) $ (3,136) $ (7,331) $ (1,712) $ (10,003) $ 1,118 $ (685) $ (757) $ (1,701) $ (408) $ (2,335) $ 256 0.01 0.01 $1,466,298 $ 172,266 $ (23,514) $ $ $ (5,457) (0.24) (0.24) $ (0.03) $ $ (0.03) $ $ (0.03) $ (0.03) $ (0.07) $ (0.02) $ (0.10) $ $ (0.03) $ (0.03) $ (0.07) $ (0.02) $ (0.10) $ INDEPENDENT AUDITORS’ REPORT The Board of Directors and Stockholders of Circuit City Stores, Inc.: We have audited the accompanying balance sheets of the CarMax Group (as deﬁned in Note 1) as of February 29, 2000 and February 28, 1999 and the related statements of operations, group equity and cash ﬂows for each of the ﬁscal years in the three-year period ended February 29, 2000. These ﬁnancial statements are the responsibility of Circuit City Stores, Inc.’s management. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements.An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation.We believe that our audits provide a reasonable basis for our opinion. As more fully discussed in Note 1, the ﬁnancial statements of the CarMax Group should be read in conjunction with the consolidated ﬁnancial statements of Circuit City Stores, Inc. and subsidiaries and the ﬁnancial statements of the Circuit City Group. In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the ﬁnancial position of the CarMax Group as of February 29, 2000 and February 28, 1999 and the results of its operations and its cash ﬂows for each of the ﬁscal years in the three-year period ended February 29, 2000 in conformity with generally accepted accounting principles. Richmond,Virginia April 4, 2000 80 CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT Slide 83: MANAGEMENT’S REPORT The Board of Directors and Stockholders of Circuit City Stores, Inc.: The consolidated ﬁnancial statements of Circuit City Stores, Inc. and subsidiaries, as well as the ﬁnancial statements of the Circuit City Group and the CarMax Group, have been prepared under the direction of management, which is responsible for their integrity and objectivity. These ﬁnancial statements have been prepared in conformity with generally accepted accounting principles,except for the Circuit City Group,which has accounted for its interest in the CarMax Group in a manner similar to the equity method of accounting. Generally accepted accounting principles require that the CarMax Group be consolidated with the Circuit City Group. However, management feels the manner in which the Circuit City Group is presented more clearly indicates the performance of the Circuit City business. The ﬁnancial statements include amounts that are the best estimates and judgments of management with consideration given to materiality. Management is responsible for maintaining an internal control structure designed to provide reasonable assurance that the books and records reﬂect the transactions of the Company and that the Company’s established policies and procedures are carefully followed. 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 structure provides reasonable assurance that assets are safeguarded and that ﬁnancial information is objective and reliable. The Company’s and the Groups’ ﬁnancial statements have been audited by KPMG LLP, independent auditors. Their Independent Auditors’ Reports, which are based on audits made in accordance with generally accepted auditing standards, express opinions as to the fair presentation of the ﬁnancial statements in conformity with generally accepted accounting principles. In performing their audits, KPMG LLP considers the Company’s internal control structure to the extent it deems necessary in order to issue its opinions on the Company’s and the Groups’ ﬁnancial statements. The audit committee of the board of directors is composed solely of outside directors. The committee meets periodically with management, the internal auditors and the independent auditors to assure each is properly discharging its responsibilities. KPMG LLP and the internal auditors have full and free access to meet privately with the audit committee to discuss accounting controls, audit ﬁndings and ﬁnancial reporting matters. Richard L. Sharp Chairman and Chief Executive Ofﬁcer Michael T. Chalifoux Executive Vice President, Chief Financial Ofﬁcer and Corporate Secretary April 5, 2000 BOARD OF DIRECTORS Richard L. Sharp (3) Chairman and Chief Executive Ofﬁcer Alan L.Wurtzel (2,5) Vice Chairman of the Board W.Alan McCollough (3) President and Chief Operating Ofﬁcer Michael T. Chalifoux (3) Executive Vice President, Chief Financial Ofﬁcer and Corporate Secretary Richard N. Cooper (4,5) Professor of Economics, Harvard University; Boston, Massachusetts Barbara S. Feigin (4,5) Consultant; Retired, Executive Vice President, Worldwide Director of Strategic Services, Grey Advertising, Inc.; New York, New York James F. Hardymon (1,2) Retired, Chairman and Chief Executive Ofﬁcer, Textron, Inc.; Providence, Rhode Island Robert S. Jepson Jr. (1,2) Chairman and Chief Executive Ofﬁcer, Jepson Associates, Inc.; Savannah, Georgia Major General Hugh G. Robinson (Ret.), P.E. (2,4) Chairman and Chief Executive Ofﬁcer, The Tetra Group; Dallas, Texas Walter J. Salmon (1,2) Stanley Roth Senior Professor of Retailing, Emeritus, Harvard Business School; Boston, Massachusetts Mikael Salovaara (4,5) Partner, Greycliff Partners; Morristown, New Jersey John W. Snow (1,2) Chairman, President and Chief Executive Ofﬁcer, CSX Corporation; Richmond,Virginia Edward Villanueva (4,5) Financial Consultant, Retired, Former Vice President and Treasurer (1) Compensation and Personnel Committee Member (2) Nominating and Governance Committee Member (3) Executive Committee Member (4) Audit Committee Member (5) Pension Investment Committee Member CIRCUIT CITY STORES, INC. 2000 ANNUAL REPORT 81 Slide 84: COMPANY OFFICERS Richard L. Sharp Chairman and Chief Executive Ofﬁcer W.Alan McCollough President and Chief Operating Ofﬁcer Richard S. Birnbaum Executive Vice President Operations Michael T. Chalifoux Executive Vice President Chief Financial Ofﬁcer and Corporate Secretary John W. Froman Executive Vice President Merchandising Dennis J. Bowman Senior Vice President and Chief Information Ofﬁcer W. Stephen Cannon Senior Vice President and General Counsel Philip J. Dunn Senior Vice President Treasurer and Controller John A. Fitzsimmons Senior Vice President Administration W.Austin Ligon Senior Vice President Automotive Gary M. Mierenfeld Senior Vice President Distribution and National Service Jeffrey S.Wells Senior Vice President Human Resources George D. Clark Jr. Vice President and Central Division President Michael K. Froning Vice President and Southern Division President Mario Ramirez Vice President and Western Division President Randall C. Stephen Vice President and Northeast Division President Mark A.Arensmeyer Vice President Superstore Human Resources and Superstore Training Edward J. Brett Vice President 82 CIRCUIT CITY STORES, INC. Keith D. Browning Vice President David W. Cecil Vice President Merchandising Joseph T. Cipolla Vice President Management Information Systems Miles M. Circo Vice President and Chief Technical Ofﬁcer Ann M. Collier Vice President Financial and Public Relations Benjamin B. Cummings Jr. Vice President Real Estate Neal N. Lappe Vice President Product Service Jerry L. Lawson Vice President General Manager Carl C. Liebert III Vice President Corporate Operations R. Bruce Lucas Vice President Construction Kim D. Orcutt Vice President Merchandising George R. Pasini Vice President Design Michael T. Ryan Vice President Merchandising Richard W. Souder Jr. Vice President Merchandising Ann-Marie Stephens Vice President Strategic Planning Blaine Altaffer Assistant Vice President Merchandising Lisa J. Baldyga Assistant Treasurer L. Dan Barzel Assistant Vice President Merchandising Jay W. Bertagnoli Assistant Vice President Merchandising Julie S. Bilodeau Assistant Vice President Market Research and Analysis Bernard H. Curlee Jr. Assistant Vice President Technical Service William C. Denney Assistant Vice President Merchandising Peter A. Douglas Assistant Vice President General Manager Douglas R. Drews Assistant Vice President Distribution Victor M. Engesser Assistant Vice President Merchandising Linda N. English Assistant Vice President Assistant Controller Kenneth S. Golden Assistant Vice President Merchandising Stanley L. Heller Assistant Vice President Real Estate Henry Hewitt Assistant Vice President Merchandising Eric A. Jonas Jr. Assistant Vice President Corporate Human Resource Services Thomas E. Krieck Assistant Vice President General Manager William E. McCorey Assistant Vice President Management Information Systems Janice A. McNee Assistant Vice President Merchandising Douglas T. Moore Assistant Vice President Merchandising Joseph E. Oren Assistant Vice President Management Information Systems Kent E. Richardson Assistant Vice President Store Design Martin C. Schaeffer Assistant Vice President General Manager Elaine M. Schramm Assistant Vice President Loss Prevention Frank X. Smalara Assistant Vice President Management Information Systems Paul D. Swenson Assistant Vice President Warranty Administration James H.Wimmer Assistant Vice President General Operations Manager CARMAX OFFICERS W.Austin Ligon President Keith D. Browning Vice President and Chief Financial Ofﬁcer Michael K. Dolan Vice President and Chief Information Ofﬁcer Thomas J. Folliard Vice President Merchandising Joseph S. Kunkel Vice President Marketing and Strategy Mark F. O’Neil Vice President and Division President Operations Edwin J. Hill Assistant Vice President Service Operations Scott A. Rivas Assistant Vice President Human Resources Angela C. Schwarz Assistant Vice President First North American Credit Corporation Fred S.Wilson Assistant Vice President Loss Prevention 2000 ANNUAL REPORT Slide 85: HIGH-LOW PRICES Circuit City $55 $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 1234 1996 1234 1997 1234 1998 1234 1999 1234 2000 C I R C U I T C I T Y M A R K E T S (as of 2/29/00) Alabama Illinois Missouri Tennessee Birmingham (3) Huntsville Montgomery Tuscaloosa Arizona Phoenix (8) Tucson (2) Arkansas Champaign/ Springﬁeld (2) Chicago (25) Peoria/ Bloomington (2) Rockford Indiana Columbia St. Louis (7) Springﬁeld Nebraska Lincoln Omaha Nevada Chattanooga Jackson Johnson City Kingsport Knoxville (2) Memphis (2) Nashville (5) Texas Fort Smith (2) Little Rock (2) California CarMax $25 $20 $15 $10 $5 $0 1234 1996 1234 1997 1234 1998 1234 1999 1234 2000 Bakersﬁeld Chico/Redding (2) Fresno (3) Los Angeles (41) Palm Springs Sacramento (5) Salinas (3) San Diego (8) San Francisco (16) Santa Barbara (2) Colorado Evansville Fort Wayne Indianapolis (7) Lafayette South Bend Terre Haute Kansas Las Vegas (3) Reno New Mexico Albuquerque New York Kansas City (4) Topeka Wichita (2) Kentucky Binghamton Buffalo (3) New York (31) Rochester (3) Syracuse North Carolina Lexington Louisville (4) Paducah (2) Louisiana Colorado Springs (3) Denver (8) Grand Junction Connecticut Common Stock Prices As of February 29, 2000, there were approximately 8,600 holders of the Circuit City Group Common Stock and 540 holders of the CarMax Group Common Stock. The ﬁrst graph above shows the common stock trends for Circuit City Stores, Inc. Common Stock from March 1, 1995, through February 3, 1997, and the common stock trends for Circuit City Stores, Inc.—Circuit City Group Common Stock from February 4, 1997, through February 29, 2000. The Circuit City Stores, Inc. Common Stock was redesignated as and, on February 4, 1997, began trading as Circuit City Group Common Stock. It includes a retained interest in the equity value of newly issued Circuit City Stores,Inc.—CarMax Group Common Stock.Circuit City Group Common Stock prices have been adjusted to reﬂect a two-for-one stock split effective June 30,1999. The second graph shows the common stock trends for Circuit City Stores, Inc.—CarMax Group Common Stock from February 4, 1997, the ﬁrst day it was traded, through February 29, 2000. Hartford (4) Florida Baton Rouge Lafayette New Orleans (4) Lake Charles Texarkana/ Shreveport Maine Charlotte (6) Greensboro (3) Greenville/ New Bern (2) Raleigh (5) Wilmington Ohio Abilene Amarillo Austin (2) Beaumont Corpus Christi Dallas/ Fort Worth (10) El Paso (2) Houston (12) Lubbock McAllen/ Brownsville (2) Midland/Odessa (2) San Antonio (3) Tyler/Longview (3) Waco (4) Wichita Falls Utah Fort Myers (3) Gainesville (2) Jacksonville (3) Miami (9) Orlando (6) Panama City Pensacola (3) Tallahassee Tampa (9) West Palm Beach (4) Georgia Bangor Portland Maryland Cincinnati (6) Cleveland (8) Columbus (4) Dayton (3) Toledo (2) Youngstown (2) Oklahoma Salt Lake City (5) Vermont Burlington Virginia Baltimore (6) Salisbury Massachusetts Oklahoma City (2) Tulsa (2) Oregon Charlottesville Harrisonburg Norfolk (7) Richmond (4) Roanoke (3) Washington Boston (12) Springﬁeld (2) Michigan Eugene Medford Portland (5) Pennsylvania Seattle (9) Spokane (2) Washington D.C. SHAREHOLDER INFORMATION Certified Public Accountants Annual Meeting KPMG LLP Richmond,Virginia Transfer Agent & Registrar Norwest Bank Minnesota, N.A. South St. Paul, Minnesota (800) 468-9716 email: stocktransfer@norwest.com Rights Agent June 13, 2000, 10:00 a.m. The Jefferson Hotel Franklin and Adams Streets Richmond,Virginia Form 10-K Atlanta (13) Augusta Columbus Macon Savannah Hawaii Detroit (11) Flint (2) Grand Rapids (5) Lansing (3) Traverse City Minnesota Honolulu Idaho Minneapolis (9) Mississippi Erie Harrisburg (3) Johnstown (2) Philadelphia (14) Pittsburgh (5) Scranton/ Wilkes-Barre (3) Rhode Island Maryland (8) N.Virginia (9) West Virginia Charleston/ Huntington (2) Clarksburg (2) Wheeling (2) Wisconsin Norwest Bank Minnesota, N.A. South St. Paul, Minnesota Corporate Offices Form 10-K Annual Report to the Securities and Exchange Commission provides certain additional information and will be available in June. A copy of this report may be obtained without charge upon request to: Office of the Corporate Secretary Boise Idaho Falls Biloxi Jackson Tupelo Providence (4) South Carolina Charleston Columbia (2) Florence Greenville (4) C A R M A X M A R K E T S (as of 2/29/00) California Georgia South Carolina Appleton/ Green Bay (2) Madison (2) Milwaukee (3) Wyoming Cheyenne 9950 Mayland Drive Richmond,Virginia 23233-1464 (804) 527-4000 Web Sites Circuit City Stores, Inc. 9950 Mayland Drive Richmond,Virginia 23233-1464 Shareholder Inquiries Virginia Los Angeles (4) Florida Atlanta (3) Illinois Greenville Tennessee Richmond Washington, D.C./ Baltimore (5) http://www.circuitcity.com http://www.carmax.com Investor Information Web Sites Ofﬁce of Financial Relations (804) 527-4000, extension 2077 Securities Analyst Inquiries Miami (3) Orlando (2) Tampa (2) Chicago (6) North Carolina Nashville Texas http://investor.circuitcity.com http://investor.carmax.com Ann M. Collier Vice President Financial and Public Relations (804) 527-4058 Charlotte Raleigh Dallas/Fort Worth(5) Houston (4) San Antonio Slide 86*: CIRCUIT CITY STORES, INC. 9950 MAYLAND DRIVE RICHMOND, VIRGINIA 23233-1464