-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T6hcbmZaj/l6xyXhmZ1EfvZT40l/jxvggfHWlCUnh7qLOIy/CQ9IwITA1EFUQkex ZCTg7YYp9s5SZC9fzjLIZg== 0000928597-97-000023.txt : 19970530 0000928597-97-000023.hdr.sgml : 19970530 ACCESSION NUMBER: 0000928597-97-000023 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970529 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIRCUIT CITY STORES INC CENTRAL INDEX KEY: 0000104599 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RADIO TV & CONSUMER ELECTRONICS STORES [5731] IRS NUMBER: 540493875 STATE OF INCORPORATION: VA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05767 FILM NUMBER: 97616186 BUSINESS ADDRESS: STREET 1: 9950 MAYLAND DR CITY: RICHMOND STATE: VA ZIP: 23233 BUSINESS PHONE: 8045274000 MAIL ADDRESS: STREET 1: 9950 MAYLAND DRIVE CITY: RICHMOND STATE: VA ZIP: 23233 FORMER COMPANY: FORMER CONFORMED NAME: WARDS CO INC DATE OF NAME CHANGE: 19840620 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________ to _________ Commission File No.: 1-5767 CIRCUIT CITY STORES, INC. (Exact name of Registrant as specified in its charter) VIRGINIA 54-0493875 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 9950 Mayland Drive Richmond, VA 23233 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (804) 527-4000 Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- Circuit City Stores, Inc. - Circuit City Group Common Stock, Par Value $0.50 New York Stock Exchange Circuit City Stores, Inc. - CarMax Group Common Stock, Par Value $0.50 New York Stock Exchange Rights to Purchase Preferred Stock, - ----------------------------------- Series E, Par Value $20.00 New York Stock Exchange Series F, Par Value $20.00 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K [ ]. On May 2, 1997, the Company had outstanding 98,230,743 Circuit City Group common shares and 21,860,000 CarMax Group common shares. The aggregate market value of the common shares held by non-affiliates (without admitting that any person whose shares are not included in determining such value is an affiliate) was $3,818,720,134 for the Circuit City Group and $322,435,000 for the CarMax Group based upon the closing price of these shares as reported by the New York Stock Exchange on May 2, 1997. Page 1 of 17 DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in Parts I, II, III and IV of this Form 10-K Report: (1) Pages 19 through 69 of the Company's Annual Report to Shareholders for the fiscal year ended February 28, 1997 (Parts I, II and IV) and (2) "Item One - Election of Directors," "Beneficial Ownership of Securities," "Executive Compensation," "Employment Agreements and Change-in-Control Arrangements," "Compensation of Directors" and "Section 16(a) Compliance" in the May 9, 1997 Proxy Statement, furnished to shareholders of the Company in connection with the 1997 Annual Meeting of such shareholders (Part III). TABLE OF CONTENTS Item Page ---- PART I 1. Business 3 2. Properties 8 3. Legal Proceedings 10 4. Submission of Matters to a Vote of Security Holders 10 Executive Officers of the Company 11 PART II 5. Market for the Company's Common Equity and Related Stockholder Matters 13 6. Selected Financial Data 13 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 13 8. Financial Statements and Supplementary Data 13 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 PART III 10. Directors and Executive Officers of the Company 14 11. Executive Compensation 14 12. Security Ownership of Certain Beneficial Owners and Management 14 13. Certain Relationships and Related Transactions 14 PART IV 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 14
2 of 17 PART I Item 1. Business. Circuit City Stores, Inc. was incorporated under the laws of Virginia in 1949. Its corporate headquarters is located at 9950 Mayland Drive, Richmond, Va. Its retail operations consist of Circuit City Superstores, Circuit City electronics-only stores and mall-based Circuit City Express stores. It has a wholly owned credit card bank subsidiary, First North American National Bank, that extends consumer credit. Certain of its subsidiaries operate CarMax Auto Superstores, a used auto retail business that also sells new cars. Changes in Capital Structure. On January 24, 1997, Circuit City Stores, Inc. shareholders approved the creation of two common stock series. The Company's existing common stock was subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common Stock. In an initial public offering, which was completed February 7, 1997, the Company sold 21.86 million shares of Circuit City Stores, Inc.-CarMax Group Common Stock. The Circuit City Group Common Stock is intended to track separately the performance of the Circuit City store-related operations, a retained interest in the CarMax Group, and all other businesses in which the Company may be engaged (other than those comprising the CarMax Group). The CarMax Group Common Stock is intended to track separately the performance of the CarMax operations. 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 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, financial information about one Group should be read in conjunction with financial information about the other Group, as well as consolidated information. In this document, the following terms and definitions are used: The Company refers to Circuit City Stores, Inc. and subsidiaries, which includes Circuit City retail stores and related operations and the CarMax retail stores and related operations. Circuit City refers to the retail operations under the Circuit City name and to all related operations such as product service and First North American National Bank. Circuit City Group refers to the Circuit City operations and to the retained interest in the equity value of the CarMax Group. CarMax Group and CarMax refer to the retail locations under the CarMax name and to all related operations such as First North American Credit Corporation. Circuit City Group: General. This section describes the business of the Circuit City Group exclusive of its retained interest in the CarMax business which is discussed separately below. Circuit City is the nation's largest retailer of brand-name consumer electronics and major appliances and a leading retailer of personal computers and music software. It sells video equipment, including televisions, digital satellite systems, video cassette recorders and camcorders; audio equipment, including home stereo systems, compact disc players, tape recorders and tape players; mobile electronics, including car stereo systems and security systems; home office products, including personal computers, peripheral equipment and facsimile machines; other consumer electronics products, including cellular phones, telephones and portable audio and video products; entertainment software; and major appliances, including washers, dryers, refrigerators, microwave ovens and ranges. 3 of 17 Each Circuit City store location follows detailed operating procedures and merchandising programs. Included are procedures for inventory maintenance, advertising, customer relations, store administration, merchandise display, store security and the demonstration and sale of products. Each store carries a standard line of products selected at the corporate level and supplied directly to the stores by regional warehouse distribution facilities. Expansion. As of April 30, 1997, Circuit City operates 500 retail locations throughout the United States. In fiscal 1998, Circuit City expects to open approximately 60 Superstores, to replace 10 to 15 stores and to add Circuit City Express stores. New-market entries will comprise 35 to 40 of the new Superstores, including approximately 15 in the New York City market. Circuit City's goal is to maximize profitability in each market it serves by capturing large market shares that produce high sales volumes across a broad merchandise mix. Merchandising. Because management believes that local markets have individual characteristics which vary greatly by the advertising, merchandising and pricing strategies of competitors, Circuit City has organized its marketing function to focus on markets with similar competitive conditions. Circuit City's operating regions benefit from a centralized buying organization. The central buying staff reduces costs by purchasing in large volumes, structures a sound basic merchandising program and is supported by advanced management information and distribution systems. Circuit City's merchandising strategy emphasizes a broad selection of products, including the industry's newest technologies, and a wide range of prices. Merchandise mix and displays are controlled centrally to help ensure a high level of consistency from store to store. Merchandise pricing and selling strategies vary by market to reflect competitive conditions. Although suggested retail prices are established by the corporate merchandising department, each store manager is responsible for shopping the local competition on a regular basis and has the authority to adjust retail prices to meet market conditions. As part of its competitive strategy, Circuit City advertises low prices and provides each customer with a low-price guarantee. Circuit City will beat any legitimate price from a local competitor stocking the same new item in a factory-sealed box. If a customer finds a lower price, including Circuit City's own sale price, within 30 days, Circuit City will refund 110 percent of the difference to the customer. Suppliers. During fiscal 1997, Circuit City's 10 largest suppliers accounted for approximately 51 percent of merchandise purchased. Circuit City's major suppliers include Sony, Thomson, Whirlpool, Packard Bell, Panasonic, NEC, JVC, Hitachi, Hewlett Packard and GE Appliances. Brand-name advertised products are sold by all of Circuit City's retail locations. Circuit City has no significant long-term contracts for the purchase of merchandise. In the past, Circuit City has not experienced any continued or ongoing difficulty obtaining satisfactory sources of supply and believes that adequate sources of supply exist for the types of merchandise sold in its stores. Advertising. Circuit City relies on considerable amounts of advertising to stimulate Superstore and electronics only store sales. Advertising expenditures were 4.8 percent of sales in fiscal 1997 and 4.7 percent of sales in fiscal 1996 and 1995. Circuit City primarily uses print advertising, including multi-page vehicles and run-of-press newspaper ads, for Superstore and electronics-only store advertising. Circuit City emphasizes the use of multi-page vehicles to allow a more extensive presentation of the broad selection of products and price ranges it carries. These multi-page vehicles are generally distributed in newspapers but are, in some cases, mailed directly to residences outside the newspapers' area of circulation. Television campaigns include merchandise assortment, price and customer service messages. With a presence in most major metropolitan markets, Circuit City has begun to take advantage of national broadcast and print advertising opportunities. Competition. The brand-name consumer electronics and major appliance business is highly competitive. Circuit City's competitors include other full-service retailers, self-service retailers, specialty retailers with differing product selections and services, general merchandise retailers and local independent operators. Over the past three years, competition has shifted to include more self-service retailers that often offer a more limited product selection but at highly competitive prices. Circuit City uses pricing, selection and service to differentiate itself from the competition. As part of its competitive strategy, Circuit City strives to maintain highly competitive prices and offers every customer the low-price guarantee previously described. Circuit City Superstores offer a broad product selection that includes 3,200 to 4,000 name-brand items (excluding music software), depending on the selling square footage of the Superstore. Professionally trained sales counselors, convenient credit options, factory-authorized product repair, home delivery, installation centers for automotive electronics, a toll-free product support line and a return policy of 30 days on most merchandise, excluding computer equipment, reflect a strong commitment to customer service. 4 of 17 Customer Satisfaction. Extensive market research is conducted to measure Circuit City's customer service record and to refine its consumer offer. Approximately 350,000 random surveys are conducted each year to track satisfaction among Circuit City's existing customer base. These surveys, conducted from customer transaction records, measure satisfaction with all points of customer interaction, including sales counselors, cashiers, warehouse staff, Roadshop installers and home delivery and product service representatives. Quick feedback allows management to immediately address individual performance issues. Customer Service Index scores for each store recognize strong overall performance and quickly pinpoint management issues that require attention. Training. Circuit City staffs its stores with commissioned sales counselors, support personnel (cashiers and stockpersons), a store manager, one or more sales managers and, in larger stores, an operations manager. New sales counselors complete a minimum two-week training program focused on product knowledge, customer service and store operations. Seven regional training facilities are utilized for classroom sessions taught by more than 40 professional trainers, and a state-of-the-art video facility produces audio, video and computer-based training materials. Formalized training for store, sales and operations managers focuses on human resource management, sales management and critical operating procedures. Individual development plans address personal training needs, giving employees advancement opportunity. Consumer Credit. Because consumer electronics, personal computers and major appliances represent relatively large purchases for the average consumer, Circuit City's business is affected by consumer credit availability, which varies with the state of the economy and the location of a particular store. In fiscal 1997, approximately 15 percent of Circuit City's total sales were made through its private-label credit card and 46 percent through third-party credit sources. The Company established a subsidiary, First North American National Bank ("FNANB"), in fiscal 1991 to handle its private-label credit card business. The credit card bank subsidiary is located in Marietta, Ga. Interfacing FNANB with Circuit City's point-of-sale (POS) system has produced a rapid customer credit approval process. A customer's application can be electronically scored, and qualified customers can generally receive approval in under one minute. In addition to increased credit availability, the private-label credit card program provides Circuit City with additional marketing opportunities, including direct mail campaigns to credit card customers and special financing programs for promotions. FNANB's credit extension, customer service and collection operations are fully automated with state-of the-art technology to maintain a high level of customer service. This technology aids FNANB's collection philosophy of contacting the cardholder in his/her initial days of delinquency to resolve the past due status. FNANB also manages a growing bankcard portfolio. Receivables generated by both the private-label credit card and bankcard programs are sold to non-affiliated entities under asset securitization programs. Systems. Circuit City's in-store POS system maintains an on-line record of all transactions and allows management to track performance by region, store and individual sales counselor. The information gathered by the system supports automatic replenishment of in-store inventory from the regional distribution centers and is incorporated into product buying decisions. The POS system is interfaced with the FNANB credit approval system. In the stores, electronic signature capture for all credit card purchases, bar-code scanning for product returns and repairs, automatic price tag printing for price changes and computerized home delivery scheduling all enhance Circuit City's customer service, eliminating time-consuming administrative tasks for store personnel and reducing costs through smoother store-level execution. Circuit City's proprietary Customer Service Information System maintains an on-line history of customer purchases and enables Circuit City to better assist individuals with future purchases by ensuring that new products can be integrated with existing products in the home. It also facilitates product returns and product repair. In addition, this system supports our toll-free product support line. The product support line provides customers with access to skilled product specialists. From their homes, customers can receive immediate answers to basic questions regarding product usage and installation. This service is available only for products purchased at Circuit City. Distribution. At April 30, 1997, Circuit City operated nine automated electronics distribution centers. These centers are designed to serve stores within a 500-mile range. They utilize conveyor systems and laser bar-code scanners to reduce labor requirements, prevent inventory damage and maintain inventory control. Circuit City also operates smaller distribution centers handling primarily appliances and larger electronics products. Management believes that the use of the distribution centers enables it to efficiently distribute a broad selection of merchandise to its stores, reduce inventory requirements at individual stores, benefit from volume purchasing and maintain accounting control. Circuit City also operates an automated, centralized distribution center for music software. Virtually all of Circuit City's Superstore and electronics-only store merchandise is distributed through its distribution centers. 5 of 17 Service. Circuit City offers service and repair for nearly all the products it sells. Customers also are able to purchase extended warranty plans on most of the merchandise Circuit City sells. At April 30, 1997, Circuit City had 34 regional, factory-authorized repair facilities. To meet customer needs, merchandise needing service or repair usually is moved by truck from the stores to the nearest regional service facility and is returned to the customer at the store after repair. Circuit City also has in-home technicians who service large items not conveniently carried to a store. Extended warranty plans extend coverage beyond the normal manufacturer's warranty period, usually with terms of coverage (including the manufacturer's warranty period) between 12 and 60 months. Circuit City sells two extended warranty programs on behalf of unrelated third parties that issue these plans for merchandise sold by Circuit City and other retailers. One of these programs is sold in most major markets and features in-home service for personal computer products. The second program covers consumer electronics and major appliances and was offered by approximately 85 percent of Circuit City Superstores at April 30, 1997. Circuit City sells its own extended warranty contracts in markets where the third-party programs are not available. Seasonality. Like many retail businesses, Circuit City's sales are greater in the fourth quarter of the fiscal year than in other periods of the fiscal year because of holiday buying patterns. A corresponding pre-seasonal inventory build-up is associated with this sales volume. This increased sales volume results in a lower ratio of fixed costs to sales and produces a higher ratio of operating income to sales in the fourth fiscal quarter. Circuit City's sales for the fourth fiscal quarter (which includes the Christmas season) were $2,282,625,000 in fiscal 1997, $2,180,506,000 in fiscal 1996 and $1,883,571,000 in fiscal 1995 and represented approximately 32 percent of sales in fiscal 1997 and 1996 and approximately 34 percent of sales in fiscal year 1995. CarMax Group: General. In 1993, the Company began to test CarMax The Auto Superstore(R): a retail concept selling used cars. In fiscal 1997, the Company announced the national rollout of this concept. CarMax is a leading retailer of used cars and light trucks in the United States with seven stores located in the Southeast and one vehicle reconditioning center in Orlando, Florida. CarMax purchases, reconditions and sells used vehicles at each of its stores and sells new vehicles at one of its Atlanta, Georgia locations under a franchise agreement with Chrysler Corporation ("Chrysler"). CarMax has also entered into an agreement, pending manufacturer approval, for a second Chrysler franchise at an Atlanta location to be opened in fiscal 1998. Expansion. CarMax has announced an aggressive rollout plan. Over the next five years, it plans to reach a total of 80 to 90 locations, expand the retail repair business and add new-vehicle franchises that will build volume and further leverage the fixed costs of the used-car Superstores. Merchandising. Each CarMax store features a broad selection of quality used cars and light trucks with a wide range of prices appealing to a wide range of potential customers. CarMax stores vary in inventory size from 400 to 1,000 vehicles depending on local market size and consumer demand. To appeal to the vast array of consumer preferences and budgets, CarMax offers its used vehicles under two programs - the CarMax program and the ValuMax program. CarMax vehicles generally are one to five years old, with less than 60,000 miles, and most are priced from $9,500 to $21,000. Through the ValuMax program, CarMax sells high-quality used vehicles that generally are more than five years old and/or have over 60,000 miles, with most priced in a range from $4,500 to $10,500. To ensure that CarMax quality standards are maintained, vehicles under both programs undergo a comprehensive, certified quality inspection by CarMax service technicians. CarMax backs its commitment to quality with a five-day or 250-mile, money-back guarantee, subject to vehicles being returned in substantially the same condition, and a free, 30-day comprehensive warranty on each vehicle. CarMax's used cars are priced at an average of $500 to $1,000 below the NADA average book value. All customers receive the same low price with no negotiating required. CarMax does not charge any processing, administration, application or other "hidden" fees, other than those mandated by local and state regulations. Competitive financing and extended warranty rates also are offered. CarMax has replaced the traditional "trade-in" transaction with a process in which trained CarMax buyers appraise any vehicle, usually in 30 minutes or less, and provide the vehicle's owner with a written guaranteed cash offer that is good for seven days or 300 miles. The appraisal process is available to everyone, whether or not they are purchasing a vehicle from CarMax. 6 of 17 Suppliers. CarMax acquires a significant proportion of its used-vehicle inventory at its store locations. CarMax appraises and makes an offer to purchase any properly documented vehicle from an individual. CarMax also acquires a significant proportion of its used vehicles through auctions and, to a lesser extent, directly from other sources, including wholesalers, franchised and independent dealers and fleet owners, such as leasing companies and rental companies. Based on consumer acceptance of the appraisal process at existing CarMax stores and the experience and success of CarMax to date in acquiring vehicles from auctions and other sources, management believes that its sources of used vehicles will continue to be sufficient to meet current needs and to support planned expansion. Reconditioning. All vehicles are thoroughly inspected and reconditioned. Most vehicles are reconditioned at each store facility. With a significant portion of vehicles purchased at the store, in-store reconditioning reduces transportation cost and helps quickly move vehicles onto the sales lot. CarMax stores have 15 to 40 mechanical bays available for reconditioning. A centralized 40-bay reconditioning facility in Orlando, Fla., supplements in-store capacity and supports new store openings. Advertising. CarMax is able to realize significant cost savings on advertising by purchasing its advertising jointly with Circuit City, thus leveraging Circuit City's media buying power. Television and radio ads are designed to enhance consumer awareness of the CarMax name and key components of the CarMax offer and are distinctly different from those placed by most auto dealers. Newspaper ads promote CarMax's selection and price leadership, targeting consumers with immediate purchase intentions. Advertising expenditures were 2.3 percent of sales in fiscal 1997, 2.6 percent of sales in 1996, and 2.9 percent of sales in 1995. Franchise. CarMax operates its new-car dealership in the Atlanta market under a Sales and Service Agreement ("Franchise Agreement") with Chrysler. The Franchise Agreement provides, among other things, that CarMax has the right and obligation to sell specified models of new Chrysler-manufactured vehicles and provide related parts and service solely at its Gwinnett location. The Franchise Agreement imposes various requirements on CarMax and compliance with these requirements is closely monitored by Chrysler. The Franchise Agreement may be terminated by Chrysler on generally not less than 60 days written notice for specified reasons. Competition. Automotive retailing in the United States is highly competitive with approximately 23,000 franchised dealers and an even greater number of independent used-vehicle dealers. In the used-vehicle market, CarMax competes with existing franchised and independent dealers, rental companies and private parties. The used-vehicle market also has attracted attention recently from a number of public companies. Many franchised new-car dealerships have also increased their focus on the used-vehicle market. Part of CarMax's business strategy is to position itself as a low-price, low-cost operator in the industry. In the new-vehicle market, CarMax competes with other franchised dealers offering vehicles produced by the same or other manufacturers, auto brokers and leasing companies. As is typical of such arrangements, CarMax's existing franchise agreement with Chrysler does not guarantee exclusivity within a specified territory. Aggressive discounting by manufacturers of new cars, which typically occurs in the fall during the close-out of prior year models, may result in lower retail sales prices and margins for used vehicles during such discounting. Customer Satisfaction. The elements of the CarMax offer are designed to create a customer-friendly experience. The no-haggle pricing allows the sales consultant to focus solely on the customer's needs. CarMax sales personnel play a significant role in ensuring a customer-friendly sales process. All sales consultants, including both full and part-time employees, are compensated solely on a commission basis. The amount of the commission is a fixed dollar amount per vehicle sold. The entire purchase process, including a test-drive and financing, can be completed in less than one hour. Extensive market research is conducted to measure CarMax's customer service record and to refine its consumer offer. Training. At the completion of the fiscal 1998 store opening plan, the 17 location general managers are expected to average almost three years of CarMax management experience and 10 years of prior management experience. The location general manager and department managers for a new store are typically hired at least one year prior to the scheduled store opening date. During that time these managers participate in a rigorous training program at CarMax headquarters and the existing stores that rotates them through most key departments and operations of the business. Each store has 10 to 15 inventory buyers. Each buyer undergoes an 18-to-24 month apprenticeship under the tutelage of an experienced buyer and appraise thousands of cars before making their first independent purchase. All sales consultants complete two weeks of initial training. 7 of 17 Consumer Credit. CarMax provides financing for its customers' vehicle purchases through its financing unit, First North American Credit Corporation ("FNAC") and other third-party lenders. Sub-prime financing is provided by third-party lenders with no financial recourse to CarMax. Sales consultants use AutoMation(R) to electronically submit financing applications and receive responses from multiple lenders, generally in less than eight minutes. Systems. CarMax utilizes AutoMation(R), a unique, proprietary and enterprise-wide inventory management system. Using a touch screen, customers can electronically search the inventory for cars that meet their feature requirements and price range. AutoMation(R) displays a color picture of the car and generates a vehicle information sheet for customer reference. After the selection process is complete, financing applications and purchase and title forms are submitted electronically, reducing customer wait time. The inventory management system includes bar codes on each vehicle and each on-site parking place. Daily scanning tracks movement of vehicles on the lot. An electronic gate helps track test drives for vehicles and sales consultants. This combination of systems allows close monitoring and addressing of inventory and sales performance issues. Service. Until fiscal 1997, CarMax only performed minor repair service under the CarMax free 30-day comprehensive warranty on used vehicles. CarMax began testing retail repair service in its Atlanta, Georgia locations and more extensive warranty service on Chrysler vehicles at the new-car franchise in fiscal 1997. In order to achieve greater future profitability, attract new customers and further develop customer loyalty, retail repair service was expanded to all retail locations commencing in fiscal 1998. Optional primary or extended service policies are available on every vehicle at low, fixed prices. CarMax's MaxCare(R) extended service policies offer superior bumper-to-bumper protection for up to an additional 72 months or 100,000 miles. Seasonality. The business of CarMax is seasonal, with each location generally experiencing more of its net sales in the first half of the fiscal year. CarMax anticipates that the seasonality of its business may vary from region to region as its operations expand geographically. Employees: On April 30, 1997, the Company had 25,859 hourly and salaried employees and 15,883 sales employees working on a commission basis. None of the Company's employees is subject to a collective bargaining agreement. Additional personnel are employed during peak selling seasons. The Circuit City Group accounted for 24,616 of the Company's hourly and salaried employees and 15,455 of the Company's sales employees working on a commission basis. The CarMax Group accounted for 1,243 of the Company's hourly and salaried employees and 428 of the Company's sales employees working on a commission basis. Management of the Company considers its relationship with its employees to be good. Item 2. Properties. At April 30, 1997, the Company's Circuit City retail operations were conducted in 500 locations. The Company operates four Circuit City Superstore formats with square footage and merchandise assortments tailored to population and volume expectations for specific trade areas. The "D" format was developed in fiscal 1995 to serve the most populous trade areas. At the end of fiscal 1997, selling space in the "D" format averaged approximately 24,000 square feet with total square footage averaging 43,360. The "D" stores offer the largest merchandise assortment of all the formats. The "C" format constitutes the largest percent of the store base. Selling square footage in this format has been increased during the last several years, and new "C" stores in fiscal 1997 generally had between 17,000 and 20,000 square feet of selling space; total square footage for all "C" stores averaged 34,220. The "B" format is often located in smaller markets or in trade areas that are on the fringes of larger metropolitan markets. At the end of fiscal 1997, selling space in these stores averaged approximately 12,000 square feet with an average total square footage 25,318. The "B" stores offer a broad merchandise assortment that maximizes return on investment in these lower volume areas. The "A" format serves the least populated trade areas. Selling space in these stores averaged approximately 10,000 square feet at the end of fiscal 1997, and total square footage averaged 18,507. The "A" stores feature a layout, staffing levels and merchandise assortment that creates high productivity in the smallest markets. The four electronics-only stores offer the Company's full line of consumer electronics and a limited selection of major appliances. Selling space in these stores averages approximately 4,000 square feet with an average total square footage of approximately 8,000. The Company's 49 mall-based Circuit City Express stores are located in regional malls, average approximately 2,000 to 3,000 square feet in size and sell small, gift-oriented items. 8 of 17 The Company's CarMax operations were conducted in seven locations. The Company operates three different store formats which vary in acreage, vehicle assortment and facility square footage depending on local market size and consumer demands. A typical "C" store will have 24 to 28 acres with room to display up to 1,000 used vehicles and showroom, reconditioning and service facilities totaling about 92,000 square feet. The typical "B" format store will cover 20 to 23 acres, have room to display up to 800 used vehicles and include facilities with a total of approximately 74,000 square feet. The "A" format will typically cover 15 to 19 acres, have room for up to 600 used vehicles and include facilities that total about 57,000 square feet. All formats will include additional display room for new cars, wherever possible. The following table summarizes the Company's Circuit City and CarMax stores as of April 30, 1997:
Circuit City Group CarMax Group ---------------------------------------------------------- ------------------------------ Superstores Electronics - Mall Superstores ------------------------ ----------------- D C B A Only Stores Total C B A Total - - - - ---- ------ ----- ------------------- ----- Alabama - 5 - - - 1 6 - - - - Arizona 2 6 1 - - 1 10 - - - - Arkansas - 2 - - - - 2 - - - - California 12 55 11 2 - 3 83 - - - - Colorado 5 2 - 1 - - 8 - - - - Connecticut 2 2 - - - - 4 - - - - Delaware - 1 - - - 1 2 - - - - District of Columbia - - - - - 1 1 - - - - Florida 4 23 7 - - 1 35 - 2 - 2 Georgia 3 8 4 - - 4 19 1 - 1 2 Hawaii 1 - - - - - 1 - - - - Illinois 6 19 4 - - 4 33 - - - - Indiana - 3 2 - - - 5 - - - - Kansas 1 3 - - - - 4 - - - - Kentucky - 5 - - - - 5 - - - - Louisiana - 5 - - - - 5 - - - - Maine - - 1 - - - 1 - - - - Massachusetts 1 8 3 - - 6 18 - - - - Maryland 1 12 1 1 4 19 - - - - Michigan 7 4 1 2 - 1 15 - - - - Minnesota 1 7 1 - - 3 12 - - - - Missouri 1 9 - - - 1 11 - - - - Nebraska 1 1 - - - - 2 - - - - Nevada 1 3 - - - - 4 - - - - New Hampshire - 4 - - - 2 6 - - - - New Jersey - 4 - - - - 4 - - - - New Mexico 1 - - - - - 1 - - - - New York 4 2 - 1 - 3 10 - - - - North Carolina 5 6 4 1 - 2 18 - 1 1 2 Ohio 6 8 1 - - 2 17 - - - - Oklahoma - 2 1 - - - 3 - - - - Oregon 2 5 - - - - 7 - - - - Pennsylvania 2 10 1 2 - 2 17 - - - - Rhode Island - 1 - - - - 1 - - - - South Carolina 2 4 1 - - 1 8 - - - - Tennessee 2 7 1 - 1 - 11 - - - - Texas 7 25 4 5 - 2 43 - - - - Utah 5 - - - - - 5 - - - - Virginia 2 13 5 4 - 4 28 - - 1 1 Washington 4 3 1 - - - 8 - - - - West Virginia - - - - 2 - 2 - - - - Wisconsin 4 2 - - - - 6 - - - - ---- ---- --- --- -- --- -- ---------------------------- 95 279 55 18 4 49 500 1 3 3 7 == === == == = == === = = = =
9 of 17 Of the Circuit City stores open at April 30, 1997, the Company owns four stores and leases the remaining 496 stores. Two of the four stores owned are financed by Industrial Development Revenue Bonds that are collateralized by the applicable land, building and equipment. All of the CarMax properties are leased. For information with respect to obligations for Circuit City leases, see note 9 of the Notes to Circuit City Group Financial Statements on page 52 of the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference. For information with respect to obligations for CarMax leases, see note 11 of the Notes to CarMax Group Financial Statements on page 68 of the Company's 1997 Annual Report to Stockholders, which is incorporated herein by reference. The Company owns a 388,000-square-foot consumer electronics/appliance distribution center in Doswell, Va.; a 387,000 square-foot consumer electronics/appliance distribution center in Atlanta, Ga.; and an electronic/appliance service center in Kansas City, Mo. These centers have been financed with Industrial Development Revenue Bonds. The Company owns the land but leases the two buildings in which its corporate headquarters is located. The Company leases space for all warehouse, service and office facilities except for the aforementioned properties. Item 3. Legal Proceedings. 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. Item 4. Submission of Matters to a Vote of Security Holders. (a) A special meeting of the Company's shareholders was held on January 24, 1997. (c) (i) At such special meeting, the shareholders of the Company approved the amendment of the Amended and Restated Articles of Incorporation (the "Articles") to provide for the issuance of the Company's Common Stock in series by action of the Board of Directors, of which 125,000,000 shares would initially be designated by the Board of Directors as Circuit City Stores, Inc.--Circuit City Group Common Stock (the "Circuit City Stock") and 125,000,000 would initially be designated as Circuit City Stores, Inc.--CarMax Group Common Stock (the "CarMax Stock"). The amendment of the Articles was approved by the following vote:
======================================================================================= Broker For Against Abstain Non-Votes ====================================================================== Articles 73,217,506 438,975 229,977 8,485,918 ======================================================================================= (ii) At such special meeting, the shareholders of the Company approved the amendment of the Articles to increase the number of authorized shares of common stock to 350,000,000 shares from 250,000,000 shares. The amendment of the Articles was approved by the following vote: ======================================================================================= Broker For Against Abstain Non-Votes ====================================================================== Articles 71,323,637 2,374,785 188,036 8,485,918 ======================================================================================= 10 of 17 (iii)At such special meeting, the shareholders of the Company approved the amendment of the Articles to conform certain provisions thereof to the current provisions of the Virginia Stock Corporation Act and to delete certain provisions thereof that have expired. The amendment of the Articles was approved by the following vote: ======================================================================================== Broker For Against Abstain Non-Votes ======================================================================= Articles 81,436,170 663,963 272,243 0 ======================================================================================== (iv) At such special meeting, the shareholders of the Company approved the amendments of the 1994 Stock Incentive Plan (the "1994 Plan"). The amendments thereof (i) clarify that future grants may be made with respect to either Circuit City Stock or CarMax Stock, or both, (ii) reserve 5,700,000 shares of CarMax Stock for issuance pursuant to awards made under the 1994 Plan and (iii) permit conversion of options outstanding under an existing stock option plan of one of the Company's subsidiaries into options to acquire shares of CarMax Stock. The amendments of the 1994 Plan were approved by the following vote: ======================================================================================== Broker For Against Abstain Non-Votes ====================================================================== 1994 Plan 70,829,647 2,577,867 478,944 8,458,918 ======================================================================================== (v) At such annual meeting, the shareholders of the Company approved amendments of the Annual Performance-Based Bonus Plan (the "Bonus Plan") to modify the definition of Performance Criteria under the Bonus Plan. The amendment of the Bonus Plan was approved by the following vote: ======================================================================================== Broker For Against Abstain Non-Votes ====================================================================== Bonus Plan 72,418,001 973,873 494,584 8,458,918 ========================================================================================
Executive Officers of the Company. The following table identifies the present executive officers of the Company. The Company is not aware of any family relationship between any executive officers of the Company or any executive officer and any director of the Company. All executive officers are generally elected annually and serve for one year or until their successors are elected and qualify.
Name Age Office ---- --- ------ Richard L. Sharp 50 Chairman of the Board, Chief Executive Officer W. Alan McCollough 47 President and Chief Operating Officer Richard S. Birnbaum 44 Executive Vice President Operations Dennis J. Bowman 43 Senior Vice President and Chief Information Officer 11 of 17 W. Stephen Cannon 45 Senior Vice President and General Counsel Michael T. Chalifoux 50 Senior Vice President, Chief Financial Officer and Corporate Secretary John A. Fitzsimmons 54 Senior Vice President Administration W. Austin Ligon 46 Senior Vice President Automotive Jonathan T. M. Reckford 34 Senior Vice President Corporate Planning and Communications Jeffrey S. Wells 51 Senior Vice President Human Resources
Mr. Sharp is a director and a member of the Company's executive committee. He joined the Company in 1982 as executive vice president and was elected president in 1984, chief executive officer in 1986, and chairman of the board in 1994. Mr. McCollough joined the Company in 1987 as general manager of corporate operations. He was elected assistant vice president in 1989, vice president and Central Division president in 1991, senior vice president - merchandising in 1994, and president and chief operating officer in 1997. Mr. Birnbaum joined the Company in 1972. He was elected vice president in 1985, Central Division president in 1986, senior vice president - marketing in 1991, and executive vice president - operations in 1994. Mr. Bowman joined the Company in May 1996 as vice president and chief information officer. He was elected senior vice president and chief information officer in 1997. Prior to joining the Company, he had served as senior vice president - information services for Rite Aid Corporation since 1993 and was previously a consultant with McKinsey & Company since 1984. Mr. Cannon joined the Company in April 1994 as senior vice president and general counsel. Prior to joining the Company, he had been a partner in Wunder, Diefenderfer, Ryan, Cannon & Thelen, a Washington, D.C., law firm since 1986. Mr. Chalifoux is a director and a member of the Company's executive committee. He joined the Company in 1983 as corporate controller and was elected vice president and chief financial officer in 1988. He was elected senior vice president in 1991 and became corporate secretary in 1993. Mr. Fitzsimmons joined the Company in 1987 as senior vice president - administration. Mr. Ligon joined the Company in 1990 as vice president - corporate planning and communications. He was elected senior vice president - corporate planning and communications in 1991, senior vice president - corporate planning and automotive in 1994, and senior vice president-automotive and CarMax president in 1996. Mr. Reckford joined the Company in 1995 as vice president - corporate planning and communications. He was elected senior vice president - corporate planning and communications in 1996. Prior to joining the Company, he was director of business planning and development for Disney Design and Development since 1991. Mr. Wells joined the Company in 1996 as senior vice president - human resources. Prior to joining the Company, he had served as a senior vice president of Toys "R" Us, Inc. since 1992. 12 of 17 Part II With the exception of the information incorporated by reference from the 1997 Annual Report to Stockholders in Item 2 of Part I and Items 5, 6, 7, and 8 of Part II and Item 14 of Part IV of this Form 10-K, the Company's 1997 Annual Report to Stockholders is not to be deemed filed as a part of this Report. Item 5. Market for the Company's Common Equity and Related Stockholder Matters. Incorporated herein by reference is the information appearing under the heading "Common Stock" on page 23 of the Company's 1997 Annual Report to Stockholders. As of May 2, 1997, there were 8,190 shareholders of record of the Circuit City Group common stock and 144 shareholders of record of the CarMax Group common stock. Item 6. Selected Financial Data. Incorporated herein by reference is the information appearing under the heading "Reported Historical Information" on page 19 of the Company's 1997 Annual Report to Stockholders. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. Incorporated herein by reference is the information appearing under the headings "Circuit City Stores, Inc. Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 19 through 22, "Circuit City Group Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 38 through 41, and "CarMax Group Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 55 through 57 of the Company's 1997 Annual Report to Stockholders. Item 8. Financial Statements and Supplementary Data. Incorporated herein by reference is the information appearing under the headings "Consolidated Statements of Earnings," "Consolidated Balance Sheets," "Consolidated Statements of Cash Flows," "Consolidated Statements of Stockholders' Equity," "Notes to Consolidated Financial Statements," and "Independent Auditors' Report," on pages 24 through 37 of the Company's Annual Report to Stockholders. Incorporated herein by reference is the information appearing under the headings "Circuit City Group Statements of Earnings," "Circuit City Group Balance Sheets," "Circuit City Group Statements of Cash Flow," "Circuit City Group Statements of Group Equity," "Notes to Circuit City Group Financial Statements," and "Independent Auditors' Report," on pages 42 through 54 of the Company's 1997 Annual Report to Stockholders. Incorporated herein by reference is the information appearing under the headings "CarMax Group Statements of Operations," "CarMax Group Balance Sheets," "CarMax Group Statements of Cash Flows," "CarMax Group Statements of Group Equity (Deficit)," "Notes to CarMax Group Financial Statements," and "Independent Auditors' Report," on pages 58 through 69 of the Company's 1997 Annual Report to Stockholders. Incorporated herein by reference is the information appearing under the heading "Quarterly Financial Data (Unaudited)" on pages 36, 54 and 69 of the Company's 1997 Annual Report to Stockholders. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Part III With the exception of the information incorporated by reference from the Company's Proxy Statement in Items 10, 11 and 12 of Part III of this Form 10-K, the Company's Proxy Statement dated May 9, 1997, is not to be deemed filed as a part of this Report. 13 of 17 Item 10. Directors and Executive Officers of the Company. The information concerning the Company's directors required by this Item is incorporated by reference to the section entitled "Item One - Election of Directors" appearing on pages 2 through 3 of the Company's Proxy Statement dated May 9, 1997. The information concerning the Company's executive officers required by this Item is incorporated by reference to the section in Part I hereof entitled "Executive Officers of the Company" appearing on pages 11 and 12. The information concerning compliance with section 16(a) of the Securities Exchange Act of 1934 required by this Item is incorporated by reference to the section entitled "Section 16(a) Compliance" appearing on page 14 of the Company's Proxy Statement dated May 9, 1997. Item 11. Executive Compensation. The information required by this Item is incorporated by reference to the sections entitled "Executive Compensation," "Employment Agreements and Change-In-Control Arrangements," and "Compensation of Directors," appearing on pages 7 through 9 and pages 13 and 14 of the Company's Proxy Statement dated May 9, 1997. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated by reference to the section entitled "Beneficial Ownership of Securities" appearing on pages 4 and 5 of the Company's Proxy Statement dated May 9, 1997. . Item 13. Certain Relationships and Related Transactions. None. Part IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K. (a) The following documents are filed as part of this Report: 1. Financial Statements. The following Financial Statements of Circuit City Stores, Inc., the Circuit City Group and the CarMax Group, and the related Independent Auditors' Reports are incorporated by reference to pages 24 through 37, 42 through 54, and 58 through 69 of the Company's 1997 Annual Report to Shareholders: Consolidated Statements of Earnings for the fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995. Circuit City Group Statements of Earnings for the fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995. CarMax Group Statements of Operations for the fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995. Consolidated Balance Sheets at February 28, 1997, and February 29, 1996. Circuit City Group Balance Sheets at February 28, 1997, and February 29, 1996. CarMax Group Balance Sheets at February 28, 1997, and February 29, 1996. Consolidated Statements of Cash Flows for the fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995. Circuit City Group Statements of Cash Flows for the fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995. 14 of 17 CarMax Statements of Cash Flows for the fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995. Consolidated Statements of Stockholders' Equity for the fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995. Circuit City Group Statements of Group Equity for the fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995. CarMax Group Statements of Group Equity (Deficit) for the fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995. Notes to Consolidated Financial Statements. Notes to Circuit City Group Financial Statements. Notes to CarMax Group Financial Statements. Independent Auditors' Report, Circuit City Stores, Inc. Independent Auditors' Report, Circuit City Group. Independent Auditors' Report, CarMax Group. 2. Financial Statement Schedule. The following financial statement schedules of Circuit City Stores, Inc., Circuit City Group and CarMax Group for the fiscal years ended February 28, 1997, February 29, 1996, and February 28, 1995, are filed as part of this Report and should be read in conjunction with the Financial Statements of Circuit City Stores, Inc., Circuit Group and CarMax Group. II Valuation and Qualifying Accounts and Reserves, Circuit City Stores, Inc. S-1 II Valuation and Qualifying Accounts and Reserves, Circuit City Group S-1 II Valuation and Qualifying Accounts and Reserves, CarMax Group S-1 Independent Auditors' Report on Circuit City Stores, Inc. Financial Statement Schedule S-2 Independent Auditors' Report on Circuit City Group Financial Statement Schedule S-2 Independent Auditors' Report on CarMax Group Financial Statement Schedule S-2
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this Report. (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the last fiscal quarter covered by this Report. 15 of 17 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CIRCUIT CITY STORES, INC. (Registrant) By s/ Richard L. Sharp ----------------------------- Richard L. Sharp Chairman of the Board and Chief Executive Officer By s/ Michael T. Chalifoux ----------------------------- Michael T. Chalifoux Senior Vice President, Chief Financial Officer and Corporate Secretary By s/ Philip J. Dunn ----------------------------- Philip J. Dunn Vice President, Treasurer, Corporate Controller and Chief Accounting Officer May 27, 1997 16 of 17 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- Michael T. Chalifoux* Director May 27, 1997 - -------------------------- Michael T. Chalifoux Richard N. Cooper* Director May 27, 1997 - -------------------------- Richard N. Cooper Barbara S. Feigin* Director May 27, 1997 - -------------------------- Barbara S. Feigin Theodore D. Nierenberg* Director May 27, 1997 - -------------------------- Theodore D. Nierenberg Hugh G. Robinson* Director May 27, 1997 - -------------------------- Hugh G. Robinson Walter J. Salmon* Director May 27, 1997 - -------------------------- Walter J. Salmon Mikael Salovaara* Director May 27, 1997 - -------------------------- Mikael Salovaara John W. Snow* Director May 27, 1997 - -------------------------- John W. Snow s/ Richard L. Sharp Director May 27, 1997 - -------------------------- Richard L. Sharp Edward Villanueva* Director May 27, 1997 - -------------------------- Edward Villanueva Alan L. Wurtzel* Director May 27, 1997 - -------------------------- Alan L. Wurtzel By: s/ Richard L. Sharp* - -------------------------- Richard L. Sharp, Attorney-In-Fact
The original powers of attorney authorizing Richard L. Sharp and Michael T. Chalifoux, or either of them, to sign this annual report on behalf of certain directors and officers of the Company are included as exhibit 24. 17 of 17 S-1 Schedule II CIRCUIT CITY STORES, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves (Amounts in thousands)
Balance at Charged Charge-offs Balance at Beginning to less End of Description of Year Income Recoveries Year ----------- ------- ------ ---------- ---- Reserves deducted from assets to which they apply: Consolidated: Year ended February 28, 1995: Allowance for doubtful accounts $ 6,851 $ 1,292 $ (1,406) $ 6,737 ======== ======= ========= ======== Year ended February 29, 1996: Allowance for doubtful accounts $ 6,737 $ 5,078 $ (1,790) $ 10,025 ======== ======= ========= ======== Year ended February 28, 1997: Allowance for doubtful accounts $ 10,025 $ 8,773 $ (3,402) $ 15,396 ======== ======= ========= ======== Circuit City Group: Year ended February 28, 1995: Allowance for doubtful accounts $ 6,756 $ 1,020 $ (1,345) $ 6,431 ======== ======= ========= ======== Year ended February 29, 1996: Allowance for doubtful accounts $ 6,431 $ 4,599 $ (1,450) $ 9,580 ======== ======= ========= ======== Year ended February 28, 1997: Allowance for doubtful accounts $ 9,580 $ 6,817 $ (2,863) $ 13,534 ======== ======= ========= ======== CarMax Group: Year ended February 28, 1995: Allowance for doubtful accounts $ 95 $ 272 $ (61) $ 306 ======== ======= ========= ======== Year ended February 29, 1996: Allowance for doubtful accounts $ 306 $ 479 $ (340) $ 445 ======== ======= ========= ======== Year ended February 28, 1997: Allowance for doubtful accounts $ 445 $ 1,956 $ (539) $ 1,862 ======== ======= ========= ========
S-2 Independent Auditors' Report on Financial Statement Schedule The Board of Directors Circuit City Stores, Inc.: Under date of April 3, 1997, we reported on the consolidated balance sheets of Circuit City Stores, Inc. and subsidiaries (the Company) as of February 28, 1997 and February 29, 1996, 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 28, 1997, as contained in the February 28, 1997 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year ended February 28, 1997. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related Circuit City Stores, Inc. financial statement schedule as listed in Item 14(a)2 of this Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. s/KPMG Peat Marwick LLP Richmond, Virginia April 3, 1997 S-2 Independent Auditors' Report on Financial Statement Schedule The Board of Directors Circuit City Stores, Inc.: Under date of April 3, 1997, we reported on the balance sheets of the Circuit City Group as of February 28, 1997 and February 29, 1996, and the related statements of earnings, group equity and cash flows for each of the fiscal years in the three-year period ended February 28, 1997, as contained in the February 28, 1997 annual report to stockholders. Our report dated April 3, 1997 includes a qualification related to the effects of not consolidating the CarMax Group with the Circuit City Group as required by generally accepted accounting principles. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K of Circuit City Stores, Inc. for the year ended February 28, 1997. In connection with our audits of the aforementioned financial statements, we also have audited the related Circuit City Group financial statement schedule as listed in Item 14(a)2 of this Form 10-K. This financial statement schedule is the responsibility of Circuit City Stores, Inc.'s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, except for the effects of not consolidating the CarMax Group with the Circuit City Group as discussed in the preceding paragraph, such schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. s/KPMG Peat Marwick LLP Richmond, Virginia April 3, 1997 S-2 Independent Auditors' Report on Financial Statement Schedule The Board of Directors Circuit City Stores, Inc.: Under date of April 3, 1997, we reported on the balance sheets of the CarMax Group as of February 28, 1997 and February 29, 1996, and the related statements of operations, group equity (deficit) and cash flows for each of the fiscal years in the three-year period ended February 28, 1997, as contained in the February 28, 1997 annual report to stockholders. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K of Circuit City Stores, Inc. for the year ended February 28, 1997. In connection with our audits of the aforementioned financial statements, we also have audited the related CarMax Group financial statement schedule as listed in Item 14(a)2 of this Form 10-K. This financial statement schedule is the responsibility of Circuit City Stores, Inc.'s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. s/KPMG Peat Marwick LLP Richmond, Virginia April 3, 1997 Circuit City Stores, Inc. Annual Report on Form 10-K INDEX TO EXHIBITS (3) Articles of Incorporation and Bylaws (a) Amended and Restated Articles of Incorporation of the Company, effective February 3, 1997, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-22759), filed on March 4, 1997, are expressly incorporated herein by this reference. (b) Bylaws of the Company, as amended and restated June 18, 1996, filed as Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996, (File No. 1-5767) are expressly incorporated herein by this reference. (4) Instruments Defining the Rights of Security Holders, Including Indentures (a) Amended and Restated Rights Agreement dated February 3, 1997, between the Company and Norwest Bank Minnesota, N.A., as Rights Agent, is filed herewith. (b) $100,000,000 term loan agreement dated July 28, 1994, between the Company, the Long-Term Credit Bank of Japan, Limited, as agent, and the banks named therein. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy of such agreement, the Company agrees to furnish a copy of such agreement to the Commission upon request. (c) First Amendment to Term Loan Agreement dated October 24, 1995, to the $100,000,000 term loan agreement dated July 28, 1994, between the Company, the Long-Term Credit Bank of Japan, Limited, as agent, and the banks named therein. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy of such agreement, the Company agrees to furnish a copy of such agreement to the Commission upon request. (d) Second Amendment to Term Loan Agreement dated August 21, 1996, to the $100,000,00 term loan agreement dated July 28, 1994, between the Company, the Long-Term Credit Bank of Japan, Limited, as agent, and the banks named therein. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy of such agreement, the Company agrees to furnish a copy of such agreement to the Commission upon request. (e) $175,000,000 term loan agreement dated May 26, 1995, between the Company, the LTCB Trust Company, as agent, and the banks named therein. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy of such agreement, the Company agrees to furnish a copy of such agreement to the Commission upon request. (f) First Amendment to Term Loan Agreement dated October 24, 1995, to the $175,000,000 term loan agreement dated May 26, 1995, between the Company, the LTCB Trust Company, as agent, and the banks named therein. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy of such agreement, the Company agrees to furnish a copy of such agreement to the Commission upon request. (g) $130,000,000 term loan agreement dated June 14, 1996, between the Company, the Royal Bank of Canada, as agent, and the banks named therein. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy of such agreement, the Company agrees to furnish a copy of such agreement to the Commission upon request. Page 1 of 3 (h) $150,000,000 Credit Agreement dated August 31, 1996, between the Company, Crestar Bank, as agent, and the banks named therein. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy of such agreement, the Company agrees to furnish a copy of such agreement to the Commission upon request. (10) Material Contracts* (a) The Company's 1988 Stock Incentive Plan, filed as Exhibit 10(c) to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1993, (File No. 1-5767) is expressly incorporated herein by this reference. (b) Amendments to the Company's 1988 Stock Incentive Plan filed as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the fiscal year ended February 29, 1990, (File No. 1-5767) are expressly incorporated herein by this reference. (c) Amendment to the Company's 1988 Stock Incentive Plan filed as Exhibit 4(h) to the Company's Registration Statement on Form S-8 (Registration No. 33-50144) filed with the Commission on July 28, 1992, is expressly incorporated herein by this reference. (d) Amendment adopted February 20, 1997 to the Company's 1988 Stock Incentive Plan is filed herewith. (e) The Company's Amended and Restated 1989 Non-Employee Directors' Stock Option Plan, filed as Exhibit A to the Company's Definitive Proxy Statement dated May 12, 1995, for the Annual Meeting of Stockholders held on June 13, 1995, is expressly incorporated herein by this reference. (f) Amendment adopted April 9, 1996, to the Company's Amended and Restated 1989 Non-Employee Directors Stock Option Plan filed as Exhibit 10(ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996 is expressly incorporated herein by this reference. (g) Amendment adopted February 20, 1997 to the Company's Amended and Restated 1989 Non-Employee Directors Stock Option Plan is filed herewith. (h) The Company's 1994 Stock Incentive Plan, as amended as of January 24, 1997, filed as Annex III to the Company's Definitive Proxy Statement dated December 24, 1996, for a Special Meeting of Shareholders held on January 24, 1997, (File No. 1-5767) is expressly incorporated herein by this reference. (i) Letter agreement and non-compete agreement dated January 30, 1996, (revised February 12, 1996), between the Company and Alan L. Wurtzel filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1995, (File No. 1-5767) is expressly incorporated herein by this reference. (j) Employment agreement between the Company and Richard L. Sharp dated October 17, 1986, and amendment dated August 1, 1989, to the employment agreement, filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1993, (File No. 1-5767) is expressly incorporated herein by this reference. (k) Employment agreement dated June 1, 1988, between the Company and John A. Fitzsimmons, filed as Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1989, (File No. 1-5767) is expressly incorporated hereby by this reference. Page 2 of 3 (l) Amendment dated August 1, 1989, to employment agreement dated June 1, 1988, between the Company and John A. Fitzsimmons, filed as Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1993, (File No. 1-5767) is expressly incorporated herein by this reference. (m) Employment agreement dated May 25, 1989, between the Company and Michael T. Chalifoux, filed as Exhibit 10(x) to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1991, (File No. 1-5767) is expressly incorporated herein by this reference. (n) Employment agreement dated April 24, 1995, between the Company and W. Alan McCollough filed as Exhibit 10(l) to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1995, (File No. 1-5767), is expressly incorporated herein by this reference. (o) Amended and restated employment agreement dated May 12, 1995, between the Company and Richard S. Birnbaum filed as Exhibit 10(s) to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1995, (File No. 1-5767) is expressly incorporated herein by this reference. (p) The Company's Annual Performance-Based Bonus Plan, as amended as of January 24, 1997, filed as Annex IV to the Company's Definitive Proxy Statement dated December 24, 1996, for a Special Meeting of Shareholders held on January 24, 1997, (File No. 1-5767) is expressly incorporated herein by this reference. (q) Program for deferral of director compensation implemented October 1995 filed as Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1995, (Filed No. 1-5767) is expressly incorporated by this reference. (13) Annual Report to Stockholders (21) Subsidiaries of the Company (23) Consents of Experts and Counsel Consent of KPMG Peat Marwick LLP to Incorporation by Reference of Independent Auditors' Reports into the Company's Registration Statements on Form S-8. (24) Powers of Attorney (27) Financial Data Schedule * All contracts listed under Exhibit 10 are management contracts, compensatory plans or arrangements of the Company required to be filed as an exhibit. Page 3 of 3 EX-4.A 2 AMENDMENT AND RESTATED RIGHTS AGREEMENT EXHIBIT 4(a) AMENDED AND RESTATED RIGHTS AGREEMENT between CIRCUIT CITY STORES, INC. and NORWEST BANK MINNESOTA, N.A. Dated as of February 3, 1997 -i- Rights Agreement Table of Contents
Page Section 1. Certain Definitions...................................................................................2 Section 2. Appointment of Rights Agent...........................................................................5 Section 3. Issuance of Rights Certificates.......................................................................5 Section 4. Form of Rights Certificates...........................................................................7 Section 5. Countersignature and Registration.....................................................................8 Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.........................................................8 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.........................................9 Section 8. Cancellation and Destruction of Rights Certificates..................................................11 Section 9. Reservation and Availability of Preferred Shares and Common Shares...................................12 Section 10. Preferred Shares Record Date........................................................................14 Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights .......................................................................................................14 Section 12. Certificate of Adjusted Purchase Price or Number of Shares..........................................24 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power................................24 Section 14. Fractional Rights and Fractional Shares.............................................................26 Section 15. Rights of Action....................................................................................27 Section 16. Agreement of Right Holders..........................................................................27 Section 17. Rights Certificate Holder Not Deemed a Shareholder..................................................28 -i- Section 18. Concerning the Rights Agent.........................................................................28 Section 19. Merger or Consolidation or Change of Name of Rights Agent...........................................29 Section 20. Duties of Rights Agent..............................................................................29 Section 21. Change of Rights Agent..............................................................................32 Section 22. Issuance of New Rights Certificates.................................................................32 Section 23. Redemption and Termination..........................................................................33 Section 24. Exchange............................................................................................34 Section 25. Notice of Certain Events............................................................................35 Section 26. Notices.............................................................................................36 Section 27. Supplements and Amendments..........................................................................36 Section 28. Successors..........................................................................................37 Section 29. Determinations and Actions by the Board of Directors, etc...........................................37 Section 30. Benefits of this Agreement..........................................................................38 Section 31. Severability........................................................................................38 Section 32. Governing Law.......................................................................................38 Section 33. Counterparts........................................................................................38 Section 34. Descriptive Headings................................................................................38
-ii- RIGHTS AGREEMENT This Amended and Restated Rights Agreement, is entered into as of February 3, 1997, between Circuit City Stores, Inc. a Virginia corporation (the "Company"), and Norwest Bank Minnesota, N.A., a national banking association (the "Rights Agent") and successor rights agent to Crestar Bank, a Virginia banking corporation, and shall become effective as of the Redesignation (as defined herein). On April 29, 1988, the Board of Directors of the Company adopted a shareholder rights plan governed by the terms of a Rights Agreement (as amended and restated as of March 5, 1996, the "Original Agreement") and authorized and declared a dividend of one preferred share purchase right (an "Original Right") for each share of Common Stock, par value $.50 per share, of the Company (the "Common Stock") outstanding on May 9, 1988. Each Original Right represented the right to purchase one one-hundredth (subsequently one fourhundredths as a result of adjustments pursuant to Section 11(p) hereof) of a share of Cumulative Participating Preferred Stock, Series E, par value $20.00 per share (the "Series E Preferred Shares"), of the Company having the rights and preferences set forth in the form of Articles of Amendment attached as Exhibit A to the Original Agreement (before it was amended and restated as of March 5, 1996) and authorized the issuance of one Original Right with respect to each share of Common Stock that became outstanding between the Record Date and the date hereof. On January 24, 1997, the shareholders of the Company approved certain amendments to the Company's Amended and Restated Articles of Incorporation (as so amended, the "Articles of Restatement") authorizing the issuance of Circuit City Stores, Inc. -- CarMax Group Common Stock (the "CarMax Stock") as a new series of Common Stock and redesignating (the "Redesignation") each existing share of Common Stock as one share of Circuit City Stores, Inc. -- Circuit City Group Common Stock (the "Circuit City Stock"). On December 9, 1996 the Board of Directors adopted this amendment and restatement of the Original Agreement effective upon the Redesignation (as so amended and restated, the "Agreement") and, conditioned upon and simultaneously with the Redesignation, redesignated each Original Right as a Circuit City Right and authorized the issuance of one Circuit City Right and one CarMax Right with respect to each share of Circuit City Stock and CarMax Stock, respectively, that shall become outstanding (i) after the Redesignation and before the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are defined in Sections 3 and 7 hereof) or (ii) after the Distribution Date but before the earlier of the Redemption Date or the Final Expiration Date, if such Common Share became outstanding (A) upon the exercise of a stock option, (B) pursuant to any employee plan or arrangement, or (C) upon the conversion or exchange of a security which option, plan, arrangement or security was granted, established or issued, as the case may be, by the Company before the Distribution Date. -1- Each Circuit City Right, as so redesignated, will continue to represent the right to purchase one four-hundredths of a Series E Preferred Share having the rights and preferences set forth in Exhibit A-1 hereto, and each CarMax Right will represent the right to purchase one four-hundredths of a share of Cumulative Participating Preferred Stock, Series F, par value $20.00 per share (the "Series F Preferred Shares"), of the Company having the rights and preferences set forth in Exhibit A-2 hereto, in each such case upon the terms and subject to the conditions herein set forth. Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of Common Shares representing 15% or more of the total Voting Rights of all the Common Shares then outstanding, but shall not include the Company, any wholly-owned Subsidiary (as such term is hereinafter defined) of the Company or any employee benefit plan of the Company or any Subsidiary of the Company, or any Person or entity holding Common Shares for or pursuant to the terms of any such plan. (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement. (c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing), or upon the exercise of conversion rights, exchange rights, rights (other than these Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (1) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or -2- exchange, (2) securities issuable upon exercise of Rights at any time prior to the occurrence of a Triggering Event (as hereinafter defined), or (3) securities issuable upon exercise of Rights from and after the occurrence of a Triggering Event which Rights were acquired by such Person or any of such Person's Affiliates or Associates prior to the Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the "Original Rights") or pursuant to Section 11(i) hereof in connection with an adjustment made with respect to any Original Rights; or (B) the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations of the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person's Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 1(c)(ii)(B)), or disposing of any securities of the Company; provided, however, that nothing in this paragraph (iii) shall cause a person engaged in business as an underwriter of securities to be the "Beneficial Owner" of, or to "beneficially own," any securities acquired through such person's participation in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition. (d) "Business Day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the Commonwealth of Virginia or the State of New York are authorized or obligated by law or executive order to close. (e) "CarMax Right" shall have the meaning set forth in the fifth introductory paragraph of this Agreement. (f) "CarMax Stock" shall have the meaning set forth in the third introductory paragraph of this Agreement. (g) "Circuit City Right" shall have the meaning set forth in the fifth introductory paragraph of this Agreement. (h) "Circuit City Stock" shall have the meaning set forth in the third introductory paragraph of this Agreement. -3- (i) "Close of Business" on any given date shall mean 5:00 P.M., Richmond, Virginia time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., Richmond, Virginia time, on the next succeeding Business Day. (j) "Common Shares" when used with reference to the Company shall mean shares of Circuit City Stock and/or CarMax Stock, as the context requires, or any other shares of capital stock of the Company into which Circuit City Stock or CarMax Stock shall be reclassified or changed. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power, or having power to control or direct the management, of such other Person or, if such other Person is a Subsidiary of another Person, of the Person or Persons which ultimately control such first mentioned Person. (k) "Continuing Director" shall mean a director who was a member of the Board of Directors of the Company on the Distribution Date or who subsequently became a director and whose election, or nomination for election by the Company's shareholders, was approved by a vote of a majority of Continuing Directors on the Board of Directors of the Company on the date of such election or nomination. (l) "Person" shall mean any individual, firm, corporation, partnership or other entity, and shall include any successor (by merger or otherwise) of such entity. (m) "Preferred Shares" shall mean the Series E Preferred Shares and/or the Series F Preferred Shares, as the context requires, and, to the extent there are not sufficient Series E Preferred Shares or Series F Preferred Shares authorized to permit full exercise of the Rights, any other series of Preferred Stock, par value $20.00 per share, of the Company designated for such purpose containing terms substantially similar to the terms of Series E Preferred Shares or Series F Preferred Shares, respectively. (n) "Rights" shall mean Circuit City Rights and/or CarMax Rights, as the context requires. (o) "Section 11(a)(ii) Event" shall mean any event described in Section 11(a)(ii)(A) or (B) hereof. (p) "Section 13 Event" shall mean any event described in clauses (i), (ii) or (iii) of Section 13(a) hereof. (q) "Series E Preferred Shares" shall have the meaning set forth in the fifth introductory paragraph of this Agreement. -4- (r) "Series F Preferred Shares" shall have the meaning set forth in the fifth introductory paragraph of this Agreement. (s) "Share Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such. (t) "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. (u) "Triggering Event" shall mean any Section 11(a)(ii) Event or any Section 13 Event. (v) "Voting Rights" when used with reference to the capital stock of, or units of equity interest in, any Person shall mean the number of votes entitled to be cast generally in the election of directors of such Person (if such Person is a corporation) or to participate in the management and control of such Person (if such Person is not a corporation). Section 2. Appointment of Rights Agent. The Company hereby confirms the appointment of the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall prior to the Distribution Date also be the holders of the Common Shares) in accordance with the terms and conditions hereof, and the Rights Agent hereby confirms the acceptance of such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable. Section 3. Issuance of Rights Certificates. (a) The Rights in respect of the issued and outstanding Common Shares will be issued and become effective on the Record Date. A Common Share and the Right or Rights issued or to be issued hereunder in respect thereof will not be separately transferable until the date (the "Distribution Date") which is the earlier of (i) the close of business on the tenth day after the Share Acquisition Date (or, if the tenth day after the Share Acquisition Date occurs before the Record Date, the close of business on the Record Date) or (ii) the close of business on the tenth Business Day after the date of the commencement of, or first public announcement of the intent of any Person (other than the Company, any wholly-owned Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding Common Shares for or pursuant to the terms of any such plan) to commence, a tender or exchange offer the consummation of which would result in beneficial ownership by a Person of Common Shares representing 15% or more of the total Voting Rights of all the outstanding Common Shares (including any such date which is after the date of this Agreement and prior to the issuance of the Rights). Prior to the Distribution Date, each holder of Common Shares will be the holder of the Rights associated with each such share so held, except as otherwise provided in Section -5- 7(e). (A Common Share and its associated Right or Rights before the Distribution Date shall be collectively referred to as the "Unit".) Until the Distribution Date, the Rights issued from time to time hereunder shall be evidenced collectively by one or more certificates (the "Rights Certificates") delivered to and registered in the name of the Rights Agent, as Rights Agent under this Agreement; but the issuance of the Rights hereunder shall not be affected by any failure to deliver a new or replacement Rights Certificate to the Rights Agent in respect thereof. The initial Rights Certificate and any additional or replacement Rights Certificates delivered to the Rights Agent shall, prior to the Distribution Date, have a legend set forth on the face thereof to the effect that the Rights represented thereby shall not be exercisable until the Distribution Date. As soon as practicable after the Company has notified the Rights Agent of the occurrence of the Distribution Date, the Rights Agent will send, by first-class, insured, postage prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, a Rights Certificate, in substantially the form of Exhibit B-1 hereto (in the case of a Circuit City Right) or Exhibit B-2 hereto (in the case of a CarMax Right), evidencing one Right for each Common Share so held. As of the Distribution Date, the Rights will be evidenced solely by such Rights Certificates. The failure to mail any such Rights Certificate shall not affect the legality or validity of the Rights. (b) On the Record Date or as soon as practicable thereafter, the Company sent a copy of a Summary of Rights to Purchase Preferred Shares in substantially the form which was attached as Exhibit C to the Original Agreement prior to the March 5, 1996 amendment and restatement (the "Summary of Rights"), by first-class, postage prepaid mail, to each record holder of the Company's then-existing Common Stock as of the close of business on the Record Date, at the address of such holder shown on the records of the Company. The failure to send a copy of a Summary of Rights shall not affect the legality or validity of the Rights. (c) Certificates for Common Shares issued after the date hereof but prior to the earliest of the Distribution Date or the Redemption Date or the Final Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend: The holder of this certificate is entitled to certain Rights as set forth in an Amended and Restated Rights Agreement between Circuit City Stores, Inc. and Norwest Bank Minnesota, N.A. (the "Rights Agent"), dated as of ________________ as the same may be amended or supplemented from time to time hereafter (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Circuit City Stores, Inc. One or more certificates evidencing such Rights have been delivered to and registered in the name of [INSERT NAME OF RIGHTS AGENT], as Rights Agent under the Rights Agreement. Circuit City Stores, Inc., will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request -6- therefor. As described in the Rights Agreement, Rights issued to any Person who becomes an Acquiring Person (as defined in the Rights Agreement) shall become null and void. Section 4. Form of Rights Certificates. (a) The Rights Certificates (and the forms of election to purchase Preferred Shares and of assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit B-1 hereto (in the case of a Circuit City Right) or Exhibit B-2 hereto (in the case of a CarMax Right) and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates, whenever issued, that are issued in respect of Common Shares which were issued and outstanding as of the Distribution Date, shall be dated as of the Distribution Date, and all Rights Certificates that are issued in respect of other Common Shares shall be dated as of the respective dates of issuance of such Common Shares, and in each such case on their face shall entitle the holders thereof to purchase such number of one four-hundredths of a share of Preferred Shares as shall be set forth therein at the price per one four-hundredths of a Preferred Share set forth therein (the "Purchase Price"), but the amount and type of securities purchasable upon the exercise of each Right and the Purchase Price thereof shall be subject to adjustment as provided herein. (b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22 that represents Rights beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee before or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interest in such Acquiring Person or to any Person with whom such Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of Section 7(e), and any Rights Certificate issued pursuant to Section 6 or Section 11 upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in this sentence, shall contain (to the extent feasible) the following legend: The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement). Accordingly, this Rights Certificate and the Rights represented -7- hereby may become null and void in the circumstance specified in Section 7(e) of such Agreement. Section 5. Countersignature and Registration. The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board, its President, any Executive Vice President, or any Senior Vice President, and by the Secretary, an Assistant Secretary, Treasurer or an Assistant Treasurer of the Company, either manually or by facsimile signature, and have affixed thereto the Company's seal or a facsimile thereof. The Rights Certificates shall not be valid for any purpose unless manually countersigned by an authorized signatory of the Rights Agent. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent, and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. The Rights Agent will keep or cause to be kept, at its principal offices, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the date of each of the Rights Certificates. Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof, at or prior to the close of business on the earlier of the Redemption Date or the Final Expiration Date (as such terms are defined in Section 7 hereof), any Rights Certificate or Rights Certificates (other than Rights Certificates representing Rights that have become void pursuant to Section 7(e)) may be transferred, split up, combined or exchanged for another Rights Certificate or Rights Certificates, entitling the registered holder to purchase a like number of one four-hundredths of a share of Preferred Shares (or, following a Triggering Event, Common Shares, other securities, cash or other assets, as the case may be) as the Rights Certificate or Rights Certificates surrendered then entitled such holder (or former holder in the case of a transfer) to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Rights Certificates to be transferred, split up, combined or exchanged at the principal office or offices of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered -8- holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall request. Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e) and Section 14 hereof, countersign and deliver to the Person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificates. Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will execute and deliver a new Rights Certificate of like tenor to the Rights Agent for counter-signature and delivery to the registered owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. (a) Subject to Section 7(e) hereof, the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein including, without limitation, the restrictions on exercisability set forth in Section 9(c) and Section 11(a)(iii) hereof) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and the certificate on the reverse side thereof duly executed, to the Rights Agent at the principal office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price with respect to the total number of one four-hundredths of a Preferred Share (or other securities, cash or other assets, as the case may be) as to which such surrendered Rights are then exercisable, at or prior to the earlier of (i) the close of business on April 29, 1998 (the "Final Expiration Date"), or (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"). (b) The purchase price for each one one-hundredths of a Series E Preferred Share pursuant to the exercise of a Circuit City Right shall initially be $140.00 (as adjusted, the "Series E Purchase Price"). The purchase price for each one one-hundredths of a Series F Preferred Share pursuant to the exercise of a CarMax Right shall initially be $88.00 (as adjusted, the "Series F Purchase Price"). The Series E Purchase Price and the Series F Purchase Price shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in accordance with paragraph (c) below. References in this Agreement to the "Purchase Price" shall mean the Series E Purchase Price and/or the Series F Purchase Price, as the context requires. -9- (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase and the certificate duly executed, accompanied by payment, with respect to each Right so exercised, of the Purchase Price per one fourhundredths of a Preferred Share (or other shares, securities, cash or other assets, as the case may be) to be purchased as set forth below and an amount equal to any applicable transfer tax required to be paid by the holder of such Rights Certificate in accordance with Section 9, the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Shares (or make available, if the Rights Agent is the transfer agent for such shares) certificates for the total number of one four-hundredths of a Preferred Share to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) if the Company shall have elected to deposit the total number of Preferred Shares issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent depositary receipts representing such number of one four-hundredths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash, if any, to be paid in lieu of issuance of fractional shares in accordance with Section 14, (iii) promptly after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt, promptly deliver such cash, if any, to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced pursuant to Section 11(a)(iii) hereof) shall be made (x) in cash or by certified bank check or bank draft payable to the order of the Company, or (y) at the election of the Company with respect to all exercisable Rights by delivery of a certificate or certificates (with appropriate stock powers executed in blank attached thereto) evidencing a number of Common Shares equal to the then Purchase Price divided by the closing price (as determined pursuant to Section 11(d) hereof) per Common Share on the Trading Day (as hereinafter defined) immediately preceding the date of such exercise or (z) in the event the Company permits payment with Common Shares, a combination thereof. In the event the Company elects to accept Common Shares in payment of the Purchase Price, it shall notify the Rights Agent of such election and of the closing price per Common Share on the Trading Date immediately preceding the date of exercise to which such election relates. In the event that the Company is obligated to issue other securities (including Common Shares) of the Company, pay cash and/or distribute other property pursuant to Section 11(a) hereof, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. (d) In case the registered holder of any Rights Certificate shall exercise fewer than all the Rights evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the -10- registered holder of such Rights Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee before or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer that the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e), shall be void without any further action and any holder of such Rights shall thereafter have no right whatsoever with respect to such Rights (including, without limitation, the right to exercise such Rights) under any provision of this Agreement or otherwise. No Rights Certificate shall be issued pursuant to Section 3 that represents Rights beneficially owned by an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof; no Rights Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof or to any nominee of such Acquiring Person, Associate or Affiliate; and any Rights Certificate delivered to the Rights Agent for transfer to an Acquiring Person whose Rights would be void pursuant to the preceding sentence shall be cancelled. The Company shall use all reasonable efforts to insure that the provisions of this Section 7(e) and Section 4(b) are complied with, but shall have no liability to any holder of Rights Certificates or any other Person as a result of its failure to make any determinations with respect to an Acquiring Person or its Affiliates, Associates or transferees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. Cancellation and Destruction of Rights Certificates. All Rights Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the -11- Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights Certificates to the Company. Section 9. Reservation and Availability of Preferred Shares and Common Shares. (a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued Preferred Shares (and, following the occurrence of a Triggering Event, out of its authorized and unissued Common Shares and/or other securities) the number of Preferred Shares (and, following the occurrence of a Triggering Event, Common Shares and/or other securities) that, as provided in this Agreement, will be sufficient to permit the exercise in full of all outstanding Rights. (b) So long as the Preferred Shares (and, following the occurrence of a Triggering Event, Common Shares and/or other securities) issuable and deliverable upon the exercise of Rights may be listed on any national securities exchange, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable (but only to the extent that it is reasonably likely that the Rights will be exercised), all shares reserved for such issuance to be listed on such exchange upon official notice of issuance upon such exercise. (c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the first occurrence of a Section 11(a)(ii) Event on which the consideration to be delivered by the Company upon exercise of the Rights has been determined pursuant to this Agreement (including in accordance with Section 11(a)(iii) hereof), a registration statement under the Securities Act of 1933 (the "Act"), with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing, (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities, and (B) the Final Expiration Date, and (iv) obtain such regulatory approvals as may be necessary for it to issue securities purchasable upon the exercise of the Rights. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. The Company may temporarily suspend, for a period of time not to exceed 90 days after the date set forth in clause (i) of the first sentence of this Section 9(c), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective or to obtain any other required regulatory approval in connection with the exercisability of the Rights. Upon any such suspension, the Company shall issue a public announcement stating, and notify the Rights -12- Agent, that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. In addition, if the Company shall determine that a registration statement is required following the Distribution Date, the Company may temporarily suspend the exercisability of the Rights until such time as a registration statement has been declared effective. In the event any Right is exercised prior to the occurrence of a Section 11(a)(ii) Event or a Section 13 Event, the Company may defer for up to 90 days the issuance of Preferred Shares upon such exercise in order to obtain any necessary regulatory approval. If, within 90 days after such exercise of any Right, the Company is unable to obtain any required regulatory approval for the issuance of the Preferred Shares, or if the Company is otherwise unable to issue the Preferred Shares under the terms of its Articles of Restatement or for any other reason, then the Company shall substitute for the Preferred Shares otherwise issuable upon exercise of the Right (1) cash, (2) a reduction in the Purchase Price, (3) Common Shares or other equity securities of the Company, except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, (4) debt securities of the Company, except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, (5) other assets, or (6) any combination of the foregoing, having an aggregate value equal to the Current Market Price (as defined in Section 11(d)(ii)) of the Preferred Shares for which such Right is exercisable, where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction if the requisite qualification in such jurisdiction shall not have been obtained or the exercise thereof shall not be permitted under applicable law. (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all one four-hundredths of a Preferred Share (and, following the occurrence of a Triggering Event, Common Shares and/or other securities) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Rights Certificates and of any certificate for a number of one four-hundredths of a Preferred Share (or Common Shares and/or other securities, as the case may be) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a person other than, or the issuance or delivery of a number of one fourhundredths of a Preferred Share (or Common Shares and/or other securities, as the case may be) in respect of a name other than that of, the registered holder of the Rights Certificate evidencing Rights surrendered for exercise or to issue or deliver any certificates for a number of one four-hundredths of a Preferred Share (or Common Shares and/or other securities, as the case may be) upon the exercise of any Rights until any such tax shall have been paid (any such -13- tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. Section 10. Preferred Shares Record Date. Each person in whose name any certificate for a number of one four-hundredths of a Preferred Share is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Preferred Shares (or Common Shares and/or other securities, as the case may be) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Shares (or Common Shares and/or other securities, as the case may be) transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares (fractional or otherwise) on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares (or Common Shares and/or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a shareholder of the Company with respect to shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights. The Purchase Price, the number and kind of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on any series of the Preferred Shares payable in Preferred Shares, (B) subdivide any series of the outstanding Preferred Shares, (C) combine any series of the outstanding Preferred Shares into a smaller number of Preferred Shares or (D) issue any shares of its capital stock in a reclassification of any series of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the Purchase Price then in effect, the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer books of the Company were open, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment under both Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i) -14- shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii). (ii) In the event (A) any Acquiring Person or any Associate or Affiliate of any Acquiring Person, at any time after the date of this Agreement, directly or indirectly, (1) shall merge into the Company or otherwise combine with the Company and the Company shall be the continuing or surviving corporation of such merger or combination and all the Common Shares of the Company shall remain outstanding and not changed into or exchanged for stock or other securities of any other Person or the Company or cash or any other property, (2) shall, in one or more transactions, transfer any assets to the Company or any of its Subsidiaries in exchange (in whole or in part) for shares of any class or series of capital stock of the Company or any of its Subsidiaries or for securities exercisable for or convertible into shares of any class or series of capital stock of the Company or any of its Subsidiaries or otherwise obtain from the Company or any of its Subsidiaries, with or without consideration, any additional shares of any class or series of capital stock of the Company or any of its Subsidiaries or securities exercisable for or convertible into shares of any class or series of capital stock of the Company or any of its Subsidiaries (other than as part of a pro rata distribution to all holders of such shares of any class or series of capital stock of the Company or any of its Subsidiaries), (3) shall sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose (in one or more transactions), to, from, with or of, as the case may be, the Company or any of its Subsidiaries, assets (including securities) on terms and conditions less favorable to the Company than the Company would be able to obtain in arm's-length negotiation with an unaffiliated third party (other than pursuant to a transaction set forth in Section 13(a) hereof), (4) shall sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose (in one or more transactions), to, from, with or of, as the case may be, the Company or any of the Company's Subsidiaries (other than incidental to the lines of business, if any, engaged in as of the date hereof between the Company and such Acquiring Person or Associate or Affiliate) assets having an aggregate fair market value of more than $2 million (other than pursuant to a transaction set forth in Section 13(a) hereof), (5) shall receive any compensation from the Company or any of the Company's Subsidiaries other than compensation for full-time employment as a regular employee at rates in accordance with the Company's (or its Subsidiaries') past practices, or (6) shall receive the benefit, directly or indirectly (except proportionately as a shareholder and except if resulting from a requirement of law or governmental regulation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantage provided by the Company or any of its Subsidiaries, or (B) -15- any Person shall become the Beneficial Owner of Common Shares representing 15% or more of the total Voting Rights of all the Common Shares of the Company then outstanding except pursuant to a tender offer made in the manner prescribed by Section 14(d) of the Exchange Act and the rules and regulations promulgated thereunder; provided, however, that (a) such tender offer shall provide for the acquisition of all of the outstanding shares of Circuit City Stock and CarMax Stock held by any Person other than such Acquiring Person and its Associates or Affiliates for cash and (b) a majority of the Continuing Directors shall have determined that such tender offer is fair, or (C) during such time as there is an Acquiring Person, there shall be any reclassification of securities (including any reverse stock split), or recapitalization of the Company, or any merger or consolidation of the Company with any of its Subsidiaries or any other transaction or series of transactions involving the Company or any of its Subsidiaries (whether or not with or into or otherwise involving an Acquiring Person), other than a transaction or transactions to which the provisions of Section 13(a) apply, which has the effect, directly or indirectly, of increasing by more than 1% the proportionate share of the outstanding shares of any class or series of equity securities or of securities exercisable for or convertible into securities of the Company or any of its Subsidiaries which is directly or indirectly owned by any Acquiring Person or any Associate or Affiliate of any Acquiring Person, then, promptly following the occurrence of any event described in Section 11(a)(ii)(A), (B) or (C) hereof, proper provision shall be made so that each holder of a Right, except as provided below and in Section 7(e), shall thereafter have the right to receive, upon exercise thereof at the then current Purchase Price, in accordance with the terms of this Agreement, in lieu of a number of one four-hundredths of a Preferred Share, such number of shares of Circuit City Stock (in the case of a Circuit City Right) or CarMax Stock (in the case of a CarMax Right) as shall equal the result obtained by (x) multiplying the then current Purchase Price by the then number of one four-hundredths of a Preferred Share for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event, and dividing that product (which product, following such first occurrence, shall thereafter be referred to as the "Purchase Price" for each Right and for all purposes of this Agreement) by (y) 50% of the Current Market Price per share of the applicable series of Common Shares (determined pursuant to Section 11(d)) on the date of such first occurrence (such number of shares, the "Adjustment Shares"); provided, that the Purchase Price and the number of Adjustment Shares shall be further adjusted as provided in this Agreement to reflect any events occurring after the date of such first occurrence. (iii) In the event that the aggregate number of shares of Circuit City Stock or CarMax Stock authorized by the Company's Articles of Restatement but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights is not sufficient to permit the exercise in full of the Circuit City Rights or CarMax Rights, as the case may be, in -16- accordance with the foregoing subparagraph (ii) of this Section 11(a), or if any necessary regulatory approval for such issuance has not been obtained by the Company, the Company shall: (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of each such Right (the "Current Value") over (2) the Purchase Price (such excess, the "Spread"), and (B) with respect to each such Right, make adequate provision to substitute for the Adjustment Shares, upon exercise of such Rights, (1) cash, (2) a reduction in the Purchase Price, (3) Common Shares or other equity securities of the Company (including, without limitation, shares or units of shares of preferred stock which the Board of Directors of the Company has deemed to have the same value as shares of Circuit City Stock or CarMax Stock, as applicable (such shares or units of shares of preferred stock are herein called "common stock equivalents"), except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, (4) debt securities of the Company, except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, (5) other assets, or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; provided, however, if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within 30 days following the later of (x) the first occurrence of a Section 11(a)(ii) Event and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger Date"), then the Company shall be obligated, subject to Section 7(e), to deliver, upon the surrender for exercise of each such Right and without requiring payment of the Purchase Price, Common Shares (to the extent available), except to the extent that the Company has not obtained any necessary regulatory approval for such issuance, and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If the Board of Directors of the Company shall determine in good faith that it is likely that sufficient additional Common Shares could be authorized for issuance upon exercise in full of such Rights or that any necessary regulatory approval for such issuance will be obtained, the 30-day period set forth above may be extended to the extent necessary, but not more than 90 days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek shareholder approval for the authorization of such additional shares or take action to obtain such regulatory approval (such period, as it may be extended, the "Substitution Period"). To the extent that the Company determines that some action need be taken pursuant to the first and/or second sentences of this Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all outstanding Circuit City Rights or CarMax Rights, as the case may be, and (y) may suspend the exercisability of such Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares, to take any action to obtain any required regulatory approval and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of such Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11(a)(iii), the value of the Common Shares -17- shall be the Current Market Price (as determined pursuant to Section 11(d) hereof) per share of the Common Shares on the Section 11(a)(ii) Trigger Date and the value of any "common stock equivalent" shall be deemed to have the same value as the Common Shares on such date. (b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of any series of Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase such Preferred Shares (or shares having the same rights, privileges and preferences as such Preferred Shares ("equivalent preferred shares") or securities convertible into such Preferred Shares or equivalent preferred shares at a price per Common Share or equivalent preferred share (or having a conversion price per share, if a security convertible into such Preferred Shares or equivalent preferred shares) less than the Current Market Price per share of such Preferred Shares (as defined in Section 11(d)) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of such Preferred Shares outstanding on such record date plus the number of such Preferred Shares which the aggregate offering price of the total number of such Preferred Shares or equivalent preferred shares or both so to be offered (or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such Current Market Price and the denominator of which shall be the number of such Preferred Shares outstanding on such record date plus the number of additional such Preferred Shares or equivalent preferred shares or both to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid in a consideration part or all of which may be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Preferred Shares of such series owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for the making of a distribution to all holders of any series of Preferred Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in such Preferred Shares) or subscription rights or warrants (excluding those referred to in Section 11(b)), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the Current Market Price per share of such Preferred Shares (as defined in Section 11(d)) on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, -18- whose determination shall be described in a statement filed with the Rights Agent) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one such Preferred Share and the denominator of which shall be such Current Market Price per share of such Preferred Shares. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d) (i) For the purpose of any computation hereunder (other than computations made pursuant to Section 11(a)(iii) hereof), the "Current Market Price" per share of the Common Shares on any date shall be deemed to be the average of the daily closing prices per share of such Common Shares for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date, and for purposes of computations made pursuant to Section 11(a)(iii) hereof, the "Current Market Price" per share of the Common Shares on any date shall be deemed to be the average of the daily closing prices per share of such Common Shares for the ten consecutive Trading Days immediately following such date; provided, however, that in the event that the Current Market Price per share of the Common Shares is determined during a period following the announcement by the issuer of such Common Shares of (A) a dividend or distribution on such Common Shares payable in such Common Shares or securities convertible into such Common Shares (other than the Rights), or (B) any subdivision, combination or reclassification of such Common Shares, and prior to the expiration of the requisite 30 Trading Days or ten Trading Days, as set forth above, after the ex-dividend date for such dividend or distribution or the record date for such subdivision, combination or reclassification, then, and in each such case, the Current Market Price shall be appropriately adjusted to reflect the Current Market Price per Common Share equivalent. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Common Shares are listed or admitted to trading or, if the Common Shares are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, or, if on any such date the Common Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Shares selected by the Board of Directors of the Company. If on any such date no market maker is making a market in the Common Shares, the fair value of such shares on such date as determined in good faith by the Board of Directors of the Company shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Shares are listed or admitted -19- to trading is open for the transaction of business or, if the Common Shares are not listed or admitted to trading on any national securities exchange, a Business Day. If the Common Shares are not publicly held or not so listed or traded, "Current Market Price" per share shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. (ii) For the purpose of any computation hereunder, the "Current Market Price" per share of the Preferred Shares shall be determined in the same manner as set forth above for Common Shares in clause (i) of this Section 11(d) (other than the last sentence thereof). If the Current Market Price per share of either series of Preferred Shares cannot be determined in the manner provided above or if either series of Preferred Shares is not publicly held or listed or traded in a manner described in clause (i) of this Section 11(d), the "Current Market Price" per share of such series of Preferred Shares shall be conclusively deemed to be (A) in the case of the Series E Preferred Stock, the Current Market Price per share of the Circuit City Stock (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof), multiplied by 400 and (B) in the case of the Series F Preferred Stock, the Current Market Price per share of the CarMax (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof), multiplied by 400. If neither the applicable series of Common Shares nor the applicable series of Preferred Shares are publicly held or so listed or traded, "Current Market Price" per share shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. For all purposes of this Agreement, the "Current Market Price" of one four-hundredths of a Preferred Share shall be equal to the "Current Market Price" of one Preferred Share divided by 400. (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least l% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest ten-thousandth of a Common Share or other share or onemillionth of a Preferred Share, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the date of the expiration of the right to exercise any Rights. (f) If, as a result of an adjustment made pursuant to Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly -20- equivalent as practicable to the provisions with respect to the Preferred Shares contained in Section 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one four-hundredths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Section 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price per one four-hundredths of a Preferred Share, that number of one four-hundredths of a Preferred Share (calculated to the nearest one one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number of one four-hundredths of a share covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of one four-hundredths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment in the number of Rights shall be exercisable for the number of one four-hundredths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement, and notify the Rights Agent, of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, -21- and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of one four-hundredths of a Preferred Share issuable upon the exercise of a Right, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per one four-hundredths of a share and the number of four-hundredths of a share which were expressed in the initial Rights Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below one four-hundredths of the then par value, if any, of the number of one four-hundredths of a Preferred Share issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Preferred Shares at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date of the number of one four-hundredths of a Preferred Share and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the number of one four-hundredths of a Preferred Share and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) or securities upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that in their good faith judgment the Board of Directors of the Company shall determine to be advisable in order that any consolidation or subdivision of the Preferred Shares, issuance wholly for cash of any of the Preferred Shares at less than the Current Market Price, issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or exchangeable for Preferred Shares, dividends on Preferred Shares payable in Preferred Shares or issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to holders of its Preferred Shares shall not be taxable to such shareholders. -22- (n) The Company covenants and agrees that it shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), (ii) merge with or into any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(o) hereof), if (x) at the time of or immediately after such consolidation, merger or sale there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale, the stockholders of the Person who constitutes, or would constitute, the "Principal Party" for purposes of Section 13(a) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. (o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Section 23 or Section 27 hereof, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. (p) In the event that at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on any series of the outstanding Common Shares payable in Common Shares (other than a dividend payable in shares of CarMax Stock to the extent such dividend reduces the Number of Shares Issuable with Respect to the Inter-Group Interest, as such term is defined in the Articles of Restatement) or (ii) effect a subdivision, combination or consolidation of any series of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares) into a greater or lesser number of Common Shares, then in any such case (i) the number of one four-hundredths of a Series E Preferred Share (in the case of an event affecting the Circuit City Stock) or a Series F Preferred Share (in the case of an event affecting the CarMax Stock) purchasable after such event upon proper exercise of each Right shall be determined by multiplying the number of one four-hundredths of a Preferred Share so purchasable immediately prior to such event by a fraction, the numerator of which is the number of such Common Shares outstanding immediately before such event and the denominator of which is the number of such Common Shares outstanding immediately after such event and (ii) each such Common Share outstanding immediately after such event shall have issued with respect to it that number of Rights which each such Common Share outstanding immediately prior to such event had issued with respect to it. The adjustments provided for in this Section 11(p) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. If an event -23- occurs which would require an adjustment under Section 11(a)(ii) and this Section 11(p), the adjustments provided for in this Section 11(p) shall be in addition and prior to any adjustment required pursuant to Section 11(a)(ii). (q) In the event that at any time after the date of this Agreement and prior to the Distribution Date, the Company shall redeem the shares of Circuit City Stock or CarMax Stock in exchange for shares of common stock of one or more subsidiaries of the Company pursuant to paragraph (B)(5)(b) of Article V, then there shall be issued with respect to each such share of common stock of a subsidiary delivered directly to the holders of Circuit City Stock or CarMax Stock, as applicable, a share purchase right under a shareholder rights plan to be established by such subsidiary. Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the Company shall (a) promptly prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent and with the transfer agent for the Common Shares and Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Rights Certificate in accordance with Section 25 hereof. Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. (a) In the event that, following the Share Acquisition Date, directly or indirectly, (i) the Company shall consolidate with, or merge with and into, any other Person (other than a subsidiary of the Company in a transaction which complies with Section 11(o) hereof or any employee benefit plan of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan) and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (ii) any Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof or any employee benefit plan of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan) shall consolidate with the Company, or merge with and into the Company, and the Company shall be the continuing or surviving corporation of such consolidation or merger and, in connection with such merger, all or part of the outstanding Common Shares shall be changed into or exchanged for stock or other securities of any other Person (or the Company) or cash or any other property, or (iii) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons (other than the Company or any of its Subsidiaries in one or more transactions each of which complies with Section 11(o) hereof), then, and in each such case, proper provision shall be made so that (A) each holder of a Right (except as otherwise provided in Section 7(e) hereof) shall thereafter have the right to receive, upon the exercise thereof at the then current Series E Purchase Price (in the case of a Circuit City Right) or the then current Series F Purchase Price (in the case of a CarMax Right), in accordance with the terms of this Agreement, such number of validly authorized and issued, -24- fully paid, nonassessable and freely tradeable shares of Common Shares of the Principal Party (as such term is hereinafter defined), not subject to any liens, encumbrances, rights of first refusal or other adverse claims, as shall be equal to the result obtained by (1) multiplying such then current Purchase Price by the number of one four-hundredths of a Preferred Share for which such Right is then exercisable (without taking into account any adjustment previously made pursuant to Section 11(a)(ii)) and (2) dividing that product (which, following the first occurrence of a Section 13 Event, shall be referred to as the "Purchase Price" for each such Right and for all purposes of this Agreement) by 50% of the Current Market Price per share of the Common Shares of such Principal Party on the date of consummation of such Section 13 Event; (B) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (C) the term "Company" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 hereof shall apply only to such Principal Party following the first occurrence of a Section 13 Event; (D) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Shares in accordance with Section 9) in connection with the consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its Common Shares thereafter deliverable upon the exercise of the Rights; and (E) the provisions of Section 11(a)(ii) hereof shall be of no effect following the first occurrence of any Section 13 Event. (b) "Principal Party" shall mean (i) in the case of any transaction described in clause (i) or (ii) of the first sentence of Section 13(a), the Person that is the issuer of any securities into which Common Shares of the Company are converted in such merger or consolidation, and if no securities are so issued, the Person that is the other party to such merger or consolidation; and (ii) in the case of any transaction described in clause (iii) of the first sentence of Section 13(a), the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions; provided, however, that in any such case, (1) if the Common Shares of such Person are not at such time and have not been continuously over the preceding 12-month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the Common Shares of which is and has been so registered, "Principal Party" shall refer to such other Person; and (2) in case such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Shares of two or more of which are and have been so registered, "Principal Party" shall refer to whichever of such Persons is the issuer of the Common Shares having the greatest aggregate market value. -25- (c) The Company shall not consummate any Section 13 Event unless the Principal Party shall have a sufficient number of authorized shares of its Common Shares which have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in paragraphs (a) and (b) of this Section 13 and further providing that, as soon as practicable after the date of any Section 13 Event, the Principal Party will (i) prepare and file a registration statement under the Act, with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, and will use its best efforts to cause such registration statement to (A) become effective as soon as practicable after such filing and (B) remain effective (with a prospectus at all times meeting the requirements of the Act) until the Final Expiration Date; and (ii) will deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act. The foregoing provisions set forth in this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. In the event that a Section 13 Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in Section 13(a). Section 14. Fractional Rights and Fractional Shares. (a) The Company shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any -26- such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. (b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions which are integral multiples of one four-hundredths of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions which are integral multiples of one four-hundredths of a Preferred Share). Fractions of Preferred Shares in integral multiples of one four-hundredths of a Preferred Share may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it, provided that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as Beneficial Owners of the Preferred Shares. In lieu of fractional Preferred Shares the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Preferred Share. For purposes of this Section 14(b), the current market value of a Preferred Share shall be the closing price of a Preferred Share (as determined pursuant to the second sentence of Section 11(d)) for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Rights expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right. Section 15. Rights of Action. All rights of action in respect to this Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of the Common Shares), may, on his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person subject to this Agreement. -27- Section 16. Agreement of Right Holders. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent designated for such purposes, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; (c) subject to Section 6 and Section 7(f) hereof, the Company and the Rights Agent may deem and treat the person in whose name the Rights Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent, subject to the last sentence of Section 7(e) hereof, shall be required to be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation; provided, however, the Company must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. Section 17. Rights Certificate Holder Not Deemed a Shareholder. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable upon the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in Section 25), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. -28- Section 18. Concerning the Rights Agent. The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the acceptance, exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without gross negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done, suffered or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises (including reasonable counsel fees and expenses). The Rights Agent shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Rights Certificate or certificate for the Preferred Shares or Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons, or otherwise upon the advice of its counsel as set forth in Section 20 hereof. Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, a successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been -29- countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken, suffered or omitted in good faith by it under the provisions of this Agreement in reliance upon such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person and the determination of "Current Market Price") be proved or established by the Company prior to taking, suffering or omitting any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board, the President, any Executive Vice President, any Senior Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full and complete authorization to the Rights Agent for any action taken, suffered or omitted in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own gross negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement, the Summary of Rights or in the Rights Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any change in the exercisability of the Rights or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11, 13 or 23, or the ascertaining of the existence of facts that would -30- require any such change or adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after actual notice that such change or adjustment is required); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares or other securities to be issued pursuant to this Agreement or any Rights Certificate or as to whether any Preferred Shares or other securities will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board, the President, any Executive Vice President, any Senior Vice President, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken, suffered or omitted to be taken in good faith by it under the provisions of this Agreement in reliance upon instructions of any such officer. At any time the Rights Agent may apply to the Company for written instructions with respect to any matter arising in connection with the Rights Agent's duties and obligations arising under this Agreement. Such application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent with respect to its duties or obligations under this Agreement and the date on and/or after which such action shall be taken and the Rights Agent shall not be liable for any action taken or omitted in accordance with a proposal included in any such application on or after the date specified therein (which date shall not be less than three Business Days after the Company receives such application, without the Company's consent) unless, prior to taking or initiating such action, the Rights Agent has received written instructions in response to such application specifying the action to be taken or omitted. (h) The Rights Agent and any shareholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting -31- from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Company. Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days notice in writing mailed to the Company and to the transfer agent of the Common Shares and Preferred Shares by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to the transfer agent of the Common Shares and Preferred Shares by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his Rights Certificate for inspection by the Company), then the registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the States of New York or Virginia (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the States of New York or Virginia), in good standing, having a principal office in the States of New York or Virginia, which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any -32- such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and the transfer agent of the Common Shares and Preferred Shares, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Rights Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of Common Shares following the Distribution Date and prior to the redemption or expiration of the Rights, the Company (a) shall, with respect to Common Shares so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement (so long as such options, plan or arrangement were granted or established, as the case may be, prior to the Distribution Date), or upon the exercise, conversion or exchange of securities issued by the Company after the date hereof and prior to the Distribution Date, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Rights Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Persons to whom such Rights Certificate would be issued, and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 23. Redemption and Termination. (a) The Board of Directors of the Company may, at its option, at any time prior to the earlier of (i) the close of business on the tenth day following the Share Acquisition Date (or, if the Share Acquisition Date shall have occurred prior to the Record Date, the close of business on the fifteenth day following the Record Date), or (ii) the Final Expiration Date, redeem all but not less than all the then outstanding Rights at a redemption price of $.0025 per Right, as such amount may be appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price") and the Company may, at its option, pay the Redemption Price either in Common Shares (based on the "Current Market Price," as defined in Section 11(d)(i) hereof, of the Common Shares at the time of redemption) or cash; provided, however, if the Board of Directors of the Company authorizes redemption of the Rights in either of the circumstances set forth in clauses (i) and (ii) below, then there must be Continuing Directors then in office and such authorization shall require the concurrence of a majority of such Continuing Directors: (i) such authorization occurs on or after the time a Person becomes an Acquiring -33- Person, or (ii) such authorization occurs on or after the date of a change (resulting from a proxy or consent solicitation) in a majority of the directors in office at the commencement of such solicitation if any Person who is a participant in such solicitation has stated (or, if upon the commencement of such solicitation, a majority of the Board of Directors of the Company has determined in good faith) that such Person (or any of its Affiliates or Associates) intends to take, or may consider taking, any action which would result in such Person becoming an Acquiring Person or which would cause the occurrence of a Triggering Event. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights (such action being adopted in the manner required by paragraph (a) above), evidence of which shall have been filed with the Rights Agent and without any further action and without any notice, the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right so held. Promptly after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to all such holders at each holder's last address as it appears upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Section 24. Exchange. (a) With the affirmative vote of a majority of the Continuing Directors, the Company may at any time after any Person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights for Common Shares at an exchange ratio of one share of Circuit City Stock per Circuit City Right and one share of CarMax Stock per CarMax Right, each such ratio being appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (each such exchange ratio being hereinafter referred to as an "Exchange Ratio"). Notwithstanding the foregoing, the Company shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of Common Shares representing 50% or more of the total Voting Rights of all the Common Shares of the Company then outstanding. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to subsection (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of shares of Circuit City Stock or CarMax Stock, as the case may be, equal to the number of such Rights held by such holder multiplied by the applicable Exchange Ratio. The Company shall -34- promptly give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights held by each holder of Rights. (c) In any exchange pursuant to this Section 24, the Company, at its option, may substitute (i) Series E Preferred Shares (or equivalent preferred shares, as such term is defined in Section 11(b) hereof) for shares of Circuit City Stock exchangeable for Circuit City Rights, at the initial rate of one four-hundredths of a Series E Preferred Share (or equivalent preferred share) for each share of Circuit City Stock and (ii) Series F Preferred Shares (or equivalent preferred shares, as such term is defined in Section 11(b) hereof) for shares of CarMax Stock exchangeable for CarMax Rights, at the initial rate of one four-hundredths of a Series F Preferred Share (or equivalent preferred share) for each share of CarMax Stock, such rates, in the case of clause (i) or (ii) of this Section 24(c), to be appropriately adjusted to reflect adjustments in the voting rights of the Preferred Shares pursuant to the terms thereof, so that the fraction of a Preferred Share delivered in lieu of a Common Share shall have the same voting rights as such Common Share. (d) In the event that there shall not be sufficient Common Shares or Preferred Shares authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional Common Shares or Preferred Shares for issuance upon exchange of the Rights. (e) The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of the Rights Certificates with regard to which such fractional Common Shares would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Common Share. For the purposes of this subsection (e), the current market value of a whole Common Share shall be the closing price of such Common Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately after the public announcement by the Company that an exchange is to be effected pursuant to this Section 24. Section 25. Notice of Certain Events. In case the Company shall propose (a) to pay any dividend payable in stock of any class or series to the holders of either series of Preferred Shares or to make any other distribution to the holders of either series of Preferred Shares (other than a regular quarterly cash dividend) or (b) to offer to the holders of either -35- series of Preferred Shares rights or warrants to subscribe for or to purchase any additional such Preferred Shares or shares of stock of any class or series or any other securities, rights or options, or (c) to effect any reclassification of either series of Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares of such series), or (d) to effect any consolidation or merger into or with any other Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with Section 11(o) hereof), or (e) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Shares and/or Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (a) or (b) above at least 20 days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least 20 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares and/or Preferred Shares, whichever shall be the earlier. In case any Section 11(a)(ii) Event shall occur, then, in any such case, the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which shall specify the event and the consequences of the event to holders of Rights under Section 11(a)(ii) hereof, and all references in the preceding paragraph to Preferred Shares shall be deemed thereafter references to Common Shares and/or, if appropriate, other securities. Section 26. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Circuit City Stores, Inc. 9950 Mayland Drive Richmond, VA 23233 Attention: Secretary Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to -36- or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: Norwest Bank Minnesota, N.A. 161 North Concord Exchange South St. Paul, Minnesota 55075 Attention: Shareowner Services Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. Supplements and Amendments. Prior to the Distribution Date and subject to the penultimate sentence of this Section 27, the Company may and the Rights Agent shall, if the Company so directs, supplement or amend any provision of this Agreement without the approval of any holders of certificates representing Common Shares. From and after the Distribution Date and subject to the penultimate sentence of this Section 27, the Company may and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without the approval of any holders of Rights Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) shorten or lengthen any time period hereunder (which lengthening or shortening, following the first occurrence of an event set forth in clauses (i) and (ii) of the proviso to Section 23(a) hereof, shall be effective only if there are Continuing Directors and shall require the concurrence of a majority of such Continuing Directors), or (iv) to change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person); provided, this Agreement may not be supplemented or amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time period relating to when the Rights may be redeemed at such time as the Rights are not then redeemable, or (B) any other time period unless such lengthening is for the purpose of protecting, enhancing or clarifying the rights of, and/or the benefits to, the holders of Rights (other than any Acquiring Person and its Affiliates and Associates). Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment. Notwithstanding anything contained in this Agreement to the contrary, no supplement or amendment shall be made which changes the Redemption Price, the Final Expiration Date, the Purchase Price or the number of one four-hundredths of a Preferred Share for which a Right is exercisable. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Shares (other than an Acquiring Person). -37- Section 28. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. Determinations and Actions by the Board of Directors, etc. For all purposes of this Agreement, any calculation of the number of Common Shares outstanding at any particular time, including for purposes of determining the number of such outstanding Common Shares of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company (with, where specifically provided for herein, the consent of a majority of the Continuing Directors) shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board (with, where specifically provided for herein, the consent of a majority of the Continuing Directors) or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement, (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement) and (iii) make all factual determinations deemed necessary or advisable for the administration of this Agreement. All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights and all other parties, and (y) not subject the Board to any liability to the holders of the Rights. Section 30. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the Common Shares). Section 31. Severability. If any term, provision, covenant or restriction of this Agreement, or any portion thereof, is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement, including any portions of any thereof which are not held to be invalid, void or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company, with the consent of a majority of the Continuing Directors after the Distribution Date, determines in its good faith business judgment that severing the invalid language from -38- this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the close of business on the tenth day following the date of such determination by the Board of Directors. Section 32. Governing Law. This Agreement, each Right, and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the Commonwealth of Virginia and for all purposes shall be governed by and construed in accordance with the laws of such Commonwealth applicable to contracts to be made and performed entirely within such Commonwealth. Section 33. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 34. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. -39- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. CIRCUIT CITY STORES, INC. Attest: By Michael T. Chalifoux By R. L. Sharp ------------------------- ------------------------- Title Senior Vice President, Title Chairman of the Board, ------------------------- ---------------------- Chief Financial Officer President ------------------------- ---------------------- NORWEST BANK MINNESOTA, N.A. Attest: By Kenneth Swanson By Barbara M. Novak ---------------------------- ------------------------ Title Assistant Secretary Title Vice-President -------------------------- --------------------- -40- EXHIBIT A-1 The Board of Directors of the Corporation has approved the following provisions to be set forth as Section C of Article IV of the Corporation's Articles of Restatement setting forth certain relative rights and preferences of the Series E Preferred Shares: C. Series E Preferred Stock. The Board of Directors of the Corporation has heretofore designated 500,000 shares of the Preferred Stock as the Cumulative Participating Preferred Stock, Series E ("Series E Stock"). Such number may from time to time be decreased (but not below the number of shares of Series E Stock then outstanding) by the Board of Directors of the Corporation. In addition to any relative rights and preferences hereinabove granted, the relative rights and preferences of such series and the holders of the outstanding shares thereof are as set forth in paragraphs (C)(1) through (C)(5) of this Article. (1) Dividends and Distributions. (a) The holders of shares of the Series E Stock, in preference to the holders of shares of the Circuit City Stock and the CarMax Stock and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the fifteenth day (or, if not a business day, the preceding business day) of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of the Series E Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 400 times the aggregate per share amount of all cash dividends, and 400 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Circuit City Stock, or a subdivision of the outstanding shares of Circuit City Stock (by reclassification or otherwise), declared on the Circuit City Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of the Series E Stock. In the event the Corporation shall at any time after January 1, 1997 declare or pay any dividend on Circuit City Stock payable in shares of Circuit City Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Circuit City Stock (by reclassification or otherwise than by payment of a dividend in shares of Circuit City Stock) into a greater or lesser number of shares of Circuit City Stock, then in each such case the amount per share to which holders of shares of the Series E Stock shall be entitled under clause (b) of the preceding sentence shall be adjusted by multiplying the amount per share to which A-1-1 holders of shares of the Series E Stock were entitled immediately prior to such event under clause (b) of the preceding sentence by a fraction the numerator of which is the number of shares of Circuit City Stock outstanding immediately after such event and the denominator of which is the number of shares of Circuit City Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series E Stock as provided in paragraph (C)(1)(a) of this Article immediately after it declares a dividend or distribution on the Circuit City Stock (other than a dividend payable in shares of Circuit City Stock); provided that, in the event no dividend or distribution shall have been declared on the Circuit City Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series E Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of the Series E Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of the Series E Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of the Series E Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of the Series E Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of the Series E Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. (2) Voting Rights. Except to the extent provided by law, the holders of shares of the Series E Stock shall not be entitled (i) to vote on any matter or (ii) to receive notice of, or to participate in, any meeting of shareholders of the Corporation at which they are not entitled to vote. (3) Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series E Stock as provided in paragraph (C)(1) of this Article are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not A-1-2 declared, on shares of the Series E Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare, set apart or pay dividends on or make any other distributions on the Common Stock or any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series E Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series E Stock, except dividends paid ratably on the Series E Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; or (iii) redeem or purchase or otherwise acquire for consideration shares of the Series E Stock, any such parity stock or any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) with the Series E Stock, or set aside for or pay to any sinking fund therefor. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (C)(3)(a) of this Article, purchase or otherwise acquire such shares at such time and in such manner. (4) Reacquired Shares. Any shares of the Series E Stock redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, par value $20.00 per share, and may be reissued as a new series or a part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors or as part of an existing series of Preferred Stock. (5) Redemption. (a) The Corporation may, at its option and at any time and from time to time after April 29, 2048, redeem all or any portion of the outstanding shares of Series E Stock. (b) The redemption price shall be an amount per share equal to the greater of (i) $14,000 or (ii) subject to the provision for adjustment hereinafter set forth, 400 times the current market price per share of Circuit City Stock on the date fixed for redemption, plus in each such case an amount equal to accrued and unpaid dividends A-1-3 and distributions thereon, whether or not declared, to the date fixed for redemption. The current market price per share of Circuit City Stock on any date shall be deemed to be the average of the daily closing prices per share of such Circuit City Stock for the 30 consecutive trading days immediately prior to such date. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange ("NYSE") or, if the Common Stock is not listed or admitted to trading on the NYSE, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Circuit City Stock is listed or admitted to trading or, if the Circuit City Stock is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations Systems ("NASDAQ") or such other system then in use, or, if on any such date the Circuit City Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Circuit City Stock. If no professional market maker is then making a market in the Circuit City Stock, the current market price per share of the Circuit City Stock shall be deemed to be $1.00. As used herein, the term trading day shall mean a day on which the principal national securities exchange on which the Circuit City Stock is listed or admitted to trading is open for the transaction of business or, if the Circuit City Stock is not listed or admitted to trading on any national securities exchange, a business day. In the event the Corporation shall at any time after January 1, 1997 declare or pay any dividend on Common Stock payable in shares of Circuit City Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Circuit City Stock) into a greater or lesser number of shares of Circuit City Stock, then in each such case the aggregate amount per share to which holders of shares of the Series E Stock shall be entitled under the provisions of the first sentence of this paragraph shall be adjusted by multiplying the amount per share to which holders of shares of the Series E Stock should have been entitled immediately prior to such event under the provisions of the first sentence of this paragraph by a fraction the numerator of which is the number of shares of Circuit City Stock outstanding immediately after such event and the denominator of which is the number of shares of Circuit City Stock that were outstanding immediately prior to such event. (c) In case less than all of the outstanding shares of Series E Stock are to be redeemed, not more than 60 days prior to the date fixed for redemption the Corporation shall select the shares to be redeemed. Such shares shall be selected by lot or designated ratably or in such other equitable manner as the Corporation may determine. The Corporation in its discretion may select the particular certificates (if there are more A-1-4 than one) representing shares registered in the name of a holder that are to be redeemed. (d) Not less than 30 nor more than 60 days prior to the date fixed for redemption, notice of redemption shall be given by first class mail, postage prepaid, to the holders of record of the outstanding shares of the Series E Stock to be redeemed at their last known addresses shown in the Corporation's share transfer records. The notice of redemption shall set forth the paragraph of this Article pursuant to which the shares are being redeemed, the number of shares to be redeemed, the date fixed for redemption, the applicable redemption price, and the place or places where certificates representing shares to be redeemed may be surrendered. In case less than all of the outstanding shares of the Series E Stock are to be redeemed the notice of redemption shall also set forth the numbers of the certificates representing shares to be redeemed and, in case less than all shares represented by any such certificate are to be redeemed, the number of shares represented by such certificate to be redeemed. (e) If notice of redemption of any outstanding shares of Series E Stock shall have been duly mailed as herein provided, then on or before the date fixed for redemption the Corporation shall deposit cash sufficient to pay the redemption price of such shares in trust for the benefit of the holders of the shares to be redeemed with any bank or trust company in the City of Richmond, Commonwealth of Virginia, having capital and surplus aggregating at least $50,000,000 as of the date of its most recent report of financial condition and named in such notice, to be applied to the redemption of the shares so called for redemption against surrender for cancellation of the certificates representing such shares. From and after the time of such deposit all shares for the redemption of which such deposit shall have been made shall, whether or not the certificates therefor shall have been surrendered for cancellation, no longer be deemed to be outstanding for any purpose, and all rights with respect to such shares shall thereupon cease and terminate except the right to receive payment of redemption price but without interest. Any interest earned on funds so deposited shall be paid to the Corporation from time to time. Any funds so deposited and unclaimed at the end of five years from the date fixed for redemption shall be repaid to the Corporation, free of trust, and the holders of the shares called for redemption who shall not have surrendered their certificates representing such shares prior to such repayment shall be deemed to be unsecured creditors of the Corporation for the amount of the redemption price and shall look only to the Corporation for payment thereof, without interest, subject to the laws of the Commonwealth of Virginia. (f) The Corporation shall also have the right to acquire outstanding shares of Series E Stock otherwise than by redemption pursuant to paragraph (C)(5)(a) of this Article, from time to time for such consideration as may be acceptable to the holders thereof; provided, however, that if all dividends accrued on all outstanding shares of Series E Stock shall not have been declared and paid or declared and a sum sufficient A-1-5 for the payment thereof set apart, neither the Corporation nor any subsidiary shall so acquire any shares of Series E Stock except in accordance with a purchase offer made on the same terms to all the holders of the outstanding shares of Series E Stock. A-1-6 EXHIBIT A-2 The Board of Directors of the Corporation has approved the following provisions to be set forth as Section D of Article IV of the Corporation's Articles of Restatement setting forth certain relative rights and preferences of the Series F Preferred Shares: D. Series F Preferred Stock. The Board of Directors of the Corporation has heretofore designated 500,000 shares of the Preferred Stock as the Cumulative Participating Preferred Stock, Series F ("Series F Stock"). Such number may from time to time be decreased (but not below the number of shares of Series F Stock then outstanding) by the Board of Directors of the Corporation. In addition to any relative rights and preferences hereinabove granted, the relative rights and preferences of such series and the holders of the outstanding shares thereof are as set forth in paragraphs (D)(1) through (D)(5) of this Article. (1) Dividends and Distributions. (a) The holders of shares of the Series F Stock, in preference to the holders of shares of the Circuit City Stock and the CarMax Stock and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the fifteenth day (or, if not a business day, the preceding business day) of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of the Series F Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 400 times the aggregate per share amount of all cash dividends, and 400 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of CarMax Stock, or a subdivision of the outstanding shares of CarMax Stock (by reclassification or otherwise), declared on the CarMax Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of the Series F Stock. In the event the Corporation shall at any time after January 1, 1997 declare or pay any dividend on CarMax Stock payable in shares of CarMax Stock, or effect a subdivision or combination or consolidation of the outstanding shares of CarMax Stock (by reclassification or otherwise than by payment of a dividend in shares of CarMax Stock) into a greater or lesser number of shares of CarMax Stock, then in each such case the amount per share to which holders of shares of the Series F Stock shall be entitled under clause (b) of the preceding sentence shall be adjusted by multiplying the amount per share to which holders of shares of the A-2-1 Series F Stock were entitled immediately prior to such event under clause (b) of the preceding sentence by a fraction the numerator of which is the number of shares of CarMax Stock outstanding immediately after such event and the denominator of which is the number of shares of CarMax Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series F Stock as provided in paragraph (D)(1)(a) of this Article immediately after it declares a dividend or distribution on the CarMax Stock (other than a dividend payable in shares of CarMax Stock); provided that, in the event no dividend or distribution shall have been declared on the CarMax Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series F Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of the Series F Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of the Series F Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of the Series F Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of the Series F Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of the Series F Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. (2) Voting Rights. Except to the extent provided by law, the holders of shares of the Series F Stock shall not be entitled (i) to vote on any matter or (ii) to receive notice of, or to participate in, any meeting of shareholders of the Corporation at which they are not entitled to vote. (3) Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series F Stock as provided in paragraph (C)(1) of this Article are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not A-2-2 declared, on shares of the Series F Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare, set apart or pay dividends on or make any other distributions on the Common Stock or any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series F Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series F Stock, except dividends paid ratably on the Series F Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; or (iii) redeem or purchase or otherwise acquire for consideration shares of the Series F Stock, any such parity stock or any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) with the Series F Stock, or set aside for or pay to any sinking fund therefor. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (D)(3)(a) of this Article, purchase or otherwise acquire such shares at such time and in such manner. (4) Reacquired Shares. Any shares of the Series F Stock redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, par value $20.00 per share, and may be reissued as a new series or a part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors or as part of an existing series of Preferred Stock. (5) Redemption. (a) The Corporation may, at its option and at any time and from time to time after April 29, 2048, redeem all or any portion of the outstanding shares of Series F Stock. (b) The redemption price shall be an amount per share equal to the greater of (i) $8,800 or (ii) subject to the provision for adjustment hereinafter set forth, 400 times the current market price per share of CarMax Stock on the date fixed for redemption, plus in each such case an amount equal to accrued and unpaid dividends A-2-2 and distributions thereon, whether or not declared, to the date fixed for redemption. The current market price per share of CarMax Stock on any date shall be deemed to be the average of the daily closing prices per share of such CarMax Stock for the 30 consecutive trading days immediately prior to such date. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange ("NYSE") or, if the Common Stock is not listed or admitted to trading on the NYSE, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the CarMax Stock is listed or admitted to trading or, if the CarMax Stock is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations Systems ("NASDAQ") or such other system then in use, or, if on any such date the CarMax Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the CarMax Stock. If no professional market maker is then making a market in the CarMax Stock, the current market price per share of the CarMax Stock shall be deemed to be $1.00. As used herein, the term trading day shall mean a day on which the principal national securities exchange on which the CarMax Stock is listed or admitted to trading is open for the transaction of business or, if the CarMax Stock is not listed or admitted to trading on any national securities exchange, a business day. In the event the Corporation shall at any time after January 1, 1997 declare or pay any dividend on Common Stock payable in shares of CarMax Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of CarMax Stock) into a greater or lesser number of shares of CarMax Stock, then in each such case the aggregate amount per share to which holders of shares of the Series F Stock shall be entitled under the provisions of the first sentence of this paragraph shall be adjusted by multiplying the amount per share to which holders of shares of the Series F Stock should have been entitled immediately prior to such event under the provisions of the first sentence of this paragraph by a fraction the numerator of which is the number of shares of CarMax Stock outstanding immediately after such event and the denominator of which is the number of shares of CarMax Stock that were outstanding immediately prior to such event. (c) In case less than all of the outstanding shares of Series F Stock are to be redeemed, not more than 60 days prior to the date fixed for redemption the Corporation shall select the shares to be redeemed. Such shares shall be selected by lot or designated ratably or in such other equitable manner as the Corporation may determine. The Corporation in its discretion may select the particular certificates (if there are more A-2-3 than one) representing shares registered in the name of a holder that are to be redeemed. (d) Not less than 30 nor more than 60 days prior to the date fixed for redemption, notice of redemption shall be given by first class mail, postage prepaid, to the holders of record of the outstanding shares of the Series F Stock to be redeemed at their last known addresses shown in the Corporation's share transfer records. The notice of redemption shall set forth the paragraph of this Article pursuant to which the shares are being redeemed, the number of shares to be redeemed, the date fixed for redemption, the applicable redemption price, and the place or places where certificates representing shares to be redeemed may be surrendered. In case less than all of the outstanding shares of the Series F Stock are to be redeemed the notice of redemption shall also set forth the numbers of the certificates representing shares to be redeemed and, in case less than all shares represented by any such certificate are to be redeemed, the number of shares represented by such certificate to be redeemed. (e) If notice of redemption of any outstanding shares of Series F Stock shall have been duly mailed as herein provided, then on or before the date fixed for redemption the Corporation shall deposit cash sufficient to pay the redemption price of such shares in trust for the benefit of the holders of the shares to be redeemed with any bank or trust company in the City of Richmond, Commonwealth of Virginia, having capital and surplus aggregating at least $50,000,000 as of the date of its most recent report of financial condition and named in such notice, to be applied to the redemption of the shares so called for redemption against surrender for cancellation of the certificates representing such shares. From and after the time of such deposit all shares for the redemption of which such deposit shall have been made shall, whether or not the certificates therefor shall have been surrendered for cancellation, no longer be deemed to be outstanding for any purpose, and all rights with respect to such shares shall thereupon cease and terminate except the right to receive payment of redemption price but without interest. Any interest earned on funds so deposited shall be paid to the Corporation from time to time. Any funds so deposited and unclaimed at the end of five years from the date fixed for redemption shall be repaid to the Corporation, free of trust, and the holders of the shares called for redemption who shall not have surrendered their certificates representing such shares prior to such repayment shall be deemed to be unsecured creditors of the Corporation for the amount of the redemption price and shall look only to the Corporation for payment thereof, without interest, subject to the laws of the Commonwealth of Virginia. (f) The Corporation shall also have the right to acquire outstanding shares of Series F Stock otherwise than by redemption pursuant to paragraph (D)(5)(a) of this Article, from time to time for such consideration as may be acceptable to the holders thereof; provided, however, that if all dividends accrued on all outstanding shares of Series F Stock shall not have been declared and paid or declared and a sum sufficient A-2-4 for the payment thereof set apart, neither the Corporation nor any subsidiary shall so acquire any shares of Series F Stock except in accordance with a purchase offer made on the same terms to all the holders of the outstanding shares of Series F Stock. A-2-5 Exhibit B-1 [Form of Rights Certificate] Certificate No. CCR-__________ Rights NOT EXERCISABLE [BEFORE THE DISTRIBUTION DATE (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) OR]* AFTER April 29, 1998 OR EARLIER IF NOTICE OF REDEMPTION IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH AGREEMENT.]** Circuit City Group Rights Certificate Circuit City Stores, Inc. - -------- *This portion of the legend in brackets shall be inserted only upon the Rights Certificates delivered to the Rights Agent prior to the Distribution Date. **This portion of the legend in brackets shall be inserted only if applicable and shall replace the immediately preceding sentence. B-1-1 This certifies that _______________ , or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Amended and Restated Rights Agreement dated as of February ___, 1997 (the "Rights Agreement") between Circuit City Stores, Inc., a Virginia corporation (the "Company"), and Norwest Bank Minnesota, N.A., a national banking association (Norwest Bank Minnesota, N.A. or its successor as rights agent under the Rights Agreement, the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M. (Richmond, Virginia time) on April 29, 1998 (the "Final Expiration Date") at the principal office or offices of the Rights Agent designated for such purpose, or at its successor as Rights Agent, one four-hundredths of a fully paid nonassessable share of Cumulative Participating Preferred Stock, Series E, par value $20.00 per share (the "Preferred Shares"), of the Company, at a purchase price of $35.00 per one four-hundredths of a Preferred Share (the "Purchase Price"), upon presentation and surrender of this Rights Certificate with the Form of Election to Purchase duly executed. The Purchase Price shall be paid in cash or, if the Company so permits, Common Shares having an equivalent value or, if the Company has permitted payment with Common Shares, a combination of cash and Common Shares. The number of Rights evidenced by this Rights Certificate (and the number of shares which may be purchased upon exercise thereof) set forth above, and the Purchase Price per share set forth above, are the number and Purchase Price as of February ___, 1997, based on the Preferred Shares as constituted at such date. Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined in the Rights Agreement), if the Rights evidenced by this Right Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined in the Rights Agreement), (ii) a transferee of any such Acquiring Person, Associate or Affiliate, or (iii) under certain circumstances specified in the Rights Agreement, a transferee of a person who, concurrently with or after such transfer, became an Acquiring Person or an Affiliate or Associate of an Acquiring Person, such Rights shall become null and void and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Section 11(a)(ii) Event. As provided in the Rights Agreement, the Purchase Price and the number and kind of Preferred Shares or other securities which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the happening of certain events, including Triggering Events (as such term is defined in the Rights Agreement). This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights B-1-2 Certificates which limitations of rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the principal offices of the Company and are also available upon written request to the Company. This Rights Certificate, with or without other Rights Certificates, upon surrender at the office or offices of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of one fourhundredths of a Preferred Share as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be redeemed by the Company at its option, with the approval of a majority of the Continuing Directors (as such term is defined in the Rights Agreement), at a redemption price of $.0025 per Right, payable, at the option of the Company, in cash or Common Shares, at any time prior to the earlier of the close of business on (i) the tenth day (as such time period may be extended or shortened pursuant to the Rights Agreement) following the Share Acquisition Date (as such term is defined in the Rights Agreement) and (ii) the Final Expiration Date. No fractional Preferred Shares will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one fourhundredths of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Rights Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or, to receive notice of meetings or other actions affecting shareholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. B-1-3 WITNESS the facsimile signatures of the proper officers of the Company and its corporate seal. Dated as of: ATTEST: CIRCUIT CITY STORES, INC. ______________________________ By: _________________________ Title: Title: Countersigned: [INSERT NAME OF RIGHTS AGENT] By__________________________________ Authorized Signature B-1-4 [Form of Reverse Side of Rights Certificate] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificates.) FOR VALUE RECEIVED _____________________________ hereby sells, assigns and transfers unto (Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ___________________ Attorney, to transfer the withinnamed Rights Certificate on the books of the within-named Company, with full power of substitution. Dated:___________ 19 ______________________________ Signature Signature Guaranteed: Signatures must be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee Medallion program), pursuant to SEC Rule 17Ad-15. Certificate The undersigned hereby certifies by checking the appropriate boxes that: (i) this Rights Certificate [ ] is [ ] is not being sold, assigned or transferred by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Rights Agreement); and (ii) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. B-1-5 Dated: ______________, 19 _____________________________ Signature B-1-6 Notices The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. B-1-7 [Form of Reverse Side of Rights Certificate -- continued] FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise the Rights Certificate.) To: Circuit City Stores, Inc. The undersigned hereby irrevocably elects to exercise __________________________ Rights represented by this Rights Certificate to purchase the Preferred Shares issuable upon the exercise of the Rights (or such other securities of the Company or of any other person which may be issuable upon the exercise of the Rights) and requests that certificates for such shares be issued in the name of and delivered to: Please insert social security or other identifying number (Please print name and address) If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number (Please print name and address) Dated:_______________, 19 ______________________________ Signature (Signature must conform in all respects to name of holder as specified on the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever) B-1-8 Signature Guaranteed: Signatures must be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee Medallion program), pursuant to SEC Rule 17Ad-15. Dated: ____________ , 19 _____________________________ Signature Certificate The undersigned hereby certifies by checking the appropriate boxes that: 1. the Rights evidenced by this Rights Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Rights Agreement); 2. after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. Dated: _____________, 19 _____________________________ Signature B-1-9 Notice The signature to the foregoing Election must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. B-1-10 Exhibit B-2 [Form of Rights Certificate] Certificate No. CMR-__________ Rights NOT EXERCISABLE [BEFORE THE DISTRIBUTION DATE (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) OR]*** AFTER April 29, 1998 OR EARLIER IF NOTICE OF REDEMPTION IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH AGREEMENT.]**** CarMax Group Rights Certificate Circuit City Stores, Inc. This certifies that _______________ , or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, - -------- ***This portion of the legend in brackets shall be inserted only upon the Rights Certificates delivered to the Rights Agent prior to the Distribution Date. ****This portion of the legend in brackets shall be inserted only if applicable and shall replace the immediately preceding sentence. B-2-1 subject to the terms, provisions and conditions of the Amended and Restated Rights Agreement dated as of February ___, 1997 (the "Rights Agreement") between Circuit City Stores, Inc., a Virginia corporation (the "Company"), and Norwest Bank Minnesota, N.A., a national banking association (Norwest Bank Minnesota, N.A. or its successor as rights agent under the Rights Agreement, the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M. (Richmond, Virginia time) on April 29, 1998 (the "Final Expiration Date") at the principal office or offices of the Rights Agent designated for such purpose, or at its successor as Rights Agent, one four-hundredths of a fully paid nonassessable share of Cumulative Participating Preferred Stock, Series F, par value $20.00 per share (the "Preferred Shares"), of the Company, at a purchase price of $22.00 per one four-hundredths of a Preferred Share (the "Purchase Price"), upon presentation and surrender of this Rights Certificate with the Form of Election to Purchase duly executed. The Purchase Price shall be paid in cash or, if the Company so permits, Common Shares having an equivalent value or, if the Company has permitted payment with Common Shares, a combination of cash and Common Shares. The number of Rights evidenced by this Rights Certificate (and the number of shares which may be purchased upon exercise thereof) set forth above, and the Purchase Price per share set forth above, are the number and Purchase Price as of February ___, 1997, based on the Preferred Shares as constituted at such date. Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined in the Rights Agreement), if the Rights evidenced by this Right Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined in the Rights Agreement), (ii) a transferee of any such Acquiring Person, Associate or Affiliate, or (iii) under certain circumstances specified in the Rights Agreement, a transferee of a person who, concurrently with or after such transfer, became an Acquiring Person or an Affiliate or Associate of an Acquiring Person, such Rights shall become null and void and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Section 11(a)(ii) Event. As provided in the Rights Agreement, the Purchase Price and the number and kind of Preferred Shares or other securities which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and adjustment upon the happening of certain events, including Triggering Events (as such term is defined in the Rights Agreement). This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates which limitations of rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of B-2-2 the Rights Agreement are on file at the principal offices of the Company and are also available upon written request to the Company. This Rights Certificate, with or without other Rights Certificates, upon surrender at the office or offices of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of one fourhundredths of a Preferred Share as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have entitled such holder to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be redeemed by the Company at its option, with the approval of a majority of the Continuing Directors (as such term is defined in the Rights Agreement), at a redemption price of $.0025 per Right, payable, at the option of the Company, in cash or Common Shares, at any time prior to the earlier of the close of business on (i) the tenth day (as such time period may be extended or shortened pursuant to the Rights Agreement) following the Share Acquisition Date (as such term is defined in the Rights Agreement) and (ii) the Final Expiration Date. No fractional Preferred Shares will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one fourhundredths of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Rights Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or, to receive notice of meetings or other actions affecting shareholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. B-2-3 WITNESS the facsimile signatures of the proper officers of the Company and its corporate seal. Dated as of: ATTEST: CIRCUIT CITY STORES, INC. ______________________________ By: __________________ Title: Title: Countersigned: [INSERT NAME OF RIGHTS AGENT] By__________________________________ Authorized Signature B-2-4 [Form of Reverse Side of Rights Certificate] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificates.) FOR VALUE RECEIVED _____________________________ hereby sells, assigns and transfers unto (Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ___________________ Attorney, to transfer the withinnamed Rights Certificate on the books of the within-named Company, with full power of substitution. Dated:___________ 19 ______________________________ Signature Signature Guaranteed: Signatures must be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee Medallion program), pursuant to SEC Rule 17Ad-15. Certificate The undersigned hereby certifies by checking the appropriate boxes that: (i) this Rights Certificate [ ] is [ ] is not being sold, assigned or transferred by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Rights Agreement); and (ii) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. B-2-5 Dated: ______________, 19 _____________________________ Signature B-2-6 Notices The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. B-2-7 [Form of Reverse Side of Rights Certificate -- continued] FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise the Rights Certificate.) To: Circuit City Stores, Inc. The undersigned hereby irrevocably elects to exercise __________________________ Rights represented by this Rights Certificate to purchase the Preferred Shares issuable upon the exercise of the Rights (or such other securities of the Company or of any other person which may be issuable upon the exercise of the Rights) and requests that certificates for such shares be issued in the name of and delivered to: Please insert social security or other identifying number (Please print name and address) If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number (Please print name and address) Dated:_______________, 19 ______________________________ Signature (Signature must conform in all respects to name of holder as specified on the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever) B-2-8 Signature Guaranteed: Signatures must be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee Medallion program), pursuant to SEC Rule 17Ad-15. Dated: ____________ , 19 _____________________________ Signature Certificate The undersigned hereby certifies by checking the appropriate boxes that: 1. the Rights evidenced by this Rights Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined pursuant to the Rights Agreement); 2. after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person. Dated: _____________, 19 _____________________________ Signature B-2-9 Notice The signature to the foregoing Election must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. B-2-10 EX-10.D 3 AMENDMENT TO 1988 STOCK INCENTIVE PLAN Exhibit 10(d) Amendment to 1988 Stock Incentive Plan The following resolution relating to the 1988 Stock Incentive Plan was adopted by the Board of Directors of Circuit City Stores, Inc. at its meeting on February 20, 1997: RESOLVED that Section 2(e) of the 1988 Stock Incentive Plan . . . are hereby amended to change the references therein to "Common Stock" or "common stock of the Company" to read "Circuit City Stores, Inc.--Circuit City Group Common Stock." EX-10.G 4 AMENDMENT TO AMENDED AND RESTATED 1989 NON-EMPLOYE Exhibit 10(g) Amendment to Amended and Restated 1989 Non-Employee Directors Stock Option Plan The following resolution relating to the Amended and Restated 1989 Non-Employee Directors Stock Option Plan was adopted by the Board of Directors of Circuit City Stores, Inc. at its meeting on February 20, 1997: RESOLVED, that . . . Section 4 of the 1989 Directors Plan . . . are hereby amended to change the references therein to "Common Stock" or "common stock of the Company" to read "Circuit City Stores, Inc.--Circuit City Group Common Stock." EX-13 5 ANNUAL REPORT TO STOCKHOLDERS REPORTED HISTORICAL INFORMATION - ----------------------------------------------------------------------------------------------------------------------------- (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Net sales and operating revenues................ $7,663,811 $7,029,123 $5,582,947 $4,130,415 $3,269,769 Net earnings.................................... $ 136,414 $ 179,375 $ 167,875 $ 132,400 $ 110,250 Net earnings (loss) per share: Circuit City Group common stock.............. $ 1.38 $ 1.82 $ 1.72 $ 1.36 $ 1.15 CarMax Group common stock.................... $ (0.01) $ - $ - $ - $ - Total assets.................................... $3,081,173 $2,526,022 $2,004,055 $1,554,664 $1,262,930 Long-term debt, excluding current installments.. $ 430,290 $ 399,161 $ 178,605 $ 29,648 $ 82,387 Deferred revenue and other liabilities.......... $ 166,295 $ 214,001 $ 241,866 $ 268,360 $ 232,054 Cash dividends per share paid on Circuit City Group common stock.............. $ 0.14 $ 0.12 $ 0.10 $ 0.08 $ 0.06 --------------------------------------------------------------------------
See notes to consolidated financial statements. CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- On January 24, 1997, Circuit City Stores, Inc. shareholders approved the creation of two common stock series. The Company's existing common stock was subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common Stock. In an initial public offering, which was completed February 7, 1997, the Company sold 21.86 million shares of Circuit City Stores, Inc.-CarMax Group Common Stock. The Circuit City Group Common Stock is intended to track separately the performance of the Circuit City store-related operations and a retained interest in the CarMax Group. The effects of this retained interest on the Circuit City Group's Financial Statements are identified by the term "Inter-Group." All other line items relate to Circuit City operations. The CarMax Group Common Stock is intended to track separately the performance of the CarMax operations. The CarMax interest held by the Circuit City Group is not considered outstanding CarMax Group stock. Therefore, any net earnings or loss attributable to the Circuit City Group's interest is 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 of both the Circuit City Group and the CarMax Group. All financial statements reflect consummation of the CarMax Group stock offering on February 7, 1997. For additional information, refer to the "Management's Discussion and Analysis of Results of Operations and Financial Condition" for the Circuit City Group and for the CarMax Group. RESULTS OF OPERATIONS SALES GROWTH Total sales for Circuit City Stores, Inc. increased 9 percent in fiscal 1997, to $7.66 billion. In fiscal 1996, total sales were $7.03 billion, a 26 percent increase from $5.58 billion in fiscal 1995. Percentage Sales Change From Prior Year Circuit City Circuit City CarMax Stores, Inc. Group Group Total Total Comparable Total Comparable Fiscal Sales Sales Sales Sales Sales 1997.......... 9% 6% (8)% 85% 23% 1996.......... 26% 23% 5% 258% 12% 1995.......... 35% 34% 15% 376% 43% 1994.......... 26% 26% 8% - - 1993.......... 17% 17% 7% - -
The Circuit City Group. Geographic expansion and the addition of product categories such as personal computers have been the primary contributors to the Circuit City Group's total sales growth during the past five years. Late in fiscal 1996, industry sales of consumer electronics and personal computers weakened, resulting in comparable store sales declines for the Circuit City Group. That softness continued into fiscal 1997, with personal computer sales declining more dramatically during the second half of that year. The industry's weakness produced an intense promotional climate and lower average retail prices. Stronger industry sales of major appliances and fully featured video products, categories in which Circuit City maintains relatively high market shares, partly offset decreased sales in the other categories. Based on market research and sales performance, management believes that Circuit City has gained market share in the major appliance, digital satellite system and big-screen television product classes during the past year. The industry weakness has resulted in a significant number of competitive store closings and reductions in competitor expansion plans. As a result, management believes that the Circuit City locations continue to maintain substantial shares in existing markets and to build significant shares in new markets. The Circuit City Group sells two extended warranty programs on behalf of unrelated third parties that issue these plans for merchandise sold by the Group and other retailers. One of these programs is sold in most major markets and fea- 19 tures in-home service for personal computer products. The second program covers electronics and major appliances and at the end of fiscal year 1997 was offered by approximately 85 percent of the Superstores. The remaining stores sell a Circuit City extended warranty. For the Circuit City Group, gross dollar sales from all extended warranty programs were 6.0 percent of the Group's total sales in fiscal year 1997, compared with 5.9 percent in fiscal 1996 and 5.8 percent in fiscal 1995. Total extended warranty revenue, which is reported in the Group's total sales, was 5.1 percent of sales in fiscal years 1997 and 1996 and 5.4 percent in fiscal year 1995. 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 3.6 percent of the Group's total sales in fiscal 1997, 3.0 percent in fiscal 1996 and 2.3 percent in fiscal 1995. The increase reflects the higher percentage of stores selling third-party contracts. The Group expects third-party extended warranty revenue to continue increasing in fiscal 1998. The CarMax Group. The fiscal 1997 sales growth for the CarMax Group primarily reflects the addition of three locations and comparable store sales increases for two locations classified as comparable stores throughout the year and two locations classified as comparable stores for a portion of the year. Early in fiscal 1997, CarMax began selling new vehicles at its largest store in Norcross, Ga., under the terms of a franchise agreement with Chrysler Corporation. That store is included in the comparable store base. The fiscal 1996 growth includes two additional locations, one location classified as a comparable store throughout the year and a second location classified as a comparable store for a portion of the year. The fiscal 1995 sales increase includes the addition of a second store and one store classified as comparable for a portion of the year. In most states, the CarMax Group sells extended warranties on behalf of an unrelated third party and has no contractual liability to the customer under the warranty program. In states where third-party warranty sales are not feasible, CarMax sells its own extended warranty. For the CarMax Group, gross dollar sales from all extended warranty programs were 3.5 percent of the Group's total sales in fiscal 1997, 3.8 percent in fiscal 1996 and 3.3 percent in fiscal 1995. Total extended warranty revenue, which is reported in the Group's total sales, was 1.2 percent of total sales in fiscal 1997, 1.4 percent in fiscal 1996 and 0.5 percent in fiscal 1995. Third-party extended warranty revenue was 1.1 percent of the Group's total sales in fiscal 1997, 1.3 percent in fiscal 1996 and 0.4 percent in fiscal 1995. The lower extended warranty percentages in fiscal 1997 reflect the additional sales of new cars, which are covered by manufacturers' warranties. Impact of Inflation. Inflation has not been a significant contributor to the Company's results. During the past year, the average retail price has declined in virtually all of the Circuit City Group's product categories. Management expects no significant short-term change in this trend. Because the Group purchases substantially all products, including consumer electronics, 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. Management expects that increases in vehicle pricing would have a positive impact on the CarMax Group's sales and earnings. COST OF SALES, BUYING AND WAREHOUSING The gross profit margin was 23.0 percent of sales in fiscal 1997, a decrease from 23.3 percent in fiscal 1996 and 24.8 percent in fiscal 1995. The lower gross margins in fiscal years 1997 and 1996 versus fiscal year 1995 reflect weak industry sales for the Circuit City Group and the resulting intensity in the promotional climate; a higher mix of personal computer sales, which produce gross profit margins lower than the Circuit City Group's average; and the increased sales contribution from the CarMax Group. In fiscal 1997, the margin pressure for the Circuit City Group was offset by a reduction in personal computer sales when compared with the prior year and an increase in major appliance, digital satellite system and big-screen television sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to 19.7 percent of sales in fiscal 1997 from 18.8 percent in fiscal 1996 but was slightly improved from 19.8 percent in fiscal 1995. The fiscal 1997 ratio primarily reflects the impact of lower comparable store sales and the less favorable productivity of larger-square-footage stores for the Circuit City Group. These factors were partly offset by that Group's ongoing focus on maximizing store productivity and corporate overhead efficiency, a net contribution from the Company's financing operations and the lower expense structure for CarMax. INTEREST EXPENSE Interest expense was 0.4 percent of sales in fiscal 1997 and fiscal 1996 and 0.2 percent in fiscal 1995. Interest expense was incurred for both the Circuit City and CarMax Groups on debt used to fund store expansion and working capital. The increase from fiscal 1995 to fiscal 1996 reflects higher interest rates, increased long-term debt and higher short-term borrowings resulting from the Company's growth. INCOME TAXES The effective income tax rate was 38.0 percent in fiscal 1997 and 37.5 percent in both fiscal 1996 and fiscal 1995. The increase in the tax rate for fiscal 1997 reflects increased sales in states with higher tax rates. NET EARNINGS Net earnings for Circuit City Stores, Inc. declined 24 percent to $136.4 million in fiscal 1997. In fiscal 1996, net earnings 20 were $179.4 million, a 7 percent increase from $167.9 million in fiscal 1995. The lower earnings in fiscal 1997 reflect the challenging industry environment faced by the Circuit City Group and the anticipated losses for the CarMax Group during the testing stage and the first phase of a national roll out. RETURN ON SALES Return on sales was 1.8 percent in fiscal 1997 compared with 2.6 percent in fiscal 1996 and 3.0 percent in fiscal 1995. The reductions reflect the lower earnings, including the higher losses for the CarMax Group. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Early application is not permitted. This statement establishes new standards for computing and presenting earnings per share. The Company has not determined the impact of SFAS No. 128 on its earnings per share computations and presentation. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES In fiscal 1997, net cash provided by operating activities was $14.2 million compared with $55.3 million used in operating activities in fiscal 1996 and $47.0 million provided by operating activities in fiscal 1995. The fiscal 1997 improvement primarily reflects less rapid growth in inventory for the Circuit City Group and a higher increase in accounts payable partly offset by an increase in accounts receivable and lower net earnings. The fiscal 1996 decrease in cash principally reflects the limited earnings growth and lower increases in the provision for deferred income taxes and in accounts payable, accrued expenses, other current liabilities and accrued income taxes. Capital expenditures have been funded through sale-leaseback transactions, landlord reimbursements and short- and long-term debt. Capital expenditures of $542.0 million in fiscal 1997 principally reflect Circuit City and CarMax Superstores opened during the year and a portion of the Superstores opening in fiscal 1998. The sale-leaseback and landlord reimbursement transactions completed in fiscal 1997 totaled $332.7 million and were largely related to real estate purchased in fiscal 1997 and fiscal 1996. Capital expenditures of $518.2 million in fiscal 1996 and $375.4 million in fiscal 1995 largely were incurred in connection with the Group's expansion programs. Receivables generated by the financing operations are funded through securitization transactions, which allow the financing operations to sell the receivables while retaining a small interest in the receivables. The credit card bank subsidiary has a master trust securitization facility for its private-label credit card that allows the transfer of up to $1.22 billion in receivables through both private placement and the public market. A second securitization program allows for the transfer of up to $1.45 billion in receivables related to the subsidiary's bankcard programs. The securitization program for auto loan receivables was started in fiscal 1996 with securitized receivable proceeds totaling $87.0 million at February 29, 1996. At February 28, 1997, securitized receivables totaled $145.0 million. Under the securitization program, receivables are sold to an unaffiliated third party with the servicing retained. Management expects that these securitization programs can be expanded to accommodate future receivables growth. Capitalization Fiscal 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- (DOLLAR AMOUNTS IN MILLIONS) $ % $ % $ % $ % $ % - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt, excluding current installments.................. 430.3 19 399.2 23 178.6 14 29.6 3 82.4 9 Other long-term liabilities................... 199.4 9 231.8 14 241.9 19 268.4 27 232.1 26 Total stockholders' equity....... 1,614.8 72 1,063.9 63 877.4 67 710.4 70 575.5 65 ---------------------------------------------------------------------------------------- TOTAL CAPITALIZATION............. 2,244.5 100 1,694.9 100 1,297.9 100 1,008.4 100 890.0 100 ----------------------------------------------------------------------------------------
CAPITAL STRUCTURE Total assets at February 28, 1997, were $3.08 billion, up $555.2 million, or 22 percent since February 29, 1996. The rise in assets primarily includes increases of $207.6 million in net receivables, $158.9 million in cash and cash equivalents, $111.8 million in net property and equipment and $69.2 million in inventory. Over the past three years, expansion for both Groups has been funded with internally generated cash, sale-leaseback transactions, operating leases and long-term debt. Consumer receivables have been funded through securitization transactions. Late in fiscal 1997, Circuit City Stores, Inc. raised a net of $412.3 million through the initial public offering of 21.86 million shares of newly created CarMax Group Common Stock. The CarMax Group used approximately $187 million of the net proceeds to repay its allocated portion of Circuit City Stores, Inc. indebtedness. Management expects to use the remainder of the net proceeds to finance part of the CarMax expansion plan. In fiscal 1997, the Company entered into a five-year, $130 million unsecured bank term loan 21 agreement. At February 29, 1996, the Company classified $100 million of short-term debt as long-term in anticipation of this agreement. During the period from fiscal 1993 to 1997, stockholders' equity grew substantially. From fiscal 1996 to 1997 stockholders' equity increased 52 percent to $1.61 billion. Capitalization for the past five years is illustrated in the "Capitalization" table on page 21. Lower earnings for the Circuit City Group and higher losses from the CarMax Group combined with the increase in equity resulting from the CarMax offering produced a return on equity of 10.2 percent in fiscal 1997 compared with 18.5 percent in fiscal 1996. The returns are below the Company's long-term objective of 20 percent but reflect the challenging short-term environment for the Circuit City Group and the investment in CarMax growth. Management anticipates that in fiscal 1998 capital expenditures of approximately $830 million will be funded through a combination of internally generated cash, proceeds from the CarMax Group stock offering, sale-leaseback transactions and operating leases and that securitization transactions will finance the growth in receivables. At the end of fiscal 1997, Circuit City maintained a multi-year, $150 million unsecured revolving credit agreement and $415 million in 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 disposed of 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. Such financial activities include the investment of surplus cash, issuance and repayment of debt, securitization of receivables and sale-leasebacks of real estate. FORWARD-LOOKING STATEMENTS 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 new "safe harbor" provisions of the Act and is including this section in "Management's Discussion and Analysis" in order to do so. Company statements that are not historical facts, including statements about management's expectations for fiscal year 1998 and beyond, are forward-looking statements and involve various risks and uncertainties. Factors that could cause the Company's actual results to differ materially from management's projections, forecasts, estimates and expectations include, but are not limited to, the following: (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 electronic 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 new products or product features in the merchandise categories the Company sells and changes in the Company's actual merchandise sales mix; (d) lack of availability/access to sources of supply for appropriate Circuit City or CarMax inventory; (e) 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; (f) changes in availability or cost of capital expenditure and working capital financing, including the availability of long-term financing to support development of retail stores and distribution facilities and the availability of securitization financing for credit card and auto installment loan receivables; (g) changes in production or distribution costs or cost of materials for the Company's advertising; (h) availability of appropriate real estate locations for expansion; (i) 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, 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; (j) adverse results in significant litigation matters; (k) changes in levels of competition in the car business from either traditional competitors and/or new non-traditional competitors utilizing auto superstore or other formats; (l) the inability of the CarMax stores to reach planned mature sales and earnings potential by the end of their fourth year, which is the maturation point expected by management, but which has not been proven since no location has been open for four years; and (m) 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. 22 COMMON STOCK - -------------------------------------------------------------------------------- Circuit City Stores, Inc. Common Stock began trading as Circuit City Stores, Inc.-Circuit City Group Common Stock on February 4, 1997. Newly created Circuit City Stores, Inc.-CarMax Group Common Stock also began trading on February 4, 1997. Both Group stocks are traded on the New York Stock Exchange. The quarterly market price and dividend data shown below apply to the Circuit City Stores, Inc. Common Stock or the Circuit City Group Common Stock for the applicable periods. No data is shown for the CarMax Group Stock since it traded for less than a month in the two-year period and pays no dividends at this time. Market Price of Common Stock Dividends Fiscal 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- HIGH LOW HIGH LOW - ------------------------------------------------------------------------------------------------------------------------- 1st...................................................... $36.00 $29.25 $29.13 $21.50 $.030 $.025 2nd...................................................... $38.75 $29.25 $37.13 $26.25 $.035 $.030 3rd...................................................... $36.88 $30.25 $38.00 $28.13 $.035 $.030 4th...................................................... $35.75 $28.63 $31.25 $25.00 $.035 $.030 ---------------------------------------------------------- TOTAL $.135 $.115
23 CONSOLIDATED STATEMENTS OF EARNINGS - ----------------------------------------------------------------------------------------------------------------------------- Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 % 1996 % 1995 % - ----------------------------------------------------------------------------------------------------------------------------- NET SALES AND OPERATING REVENUES.................. $ 7,663,811 100.0 $ 7,029,123 100.0 $5,582,947 100.0 Cost of sales, buying and warehousing............. 5,902,711 77.0 5,394,293 76.7 4,197,94 75.2 GROSS PROFIT...................................... 1,761,100 23.0 1,634,830 23.3 1,385,000 24.8 -------------------------------------------------------------------------- Selling, general and administrative expenses [NOTE 9].............................. 1,511,294 19.7 1,322,430 18.8 1,106,370 19.8 Interest expense [NOTE 4]......................... 29,782 0.4 25,400 0.4 10,030 0.2 -------------------------------------------------------------------------- TOTAL EXPENSES.................................... 1,541,076 20.1 1,347,830 19.2 1,116,400 20.0 -------------------------------------------------------------------------- Earnings before income taxes................. 220,024 2.9 287,000 4.1 268,600 4.8 Provision for income taxes [NOTE 5]............... 83,610 1.1 107,625 1.5 100,725 1.8 -------------------------------------------------------------------------- NET EARNINGS...................................... $ 136,414 1.8 $ 179,375 2.6 $ 167,875 3.0 -------------------------------------------------------------------------- Net earnings (loss) attributable to [NOTES 1 AND 2]: Circuit City Group common stock................ $ 136,680 $ 179,375 $ 167,875 CarMax Group common stock...................... (266) - - ------------ ----------- ---------- ............................................... $ 136,414 $ 179,375 $ 167,875 ----------- ----------- ---------- Weighted average common shares and common share equivalents [NOTE 2]: Circuit City Group common stock................ 99,342 $ 98,546 97,369 ----------- ----------- ---------- CarMax Group common stock...................... 21,860 ----------- NET EARNINGS (LOSS) PER SHARE [NOTE 2]: Circuit City Group common stock................ $ 1.38 $ 1.82 $ 1.72 ----------- ----------- ---------- CarMax Group common stock...................... $ (0.01) ----------- See accompanying notes to consolidated financial statements. 24 CONSOLIDATED BALANCE SHEETS At February 28 or 29 (AMOUNTS IN THOUSANDS EXCEPT SHARE DATA) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents........................................................... $ 202,643 $ 43,704 Net accounts and notes receivable [NOTE 10]......................................... 531,974 324,395 Inventory........................................................................... 1,392,363 1,323,183 Deferred income taxes [NOTE 5]...................................................... 21,340 26,996 Prepaid expenses and other current assets........................................... 14,813 17,399 ---------------------------------- TOTAL CURRENT ASSETS................................................................ 2,163,133 1,735,677 Property and equipment, net [NOTES 3 AND 4]......................................... 886,091 774,265 Other assets........................................................................ 31,949 16,080 ---------------------------------- TOTAL ASSETS........................................................................ $ 3,081,173 $ 2,526,022 ---------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current installments of long-term debt [NOTES 4 AND 8].............................. $ 1,490 $ 1,436 Accounts payable.................................................................... 720,754 604,488 Short-term debt [NOTE 4]............................................................ 347 92,087 Accrued expenses and other current liabilities...................................... 105,500 123,789 Accrued income taxes............................................. 8,560 9,375 -------------------------------- TOTAL CURRENT LIABILITIES........................................................... 836,651 831,175 Long-term debt, excluding current installments [NOTES 4 AND 8]...................... 430,290 399,161 Deferred revenue and other liabilities.............................................. 166,295 214,001 Deferred income taxes [NOTE 5]...................................................... 33,081 17,764 ---------------------------------- TOTAL LIABILITIES................................................................... 1,466,317 1,462,101 ---------------------------------- STOCKHOLDERS' EQUITY [NOTES 1 AND 6]: Circuit City Group common stock, $0.50 par value; 175,000,000 shares authorized; 98,178,000 shares issued and outstanding (97,380,000 in 1996)........ 49,089 48,690 CarMax Group common stock, $0.50 par value; 175,000,000 shares authorized; 21,860,000 shares issued and outstanding......................................... 10,930 - Capital in excess of par value...................................................... 506,823 90,432 Retained earnings................................................................... 1,048,014 924,799 ---------------------------------- TOTAL STOCKHOLDERS' EQUITY.......................................................... 1,614,856 1,063,921 ---------------------------------- Commitments and contingent liabilities [NOTES 1, 7, 8, 10, 11 AND 12] TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $ 3,081,173 $ 2,526,022 ---------------------------------- See accompanying notes to consolidated financial statements. 25 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net earnings.................................................... $ 136,414 $ 179,375 $ 167,875 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization................................ 98,977 79,812 66,866 (Gain) loss on sales of property and equipment............... (1,540) 5,600 2,199 Provision for deferred income taxes.......................... 20,973 22,411 73,745 Decrease in deferred revenue and other liabilities........... (47,706) (27,865) (26,494) Increase in net accounts and notes receivable................ (207,579) (59,830) (75,575) Increase in inventory, prepaid expenses and other current assets (66,594) (290,644) (317,114) (Increase) decrease in other assets.......................... (15,869) 1,911 (3,819) Increase in accounts payable, accrued expenses and other current liabilities, and accrued income taxes........... 97,162 33,910 159,297 ------------------------------------------------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............. 14,238 (55,320) 46,980 ------------------------------------------------------ INVESTING ACTIVITIES: Purchases of property and equipment............................. (541,989) (518,175) (375,406) Proceeds from sales of property and equipment................... 332,726 251,454 151,481 ----------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES........................... (209,263) (266,721) (223,925) ------------------------------------------------------ FINANCING ACTIVITIES: (Payments on) proceeds from issuance of short-term debt, net.... (91,740) 92,087 - Proceeds from issuance of long-term debt........................ 32,619 222,000 153,000 Principal payments on long-term debt............................ (1,436) (2,386) (3,484) Proceeds from issuance of Circuit City Group common stock, net.. 15,385 18,245 8,352 Proceeds from issuance of CarMax Group common stock, net........ 412,335 - - Dividends paid on Circuit City Group common stock............... (13,199) (11,163) (9,155) NET CASH PROVIDED BY FINANCING ACTIVITIES....................... 353,964 318,783 148,713 ----------------------------------------------------- Increase (decrease) in cash and cash equivalents................... 158,939 (3,258) (28,232) Cash and cash equivalents at beginning of year..................... 43,704 46,962 75,194 ----------------------------------------------------- Cash and cash equivalents at end of year........................... $ 202,643 $ 43,704 $ 46,962 ----------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest........................................................ $ 29,925 $ 22,905 $ 8,150 Income taxes.................................................... $ 73,113 $ 88,477 $ 98,894 See accompanying notes to consolidated financial statements. 26 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------------- Common Shares Outstanding Common Stock Capital In Circuit City CarMax Circuit City CarMax Excess of Retained (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Group Group Group Group Par Value Earnings Total - ----------------------------------------------------------------------------------------------------------------------------- BALANCE AT MARCH 1, 1994.......................... 96,080 - $ 48,040 $ - $ 64,485 $ 597,867 $ 710,392 ------------------------------------------------------------------------ Net earnings................................... - - - - - 167,875 167,875 Exercise of common stock options [NOTE 6]...... 260 - 130 - 2,519 - 2,649 Shares issued under Employee Stock Purchase Plan [NOTE 6]................ 87 - 43 - 1,868 - 1,911 Shares issued under the 1994 Stock Incentive Plan [NOTE 6]..................... 211 - 106 - 3,740 - 3,846 Tax benefit from stock issued.................. - - - - 3,272 - 3,272 Shares cancelled upon reacquisition by Company. (162) - (81) - (3,089) - (3,170) Unearned compensation-restricted stock......... - - - - (156) - (156) Cash dividends-Circuit City Group common stock ($0.10 per share)..................... - - - - - (9,155) (9,155) ------------------------------------------------------------------------- BALANCE AT FEBRUARY 28, 1995...................... 96,476 - 48,238 - 72,639 756,587 877,464 ------------------------------------------------------------------------ Net earnings................................... - - - - - 179,375 179,375 Exercise of common stock options [NOTE 6]...... 645 - 322 - 7,831 - 8,153 Shares issued under Employee Stock Purchase Plan [NOTE 6]................ 75 - 38 - 2,174 - 2,212 Shares issued under the 1994 Stock Incentive Plan [NOTE 6]..................... 259 - 129 - 5,745 - 5,874 Tax benefit from stock issued.................. - - - - 4,746 - 4,746 Shares cancelled upon reacquisition by Company. (75) - (37) - (1,631) - (1,668) Unearned compensation-restricted stock......... - - - - (1,072) - (1,072) Cash dividends-Circuit City Group common stock ($0.12 per share)..................... - - - - - (11,163) (11,163) ------------------------------------------------------------------------- BALANCE AT FEBRUARY 29, 1996...................... 97,380 - 48,690 - 90,432 924,799 1,063,921 ------------------------------------------------------------------------ Net earnings............................ - - - - - 136,414 136,414 Exercise of common stock options [NOTE 6]...... 786 - 393 - 13,497 - 13,890 Shares issued under Employee Stock Purchase Plan [NOTE 6]................ 78 - 39 - 2,491 - 2,530 Shares issued under the 1994 Stock Incentive Plan [NOTE 6]..................... 255 - 127 - 7,455 - 7,582 Tax benefit from stock issued.................. - - - - 3,080 - 3,080 Shares issued in the CarMax Group stock offering.................................... - 21,860 - 10,930 401,405 - 412,335 Shares cancelled upon reacquisition by Company. (321) - (160) - (9,654) - (9,814) Unearned compensation-restricted stock......... - - - - (1,883) - (1,883) Cash dividends-Circuit City Group common stock ($0.14 per share)..................... - - - - - (13,199) (13,199) ------------------------------------------------------------------------ BALANCE AT FEBRUARY 28, 1997...................... 98,178 21,860 $ 49,089 $ 10,930 $ 506,823 $ 1,048,014 $ 1,614,856 ------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION On January 24, 1997, the shareholders of Circuit City Stores, Inc. and its subsidiaries (the "Company") authorized a restructuring of the existing common stock of the Company into two new series of common stock intended to reflect separately the performance of the Company's two main businesses - the consumer electronics, major appliance, personal computer and music software retail business, including its interest in the CarMax Group referred to below (the "Circuit City Group"), and the used- and new-car retail business (the "CarMax Group"). Subsequent to shareholder approval, the board of directors approved the redesignation of each share of the Company's existing common stock as a share of a new series of common stock called Circuit City Stores, Inc.-Circuit City Group Common Stock, par value $0.50 per share ("Circuit City Stock"), which is intended to reflect separately the performance of the Circuit City Group, which is generally comprised of (i) the Company's consumer electronics, major appliance, personal computer and music software retail business, (ii) an interest in the CarMax Group, which excludes the interest represented by any outstanding shares of CarMax Stock, as described below, and (iii) all other businesses in which the Company may be engaged (other than those comprising the CarMax Group). For presentation purposes, this redesignation of the Company's common stock has been treated as if it occurred as of the beginning of the earliest period presented in the accompanying consolidated financial statements. In addition, the board of directors authorized the designation and issuance of shares of a new series of common stock called Circuit City Stores, Inc.-CarMax Group Common Stock, par value $0.50 per share ("CarMax Stock"), which is intended to reflect separately the performance of the used- and new-car retail business that comprises the CarMax Group. The Circuit City Group and the CarMax Group are sometimes referred to collectively as the "Groups" and individually as a "Group." On February 7, 1997, the Company completed an offering of 21,860,000 shares of CarMax Stock for cash in a public offering (the "Offering") for $20.00 per share aggregating $437.2 million in proceeds before deducting related expenses of $24.9 million. The Company allocated the net proceeds of the Offering to the CarMax Group. Upon completion of the Offering and without giving effect to options, the outstanding CarMax Stock represented 22.5 percent of the equity value of the CarMax Group, and the Circuit City Group held a 77.5 percent interest (the "Inter-Group Interest") in the equity value of the CarMax Group. Holders of Circuit City Stock and holders of CarMax 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. The financial results of the Circuit City Group and of the CarMax Group could affect the market price of either series of stock or the assets legally available for payment of dividends. Accordingly, the Company's financial information should be read in conjunction with the Circuit City Group's and the CarMax Group's financial information. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Principles of Consolidation: The consolidated financial statements include the accounts of the Company. All significant intercompany balances and transactions have been eliminated in consolidation. (B) Cash and Cash Equivalents: Cash equivalents of $165,975,000 at February 28, 1997, and $10,113,000 at February 29, 1996, consist of highly liquid debt securities with original maturities of three months or less. (C) 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 to the potential nonperformance of another material party to an agreement due to 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 loss for nonperformance. The Company broadly diversifies all financial instruments along industry, product and geographic areas. (D) 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. (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, which range from three to 25 years. Property held under capital leases 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 straight-line over the lease term or the estimated useful life of the asset, whichever is shorter. (F) Pre-opening Expenses: Expenses associated with the opening of new stores are deferred and amortized ratably over the period from the date of the store opening to the end of the fiscal year. (G) Income Taxes: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized 28 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. (H) 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. All 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. All other costs are charged to expense as incurred. Commission revenue for the unrelated third-party extended warranty plans is recognized at the time of sale. The CarMax Group sells its own service contracts and service contracts on behalf of unrelated third parties. Contracts usually have terms of coverage between 12 and 72 months. All revenue from the sale of the CarMax Group's own service contracts is 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 are deferred and charged to expense in proportion to the revenue recognized. All other costs are charged to expense as incurred. Commission revenue for the unrelated third-party service contracts is recognized at the time of sale. (I) Selling, General and Administrative Expenses: Operating profits generated by the Company's financing operations are recorded as a reduction to selling, general and administrative expenses. (J) Advertising Expenses: All advertising costs are expensed as incurred. (K) Net Earnings (Loss) Per Share: Net earnings per share for Circuit City Stock is computed by dividing net earnings attributable to Circuit City Stock, including the Circuit City Group's 100 percent interest in the losses of the CarMax Group for periods prior to the Offering and the Circuit City Group's 77.5 percent interest in the CarMax Group subsequent to the Offering, by the weighted average number of shares of Circuit City Stock and dilutive Circuit City Stock equivalents outstanding. Net loss per share for CarMax Stock is computed by dividing net loss attributable to CarMax Stock by the weighted average number of shares of CarMax Stock outstanding. Historical net loss per share is omitted from the statements of operations for periods prior to the Offering since CarMax Stock was not part of the capital structure of the Company for those periods. (L) Stock-Based Compensation: On March 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected to continue applying the provisions of the Accounting Principles Board (APB) Opinion No. 25, "Accounting For Stock Issued to Employees," and to provide the pro forma disclosure provisions of SFAS No. 123. (M) Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: In fiscal 1997, the Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Adoption of SFAS No. 125 did not have a material impact on the Company's financial position, results of operations or liquidity. (N) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of: The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," on March 1, 1996. Impairment of long-lived assets is recognized when the carrying amounts of the impaired assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell. Adoption of SFAS No. 121 did not have a material impact on the Company's financial position, results of operations or liquidity. (O) Risks and Uncertainties: The Circuit City Group is the nation's largest retailer of brand-name consumer electronics and major appliances and a leading retailer of personal computers and music 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. 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, competition or sources of supply. The CarMax Group's operations currently are concentrated in the southeastern United States. A severe economic downturn in the southeastern United States could negatively impact the CarMax Group's operating results. Due to the CarMax Group's geographic concentration and 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 29 and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. (P) 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 is based on methods that the Company believes to be reasonable. 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 be allocated between the Groups based principally upon the financial income, taxable income, credits and other amounts directly related to the respective 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. (Q) Reclassifications: Certain amounts in prior years have been reclassified to conform to classifications adopted in fiscal 1997. 3. PROPERTY AND EQUIPMENT Property and equipment, at cost, at February 28 or 29 is summarized as follows: (AMOUNTS IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------ Land and buildings (20 to 25 years)..... $ 132,127 $ 89,089 Construction in progress................ 152,831 197,980 Furniture, fixtures and equipment (3 to 8 years).................... 506,324 389,845 Leasehold improvements (10 to 15 years). 433,085 353,157 Capital leases, primarily buildings (20 years)........................... 12,471 13,140 ------------------------ 1,236,838 1,043,211 Less accumulated depreciation and amortization......................... 350,747 268,946 ------------------------ Property and equipment, net............. $ 886,091 $ 774,265 ------------------------ 4. DEBT Long-term debt at February 28 or 29 is summarized as follows: (AMOUNTS IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------ Term loans............................... $ 405,000 $275,000 Short-term debt expected to be refinanced............................ - 100,000 Industrial Development Revenue Bonds due through 2006 at various prime-based rates of interest ranging from 5.4% to 7.0%............. 13,706 12,393 Obligations under capital leases [NOTE 8] 13,074 13,204 ----------------------- Total long-term debt..................... 431,780 400,597 Less current installments................ 1,490 1,436 ----------------------- Long-term debt, excluding current installments.................. $ 430,290 $399,161 -----------------------
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 28, 1997, the interest rate on the term loan was 5.86 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 28, 1997, the interest rate on the term loan was 5.80 percent. 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 28, 1997, the interest rate on the term loan was 5.73 percent. The Company maintains a multi-year, $150,000,000, unsecured revolving credit agreement with five banks. The agreement calls for interest based on both committed rates and money market rates and a commitment fee of 0.13 percent per annum. The agreement was entered into as of August 31, 1996, and terminates August 31, 2001. The agreement provides for annual one-year extensions of the final maturity beginning on or before August 31, 1997, and each August 31 thereafter. No amounts were outstanding under the revolving credit agreement at February 28, 1997, or February 29, 1996. The Industrial Development Revenue Bonds are collateralized by land, buildings and equipment with an aggregate carrying value of approximately $14,575,000 at February 28, 1997, and $13,073,000 at February 29, 1996. The scheduled aggregate annual principal payments on long-term obligations for the next five fiscal years are as follows: 1998 - $1,490,000; 1999 - $1,586,000; 2000 - $1,743,000; 2001 - $176,380,000; 2002 - $134,139,000. 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 28, 1997, and February 29, 1996. Short-term debt includes committed lines of credit and informal credit arrangements. Amounts outstanding and committed lines of credit available are as follows: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------- Average short-term debt outstanding....................... $186,569 $185,789 ------------------- Maximum short-term debt outstanding....................... $580,000 $479,000 ------------------- Aggregate committed lines of credit......................... $415,000 $255,000 -------------------
30 The weighted average interest rate on the outstanding short-term debt was 5.4 percent during fiscal 1997, 5.9 percent during fiscal 1996 and 5.3 percent during fiscal 1995. The Company capitalizes interest in connection with the construction of certain facilities. In fiscal 1997, interest capitalized amounted to $6,970,000 ($6,780,000 in fiscal 1996 and $3,846,000 in fiscal 1995). 5. INCOME TAXES The Company files a consolidated federal income tax return. The components of the provision for income taxes follow: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ---------------------------------------------------------- Current: Federal................... $ 55,673 $ 80,678 $21,250 State..................... 6,964 4,536 5,730 --------------------------- 62,637 85,214 26,980 --------------------------- Deferred: Federal................... 19,839 18,891 69,035 State..................... 1,134 3,520 4,710 --------------------------- 20,973 22,411 73,745 --------------------------- Provision for income taxes... $83,610 $107,625 $100,725 --------------------------- The effective income tax rate differed from the Federal statutory income tax rate as follows: 1997 1996 1995 - ------------------------------------------------------------- Federal statutory income tax rate..................... 35.0% 35.0% 35.0% State and local income taxes, net of Federal benefit....... 3.0 2.5 2.5 ------------------------- Effective income tax rate....... 38.0% 37.5% 37.5% -------------------------
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 28, 1997, and February 29, 1996, are as follows: (AMOUNTS IN THOUSANDS) 1997 1996 - --------------------------------------------------------- Deferred tax assets: Deferred revenue.................... $10,004 $24,475 Inventory capitalization............ 7,643 3,784 Accrued expenses.................... 30,176 34,190 Other............................... 3,354 3,182 ----------------- Total gross deferred tax assets.. 51,177 65,631 Deferred tax liabilities: Depreciation and amortization....... 43,085 39,800 Prepaid benefit programs............ - 886 Other prepaid expenses.............. 7,982 6,337 Other............................... 11,851 9,376 ----------------- Total gross deferred tax liabilities.................... 62,918 56,399 ----------------- Net deferred tax (liability) asset..... $(11,741) $ 9,232 -----------------
Of the gross deferred tax assets at February 28, 1997, and at February 29, 1996, approximately $47 million and $61 million, respectively, can be realized by carrybacks or offsetting of deferred tax liabilities. Based on the Company's historical and current pre-tax earnings, management believes the remaining amount will be realized through future taxable income; therefore, no valuation allowance is necessary. 6. CAPITAL STOCK AND STOCK INCENTIVE PLANS (A) 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 Stock and CarMax 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 four-hundredth of a share of Cumulative Participating Preferred Stock, Series E, $20 par value, at an exercise price of $35 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 $22 per share subject to adjustment. A total of 1,000,000 shares of such preferred stock, which have preferential dividend and liquidation rights, has been designated; 800,000 shares have been 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 continuing 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 Company also has 1,000,000 shares of undesignated preferred stock authorized of which no shares are outstanding. (B) 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 Stock shall have one vote and (ii) each outstanding share of CarMax Stock shall have a number of votes based on the weighted average ratio of the market value of a share of CarMax Stock to a share of Circuit City Stock. If shares of only one series of common stock are outstanding, each share 31 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. (C) Restricted Stock: The Company has issued restricted stock under the provisions of the 1994 and 1988 Stock Incentive Plans whereby key employees are granted restricted shares of Circuit City Stock. Shares are awarded in the name of the employee, who has all the rights of a stockholder, subject to certain restrictions or forfeitures. Restrictions on the awards generally expire three years from the date of grant. In fiscal 1997, restricted stock awards for 254,745 shares were granted to eligible employees. The market value 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 1997, a total of $3,790,200 was charged to operations ($3,362,500 in 1996 and $2,552,500 in 1995). As of February 28, 1997, 570,609 restricted shares were outstanding. (D) Employee Stock Purchase Plan: The Company has an Employee Stock Purchase Plan for all employees meeting certain eligibility criteria. Under the Plan, eligible employees may purchase shares of Circuit City Stock, subject to certain limitations, at 85 percent of its market value. Purchases are limited to 10 percent of an employee's eligible compensation, up to a maximum of $7,500 per year. All shares have been redesignated as Circuit City Stock. At February 28, 1997, a total of 563,068 shares remained available under the Plan. During fiscal 1997, 499,338 shares were issued to or purchased on the open market for employees (474,889 in fiscal 1996 and 537,467 in fiscal 1995). The average price per share was $32.68 in fiscal 1997, $29.97 in fiscal 1996 and $22.23 in fiscal 1995. The purchase price discount is charged to operations and totaled $2,433,600 in fiscal 1997, $2,030,000 in fiscal 1996 and $1,760,200 in fiscal 1995. (E) Stock Incentive Plans: Under the Company's stock incentive plans, incentive and non-qualified stock options may be granted to management, key employees and outside directors to purchase shares of Circuit City Stock or CarMax Stock. The exercise price for incentive stock options for employees and non-qualified options for outside directors is equal to, or greater than, the market value at the date of grant; for non-qualified 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. As of February 28, 1997, there were outstanding options to purchase shares of stock of the corporate entity comprising the CarMax Group. These options are held by management and key employees of the CarMax Group and vest evenly on the third, fourth and fifth anniversary of the grant date with a maximum option term of seven years. The exercise price is equal to, or greater than, the fair market value of the stock at the date of grant. The Company intends to convert these options into options to purchase CarMax Stock, preserving the aggregate intrinsic value of the options. In addition, the vesting provisions and option periods of the original grants will remain the same when converted. A summary of the status of the Company's stock options, assuming conversion of the CarMax Stock options, and changes during the years ended February 28 or 29 are shown in Table 1. Table 2 summarizes information about stock options outstanding as of February 28, 1997. - -------------------------------------------------------------------------------------------------------------------------------- Table 1 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE (Shares in Thousands) SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE - -------------------------------------------------------------------------------------------------------------------------------- Circuit City Group: Outstanding at beginning of year............ 3,563 $18.63 3,709 $ 17.14 3,594 $16.69 Granted..................................... 2,159 43.38 763 22.98 750 18.34 Exercised................................... (786) 17.67 (645) 12.64 (260) 10.18 Cancelled................................... (108) 21.90 (264) 24.06 (375) 19.41 -------- ----- ----- Outstanding at end of year................. 4,828 $29.76 3,563 $ 18.63 3,709 $17.14 ------- ----- ----- Options exercisable at end of year.......... 1,629 $17.24 1,847 $ 16.19 2,070 $15.70 ------- ----- ----- CarMax Group: Outstanding at beginning of year............ 4,278 $ 0.22 3,518 $ 0.22 - $ - Granted..................................... 961 1.68 796 0.22 3,518 0.22 Exercised................................... - - - - - Cancelled................................... (470) 0.27 (36) 0.22 - - ----- ----- ----- Outstanding at end of year................. 4,769 $ 0.51 4,278 $ 0.22 3,518 $ 0.22 ----- ----- ----- Options exercisable at end of year.......... - $ - - $ - - $ - ----- ----- ----- 32 Table 2 Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------------------------------------------------------- Weighted Average (SHARES IN THOUSANDS) Number Remaining Weighted Average Number Weighted Average Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price - ---------------------------------------------------------------------------------------------------------------------------------- Circuit City Group: $ 5.94 to 10.56................................. 285 1.0 $ 8.59 285 $ 8.59 13.19 to 20.13................................. 1,306 2.7 16.81 886 16.09 22.50 to 29.13................................. 1,057 3.9 23.62 445 24.63 29.50 to 36.88................................. 1,180 7.2 29.97 13 34.47 59.00.......................................... 1,000 6.0 59.00 - - ----- ----- Total........................................... 4,828 4.6 $29.76 1,629 $17.24 ----- ----- CarMax Group: $ 0.22.......................................... 4,540 5.0 $ 0.22 - $ - 6.25......................................... 229 5.0 6.25 - - ----- ---- Total........................................... 4,769 5.0 $ 0.51 - $ - ----- ----
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 would have been reduced 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 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 1997 may not be representative of the pro forma effects on net earnings for future years. The impact of applying SFAS No. 123 methods to the CarMax Group's net loss and net loss per share is immaterial. (AMOUNTS IN THOUSANDS Years Ended February 28 or 29 EXCEPT PER SHARE DATA) 1997 1996 - ----------------------------------------------------------------- Circuit City Group: Net earnings-as reported............. $136,680 $ 179,375 Net earnings-pro forma............... 133,326 178,325 Net earnings per share-as reported... $ 1.38 $ 1.82 Net earnings per share-pro forma..... 1.34 1.81 For the purpose of computing the Circuit City Group's 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: 1997 1996 Expected dividend yield..................... 0.4% 0.4% Expected stock volatility................... 33% 35% Risk-free interest rates.................... 6% 7% Expected lives (in years)................... 4 4
Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted for the Circuit City Group is $8 in fiscal 1997 and $9 in fiscal 1996. 7. PENSION PLAN The Company has a non-contributory 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 are generally based on years of service and average compensation. Plan assets consist primarily of equity securities and included 80,000 shares of Circuit City Stock at February 28, 1997, and February 29, 1996. The components of net pension expense are as follows: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ---------------------------------------------------------- Service cost of benefits earned during the year............. $9,388 $5,896 $4,485 Interest cost on projected benefit obligation.......... 4,701 3,632 2,715 Actual return on plan assets... (9,903) (9,277) (102) Net amortization............... 6,908 6,314 (3,452) ------------------------ Net pension expense............ $11,094 $6,565 $3,646 ------------------------ 33 Contributions required were $6,603,000 in fiscal 1997, $1,160,000 in fiscal 1996 and $3,710,000 in fiscal 1995. The following table sets forth the Plan's financial status and amounts recognized in the consolidated balance sheets as of February 28 or 29: (AMOUNTS IN THOUSANDS) 1997 1996 - --------------------------------------------------------- Actuarial present value of benefit obligation: Accumulated benefit obligation Vested.............................. $ 43,568 $39,505 Non-vested.......................... 5,401 5,136 ----------------- Total benefits......................... 48,969 44,641 Additional amounts related to projected salary increases.................... 21,607 22,747 ----------------- Projected benefit obligation for services rendered to date.................... 70,576 67,388 Plan assets at fair value.............. (62,928) (47,093) Projected benefit obligation in excess of plan assets......................... 7,648 20,295 Unrecognized gain (loss) from past experience.......................... 3,328 (14,117) Unrecognized prior service cost........ 770 875 Unrecognized net obligation being recognized over 15 years............ 1,010 1,212 ----------------- Accrued pension cost................... $ 12,756 $ 8,265 ----------------- Assumptions used in the accounting for the pension plan were: Years Ended February 28 or 29 1997 1996 1995 - ------------------------------------------------------------ Weighted average discount rate...... 7.5% 7.0% 8.0% Rate of increase in compensation levels............................ 5.5% 6.0% 6.5% Rate of return on plan assets....... 9.0% 9.0% 8.0% --------------------- 8. LEASE COMMITMENTS 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: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------- Minimum rentals.............. $ 184,618 $ 148,082 $ 118,042 Rentals based on sales volume...................... 2,322 2,871 2,513 Sublease income.............. (11,121) (9,996) (8,875) ------------------------------- Net.......................... $ 175,819 $ 140,957 $ 111,680 ------------------------------- 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, some with 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 real property leases will expire within the next 25 years; however, most of the leases have options providing for additional lease terms of from five to 28 years at terms substantially the same as the initial terms. Future minimum fixed lease obligations, excluding taxes, insurance and other costs payable directly by the Company, as of February 28, 1997, were: Operating Operating Fiscal Capital Lease Sublease (AMOUNTS IN THOUSANDS) Leases Commitments Income 1998....................... $ 1,541 $ 206,825 $(11,526) 1999....................... 1,579 204,587 (10,281) 2000....................... 1,662 202,486 (9,379) 2001....................... 1,681 201,317 (8,311) 2002....................... 1,725 198,164 (7,353) After 2002................. 19,958 2,293,922 (42,526) ------------------------------ Total minimum lease payments................ 28,146 $3,307,301 $(89,376) -------------------- Less amounts representing interest................ 15,072 ------- Present value of net minimum capital lease payments [NOTE 4]....... $13,074
In fiscal 1997, the Company entered into sale-leaseback transactions with unrelated parties at an aggregate selling price of $201,694,000 ($183,900,000 in fiscal 1996 and $85,970,000 in fiscal 1995). The Company does not have continuing involvement under the sale-leaseback transactions. 9. SUPPLEMENTARY INCOME STATEMENT INFORMATION Advertising expense, which is included in selling, general and administrative expenses in the accompanying consolidated statements of earnings, amounted to $354,270,000 (4.6 percent of net sales and operating revenues) in fiscal 1997, $324,335,000 (4.6 percent of net sales and operating revenues) in fiscal 1996 and $262,969,000 (4.7 percent of net sales and operating revenues) in fiscal 1995. 10. 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 First North American National Bank, its wholly owned credit card bank subsidiary (the "Bank Subsidiary"). The Company implemented SFAS No. 125 with respect to sales of credit card receivables occurring after December 31, 1996. Proceeds from securitization transactions were $551.1 million for fiscal 1997, $692.3 million for fiscal 1996 and $428.4 million for fiscal 1995. 34 At February 28 or 29 the following amounts were outstanding: (AMOUNTS IN THOUSANDS) 1997 1996 - ----------------------------------------------------------- Securitized receivables......... $2,594,651 $1,860,459 Interest retained by Company.... (293,586) (110,459) Net receivables transferred..... $2,301,065 $1,750,000 ------------------------- Net receivables transferred with recourse................ $1,317,565 $ 760,000 ------------------------- Program capacity................ $2,665,000 $1,910,000 -------------------------
The Bank Subsidiary finances its private-label credit card program through a single master trust, through both private placement and the public market. During fiscal 1997, the Bank Subsidiary placed an additional $225 million in the public market for a total program capacity of $1,215 million. The master trust vehicle permits further expansion of the securitization programs to meet future receivables growth. The agreements have no recourse provisions. In addition, the Bank Subsidiary has an asset securitization program in place for its bank card receivables that allows, as of February 28, 1997, the transfer of up to $1,450 million in receivables. The bank card securitization agreements provide recourse to the Company for any cash flow deficiencies. The Company believes that as of February 28, 1997, no liability existed under these recourse provisions. The finance charges from the transferred receivables are used to fund interest costs, charge-offs, servicing fees and other related costs. The Bank Subsidiary's servicing revenue, including gains on sales of receivables of $3.7 million for fiscal 1997, totaled $197.0 million for fiscal 1997, $142.9 million for fiscal 1996 and $77.8 million for fiscal 1995. The servicing fees specified in the credit card securitization agreements adequately compensate the Bank Subsidiary for servicing the accounts. Accordingly, no servicing asset or liability has been recorded. Rights recorded for future interest income from serviced assets that exceed the contractually specified servicing fees are carried at fair value and amounted to $3.2 million at February 28, 1997, and are included in net accounts receivable. (B) Auto Loan Securitization: In fiscal 1996, the Company entered into a securitization agreement to finance the consumer installment credit receivables generated by First North American Credit Corporation ("FNAC"), an installment lending division of the Company. Proceeds from the auto loan securitization transaction were $58 million during fiscal 1997 and $87 million during fiscal 1996. The seasoned portfolio and more estimable losses allowed the Company to recognize gains on the sales of these receivables beginning in fiscal 1997. At February 28 or 29 the following amounts were outstanding: (AMOUNTS IN THOUSANDS) 1997 1996 - ----------------------------------------------------------- Securitized receivables........... $155,234 $ 93,065 Interest retained by Company...... (10,234) (6,065) ---------------------- Net receivables transferred....... $145,000 $ 87,000 ---------------------- Program capacity.................. $175,000 $100,000 ----------------------
The finance charges from the transferred receivables are used to fund interest costs, charge-offs and servicing fees. A restructuring of the facility during fiscal 1997 resulted in the recourse provisions being eliminated. Servicing revenue for FNAC, including gains on sales of receivables of $4.3 million in fiscal 1997, totaled $8.7 million for fiscal 1997 and $2.0 million for fiscal 1996 and for fiscal 1995. The servicing fee specified in the auto loan securitization agreement adequately compensates FNAC for servicing the loans. Accordingly, no servicing asset or liability has been recorded. Rights recorded for future interest income from serviced assets that exceed the contractually specified servicing fee are carried at fair value and amounted to $3.1 million at February 28, 1997, and are included in net accounts receivable. 11. INTEREST RATE SWAPS 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 Bank Subsidiary 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 while the Company utilizes the swaps to convert the fixed-rate obligation to a floating-rate, LIBOR-based obligation. The fair value of the swaps is the amount at which they could be settled 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 28, 1997, would result in a gain of $10.9 million and at February 29, 1996, would result in a gain of $19.4 million. 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 35 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 28, 1997, would result in a gain of $0.1 million and at February 29, 1996, would result in a loss of $2.5 million. 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 relating to the auto loan receivable securitization to convert variable-rate financing costs to a fixed-rate obligation to better match the funding costs to the receivables being securitized. These swaps were entered into as part of the sale of receivables and are therefore included in the gain on the sale of receivables. The remaining notional amount outstanding under these swaps was $114 million at February 28, 1997, and $71 million at February 29, 1996. 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 more closely match 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. 12. 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. 13. QUARTERLY FINANCIAL DATA (UNAUDITED) (AMOUNTS IN THOUSANDS First Quarter Second Quarter Third Quarter Fourth Quarter Year EXCEPT PER SHARE DATA) ---------------------------------------------------------------------------------------------------------- 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Net sales and operating revenues.......... $1,615,266 $1,391,658 $1,767,043 $1,600,805 $1,863,947 $1,783,446 $2,417,555 $2,253,214 $7,663,811 $7,029,123 ------------------------------------------------------------------------------------------------------------- Gross profit......... $ 362,270 $ 319,886 $ 396,328 $ 368,292 $ 422,859 $ 405,134 $ 579,643 $ 541,518 $1,761,100 $1,634,830 ------------------------------------------------------------------------------------------------------------- Net earnings (loss) attributable to: Circuit City Stock $ 16,783 $ 24,618 $ 31,583 $ 41,246 $ 19,787 $ 31,451 $ 68,527 $ 82,060 $ 136,680 $ 179,375 ------------------------------------------------------------------------------------------------------------- CarMax Stock...... $ - $ - $ - $ - $ - $ - $ (266)$ - $ (266)$ - ------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share: Circuit City Stock $ 0.17 $ 0.25 $ 0.32 $ 0.42 $ 0.20 $ 0.32 $ 0.69 $ 0.83 $ 1.38 $ 1.82 ------------------------------------------------------------------------------------------------------------- CarMax Stock ..... $ - $ - $ - $ - $ - $ - $ (0.01)$ - $ (0.01)$ - -------------------------------------------------------------------------------------------------------------
36 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 28, 1997 and February 29, 1996 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 28, 1997. 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 28, 1997 and February 29, 1996 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 28, 1997 in conformity with generally accepted accounting principles. /s/KPMG Peat Markwick LLP Richmond, Virginia April 3, 1997 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 separate operating results of the core electronics 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 Peat Marwick 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 in conformity with generally accepted accounting principles of the financial statements. In performing their audits, KPMG Peat Marwick 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 Peat Marwick 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. /s/Richard L. Sharp Richard L. Sharp Chairman and Chief Executive Officer /s/Michael T. Chalifoux Michael T. Chalifoux Senior Vice President, Chief Financial Officer and Corporate Secretary April 3, 1997 37 CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- On January 24, 1997, Circuit City Stores, Inc. shareholders approved the creation of two common stock series. The Company's existing common stock was subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common Stock. In an initial public offering, which was completed February 7, 1997, the Company sold 21.86 million shares of Circuit City Stores, Inc.-CarMax Group Common Stock. The Circuit City Group Common Stock is intended to track separately the performance of the Circuit City store-related operations and a retained interest in the CarMax Group. The effects of this retained interest on the Circuit City Group's Financial Statements are identified by the term "Inter-Group." All other line items relate to Circuit City operations. The CarMax Group Common Stock is intended to track separately the performance of the CarMax operations. The CarMax interest held by the Circuit City Group is not considered outstanding CarMax Group stock. Therefore, any net earnings or loss attributable to the Circuit City Group's interest is not included in the CarMax Group's per share calculations. The following discussion and analysis refers to the Circuit City Group. Reported earnings reflect the Circuit City Group's 100 percent interest in the losses of the CarMax Group prior to the consummation of the offering on February 7, 1997, and the Circuit City Group's 77.5 percent interest in the CarMax Group from the offering to the end of fiscal year 1997. 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. RESULTS OF OPERATIONS SALES GROWTH Total sales for the Circuit City Group increased 6 percent in fiscal 1997, to $7.15 billion. In fiscal 1996, total sales were $6.75 billion, a 23 percent increase from $5.51 billion in fiscal 1995. Percentage Sales Change From Prior Year Circuit City Group Total Comparable Industry Fiscal Sales Sales Sales* 1997.............................. 6% (8)% (8)% 1996.............................. 23% 5% 6% 1995.............................. 34% 15% 11% 1994.............................. 26% 8% 7% 1993.............................. 17% 7% 7%
* The industry sales rates are derived from Electronics Industries Association, Association of Home Appliance Manufacturers, Recording Industry Association of America and Company estimates of audio, video, home office, telecommunications, appliance and music software sales. Music software is not included in industry sales prior to fiscal 1995. In those years, Circuit City was not a significant participant in this category. Continued geographic expansion of the Group's Circuit City Superstores produced the fiscal 1997 total sales increase. The contribution from new stores was partly offset by a comparable store sales decline of 8 percent, which reflects an estimated 8 percent reduction in industry sales. In fiscal 1997, the Group opened a net of 65 Superstores, including 14 in the last month of the year. The Group entered two major metropolitan markets, Detroit, Mich., and Pittsburgh, Penn. The Group also opened stores in smaller markets, added stores to existing markets and replaced or expanded 20 stores. The Group operates four Circuit City Superstore formats with square footage and merchandise assortments tailored to population and volume expectations for specific trade areas. The "D" format was developed in fiscal 1995 to serve the most populous trade areas. At the end of fiscal 1997, selling space in the "D" format stores averaged about 24,000 square feet with total square footage averaging 43,360. The "D" stores offer the largest merchandise assortment of all the formats. The "C" format constitutes the largest percent of the store base. Selling square footage in this format has been increased during the last several years, and new "C" stores in fiscal 1997 generally had between 17,000 square feet and 20,000 square feet of selling space. At the end of fiscal 1997, total square footage for all "C" stores averaged 34,220. The "B" format often is located in smaller markets or in trade areas that are on the fringes of larger metropolitan markets. At the end of fiscal 1997, selling space in these stores averaged approximately 12,000 square feet with an average total square footage of 25,318. The "B" stores offer a broad merchandise assortment that maximizes return on investment in their lower volume areas. The "A" format serves the least populated trade areas. Selling space averaged approximately 10,000 square feet at the end of fiscal 1997, and total square footage averaged 18,507. The "A" stores feature a layout, staffing levels and merchandise assortment that creates high productivity in the smallest markets. The Group also operates 45 mall-based Circuit City Express stores. These stores are located in regional malls, are approximately 2,000 to 3,000 square feet in size and sell small, gift-oriented items. During fiscal 1997, the Group opened a net of nine Circuit City Express stores. Store Mix Retail Units at Year End Fiscal 1997 1996 1995 1994 1993 Superstore "D" Superstore 95 61 12 - - "C" Superstore 278 259 257 219 188 "B" Superstore 54 46 37 30 24 "A" Superstore 16 12 6 4 2 Electronics-Only 5 5 5 7 7 Circuit City Express 45 36 35 34 39 ----------------------------- TOTAL 493 419 352 294 260 -----------------------------
38 Geographic expansion and the addition of product categories such as personal computers were the primary contributors to the Group's total sales growth from fiscal 1993 through fiscal 1996. Late in fiscal 1996, industry sales of consumer electronics and personal computers weakened, resulting in comparable store sales declines for the Circuit City Group. That softness continued into fiscal 1997, with personal computer sales declining even more dramatically during the second half of that year. The industry's weakness produced an intense promotional climate and lower average retail prices. Stronger industry sales of major appliances and fully featured video products, categories in which Circuit City maintains high market shares, partly offset decreased sales in the other categories. Based on market research and sales performance, management believes that Circuit City has gained market share in the major appliance, digital satellite system and big-screen television product classes during the past year. The industry weakness has resulted in a significant number of competitive store closings and reductions in competitor expansion plans. As a result, management believes that the Circuit City locations continue to maintain substantial shares in existing markets and to build significant shares in new markets. Sales By Merchandise Categories* Fiscal 1997 1996 1995 1994 1993 - ----------------------------------------------------------- TV................... 18% 17% 19% 20% 23% VCR/Camcorders....... 14% 13% 14% 17% 19% Audio................ 18% 19% 22% 23% 23% Home Office.......... 24% 26% 20% 12% 7% Appliances........... 15% 14% 15% 18% 19% Other................ 11% 11% 10% 10% 9% ------------------------------------ TOTAL................ 100% 100% 100% 100% 100% -------------------------------------
* In fiscal 1996, the Group moved cellular phones from the "Audio" category to the "Other" category and moved certain audio products from the "Other" category to the "Audio" category. Sales of these products have been reclassified for prior years. The Group sells two extended warranty programs on behalf of unrelated third parties that issue these plans for merchandise sold by the Group and other retailers. One of these programs is sold in most major markets and features in-home service for personal computer products. The second program covers electronics and major appliances and at the end of fiscal year 1997 was offered by approximately 85 percent of the Superstores. The remaining stores sell a Circuit City extended warranty. Gross dollar sales from all extended warranty programs were 6.0 percent of the Group's total sales in fiscal year 1997, compared with 5.9 percent in fiscal 1996 and 5.8 percent in fiscal 1995. Total extended warranty revenue, which is reported in the Group's total sales, was 5.1 percent of sales in fiscal years 1997 and 1996 and 5.4 percent in fiscal year 1995. 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 3.6 percent of the Group's total sales in fiscal 1997, 3.0 percent in fiscal 1996 and 2.3 percent in fiscal 1995. The increase reflects the higher percentage of stores selling third-party contracts. The Group expects third-party extended warranty revenue to continue increasing in fiscal 1998. Superstore Sales Per Total Square Foot Fiscal 1997................................................ $499 1996................................................ $577 1995................................................ $584 1994................................................ $523 1993................................................ $487 ----
Superstore Sales Per Total Square Foot. Over the last five years, the Group has significantly increased the percentage of store square footage devoted to selling space. In fiscal 1995, the Group introduced the larger format "D" stores in some markets. These stores generate high sales volumes in specific trade areas but lower sales per total square foot than smaller Superstores. As a result, the Group's Superstore sales per total square foot declined in fiscal 1996. In fiscal 1997, these stores and the decline in comparable store sales again produced lower Superstore sales per total square foot. Management expects to reduce the square footage in future "D" stores. This reduction, a greater overall emphasis on smaller square footage stores and an improvement in comparable store sales should lead to higher sales per total square foot. Impact of Inflation. Inflation has not been a significant contributor to the Group's results. In fact, during the past year, the average retail price has declined in virtually all of the Group's product categories. Management expects no significant short-term change in this trend. Because the Group purchases substantially all products, including consumer electronics, 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. COST OF SALES, BUYING AND WAREHOUSING The gross profit margin was 24.0 percent of sales in fiscal 1997, up from 23.9 percent in fiscal 1996 but down from 25.1 percent in fiscal 1995. The lower gross margins in fiscal years 1997 and 1996 versus fiscal year 1995 reflect weak industry sales and the resulting intensity in the promotional climate and a higher mix of personal computer sales. The lower margin in fiscal 1996 also reflects a higher mix of personal computer sales, which produce gross profit margins lower than the Group's average. In fiscal 1997, promotional pressure was offset by a reduction in personal computer sales when compared with the prior year and an increase in major appliance, digital satellite system and big-screen television sales. 39 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to 20.4 percent of sales in fiscal 1997 from 19.2 percent in fiscal 1996 and 19.9 percent in fiscal 1995. The increase primarily reflects the impact of comparable store sales declines and the less favorable productivity of larger-square-footage stores. These factors were partly offset by an ongoing focus on maximizing store productivity and corporate overhead efficiency and a net contribution from the credit card bank subsidiary. Operating profits generated by Circuit City's credit card bank subsidiary are recorded as a reduction to the Group's selling, general and administrative expenses. Throughout the past three years, the subsidiary has benefited from a generally low interest rate environment, which lowers the bank's cost of funds. INTEREST EXPENSE Interest expense was 0.3 percent of sales in fiscal 1997 and 1996 and 0.2 percent in fiscal 1995. Interest expense was incurred on allocated debt used to fund store expansion and working capital. The increase from fiscal 1995 to fiscal 1996 reflects higher interest rates, increased long-term debt and higher short-term borrowings resulting from the Group's growth. INCOME TAXES The Group's effective income tax rate was 38.2 percent in fiscal 1997 and 37.6 percent in both fiscal 1996 and fiscal 1995. The increase in the tax rate for fiscal 1997 reflects increased sales in states with higher tax rates. EARNINGS BEFORE THE INTER-GROUP INTEREST IN THE CARMAX GROUP Earnings before the Inter-Group Interest in the CarMax Group declined 21 percent to $145.7 million in fiscal 1997. In fiscal 1996, earnings before the Inter-Group Interest were $184.6 million, a 7 percent increase from $172.0 million in fiscal 1995. RETURN ON SALES Return on sales before the Inter-Group Interest in the CarMax Group was 2.0 percent in fiscal 1997 compared with 2.8 percent in fiscal 1996 and 3.1 percent in fiscal 1995. NET LOSS RELATED TO THE INTER-GROUP INTEREST IN THE CARMAX GROUP The CarMax Group has incurred losses, as anticipated, during the testing stage and with the initiation of the first phase of its national roll out announced in fiscal 1997. The net loss attributable to the Circuit City Group's Inter-Group Interest in the CarMax Group was $9.1 million in fiscal 1997, $5.2 million in fiscal 1996 and $4.1 million in fiscal 1995. NET EARNINGS Net earnings for the Circuit City Group were $136.7 million in fiscal 1997, $179.4 million in fiscal 1996 and $167.9 million in fiscal 1995. Net earnings per share were $1.38 in fiscal 1997, $1.82 in fiscal 1996 and $1.72 in fiscal 1995. The lower earnings in fiscal 1997 reflect the challenging industry environment faced by the Group and the higher losses incurred by the CarMax Group in fiscal 1997 versus fiscal 1996. OPERATIONS OUTLOOK Management believes that continued investment in Circuit City's Superstore expansion will maximize long-term shareholder value. Management estimates that in fiscal 1998 the remaining markets suitable for Superstore expansion will represent $29 billion of the consumer electronics, home office, major appliance and music software industry's total retail sales potential of $83 billion. By the year 2000, Circuit City expects to expand the Superstore base into most of these markets. In fiscal 1998, the Group expects to open approximately 60 Superstores, including an estimated 30 "C" stores. The majority of the openings will be "A", "B" and "C" stores. New-market entries will comprise 35 to 40 of the new Superstores, including approximately 15 in the New York City market and entries into Indianapolis, Ind.; Dayton and Columbus, Ohio; and numerous smaller markets. The Group also plans to replace 10 to 15 stores and add Circuit City Express stores. Management believes that a modest upturn in the industry would produce stronger sales growth than experienced in fiscal 1997. Management remains cautious but optimistic in its fiscal 1998 outlook, given the weaker-than-expected sales during the second half of fiscal 1997 and limited new product introductions. Growth for the full year will be influenced by the timing and strength of a pickup in the industry and new product introductions, such as DVD, or digital video disc. The intense promotional climate in the second half of fiscal 1996 and in fiscal 1997 has prompted some industry consolidation, which management believes will continue in fiscal 1998. Although the rationalization of industry square footage may produce a short-term negative effect on the Group's sales and gross margin, it should have a positive impact over the long term as the Circuit City stores gain a portion of the vacated market share. Management believes that the Group's financial condition and in-store execution leave it well-positioned competitively. Management believes this competitive position, an upturn in the industry and the Group's continued expansion represent substantial long-term earnings potential. Management expects CarMax to generate results in fiscal 1998 similar to those in fiscal 1997 and to generate profits by fiscal 1999. The CarMax results will be reflected in the Circuit City Group's Inter-Group Interest. 40 IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Early application is not permitted. This statement establishes new standards for computing and presenting earnings per share. The Circuit City Group has not determined the impact of SFAS No. 128 on its earnings per share computations and presentation. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES In fiscal 1997, net cash provided by operating activities was $39.7 million compared with $71.5 million used in operating activities in fiscal 1996 and $115.0 million provided by operating activities in fiscal 1995. The fiscal 1997 improvement primarily reflects less rapid growth in inventory and a higher increase in accounts payable offset by an increase in accounts receivable and lower net earnings. The fiscal 1996 decrease in cash principally reflects the limited earnings growth and lower increases in the provision for deferred income taxes and in accounts payable, accrued expenses, other current liabilities and accrued income taxes. Capital expenditures have been funded through sale-leaseback transactions, landlord reimbursements and allocated short-and long-term debt. Capital expenditures of $451.6 million in fiscal 1997 principally reflect Superstores opened during the year and a portion of the Superstores opening in fiscal 1998. The sale-leaseback and landlord reimbursement transactions completed in fiscal 1997 totaled $316.3 million and were largely related to real estate purchased in fiscal 1997 and fiscal 1996. Capital expenditures of $491.4 million in fiscal 1996 and $342.4 million in fiscal 1995 largely were incurred in connection with the Superstore expansion program. The Company's credit card bank subsidiary primarily funds its credit card programs through securitization transactions, which allow the subsidiary to sell the receivables while retaining a small interest in the receivables. The subsidiary has a master trust securitization facility for its private-label credit card that allows the transfer of up to $1.22 billion in receivables through both private placement and the public market. A second securitization program allows for the transfer of up to $1.45 billion in receivables related to the subsidiary's bankcard programs. Under the securitization programs, receivables are sold to an unaffiliated third party with the servicing retained. Management expects that these securitization programs can be expanded to accommodate future receivables growth. The Group relies on Circuit City Stores, Inc. external debt allocated to the Group to provide working capital needed to fund net assets not otherwise disposed of through sale-leasebacks or the securitization of receivables. All significant financial activities of the Group are managed by the Company on a centralized basis and are dependent on the financial condition of Circuit City Stores, Inc. Such financial activities include the investment of surplus cash, issuance and repayment of debt, securitization of receivables and sale-leasebacks of real estate. Late in fiscal 1997, Circuit City Stores, Inc. raised a net of $412.3 million through the initial public offering of 21.86 million shares of newly created CarMax Group Common Stock. At the end of fiscal 1997, the Circuit City Group retained a 77.5 percent interest in the equity of the CarMax Group. Therefore, the offering had the effect of increasing equity for the Circuit City Group by $323.9 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 Circuit City Group's capital expenditures and operations. In fiscal 1998, the Group anticipates capital expenditures of approximately $480 million. FORWARD-LOOKING STATEMENTS 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 new "safe harbor" provisions of the Act and has included a section in "Management's Discussion and Analysis" for Circuit City Stores, Inc. in order to do so. Company statements that are not historical facts, including statements about management's expectations for fiscal year 1998 and beyond, are forward-looking statements and involve various risks and uncertainties. Refer to the Circuit City Stores, Inc. "Management's Discussion and Analysis" for a review of possible risks and uncertainties. 41 CIRCUIT CITY GROUP STATEMENTS OF EARNINGS - ------------------------------------------------------------------------------------------------------------------------------ Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 % 1996 % 1995 % - ------------------------------------------------------------------------------------------------------------------------------ NET SALES AND OPERATING REVENUES................. $ 7,153,562 100.0 $ 6,753,266 100.0 $5,505,945 100.0 Cost of sales, buying and warehousing............ 5,435,923 76.0 5,142,009 76.1 4,125,800 74.9 -------------------------------------------------------------------------- GROSS PROFIT..................................... 1,717,639 24.0 1,611,257 23.9 1,380,145 25.1 -------------------------------------------------------------------------- Selling, general and administrative expenses [NOTES 3 AND 10]..................... 1,458,183 20.4 1,293,990 19.2 1,095,578 19.9 Interest expense [NOTES 3 AND 5]................. 23,503 0.3 21,325 0.3 8,985 0.2 -------------------------------------------------------------------------- TOTAL EXPENSES................................... 1,481,686 20.7 1,315,315 19.5 1,104,563 20.1 -------------------------------------------------------------------------- Earnings before income taxes and Inter-Group Interest in the CarMax Group.................. 235,953 3.3 295,942 4.4 275,582 5.0 Provision for income taxes [NOTES 3 AND 6]....... 90,221 1.3 111,332 1.6 103,600 1.9 -------------------------------------------------------------------------- EARNINGS BEFORE INTER-GROUP INTEREST IN THE CARMAX GROUP........................... 145,732 2.0 184,610 2.8 171,982 3.1 Net loss related to Inter-Group Interest in the CarMax Group [NOTE 2]......................... 9,052 0.1 5,235 0.1 4,107 0.1 -------------------------------------------------------------------------- NET EARNINGS..................................... $ 136,680 1.9 $ 179,375 2.7 $ 167,875 3.0 -------------------------------------------------------------------------- Weighted average common shares and common share equivalents...................... 99,342 98,546 97,369 ----------- ----------- ---------- NET EARNINGS PER SHARE [NOTE 2].................. $ 1.38 $ 1.82 $ 1.72 ----------- ----------- ---------- See accompanying notes to group financial statements. 42 CIRCUIT CITY GROUP BALANCE SHEETS At February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents.............................................................. $ 32,222 $ 41,485 Net accounts and notes receivable [NOTE 11]............................................ 503,624 307,833 Merchandise inventory.................................................................. 1,310,103 1,261,511 Deferred income taxes [NOTE 6]......................................................... 23,764 29,272 Prepaid expenses and other current assets.............................................. 10,711 16,627 -------------------------------- TOTAL CURRENT ASSETS................................................................... 1,880,424 1,656,728 Property and equipment, net [NOTES 4 AND 5]............................................ 793,917 754,405 Inter-Group Interest in the CarMax Group [NOTE 2]...................................... 303,657 - Other assets........................................................................... 30,258 16,080 -------------------------------- TOTAL ASSETS .......................................................................... $ 3,008,256 $ 2,427,213 -------------------------------- LIABILITIES AND GROUP EQUITY CURRENT LIABILITIES: Current installments of long-term debt [NOTES 5 AND 9]................................. $ 1,490 $ 1,436 Accounts payable....................................................................... 692,461 592,089 Short-term debt [NOTE 5]............................................................... 347 74,037 Inter-group payable [NOTE 3]........................................................... 48,147 - Accrued expenses and other current liabilities......................................... 103,441 122,625 Accrued income taxes................................................................... 8,560 9,375 -------------------------------- TOTAL CURRENT LIABILITIES.............................................................. 854,446 799,562 Long-term debt, excluding current installments [NOTES 5 AND 9]......................... 430,290 320,642 Deferred revenue and other liabilities................................................. 163,700 212,563 Inter-Group Interest in the CarMax Group [NOTE 2]...................................... - 11,201 Deferred income taxes [NOTE 6]......................................................... 33,123 19,324 -------------------------------- TOTAL LIABILITIES...................................................................... 1,481,559 1,363,292 GROUP EQUITY........................................................................... 1,526,697 1,063,921 -------------------------------- Commitments and contingent liabilities [NOTES 1, 8, 9, 11, 12 AND 13] TOTAL LIABILITIES AND GROUP EQUITY..................................................... $ 3,008,256 $ 2,427,213 -------------------------------- See accompanying notes to group financial statements. 43 CIRCUIT CITY GROUP STATEMENTS OF CASH FLOWS - ----------------------------------------------------------------------------------------------------------------------------- Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net earnings..................................................... $ 136,680 $ 179,375 $ 167,875 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Net loss related to Inter-Group Interest in the CarMax Group.. 9,052 5,235 4,107 Depreciation and amortization................................. 97,313 78,991 66,607 (Gain) loss on sales of property and equipment................ (1,540) 5,600 2,199 Provision for deferred income taxes........................... 19,307 21,301 73,333 Decrease in deferred revenue and other liabilities............ (48,863) (28,604) (27,102) Increase in net accounts and notes receivable................. (195,791) (87,594) (41,574) Increase in merchandise inventory, prepaid expenses and other current assets............................................. (42,676) (275,260) (281,394) (Increase) decrease in other assets........................... (14,178) 1,911 (3,819) Increase in accounts payable, accrued expenses and other current liabilities, and accrued income taxes........ 80,373 27,579 154,757 ------------------------------------------------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............. 39,677 (71,466) 114,989 ------------------------------------------------------ INVESTING ACTIVITIES: Purchases of property and equipment.............................. (451,561) (491,399) (342,416) Proceeds from sales of property and equipment.................... 316,276 225,704 137,181 ------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES............................ (135,285) (265,695) (205,235) ------------------------------------------------------- FINANCING ACTIVITIES: (Payments on) proceeds from issuance of short-term debt, net..... (73,690) 74,037 - Increase in inter-group payable.................................. 48,147 - - Proceeds from issuance of long-term debt, net.................... 109,702 252,724 62,263 Equity issuances, net............................................ 15,385 18,245 8,352 Dividends paid................................................... (13,199) (11,163) (9,155) ------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES........................ 86,345 333,843 61,460 ------------------------------------------------------ Decrease in cash and cash equivalents............................... (9,263) (3,318) (28,786) Cash and cash equivalents at beginning of year...................... 41,485 44,803 73,589 ------------------------------------------------------ Cash and cash equivalents at end of year............................ $ 32,222 $ 41,485 $ 44,803 ------------------------------------------------------ See accompanying notes to group financial statements. 44 CIRCUIT CITY GROUP STATEMENTS OF GROUP EQUITY - ----------------------------------------------------------------------------------------------------------------------------- (AMOUNTS IN THOUSANDS) BALANCE AT MARCH 1, 1994....................................................................................... $ 710,392 ----------- Net earnings................................................................................................ 167,875 Equity issuances, net....................................................................................... 8,352 Cash dividends.............................................................................................. (9,155) ----------- BALANCE AT FEBRUARY 28, 1995................................................................................... 877,464 ----------- Net earnings................................................................................................ 179,375 Equity issuances, net....................................................................................... 18,245 Cash dividends.............................................................................................. (11,163) ----------- BALANCE AT FEBRUARY 29, 1996................................................................................... 1,063,921 ----------- Net earnings................................................................................................ 136,680 Equity issuances, net....................................................................................... 15,385 Cash dividends.............................................................................................. (13,199) Inter-Group Interest adjustment resulting from the Offering [NOTE 2]........................................ 323,910 ----------- BALANCE AT FEBRUARY 28, 1997................................................................................... $ 1,526,697 -----------
See accompanying notes to group financial statements. 45 NOTES TO CIRCUIT CITY GROUP FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION On January 24, 1997, the shareholders of Circuit City Stores, Inc. and its subsidiaries (the "Company") authorized a restructuring of the existing common stock of the Company into two new series of common stock intended to reflect separately the performance of the Company's two main businesses - the consumer electronics, major appliance, personal computer and music software retail business, including its interest in the CarMax Group referred to below (the "Circuit City Group"), and the used- and new-car retail business (the "CarMax Group"). Subsequent to shareholder approval, the board of directors approved the redesignation of each share of the Company's existing common stock as a share of a new series of common stock called Circuit City Stores, Inc.-Circuit City Group Common Stock, par value $0.50 per share ("Circuit City Stock"), which is intended to reflect separately the performance of the Circuit City Group, which is generally comprised of (i) the Company's consumer electronics, major appliance, personal computer and music software retail business, (ii) an interest in the CarMax Group, which excludes the interest represented by any outstanding shares of CarMax Stock, as described below, and (iii) all other businesses in which the Company may be engaged (other than those comprising the CarMax Group). For presentation purposes, this redesignation of the Company's common stock has been treated as if it occurred as of the beginning of the earliest period presented in the accompanying financial statements. In addition, the board of directors authorized the designation and issuance of shares of a new series of common stock called Circuit City Stores, Inc.-CarMax Group Common Stock, par value $0.50 per share ("CarMax Stock"), which is intended to reflect separately the performance of the used- and new-car retail business that comprises the CarMax Group. The Circuit City Group and the CarMax Group are sometimes referred to collectively as the "Groups" and individually as a "Group." On February 7, 1997, the Company completed an offering of 21,860,000 shares of CarMax Stock for cash in a public offering (the "Offering") for $20.00 per share aggregating $437.2 million in proceeds before deducting related expenses of $24.9 million. The Company allocated the net proceeds of the Offering to the CarMax Group. Upon completion of the Offering and without giving effect to options, the outstanding CarMax Stock represented 22.5 percent of the equity value of the CarMax Group, and the Circuit City Group held a 77.5 percent interest (the "Inter-Group Interest") in the equity value of the CarMax Group. The Circuit City Group financial statements give effect to the management and allocation policies adopted by the board of directors, as described under "Corporate Activities" below. The Circuit City Group financial statements have been prepared on a basis that management believes to be reasonable and appropriate and include (i) the historical financial position, results of operations and cash flows of the Circuit City Group, (ii) an allocated portion of the Company's debt, including the related effects upon results of operations and cash flows, (iii) an allocated portion of the Company's corporate general and administrative costs and (iv) the Inter-Group Interest held by the Circuit City Group in the CarMax Group. Holders of Circuit City Stock and holders of CarMax 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. The financial results of the Circuit City Group and of the CarMax Group could affect the market price of either series of stock or the assets legally available for payment of dividends. Accordingly, the Circuit City Group's financial information should be read in conjunction with the Company's consolidated financial information and the CarMax Group's financial information. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Cash and Cash Equivalents: No cash equivalents were allocated to the Circuit City Group at February 28, 1997. Cash equivalents of $10,113,000 at February 29, 1996, consist of highly liquid debt securities with original maturities of three months or less. (B) Fair Value of Financial Instruments: The Company enters into financial 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 due to 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 loss for nonperformance. All financial instruments are broadly diversified along industry, product and geographic areas. (C) Merchandise Inventory: Inventory is stated at the lower of cost or market. Cost is determined by the average cost method. (D) 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, which range from three to 25 years. Property held under capital leases 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 straight-line over the lease term or the estimated useful life of the asset, whichever is shorter. (E) Pre-opening Expenses: Expenses associated with the opening of new stores are deferred and amortized ratably over the period from the date of the store opening to the end of the fiscal year. 46 (F) Income Taxes: Income taxes are accounted for in accordance with Statement of Financial Accounting Standards (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. (G) 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. All 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. All other costs are charged to expense as incurred. Commission revenue for the unrelated third-party extended warranty plans is recognized at the time of sale. (H) Inter-Group Interest: Prior to the Offering, the Circuit City Group had a 100 percent Inter-Group Interest in the CarMax Group. Following completion of the Offering, the Circuit City Group held a 77.5 percent Inter-Group Interest in the CarMax Group. 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 equity value of the Company attributable to the CarMax Group has been reflected as "Inter-Group Interest in the CarMax Group" on the Circuit City Group balance sheets. Similarly, the net losses of the CarMax Group attributable to the Circuit City Group's Inter-Group Interest are reflected as "Net 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. The carrying value of the Circuit City Group's Inter-Group Interest in the CarMax Group has been decreased proportionally for the net loss of the CarMax Group. In addition, in the event of any dividend or other distribution on CarMax Stock, an amount that is proportionate to the aggregate amount so paid in respect to shares of CarMax 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. (I) Selling, General and Administrative Expenses: Operating profits generated by financing operations are recorded as a reduction to selling, general and administrative expenses. (J) Advertising Expenses: All advertising costs are expensed as incurred. (K) Net Earnings Per Share: Net earnings per share for Circuit City Stock is computed by dividing net earnings attributable to Circuit City Stock, including the Circuit City Group's 100 percent interest in the losses of the CarMax Group for periods prior to the Offering and the Circuit City Group's 77.5 percent interest in the CarMax Group subsequent to the Offering, by the weighted average number of shares of Circuit City Stock and dilutive Circuit City Stock equivalents outstanding. (L) Stock-Based Compensation: On March 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected to continue applying the provisions of the Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and to provide the pro forma disclosure provisions of SFAS No. 123. (M) Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: In fiscal 1997, the Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Adoption of SFAS No. 125 did not have a material impact on the Circuit City Group's financial position, results of operations or liquidity. (N) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of: The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," on March 1, 1996. Impairment of long-lived assets is recognized when the carrying amounts of the impaired assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell. Adoption of SFAS No. 121 did not have a material impact on the Circuit City Group's financial position, results of operations or liquidity. (O) Risks and Uncertainties: The Circuit City Group is the nation's largest retailer of brand-name consumer electronics and major appliances and a leading retailer of personal computers and music 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. 47 Because of the Inter-Group Interest, the Circuit City Group also is subject to risks and uncertainties related to the CarMax Group. 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, competition or sources of supply. The CarMax Group's operations currently are concentrated in the southeastern United States. A severe economic downturn in the southeastern United States could negatively impact the CarMax Group's operating results. Due to the CarMax Group's geographic concentration and limited overall size, management cannot assure that unanticipated events will not have a negative impact on the Circuit City Group. 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. (P) Reclassifications: Certain amounts in prior years have been reclassified to conform to classifications adopted in fiscal 1997. 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 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 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 debt that is allocated between the Groups ("pooled debt"). 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. 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 an inter-group payable on the balance sheet. (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 the respective 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. PROPERTY AND EQUIPMENT Property and equipment, at cost, at February 28 or 29 is summarized as follows: (AMOUNTS IN THOUSANDS) 1997 1996 - --------------------------------------------------------------- Land and buildings (20 to 25 years)... $ 116,638 $ 85,263 Construction in progress.............. 88,779 188,790 Furniture, fixtures and equipment (3 to 8 years)..................... 496,657 384,330 Leasehold improvements (10 to 15 years) 427,322 350,696 Capital leases, primarily buildings (20 years)......................... 12,471 13,140 ----------------------- 1,141,867 1,022,219 Less accumulated depreciation and amortization....................... 347,950 267,814 ----------------------- PROPERTY AND EQUIPMENT, NET........... $ 793,917 $ 754,405 ----------------------- 5. DEBT Long-term pooled debt of the Company at February 28 or 29 is summarized as follows: (AMOUNTS IN THOUSANDS) 1997 1996 - -------------------------------------------------------------- Term loans.............................. $ 405,000 $ 275,000 Short-term debt expected to be refinanced........................... - 100,000 Industrial Development Revenue Bonds due through 2006 at various prime-based rates of interest ranging from 5.4% to 7.0%.................... 13,706 12,393 Obligations under capital leases [NOTE 9] 13,074 13,204 --------------------- Total long-term debt.................... 431,780 400,597 Less current installments............... 1,490 1,436 --------------------- Long-term debt, excluding current installments................. $ 430,290 $ 399,161 --------------------- Portion of long-term debt allocated to Circuit City Group................... $ 431,780 $ 322,078 ---------------------
48 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 28, 1997, the interest rate on the term loan was 5.86 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 28, 1997, the interest rate on the term loan was 5.80 percent. 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 28, 1997, the interest rate on the term loan was 5.73 percent. The Company maintains a multi-year, $150,000,000, unsecured revolving credit agreement with five banks. The agreement calls for interest based on both committed rates and money market rates and a commitment fee of 0.13 percent per annum. The agreement was entered into as of August 31, 1996, and terminates August 31, 2001. The agreement provides for annual one-year extensions of the final maturity beginning on or before August 31, 1997, and each August 31 thereafter. No amounts were outstanding under the revolving credit agreement at February 28, 1997, or February 29, 1996. The Industrial Development Revenue Bonds are collateralized by land, buildings and equipment with an aggregate carrying value of approximately $14,575,000 at February 28, 1997, and $13,073,000 at February 29, 1996. Under certain of the debt agreements, the Company must meet financial covenants relating to minimum tangible net worth, current ratios and debt-to-capital ratios. The Company was in compliance with all such covenants at February 28, 1997, and February 29, 1996. Short-term debt of the Company includes committed lines of credit and informal credit arrangements. Amounts outstanding and committed lines of credit available are as follows: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------- Average short-term debt outstanding....................... $186,569 $185,789 ------------------- Maximum short-term debt outstanding....................... $580,000 $479,000 ------------------- Aggregate committed lines of credit......................... $415,000 $255,000 -------------------
The weighted average interest rate on the outstanding short-term debt was 5.4 percent during fiscal 1997, 5.9 percent during fiscal 1996 and 5.3 percent during fiscal 1995. Interest expense allocated by the Company to the Circuit City Group, excluding interest capitalized, was $23,502,965 in fiscal 1997, $21,325,263 in fiscal 1996 and $8,984,907 in fiscal 1995. The Circuit City Group capitalizes interest in connection with the construction of certain facilities. In fiscal 1997, interest capitalized amounted to $6,072,000 ($5,466,000 in fiscal 1996 and $3,670,000 in fiscal 1995). 6. INCOME TAXES The components of the provision for income taxes on earnings before income taxes and Inter-Group Interest in the CarMax Group follow: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------- Current: Federal................. $62,649 $ 84,348 $ 23,786 State................... 8,265 5,683 6,481 ----------------------------- 70,914 90,031 30,267 ----------------------------- Deferred: Federal................. 18,150 18,047 68,719 State................... 1,157 3,254 4,614 ----------------------------- 19,307 21,301 73,333 ----------------------------- Provision for income taxes. $90,221 $111,332 $103,600 ----------------------------- The effective income tax rate differed from the Federal statutory income tax rate as follows: 1997 1996 1995 - ------------------------------------------------------------ Federal statutory income tax rate....................... 35.0% 35.0% 35.0% State and local income taxes, net of Federal benefit......... 3.2 2.6 2.6 ----------------------- Effective income tax rate......... 38.2% 37.6% 37.6% ----------------------- 49 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 28, 1997, and February 29, 1996, are as follows: (AMOUNTS IN THOUSANDS) 1997 1996 - --------------------------------------------------------- Deferred tax assets: Deferred revenue.................... $ 9,421 $22,655 Inventory capitalization............ 8,871 5,691 Accrued expenses.................... 29,981 34,190 Other............................... 2,690 3,090 ----------------- Total gross deferred tax assets.. 50,963 65,626 Deferred tax liabilities: Depreciation and amortization....... 42,544 39,448 Prepaid benefit programs............ - 886 Other prepaid expenses.............. 7,351 6,333 Other............................... 10,427 9,011 ----------------- Total gross deferred tax liabilities.................... 60,322 55,678 ----------------- Net deferred tax (liability) asset..... $ (9,359) $ 9,948 -----------------
Of the gross deferred tax assets at February 28, 1997, and February 29, 1996, approximately $46 million and $59 million, respectively, can be realized by carrybacks or offsetting of deferred tax liabilities. Based on the Circuit City Group's historical and current pre-tax earnings, management believes the remaining amount will be realized through future taxable income; therefore, no valuation allowance is necessary. 7. CAPITAL STOCK AND STOCK INCENTIVE PLANS (A) 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 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 four-hundredth of a share of Cumulative Participating Preferred Stock, Series E, $20 par value, at an exercise price of $35 per share subject to adjustment. A total of 500,000 shares of such preferred stock, which have preferential dividend and liquidation rights, has been designated; 300,000 shares have been 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 continuing 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 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. (B) 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 Stock shall have one vote and (ii) each outstanding share of CarMax Stock shall have a number of votes based on the weighted average ratio of the market value of a share of CarMax Stock to a share of Circuit City 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. (C) Restricted Stock: The Company has issued restricted stock under the provisions of the 1994 and 1988 Stock Incentive Plans whereby key employees are granted restricted shares of Circuit City Stock. Shares are awarded in the name of the employee, who has all the rights of a stockholder, subject to certain restrictions or forfeitures. Restrictions on the awards generally expire three years from the date of grant. In fiscal 1997, restricted stock awards for 254,745 shares were granted to eligible employees. The market value of these shares has been recorded as unearned compensation and is a component of stockholder's equity. Unearned compensation is expensed over the restriction periods. In fiscal 1997, a total of $3,790,200 was charged to Circuit City Group operations ($3,362,500 in 1996 and $2,552,500 in 1995). As of February 28, 1997, 570,609 restricted shares were outstanding. (D) Employee Stock Purchase Plan: The Company has an Employee Stock Purchase Plan for all employees meeting certain eligibility criteria. Under the Plan, eligible employees may purchase shares of Circuit City Stock, subject to certain limitations, at 85 percent of its market value. Purchases are limited to 10 percent of an employee's eligible compensation, up to a maximum of $7,500 per year. All shares have been redesignated as Circuit City Stock. At February 28, 1997, a total of 563,068 shares remained available under the Plan. During fiscal 1997, 499,338 shares were issued to or purchased on the open market for employees (474,889 in fiscal 1996 and 537,467 in fiscal 1995). The average price per share was $32.68 in fiscal 1997, $29.97 in fiscal 1996 and $22.23 in 50 fiscal 1995. The purchase price discount is charged to Circuit City Group operations and totaled $2,433,600 in fiscal 1997, $2,030,000 in fiscal 1996 and $1,760,200 in fiscal 1995. (E) Stock Incentive Plans: Under the Company's stock incentive plans, incentive and non-qualified stock options may be granted to management, key employees and outside directors to purchase shares of Circuit City Stock. The exercise price for incentive stock options for employees and non-qualified options for outside directors is equal to, or greater than, the market value at the date of grant; for non-qualified 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. A summary of the status of the Circuit City Group's stock options and changes during the years ended February 28 or 29 is shown in Table 1. Table 2 summarizes information about stock options outstanding as of February 28, 1997. 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 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 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 1997 may not be representative of the pro forma effects on net earnings for future years. (AMOUNTS IN THOUSANDS Years Ended February 28 or 29 EXCEPT PER SHARE DATA) 1997 1996 - --------------------------------------------------------------- Net earnings-as reported............. $136,680 $179,375 Net earnings-pro forma............... 133,326 178,325 Net earnings per share-as reported... $ 1.38 $ 1.82 Net earnings per share-pro forma..... 1.34 1.81
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: 1997 1996 Expected dividend yield................... 0.4% 0.4% Expected stock volatility................. 33% 35% Risk-free interest rates.................. 6% 7% Expected lives (in years)................. 4 4
Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted for the Circuit City Group is $8 in fiscal 1997 and $9 in fiscal 1996. Table 1 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Weighted Average Weighted Average Weighted Average (SHARES IN THOUSANDS) Shares Exercise Price Shares Exercise Price Shares Exercise Price - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year............ 3,563 $18.63 3,709 $17.14 3,594 $16.69 Granted..................................... 2,159 43.38 763 22.98 750 18.34 Exercised................................... (786) 17.67 (645) 12.64 (260) 10.18 Canceled.................................... (108) 21.90 (264) 24.06 (375) 19.41 ---- ---- ---- Outstanding at end of year.................. 4,828 $29.76 3,563 $18.63 3,709 $17.14 ----- ----- ----- Options exercisable at end of year.......... 1,629 $17.24 1,847 $16.19 2,070 $15.70 ----- ----- ----- Table 2 Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------------------------------------------- Weighted Average (SHARES IN THOUSANDS) Number Remaining Weighted Average Number Weighted Average Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price - --------------------------------------------------------------------------------------------------------------------------------- $ 5.94 to 10.56.................................... 285 1.0 $ 8.59 285 $ 8.59 13.19 to 20.13.................................... 1,306 2.7 16.81 886 16.09 22.50 to 29.13.................................... 1,057 3.9 23.62 445 24.63 29.50 to 36.88.................................... 1,180 7.2 29.97 13 34.47 59.00............................................. 1,000 6.0 59.00 - - ----- ----- Total.............................................. 4,828 4.6 $29.76 1,629 $17.24 ----- -----
51 8. PENSION PLAN The Company has a non-contributory 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 this program is being funded currently. Plan benefits are generally based on years of service and average compensation. Plan assets consist primarily of equity securities and included 80,000 shares of Circuit City Stock at February 28, 1997, and February 29, 1996. 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 components of net pension expense for the Circuit City Group are as follows: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ---------------------------------------------------------- Service cost of benefits earned during the year........... $ 9,226 $5,756 $4,451 Interest cost on projected benefit obligation........ 4,667 3,606 2,710 Actual return on plan assets. (9,783) (9,149) (101) Net amortization............. 6,830 6,227 (3,434) --------------------------- Net pension expense.......... $10,940 $6,440 $3,626 --------------------------- The following table sets forth the Circuit City Group's share of the Plan's financial status and amounts recognized in the balance sheets as of February 28 or 29: (AMOUNTS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------- Actuarial present value of benefit obligation: Accumulated benefit obligation Vested.............................. $ 43,367 $39,263 Non-vested.......................... 5,290 5,104 ----------------- Total benefits......................... 48,657 44,367 Additional amounts related to projected salary increases.................... 21,398 22,532 ----------------- Projected benefit obligation for services rendered to date.................... 70,055 66,899 Plan assets at fair value.............. (62,033) (46,444) Projected benefit obligation in excess of plan assets......................... 8,022 20,455 Unrecognized gain (loss) from past experience.......................... 3,276 (13,922) Unrecognized prior service cost........ 760 863 Unrecognized net obligation being recognized over 15 years............ 996 1,195 ----------------- Accrued pension cost................... $ 13,054 $ 8,591 ----------------- Assumptions used in the accounting for the pension plan were: Years Ended February 28 or 29 1997 1996 1995 - ------------------------------------------------------------- Weighted average discount rate...... 7.5% 7.0% 8.0% Rate of increase in compensation levels............................ 5.5% 6.0% 6.5% Rate of return on plan assets....... 9.0% 9.0% 8.0% --------------------
9. 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: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------ Minimum rentals.............. $178,599 $144,232 $117,012 Rentals based on sales volume............. 2,322 2,871 2,513 Sublease income.............. (11,121) (9,996) (8,875) ---------------------------- Net.......................... $169,800 $137,107 $110,650 ----------------------------
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, some with 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. The initial term of real property leases will expire within the next 25 years; however, most of the leases have options providing for additional lease terms of from five to 25 years at terms substantially the same as the initial terms. Future minimum fixed lease obligations, excluding taxes, insurance and other costs payable directly by the Circuit City Group, as of February 28, 1997, were: Operating Operating Fiscal Capital Lease Sublease (AMOUNTS IN THOUSANDS) Leases Commitments Income 1998.......................... $ 1,541 $ 200,406 $ (11,526) 1999.......................... 1,579 198,170 (10,281) 2000.......................... 1,662 196,194 (9,379) 2001.......................... 1,681 195,064 (8,311) 2002.......................... 1,725 191,911 (7,353) After 2002.................... 19,958 2,201,090 (42,526) -------------------------------- Total minimum lease payments.. 28,146 $3,182,835 $ (89,376) ---------------------- Less amounts representing interest................... 15,072 ------- Present value of net minimum capital lease payments [NOTE 5].......... $13,074 -------
52 In fiscal 1997, the Company entered into sale-leaseback transactions on behalf of the Circuit City Group with unrelated parties at an aggregate selling price of $185,244,000 ($158,150,000 in fiscal 1996 and $71,670,000 in fiscal 1995). Neither the Company nor the Circuit City Group has continuing involvement under the sale-leaseback transactions. 10. SUPPLEMENTARY INCOME STATEMENT INFORMATION Advertising expense, which is included in selling, general and administrative expenses in the accompanying statements of earnings, amounted to $342,777,000 (4.8 percent of net sales and operating revenues) in fiscal 1997, $317,181,000 (4.7 percent of net sales and operating revenues) in fiscal 1996 and $260,767,000 (4.7 percent of net sales and operating revenues) in fiscal 1995. 11. SECURITIZATIONS 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 First North American National Bank (the "Bank Subsidiary"), a wholly owned credit card bank subsidiary of the Company. The Circuit City Group implemented SFAS No. 125 with respect to sales of credit card receivables occurring after December 31, 1996. Proceeds from securitization transactions were $551.1 million for fiscal 1997, $692.3 million for fiscal 1996 and $428.4 million for fiscal 1995. At February 28 or 29 the following amounts were outstanding: (AMOUNTS IN THOUSANDS) 1997 1996 - ----------------------------------------------------------- Securitized receivables......... $2,594,651 $1,860,459 Interest retained by Circuit City Group................... (293,586) (110,459) Net receivables transferred..... $2,301,065 $1,750,000 ------------------------- Net receivables transferred with recourse................ $1,317,565 $ 760,000 ------------------------- Program capacity................ $2,665,000 $1,910,000 -------------------------
The Bank Subsidiary finances its private-label credit card program through a single master trust, through both private placement and the public market. During fiscal 1997, the Bank Subsidiary placed an additional $225 million in the public market for a total program capacity of $1,215 million. The master trust vehicle permits further expansion of the securitization programs to meet future receivables growth. The agreements have no recourse provisions. In addition, the Bank Subsidiary has an asset securitization program in place for its bank card receivables that allows, as of February 28, 1997, the transfer of up to $1,450 million in receivables. The bank card securitization agreements provide recourse to the Group for any cash flow deficiencies. The Group believes that as of February 28, 1997, no liability existed under these recourse provisions. The finance charges from the transferred receivables are used to fund interest costs, charge-offs, servicing fees and other related costs. The Bank Subsidiary's servicing revenue, including gains on sales of receivables of $3.7 million in fiscal 1997, totaled $197.0 million for fiscal 1997, $142.9 million for fiscal 1996 and $77.8 million for fiscal 1995. The servicing fees specified in the credit card securitization agreements adequately compensate the Bank Subsidiary for servicing the accounts. Accordingly, no servicing asset or liability has been recorded. Rights recorded for future interest income from serviced assets that exceed the contractually specified servicing fees are carried at fair value and amounted to $3.2 million at February 28, 1997, and are included in net accounts receivable. 12. INTEREST RATE SWAPS In October 1994, the Company entered into five-year interest rate swaps on behalf of the Circuit City Group 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 Bank Subsidiary 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 while the Company utilizes the swaps to convert the fixed-rate obligation to a floating rate, LIBOR-based obligation. The fair value of the swaps is the amount at which they could be settled 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 28, 1997, would result in a gain of $10.9 million, and at February 29, 1996, would result in a gain of $19.4 million. 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 28, 1997, would result in a gain of $0.1 million and at February 29, 1996, would result in a loss of $2.5 million. 53 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 Circuit City Group does not anticipate significant market risk from swaps, since their use is to more closely match 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. 13. 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. 14. QUARTERLY FINANCIAL DATA (UNAUDITED) (AMOUNTS IN THOUSANDS First Quarter Second Quarter Third Quarter Fourth Quarter Year EXCEPT PER SHARE DATA) ----------------------------------------------------------------------------------- 1997 1997 1997 1997 1997 - ---------------------------------------------------------------------------------------------------------------------------- Net sales and operating revenues....... $1,490,572 $1,634,827 $1,745,538 $2,282,625 $7,153,562 ----------------------------------------------------------------------------------- Gross profit........................... $ 350,151 $ 385,381 $ 414,604 $ 567,503 $1,717,639 ----------------------------------------------------------------------------------- Earnings before Inter-Group Interest in the CarMax Group........ $ 16,345 $ 32,631 $ 23,700 $ 73,056 $ 145,732 ----------------------------------------------------------------------------------- Net earnings........................... $ 16,783 $ 31,583 $ 19,787 $ 68,527 $ 136,680 ----------------------------------------------------------------------------------- Net earnings per share................. $ 0.17 $ 0.32 $ 0.20 $ 0.69 $ 1.38 -----------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Stockholders of Circuit City Stores, Inc.: We have audited the accompanying balance sheets of the Circuit City Group (as defined in Note 1) as of February 28, 1997 and February 29, 1996 and the related statements of earnings, group equity and cash flows for each of the fiscal years in the three-year period ended February 28, 1997. 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 Circuit City Group and the CarMax 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 28, 1997 and February 29, 1996 and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended February 28, 1997 in conformity with generally accepted accounting principles. /s/KPMG Peat Markwick LLP Richmond, Virginia April 3, 1997 54 CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- On January 24, 1997, Circuit City Stores, Inc. shareholders approved the creation of two common stock series. The Company's existing common stock was subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common Stock. In an initial public offering, which was completed February 7, 1997, the Company sold 21.86 million shares of Circuit City Stores, Inc.-CarMax Group Common Stock. The Circuit City Group Common Stock is intended to track separately the performance of the Circuit City store-related operations and a retained interest in the CarMax Group. The effects of this retained interest on the Circuit City Group's Financial Statements are identified by the term "Inter-Group." All other line items relate to Circuit City operations. The CarMax Group Common Stock is intended to track separately the performance of the CarMax operations. The CarMax interest held by the Circuit City Group is not considered outstanding CarMax Group stock. Therefore, any net earnings or loss attributable to the Circuit City Group's interest is not included in the CarMax Group's per share calculations. The following discussion and analysis refers to the CarMax Group. Reported losses attributable to the CarMax Group Common Stock reflect the Circuit City Group's 100 percent interest in the losses of the CarMax Group prior to the consummation of the offering on February 7, 1997, and the Circuit City Group's 77.5 percent interest in the CarMax Group from the offering to the end of fiscal year 1997. 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. RESULTS OF OPERATIONS SALES GROWTH Total sales for the CarMax Group increased 85 percent in fiscal 1997, to $510.3 million. In fiscal 1996, total sales increased 258 percent to $275.9 million from $77.0 million in fiscal 1995. The fiscal 1997 sales growth primarily reflects the addition of three locations and a 23 percent comparable store sales increase for two locations classified as comparable stores throughout the year and two locations classified as comparable stores for a portion of the year. Early in fiscal 1997, CarMax began selling new vehicles at its largest store in Norcross, Ga., under the terms of a franchise agreement with Chrysler Corporation. That store is included in the comparable store base. The fiscal 1996 growth includes two additional stores, a 12 percent comparable store sales increase for one location classified as a comparable store throughout the year and a second location classified as a comparable store for a portion of the year. The fiscal 1995 sales increase includes the addition of a second store and a 43 percent comparable store sales increase for one store classified as comparable for a portion of the year. Three different store formats, which vary in acreage, vehicle assortment and facility square footage allow the Group to tailor its operations to the populations and volume expectations for specific trade areas. A typical "C" store will have 24 to 28 acres with room to display up to 1,000 used vehicles and showroom, reconditioning and service facilities totaling about 92,000 square feet. The typical "B" format store will cover 20 to 23 acres, have room to display up to 800 used vehicles and include facilities with a total of approximately 74,000 square feet. The "A" format will typically cover 15 to 19 acres, have room for up to 600 used vehicles and include facilities that total about 57,000 square feet. All formats will include additional display room for new cars. Store Mix February 28 or 29 1997 1996 1995 1994 - ---------------------------------------------------------- "C" Store................ 1 1 - - "B" Store................ 3 - - - "A" Store................ 3 3 2 1 ----------------------------- TOTAL.................... 7 4 2 1 ----------------------------
In most states, CarMax sells extended warranties on behalf of an unrelated third party and has no contractual liability to the customer under the warranty program. In states where third-party warranty sales are not feasible, CarMax sells its own extended warranty. Gross dollar sales from all extended warranty programs were 3.5 percent of the Group's total sales in fiscal 1997, 3.8 percent in fiscal 1996 and 3.3 percent in fiscal 1995. Total extended warranty revenue, which is reported in the Group's total sales, was 1.2 percent of total sales in fiscal 1997, 1.4 percent in fiscal 1996 and 0.5 percent in fiscal 1995. Third-party extended warranty revenue was 1.1 percent of total sales in fiscal 1997, 1.3 percent in fiscal 1996 and 0.4 percent in fiscal 1995. The lower extended warranty percentages in fiscal 1997 reflect the additional sales of new cars, which are covered by manufacturers' warranties. Impact of Inflation. Inflation has not been a significant contributor to the Group's results. Management expects that increases in vehicle pricing would have a positive impact on the CarMax Group's sales and earnings. COST OF SALES The CarMax marketing concept includes a strong commitment to providing a high level of consumer value. CarMax attempts to price vehicles at or below the best negotiated price in the market. As a result, CarMax operates with lower gross profit margins than industry averages for used-vehicle dealerships. The gross profit margin was 8.5 percent in fiscal 1997, 8.6 percent in fiscal 1996 and 6.3 percent in fiscal 1995. The lower gross profit margin in fiscal 1997 primarily reflects the addition of the new-car franchise. New cars produce a lower 55 gross margin than used cars. Improved inventory management, including optimizing each store's vehicle mix and display based on local market demand, contributed to the margin increase in fiscal 1996. Cost of sales includes vehicle cost, reconditioning costs, transportation and other purchasing costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES CarMax's consumer-oriented marketing concept produces store volumes significantly higher than industry averages. As a result, management also expects selling, general and administrative expenses to be relatively lower as a percentage of sales than industry averages. Selling, general and administrative expenses were 10.4 percent of sales in fiscal 1997, 10.3 percent in fiscal 1996 and 14.0 percent in fiscal 1995. Since CarMax's inception, increased sales from new stores, comparable store sales growth, an increase in servicing revenue from the CarMax Group's financing unit and the addition of the Chrysler franchise have leveraged expenses. These expenses have included start-up costs, Group overhead expenses and expenses associated with the planned national roll out of CarMax Superstores. Operating profits generated by CarMax's consumer installment lending division 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 1.2 percent of sales in fiscal 1997, 1.5 percent in fiscal 1996 and 1.4 percent in fiscal 1995. Interest expense was incurred on allocated debt used primarily to fund store expansion and working capital. The decrease in interest expense as a percentage of sales in fiscal 1997 reflects the repayment of Circuit City debt allocated to the CarMax Group, using funds raised through the CarMax equity offering; an improved level of inventory per store; and the securitization of the installment receivables generated by the CarMax Group's financing unit. Management believes that proceeds from the recent equity offering and improved inventory management will further reduce interest expense in fiscal 1998. PRE-TAX LOSSES Management anticipated that CarMax would produce a loss in its initial test stage and increased losses early in the first phase of a national roll out. Pre-tax losses totaled $15.9 million in fiscal 1997, $8.9 million in fiscal 1996 and $7.0 million in fiscal 1995. All five stores open throughout fiscal 1997, including the Charlotte location, which opened on March 4, 1996, were producing an operating profit including profits from vehicle financing, but before the allocation of Group overhead expenses, at year-end. INCOME TAXES The Group's effective income tax rate was 41.5 percent in both fiscal 1997 and 1996 and 41.2 percent in fiscal 1995. The CarMax Group generated losses in all reported periods and as a result has recorded related income tax benefits. Compared with the Circuit City Group, this Group experienced relatively higher state income tax rates because, as members of the consolidated Company for state tax purposes, the CarMax Group is subject to income tax in states in which it presently does not conduct business. The tax rate is expected to decline as the Group expands geographically into additional states. NET LOSSES Net losses totaled $9.3 million in fiscal 1997, $5.2 million in fiscal 1996 and $4.1 million in fiscal 1995. For the period from the offering date to the end of fiscal 1997, the net loss attributable to the CarMax Group common stock was $266,000. The net loss per CarMax Group share for the same period was 1 cent. The remainder of the loss was attributable to the Circuit City Group. OPERATIONS OUTLOOK CarMax has begun the first phase of a national roll out that includes a planned total store count of 80 to 90 locations by the end of fiscal 2002. The planned roll out includes approximately 10 additional stores in fiscal year 1998 and 15 to 20 openings per year thereafter. CarMax also will continue to explore opportunities in new-car retailing. In less than five months of operation, the Chrysler franchise location surpassed the annual planning volume established by Chrysler. As a result, CarMax expects to add at least 25 new-car franchises to its used-car Superstore locations by the end of fiscal 2002. Management intends to add value by acquiring underperforming new-car franchises or franchise grants from automobile manufacturers. The Group currently provides repair service in four locations. Limited service is available on used vehicles at other locations. Management plans to expand its retail repair service offering in all locations going forward. Management expects CarMax to generate results in fiscal 1998 similar to those in fiscal 1997 and to generate profits by fiscal year 1999. Management believes the increased costs of Group overhead and infrastructure to support the rapid roll out plan will be partly offset by expense leverage from increased sales in fiscal 1998. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Early application is not permitted. This statement establishes new standards for computing and presenting earnings per share. The CarMax Group has not determined the impact of SFAS No. 128 on its earnings (loss) per share computations and presentation. 56 FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES In fiscal 1997, net cash used in operating activities was $25.4 million compared with $16.1 million provided by operating activities in fiscal 1996 and $68.0 million used in operating activities in fiscal 1995. The decrease in cash in fiscal 1997 primarily reflects an increase in net accounts receivable, greater inventory to support new store openings and the addition of the new-car franchise, and a higher net loss, which were partly offset by an increase in accounts payable. The fiscal 1996 cash increase principally reflects a decrease in net accounts receivable resulting from the sale of installment loan receivables through securitizations, as described below, and a lower rate of inventory growth than sales growth. The CarMax Group's capital expenditures were $90.4 million in fiscal 1997, $26.8 million in fiscal 1996 and $33.0 million in fiscal 1995. Most of CarMax's capital expenditures through fiscal 1997 related to the opening of its seven existing stores, its reconditioning center and stores scheduled to open during fiscal 1998. The auto loan securitization program was started in fiscal 1996 with securitized receivables totaling $87.0 million at February 29, 1996. At February 28, 1997, securitized receivables totaled $145.0 million. Under the securitization program, receivables are sold to an unaffiliated third party with the servicing retained. Management expects that the existing securitization program can be increased to accommodate receivables as CarMax grows. The Group has relied on Circuit City Stores, Inc.'s allocated external debt to provide working capital needed to fund net assets not otherwise disposed of through sale-leasebacks or the securitization of receivables. All significant financial activities of the Group are managed by the Company on a centralized basis and are dependent on the financial condition of Circuit City Stores, Inc. Such financial activities include the investment of surplus cash, issuance and repayment of debt, securitization of receivables and sale-leasebacks of real estate. Late in fiscal 1997, Circuit City Stores, Inc. raised a net of $412.3 million through the initial public offering of 21.86 million shares of newly created CarMax Group Common Stock. The Group used approximately $187 million of the net proceeds to repay its allocated portion of Circuit City Stores, Inc. indebtedness. Management expects to use the remainder of the net proceeds to finance part of the CarMax expansion plan. Management believes that the proceeds of the offering, proceeds from sales of property and equipment and receivables, future increases in Circuit City Stores, Inc. debt allocated to the CarMax Group and cash generated by operations will be sufficient to fund the CarMax Group's capital expenditures and operations. In fiscal 1998, the Group anticipates capital expenditures of approximately $350 million. FORWARD-LOOKING STATEMENTS 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 new "safe harbor" provisions of the Act and has included a section in "Management's Discussion and Analysis" for Circuit City Stores, Inc. in order to do so. Company statements that are not historical facts, including statements about management's expectations for fiscal year 1998 and beyond, are forward-looking statements and involve various risks and uncertainties. Refer to the Circuit City Stores, Inc. "Management's Discussion and Analysis" for a review of the possible risks and uncertainties. 57 CARMAX GROUP STATEMENTS OF OPERATIONS - ----------------------------------------------------------------------------------------------------------------------------- YEARS ENDED FEBRUARY 28 OR 29 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 % 1996 % 1995 % - ----------------------------------------------------------------------------------------------------------------------------- NET SALES AND OPERATING REVENUES................... $ 510,249 100.0 $ 275,857 100.0 $77,002 100.0 Cost of sales...................................... 466,788 91.5 252,284 91.4 72,147 93.7 ------------------------------------------------------------------------- GROSS PROFIT....................................... 43,461 8.5 23,573 8.6 4,855 6.3 ------------------------------------------------------------------------- Selling, general and administrative expenses [NOTES 3 AND 12]....................... 53,111 10.4 28,440 10.3 10,792 14.0 Interest expense [NOTE 6].......................... 6,279 1.2 4,075 1.5 1,045 1.4 ------------------------------------------------------------------------- TOTAL EXPENSES..................................... 59,390 11.6 32,515 11.8 11,837 15.4 ------------------------------------------------------------------------- Loss before income tax benefit................ 15,929 3.1 8,942 3.2 6,982 9.1 Income tax benefit [NOTES 3 AND 8]................. 6,611 1.3 3,707 1.3 2,875 3.8 ------------------------------------------------------------------------- NET LOSS........................................... $ 9,318 1.8 $ 5,235 1.9 $ 4,107 5.3 ------------------------------------------------------------------------- Net loss attributable to [NOTES 1 AND 2]: Circuit City Group common stock................. $ 9,052 $ 5,235 $ 4,107 --------- --------- ------- CarMax Group common stock....................... 266 --------- $ 9,318 Weighted average common shares..................... 21,860 --------- NET LOSS PER SHARE [NOTE 2]........................ $ 0.01 --------- See accompanying notes to group financial statements. 58 CARMAX GROUP BALANCE SHEETS - ----------------------------------------------------------------------------------------------------------------------------- At February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents.............................................................. $ 170,421 $ 2,219 Net accounts receivable [NOTE 4]....................................................... 28,350 16,562 Inter-group receivable [NOTE 3]........................................................ 48,147 - Inventory.............................................................................. 82,260 61,672 Prepaid expenses and other current assets.............................................. 4,102 772 -------------------------------- TOTAL CURRENT ASSETS................................................................... 333,280 81,225 Property and equipment, net [NOTES 5 AND 6]......................................... 92,174 19,860 Deferred income taxes [NOTE 8]......................................................... 42 1,560 Other assets........................................................................... 1,691 - -------------------------------- TOTAL ASSETS........................................................................... $ 427,187 $ 102,645 -------------------------------- LIABILITIES AND GROUP EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable....................................................................... $ 28,293 $ 12,399 Short-term debt [NOTE 6]............................................................... - 18,050 Deferred income taxes [NOTE 8]......................................................... 2,424 2,276 Accrued expenses and other current liabilities......................................... 2,059 1,164 -------------------------------- TOTAL CURRENT LIABILITIES....................................... 32,776 33,889 Long-term debt [NOTE 6]................................................................ - 78,519 Deferred revenue and other liabilities................................................. 2,595 1,438 -------------------------------- TOTAL LIABILITIES...................................................................... 35,371 113,846 GROUP EQUITY (DEFICIT)................................................................. 391,816 (11,201) -------------------------------- Commitments and contingent liabilities [NOTES 1, 4, 7, 10, 11 AND 13] TOTAL LIABILITIES AND GROUP EQUITY (DEFICIT)........................................... $ 427,187 $ 102,645 -------------------------------- See accompanying notes to group financial statements. 59 CARMAX GROUP STATEMENTS OF CASH FLOWS - ----------------------------------------------------------------------------------------------------------------------------- Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net loss............................................................... $ (9,318) $ (5,235) $ (4,107) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation........................................................ 1,664 821 259 Provision for deferred income taxes................................. 1,666 1,110 412 Increase in deferred revenue and other liabilities.................. 1,157 739 608 (Increase) decrease in net accounts receivable...................... (11,788) 27,764 (34,001) Increase in inventory, prepaid expenses and other current assets.... (23,918) (15,384) (35,720) Increase in other assets............................................ (1,691) - - Increase in accounts payable, accrued expenses and other current liabilities.............................................. 16,789 6,331 4,540 ------------------------------------------------ NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES.................... (25,439) 16,146 (68,009) ------------------------------------------------ INVESTING ACTIVITIES: Purchases of property and equipment.................................... (90,428) (26,776) (32,990) Proceeds from sales of property and equipment.......................... 16,450 25,750 14,300 Increase in inter-group receivable..................................... (48,147) - - ------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES.................................. (122,125) (1,026) (18,690) ------------------------------------------------ FINANCING ACTIVITIES: (Payments on) proceeds from issuance of short-term debt, net........... (18,050) 18,050 - (Principal payments on) proceeds from issuance of long-term debt, net.. (78,519) (33,110) 87,253 Equity issuances, net.................................................. 412,335 - - ------------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................... 315,766 (15,060) 87,253 ------------------------------------------------ Increase in cash and cash equivalents................................ 168,202 60 554 Cash and cash equivalents at beginning of year............................ 2,219 2,159 1,605 ------------------------------------------------ Cash and cash equivalents at end of year.................................. $ 170,421 $ 2,219 $ 2,159 ------------------------------------------------ See accompanying notes to group financial statements. 60 CARMAX GROUP STATEMENTS OF GROUP EQUITY (DEFICIT) (AMOUNTS IN THOUSANDS) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE AT MARCH 1, 1994......................................................................................... $ (1,859) --------- Net loss (4,107) --------- BALANCE AT FEBRUARY 28, 1995..................................................................................... (5,966) --------- Net loss...................................................................................................... (5,235) --------- BALANCE AT FEBRUARY 29, 1996..................................................................................... (11,201) --------- Net loss...................................................................................................... (9,318) --------- Equity issuances, net......................................................................................... 412,335 --------- BALANCE AT FEBRUARY 28, 1997..................................................................................... $ 391,816 --------- See accompanying notes to group financial statements.
61 NOTES TO CARMAX GROUP FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION On January 24, 1997, the shareholders of Circuit City Stores, Inc. and its subsidiaries (the "Company") authorized a restructuring of the existing common stock of the Company into two new series of common stock intended to reflect separately the performance of the Company's two main businesses - the consumer electronics, major appliance, personal computer and music software retail business, including its interest in the CarMax Group referred to below (the "Circuit City Group"), and the used- and new-car retail business (the "CarMax Group"). Subsequent to shareholder approval, the board of directors approved the redesignation of each share of the Company's existing common stock as a share of a new series of common stock called Circuit City Stores, Inc.-Circuit City Group Common Stock, par value $0.50 per share ("Circuit City Stock"), which is intended to reflect separately the performance of the Circuit City Group, which is generally comprised of (i) the Company's consumer electronics, major appliance, personal computer and music software retail business, (ii) an interest in the CarMax Group, which excludes the interest represented by any outstanding shares of CarMax Stock, as described below, and (iii) all other businesses in which the Company may be engaged (other than those comprising the CarMax Group). For presentation purposes, this redesignation of the Company's common stock has been treated as if it occurred as of the beginning of the earliest period presented in the accompanying financial statements. In addition, the board of directors authorized the designation and issuance of shares of a new series of common stock called Circuit City Stores, Inc.-CarMax Group Common Stock, par value $0.50 per share ("CarMax Stock"), which is intended to reflect separately the performance of the used- and new-car retail business that comprises the CarMax Group. The Circuit City Group and the CarMax Group are sometimes referred to collectively as the "Groups" and individually as a "Group." On February 7, 1997, the Company completed an offering of 21,860,000 shares of CarMax Stock for cash in a public offering (the "Offering") for $20.00 per share aggregating $437.2 million in proceeds before deducting related expenses of $24.9 million. The Company allocated the net proceeds of the Offering to the CarMax Group. Upon completion of the Offering and without giving effect to options, the outstanding CarMax Stock represented 22.5 percent of the equity value of the CarMax Group, and the Circuit City Group held a 77.5 percent interest (the "Inter-Group Interest") in the equity value of the CarMax Group. The CarMax Group financial statements give effect to the management and allocation policies adopted by the board of directors, as described under "Corporate Activities" below. The CarMax Group financial statements have been prepared on a basis that management believes to be reasonable and appropriate and include (i) the historical financial position, results of operations and cash flows of the CarMax Group, (ii) an allocated portion of the Company's debt, including the related effects upon results of operations and cash flow and (iii) an allocated portion of the Company's corporate general and administrative costs. Holders of Circuit City Stock and holders of CarMax 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. The financial results of the Circuit City Group and of the CarMax Group could affect the market price of either series of stock or the assets legally available for payment of dividends. Accordingly, the CarMax Group's financial information should be read in conjunction with the Company's consolidated financial information and the Circuit City Group's financial information. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Cash and Cash Equivalents: Cash equivalents of $165,975,000 at February 28, 1997, consist of highly liquid debt securities with original maturities of three months or less. No cash equivalents were allocated to the CarMax Group at February 29, 1996. (B) Installment Auto Loan Receivables: Installment auto loan receivables ("installment receivables") held for investment are stated at cost. Installment receivables held for sale are stated at the lower of cost or market. As of February 28, 1997, and February 29, 1996, cost approximates market. (C) Fair Value of Financial Instruments: The Company enters into financial 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 due to 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 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, which range from three to 15 years. 62 (F) Pre-opening Expenses: Expenses associated with the opening of new stores are deferred and amortized ratably over the period from the date of the store opening to the end of the fiscal year. (G) Income Taxes: Income taxes are accounted for in accordance with Statement of Financial Accounting Standards (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. (H) Deferred Revenue: The CarMax Group sells its own service contracts and service contracts on behalf of unrelated third parties. Contracts usually have terms of coverage between 12 and 72 months. All revenue from the sale of the CarMax Group's own service contracts is 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 are deferred and charged to expense in proportion to the revenue recognized. All other costs are charged to expense as incurred. Commission revenue for the unrelated third-party service contracts is recognized at the time of sale. (I) Selling, General and Administrative Expenses: Operating profits generated by financing operations are recorded as a reduction to selling, general and administrative expenses. (J) Advertising Expenses: All advertising costs are expensed as incurred. (K) Net Loss Per Share: Net loss per share for CarMax Stock is computed by dividing net loss attributable to CarMax Stock by the weighted average number of shares of CarMax Stock outstanding. Historical net loss per share is omitted from the statements of operations for periods prior to the Offering since CarMax Stock was not part of the capital structure of the Company for those periods. (L) Stock-Based Compensation: On March 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected to continue applying the provisions of the Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and to provide the pro forma disclosure provisions of SFAS No. 123. (M) Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: In fiscal 1997, the Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Adoption of SFAS No. 125 did not have a material impact on the CarMax Group's financial position, results of operations or liquidity. (N) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of: The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," on March 1, 1996. Impairment of long-lived assets is recognized when the carrying amounts of the impaired assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell. Adoption of SFAS No. 121 did not have a material impact on the CarMax Group's financial position, results of operations or liquidity. (O) 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, competition or sources of supply. The CarMax Group's operations currently are concentrated in the southeastern United States. A severe economic downturn in the southeastern United States could negatively impact the CarMax Group's operating results. Due to the CarMax Group's geographic concentration and limited overall size, management cannot assure that unanticipated events will not have a negative impact on the Group. 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. (P) Reclassifications: Certain amounts in prior years have been reclassified to conform to classifications adopted in fiscal 1997. 3. CORPORATE ACTIVITIES 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. Investment of surplus cash from the 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 debt that is allocated between the Circuit City Group and the CarMax Group ("pooled debt"). For the periods covered by the CarMax Group's financial statements, all debt consists of an allocated portion of the pooled debt. The 63 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. 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 an inter-group receivable on the balance sheet. (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 $1.3 million for fiscal 1997, $1.8 million for fiscal 1996 and $1.0 million for fiscal 1995. (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 the respective 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. ACCOUNTS RECEIVABLE AND SECURITIZATION TRANSACTION Accounts receivable consist of the following at February 28 or 29: (AMOUNTS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------- Trade receivables...................... $ 5,977 $ 4,001 Installment receivables held for sale.. 1,770 855 Installment receivables held for investment...................... 22,465 12,151 ----------------- Total accounts receivable.............. 30,212 17,007 Less allowance for doubtful accounts... 1,862 445 ----------------- Net accounts receivable................ $28,350 $16,562 -----------------
In fiscal 1996, the Company entered into a securitization transaction on behalf of the CarMax Group to finance the installment receivables generated by First North American Credit Corporation ("FNAC"), the Group's installment lending division. Proceeds from the auto loan securitization transaction were $58 million during fiscal 1997 and $87 million during fiscal 1996. The seasoned portfolio and more estimable losses allowed the CarMax Group to recognize gains on the sales of these receivables beginning in fiscal 1997. At February 28 or 29 the following amounts were outstanding: (AMOUNTS IN THOUSANDS) 1997 1996 - --------------------------------------------------------- Securitized receivables.............. $155,234 $ 93,065 Interest retained by CarMax Group.... (10,234) (6,065) ------------------- Net receivables transferred.......... $145,000 $ 87,000 ------------------- Program capacity..................... $175,000 $100,000 -------------------
The finance charges from the transferred receivables are used to fund interest costs, charge-offs and servicing fees. A restructuring of the facility during fiscal 1997 resulted in the recourse provisions being eliminated. Servicing revenue for FNAC, including gains on sales of receivables of $4.3 million in fiscal 1997, totaled $8.7 million for fiscal 1997 and $2.0 million for fiscal 1996 and for fiscal 1995. The servicing fee specified in the auto loan securitization agreement adequately compensates FNAC for servicing the loans. Accordingly, no servicing asset or liability has been recorded. Rights recorded for future interest income from serviced assets that exceed the contractually specified servicing fee are carried at fair value and amounted to $3.1 million at February 28, 1997, and are included in net accounts receivable. 5. PROPERTY AND EQUIPMENT Property and equipment, at cost, at February 28 or 29 is summarized as follows: (AMOUNTS IN THOUSANDS) 1997 1996 - ---------------------------------------------------------- Land.................................. $15,489 $ 3,826 Construction in progress.............. 64,052 9,190 Furniture, fixtures and equipment (3 to 8 years)..................... 9,667 5,515 Leasehold improvements (10 to 15 years)................... 5,763 2,461 ------------------ 94,971 20,992 Less accumulated depreciation......... 2,797 1,132 ------------------ Property and equipment, net........... $92,174 $19,860 ------------------
64 6. DEBT Long-term pooled debt of the Company at February 28 or 29 is summarized as follows: (AMOUNTS IN THOUSANDS) 1997 1996 - ------------------------------------------------------------- Term loans........................... $ 405,000 $ 275,000 Short-term debt expected to be refinanced........................ - 100,000 ---------------------- Total long-term debt................. $ 405,000 $ 375,000 ---------------------- Portion of long-term debt allocated to CarMax Group......... $ - $ 78,519 ----------------------
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 28, 1997, the interest rate on the term loan was 5.86 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 28, 1997, the interest rate on the term loan was 5.80 percent. 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 28, 1997, the interest rate on the term loan was 5.73 percent. The Company maintains a multi-year, $150,000,000, unsecured revolving credit agreement with five banks. The agreement calls for interest based on both committed rates and money market rates and a commitment fee of 0.13 percent per annum. The agreement was entered into as of August 31, 1996, and terminates August 31, 2001. The agreement provides for annual one year extensions of the final maturity beginning on or before August 31, 1997, and each August 31 thereafter. No amounts were outstanding under the revolving credit agreement at February 28, 1997, or February 29, 1996. Under certain of the debt agreements, the Company must meet financial covenants relating to minimum tangible net worth, current ratios and debt-to-capital ratios. The Company was in compliance with all such covenants at February 28, 1997, and February 29, 1996. Short-term debt of the Company includes committed lines of credit and informal credit arrangements. Amounts outstanding and committed lines of credit available are as follows: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 - ----------------------------------------------------------- Average short-term debt outstanding.......................... $ 186,569 $185,789 -------------------- Maximum short-term debt outstanding....................... $ 580,000 $479,000 -------------------- Aggregate committed lines of credit......................... $ 415,000 $255,000 --------------------
The weighted average interest rate on the outstanding short-term debt was 5.4 percent during fiscal 1997, 5.9 percent during fiscal 1996 and 5.3 percent during fiscal 1995. Interest expense allocated by the Company to the CarMax Group, excluding interest capitalized, was $6,278,472 in fiscal 1997, $4,074,737 in fiscal 1996 and $1,045,153 in fiscal 1995. The CarMax Group capitalizes interest in connection with the construction of certain facilities. In fiscal 1997, interest capitalized amounted to $898,000 ($1,314,000 in fiscal 1996 and $176,000 in fiscal 1995). 7. INTEREST RATE SWAPS 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, both on behalf of the CarMax Group, relating to the auto loan receivable securitization to convert variable-rate financing costs to a fixed-rate obligation to better match the funding costs to the receivables being securitized. These swaps were entered into as part of the sale of receivables and are therefore included in the gain on the sale of the receivables. The remaining notional amount outstanding under these swaps was $114 million at February 28, 1997, and $71 million at February 29, 1996. 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, 65 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 28, 1997, would result in a gain of $0.1 million and at February 29, 1996, would result in a loss of $2.5 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 CarMax Group does not anticipate significant market risk from swaps, since their use is to more closely match 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. 8. INCOME TAXES The components of the income tax benefit on loss before income tax benefit follow: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------- Current: Federal................ $ (6,976) $ (3,670) $ (2,536) State.................. (1,301) (1,147) (751) --------------------------------- (8,277) (4,817) (3,287) --------------------------------- Deferred: Federal................ 1,689 844 316 State.................. (23) 266 96 --------------------------------- 1,666 1,110 412 --------------------------------- Income tax benefit........ $ (6,611) $ (3,707) $ (2,875) --------------------------------- The effective income tax rate differed from the Federal statutory income tax rate as follows: 1997 1996 1995 - ----------------------------------------------------------- Federal statutory income tax rate...................... 35.0% 35.0% 35.0% State and local income taxes, net of Federal benefit........ 6.5 6.5 6.2 --------------------- Effective income tax rate........ 41.5% 41.5% 41.2% --------------------- 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 28, 1997, and February 29, 1996, are as follows: (AMOUNTS IN THOUSANDS) 1997 1996 - ----------------------------------------------------------- Deferred tax assets: Deferred revenue...................... $ 583 $1,820 Organization cost capitalization...... 116 92 Accrued expenses...................... 195 - Other................................. 664 - ---------------- Total gross deferred tax assets.... 1,558 1,912 ---------------- Deferred tax liabilities: Depreciation.......................... 657 352 Prepaid expenses...................... 631 4 Inventory capitalization.............. 1,228 1,907 Gain on sale of receivables........... 1,424 - Other................................. - 365 ---------------- Total gross deferred tax liabilities...................... 3,940 2,628 ---------------- Net deferred tax liability.............. $(2,382) $ (716) ----------------
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 deferred tax assets at February 28, 1997, and February 29, 1996, will be realized by the CarMax Group; therefore, no valuation allowance is necessary. 9. CAPITAL STOCK AND STOCK INCENTIVE PLAN (A) 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 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 $22 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 continuing directors) or 66 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 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. (B) 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 as to 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 Stock shall have one vote and (ii) each outstanding share of CarMax Stock shall have a number of votes based on the weighted average ratio of the market value of a share of CarMax Stock to a share of Circuit City 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. (C) Stock Incentive Plan: As of February 28, 1997, there were outstanding options to purchase shares of stock of the corporate entity comprising the CarMax Group. These options are held by management and key employees of the CarMax Group and vest evenly on the third, fourth and fifth anniversary of the grant date with a maximum option term of seven years. The exercise price is equal to, or greater than, the fair market value of the stock at the date of grant. The Company intends to convert these options into options to purchase CarMax Stock, preserving the aggregate intrinsic value of the options. In addition, the vesting provisions and option periods of the original grants will remain the same when converted. A summary of the status of the CarMax Group's stock options, assuming conversion, and changes during the years ended February 28 or 29 are shown in Table 1. Table 2 summarizes information about stock options outstanding as of February 28, 1997. TABLE 1 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Weighted Average Weighted Average Weighted Average (SHARES IN THOUSANDS) Shares Exercise Price Shares Exercise Price Shares Exercise Price - --------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year......... 4,278 $0.22 3,518 $ 0.22 - $ - Granted.................................. 961 1.68 796 0.22 3,518 0.22 Exercised................................ - - - - - - Cancelled................................ (470) 0.27 (36) 0.22 - - ------- ------- ------ Outstanding at end of year.............. 4,769 $0.51 4,278 $ 0.22 3,518 $ 0.22 ------- ------- ------ Options exercisable at end of year....... - $ - - $ - - $ - ------- ------- ------ Table 2 Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------------------------ Weighted Average (SHARES IN THOUSANDS) Number Remaining Weighted Average Number Weighted Average Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price - ------------------------------------------------------------------------------------------------------------------------------ $ 0.22....................................... 4,540 5.0 $ 0.22 - $ - 6.25....................................... 229 5.0 6.25 - - ----- ------ Total........................................ 4,769 5.0 $ 0.51 - $ - ----- ------
67 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 loss and net loss per share would not have been materially different than reported. 10. PENSION PLAN The Company has a non-contributory 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 80,000 shares of Circuit City Stock at February 28, 1997, and February 29, 1996. 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 components of net pension expense for the CarMax Group are as follows: Years Ended February 28 or 29 (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------- Service cost of benefits earned during the year............. $ 162 $ 140 $ 34 Interest cost on projected benefit obligation.......... 34 26 5 Actual return on plan assets... (120) (128) (1) Net amortization............... 78 87 (18) -------------------------- Net pension expense............ $ 154 $ 125 $ 20 -------------------------- The following table sets forth the CarMax Group's share of the Plan's financial status and amounts recognized in the balance sheets as of February 28 or 29: (AMOUNTS IN THOUSANDS) 1997 1996 - ----------------------------------------------------------- Actuarial present value of benefit obligation: Accumulated benefit obligation Vested................................ $ 201 $ 242 Non-vested............................ 111 32 ---------------- Total benefits........................... 312 274 Additional amounts related to projected salary increases...................... 209 215 ---------------- Projected benefit obligation for services rendered to date...................... 521 489 Plan assets at fair value................ (895) (649) ---------------- Plan assets in excess of projected benefit obligation.................... (374) (160) Unrecognized gain (loss) from past experience............................ 52 (195) Unrecognized prior service cost.......... 10 12 Unrecognized net obligation being recognized over 15 years.............. 14 17 ---------------- Prepaid pension cost..................... $(298) $(326) ---------------- Assumptions used in the accounting for the pension plan were: Years Ended February 28 or 29 1997 1996 1995 Weighted average discount rate...... 7.5% 7.0% 8.0% Rate of increase in compensation levels........................... 5.5% 6.0% 6.5% Rate of return on plan assets....... 9.0% 9.0% 8.0% ---------------------
11. 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 expenses for all operating leases were $6,019,000 in fiscal 1997, $3,850,000 in fiscal 1996 and $1,030,000 in fiscal 1995. Most leases provide that the CarMax Group pay taxes, maintenance, insurance and certain other operating expenses applicable to the premises. The initial term of real property leases will expire within the next 22 years; however, most of the leases have options providing for additional lease terms of from eight years to 28 years at terms substantially the same as the initial terms. Future minimum fixed lease obligations, excluding taxes, insurance and other costs payable directly by the CarMax Group, as of February 28, 1997, were: Operating Fiscal Lease (AMOUNTS IN THOUSANDS) Commitments 1998............................................ $ 6,419 1999............................................ 6,417 2000............................................ 6,292 2001............................................ 6,253 2002............................................ 6,253 After 2002...................................... 92,832 -------- Total minimum lease payments.................... $124,466 --------
In fiscal 1997, the Company entered into sale-leaseback transactions on behalf of the CarMax Group with unrelated parties at an aggregate selling price of $16,450,000 ($25,750,000 in fiscal 1996 and $14,300,000 in fiscal 1995). Neither the Company nor the CarMax Group has continuing involvement under the sale-leaseback transactions. 68 12. SUPPLEMENTARY INCOME STATEMENT INFORMATION Advertising expense, which is included in selling, general and administrative expenses in the accompanying statements of operations, amounted to $11,493,000 (2.3 percent of net sales and operating revenues) in fiscal 1997, $7,154,000 (2.6 percent of net sales and operating revenues) in fiscal 1996 and $2,202,000 (2.9 percent of net sales and operating revenues) in fiscal 1995. 13. CONTINGENT LIABILITIES 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 operation. 14. QUARTERLY FINANCIAL DATA (UNAUDITED) (AMOUNTS IN THOUSANDS First Quarter Second Quarter Third Quarter Fourth Quarter Year EXCEPT PER SHARE DATA) ------------------------------------------------------------------------------ 1997 1997 1997 1997 1997 - ---------------------------------------------------------------------------------------------------------------------------- Net sales and operating revenues............... $124,694 $132,216 $118,409 $134,930 $510,249 --------------------------------------------------------------------------- Gross profit................................... $ 12,119 $ 10,947 $ 8,255 $ 12,140 $ 43,461 --------------------------------------------------------------------------- Net loss attributable to CarMax Stock.......... $ - $ - $ - $ (266) $ (266) --------------------------------------------------------------------------- Net loss per share............................. $ - $ - $ - $ (0.01) $ (0.01) ---------------------------------------------------------------------------
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 28, 1997 and February 29, 1996 and the related statements of operations, group equity (deficit) and cash flows for each of the fiscal years in the three-year period ended February 28, 1997. 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 28, 1997 and February 29, 1996 and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended February 28, 1997 in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP Richmond, Virginia April 3, 1997 69 EX-21 6 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 CIRCUIT CITY STORES, INC. Subsidiaries of the Company Jurisdiction of Incorporation Subsidiary or Organization ---------- --------------- CC Distribution Company of Virginia, Inc. Virginia Circuit City Stores West Coast, Inc. California First North American National Bank National Bank Located in Georgia Northern National Insurance Ltd. Bermuda Patapsco Designs, Inc. Maryland CarMax, Inc. Virginia CarMax Auto Superstores, Inc. Virginia C-Max Auto Superstores, Inc. California EX-23 7 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23 Consent of Independent Auditors The Board of Directors Circuit City Stores, Inc.: We consent to incorporation by reference in the registration statements (Nos. 33-56697, 33-50144, 33-36650, 33-22874, 33-64757, 333-02971, 33-20303, 333-22759, 333-25451 AND 333-27933) on Form S-8 of Circuit City Stores, Inc. of our reports dated April 3, 1997, relating to the consolidated balance sheets of Circuit City Stores, Inc. and subsidiaries (the Company) as of February 28, 1997 and February 29, 1996, 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 28, 1997, and the related financial statement schedule, which reports are included, or incorporated by reference from the annual report to stockholders, in the February 28, 1997 annual report on Form 10-K of Circuit City Stores, Inc. We also consent to incorporation by reference in the foregoing registration statements of our reports dated April 3, 1997, relating to the balance sheets of the Circuit City Group as of February 28, 1997 and February 29, 1996, and the related statements of earnings, group equity and cash flows for each of the fiscal years in the three-year period ended February 28, 1997, and the related financial statement schedule, which reports are included, or incorporated by reference from the annual report to stockholders, in the February 28, 1997 annual report on Form 10-K of Circuit City Stores, Inc. Our reports on the Circuit City Group dated April 3, 1997, include a qualification related to the effects of not consolidating the CarMax Group with the Circuit City Group as required by generally accepted accounting principles. We also consent to incorporation by reference in the foregoing registration statements of our report dated April 3, 1997, relating to the balance sheets of the CarMax Group as of February 28, 1997 and February 29, 1996, and the related statements of operations, group equity (deficit) and cash flows for each of the fiscal years in the three-year period ended February 28, 1997, and the related financial statement schedule, which reports are included, or incorporated by reference from the annual report to stockholders, in the February 28, 1997 annual report on Form 10-K of Circuit City Stores, Inc. s/KPMG Peat Marwick LLP Richmond, Virginia May 28, 1997 EX-24 8 POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY I hereby appoint Richard L. Sharp, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. s/ Michael T. Chalifoux Michael T. Chalifoux Sr. Vice President Chief Financial Officer POWER OF ATTORNEY I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. Signature: s/Richard N. Cooper Print Name: Richard N. Cooper Title: Director POWER OF ATTORNEY I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. Signature: s/Barbara S. Feigin Print Name: Barbara S. Feigin Title: Director POWER OF ATTORNEY I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. Signature: s/Theodore D. Nierenberg Print Name: Theodore D. Nierenberg Title: Director POWER OF ATTORNEY I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. Signature: s/Hugh G. Robinson Print Name: Hugh G. Robinson Title: Director POWER OF ATTORNEY I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. Signature: s/Walter J. Salmon Print Name: Walter J. Salmon Title: Director POWER OF ATTORNEY I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. Signature: s/Mikael Salovaara Print Name: Mikael Salovaara Title: Director POWER OF ATTORNEY I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. Signature: s/John W. Snow Print Name: John W. Snow Title: Director POWER OF ATTORNEY I hereby appoint Michael T. Chalifoux, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. s/Richard L. Sharp Richard L. Sharp, Chairman, Chief Executive Officer POWER OF ATTORNEY I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. Signature: s/Edward Villanueva Print Name: Edward Villanueva Title: Director POWER OF ATTORNEY I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year ended February 28, 1997 and any amendment with such attorney-in-fact may deem appropriate or necessary. Signature: s/Alan Wurtzel Print Name: Alan Wurtzel Title: Vice-Chairman and Director EX-27 9 FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 Column 1 = CONSOLIDATED Column 2 = CIRCUIT CITY GROUP Column 3 = CARMAX GROUP Changes Caption = Allocation of Inter-Group Interest in CarMax losses YEAR YEAR YEAR Feb-28-1997 Feb-28-1997 Feb-28-1997 Feb-28-1997 Feb-28-1997 Feb-28-1997 202,643 32,222 170,421 0 0 0 531,974 503,624 28,350 0 0 0 1,392,363 1,310,103 82,260 2,163,133 1,880,424 333,280 1,236,838 1,141,867 94,971 350,747 347,950 2,797 3,081,173 3,008,256 427,187 836,651 854,446 32,776 430,290 430,290 0 0 0 0 0 0 0 60,019 49,089 10,930 1,554,837 1,477,608 381,426 3,081,173 3,008,256 427,187 7,633,811 7,153,562 510,249 7,633,811 7,153,562 510,249 5,902,711 5,435,923 466,788 5,902,711 5,435,923 466,788 0 0 0 0 0 0 29,782 23,503 6,279 220,024 235,953 (15,929) 83,610 90,221 (6,611) 136,414 145,732 (9,318) 0 0 0 0 0 0 0 (9,052) 9,052 136,414 136,680 (266) 0 1.38 (0.01) 0 1.38 (0.01)
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