Circuit City issued an update regarding the Company’s scheduled year-end earnings announcement.
“The Company has concluded that it is necessary to delay the scheduled announcement of earnings for the quarter and year ended February 28, 2005, until our current lease accounting practices review is completed. We expect to release earnings within 7 to 14 days,” said Michael E. Foss, executive vice president and chief financial officer of Circuit City Stores.
As the Company indicated in its March 4, 2005, release, the focus of its lease accounting practices review was on issues raised in recently published SEC guidance. The review of these issues has not identified any material impact on previously reported statements of operations.
As the Company neared completion of its review, however, an additional issue was identified related to leases in which buildings were constructed by the Company on leased property and transferred to the landlord after reimbursement of construction costs. Such leases are, as a matter of course, evaluated for “continuing involvement,” which, if present, would require the Company to classify a reimbursement as a financing rather than a sale under GAAP. Under both methods, aggregate expense recognition is identical over the life of the lease, but the timing of expense recognition can differ significantly between periods.
The Company’s independent auditors recently identified accounting interpretations which conclude that a seller-lessee, by not recovering substantially all construction costs, has “continuing involvement” in the property. Up to now, the Company had concluded that none of the criteria for “continuing involvement,” which generally involve guaranteed residuals, guaranteed rates of return or leave the seller-lessee with investment risk, had been met for any lease arrangement.
“The Company’s business and its financial performance are fundamentally sound,” Foss emphasized. “Excluding any adjustments resulting from this lease review, the Company would expect to report earnings for the fiscal year ended February 28, 2005 in the range of 33 cents to 35 cents per share, after 15 cents per share for costs associated with the closings of 19 Superstores, five regional offices and one distribution center, as announced on February 16, 2005.
“At this point, we believe the cumulative impact of the multi-year lease adjustments through February 28, 2005 is less than 5 cents per share. If the full multi-year adjustment were applied against fiscal 2005 earnings, it would result in a reduction in the range of anticipated reported earnings to 28 to 30 cents per share. This adjustment would not impact historical or future net cash flow or the timing of any payments under the related leases. We have not determined whether the adjustments will require a restatement of previously reported statements of operations,” Foss noted.
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