S-4/A

As filed with the Securities and Exchange Commission on June 6, 2002.

Registration No. 333-85240

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT

NO. 2

to

FORM S-4

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

CARMAX, INC.

(Exact name of registrant as specified in its charter)

Commonwealth of Virginia	5511	54-1821055
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

4900 Cox Road

Glen Allen, VA 23060

(804) 747-0422

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

W. Austin Ligon

President

CarMax, Inc.

4900 Cox Road

Glen Allen, VA 23060

(804) 747-0422

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Robert L. Burrus, Jr., Esq.	Raymond W. Wagner, Esq.	Robert B. Pincus, Esq.
McGuireWoods LLP	Simpson Thacher & Bartlett	Skadden, Arps, Slate, Meagher & Flom LLP
One James Center	425 Lexington Avenue	One Rodney Square
901 East Cary Street	New York, New York 10017	Wilmington, Delaware 19801
Richmond, Virginia 23219	(212) 455-2000	(302) 651-3000
(804) 775-1000	(212) 455-2502 (facsimile)	(302) 651-3001 (facsimile)
(804) 698-2023 (facsimile)

Approximate date of commencement of proposed sale of the securities to the public:    As soon as practicable after the effective date of this registration statement.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

Subject to completion, dated June 6, 2002.

    

PRELIMINARY PROXY STATEMENT/PROSPECTUS

June 14, 2002

Dear Shareholder:

A special meeting of the shareholders of Circuit City Stores, Inc. will be held on July 12, 2002. At the meeting, you will be asked to approve the separation of the CarMax group from the rest of Circuit City Stores. Under the separation proposal, CarMax, Inc. would become an independent, separately traded public company that would hold all of the businesses, assets and liabilities of the CarMax group. All of the shares of CarMax, Inc. common stock to be outstanding immediately after the separation would be distributed to the holders of Circuit City Stores’ existing two series of common stock in the following manner:

· Each share of CarMax Group Common Stock would be redeemed in exchange for one share of CarMax, Inc. common stock.

· Each share of Circuit City Group Common Stock would receive as a dividend a pro-rata portion of a number of shares of CarMax, Inc. common stock equal to the number of shares of CarMax Group Common Stock currently reserved for issuance to the holders of Circuit City Group Common Stock.

The separation proposal is described in detail in this proxy statement/prospectus. In addition, this document contains information about the following related items that will be on the special meeting agenda. There will be a proposal to amend Circuit City Stores’ articles of incorporation to delete provisions that will no longer be necessary after the separation. There also will be proposals to approve several compensation plans for employees and directors of CarMax, Inc., which are substantially similar to those currently in place at Circuit City Stores. None of these actions will become effective unless and until the separation is completed.

This proxy statement/prospectus relates to the 103,026,870 shares of CarMax, Inc. common stock, par value $.50 per share, that may be issued in the separation. The NYSE has authorized the listing of these shares after the separation under the symbol “KMX,” the current symbol for the CarMax Group Common Stock.

Circuit City Stores’ board of directors believes that separating the CarMax group from Circuit City Stores is in the best interests of Circuit City Stores and all of its shareholders. Circuit City Stores' board of directors unanimously recommends that you vote for the separation proposal and all of the related proposals.

See “Risk Factors” beginning on page 9 of this proxy statement/prospectus for information that you should consider in evaluating the separation proposal.

The meeting time and location are provided in the meeting notice on the next page of this proxy statement/ prospectus. It is important that your shares be represented and voted at the special meeting, regardless of the size of your holdings. Due to the voting requirements for the separation proposal and the other proposal involving the amendment to the articles of incorporation, if you do not vote your shares it will have the same effect as a vote against the proposals. Please complete, sign, date and return the accompanying proxy card in the enclosed envelope to make certain your shares will be represented at the meeting.

Attendance at the special meeting will be limited to shareholders of record as of the record date (or their authorized representatives) and to guests of Circuit City Stores. If your shares are registered in your name and you plan to attend in person, please mark the preregistration box on your proxy card. If your broker holds your shares and you want to attend the meeting, please bring to the meeting a letter from your broker identifying you as the beneficial owner of the shares.

Sincerely,

W. ALAN MCCOLLOUGH,

President and Chief Executive Officer

The Securities and Exchange Commission and state securities regulators have not approved or disapproved the separation or the securities to be issued in the separation or determined if this proxy statement/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is first being mailed to shareholders on or about June 14, 2002.

CIRCUIT CITY STORES, INC.

9950 Mayland Drive

Richmond, Virginia 23233

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO THE HOLDERS OF:

CIRCUIT CITY STORES, INC.—CIRCUIT CITY GROUP COMMON STOCK

AND

CIRCUIT CITY STORES, INC.—CARMAX GROUP COMMON STOCK

A Special Meeting of Shareholders of Circuit City Stores, Inc. will be held at 9:00 a.m., Richmond, Virginia time on July 12, 2002 at the offices of McGuireWoods LLP, One James Center, 901 East Cary Street, Richmond, Virginia for the following purposes:

1. To consider and vote upon a proposal to approve the separation of the CarMax group from Circuit City Stores, Inc. in the manner contemplated in the separation agreement, dated May 21, 2002, between Circuit City Stores, Inc. and CarMax, Inc. (currently a wholly owned subsidiary of Circuit City Stores, Inc.), by means of the redemption of CarMax Group Common Stock in exchange for shares of CarMax, Inc. common stock and the distribution of shares of CarMax, Inc. common stock as a dividend on the Circuit City Group Common Stock, all as described in the accompanying proxy statement/prospectus, and in connection with such approval, to authorize certain amendments to the Amended and Restated Articles of Incorporation to:

· expressly provide that CarMax, Inc. common stock will be exchanged for CarMax Group Common Stock in the redemption; and

· reduce the minimum period between the giving of notice of the redemption and the redemption date from 30 trading days to 10 trading days.

2. To consider and vote upon a proposal to authorize further amendments to the Amended and Restated Articles of Incorporation, provided the CarMax Group Common Stock has been redeemed, to:

· eliminate language providing for the two currently outstanding series of common stock—the Circuit City Group Common Stock and the CarMax Group Common Stock—and replace the eliminated provisions with language providing for a single class of common stock not issuable in series; and

· redesignate each outstanding share of Circuit City Group Common Stock as one share of Common Stock.

3. To consider and vote on a proposal to approve the CarMax, Inc. Annual Performance-Based Bonus Plan.

4. To consider and vote on a proposal to approve the CarMax, Inc. 2002 Stock Incentive Plan.

5. To consider and vote on a proposal to approve the CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan.

Only holders of record of outstanding shares of Circuit City Group Common Stock or CarMax Group Common Stock at the close of business on May 22, 2002 are entitled to notice of and to vote at the special meeting and any adjournments of the special meeting.

By Order of the Board of Directors

MICHAEL T. CHALIFOUX, Secretary

June 14, 2002

Additional Information

This proxy statement/prospectus:

· incorporates by reference important business and financial information about Circuit City Stores, Inc. that is not included in or delivered with this proxy statement/prospectus; and

· does not include some of the information included in the registration statement on Form S-4 filed with the SEC by CarMax, Inc. of which this proxy statement/prospectus is a part or information included in the exhibits to the registration statement.

This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference in this proxy statement/prospectus or filed as exhibits to the registration statement by requesting them in writing or by telephone from Circuit City Stores, Inc. at the following address and telephone number:

Circuit City Stores, Inc.

9950 Mayland Drive

Richmond, Virginia 23233

Attention: Corporate Secretary

Telephone: (804) 527-4022

Any request for documents should be made by July 5, 2002 to ensure timely delivery of the documents prior to the special meeting.

To find more information, see the section entitled “Where You Can Find More Information” on page 128.

Explanatory Note

To help you in reviewing this proxy statement/prospectus, we sometimes use the following terms with the particular meanings shown below:

· “Circuit City Stores”, “we”, “our”, and “us” refer to Circuit City Stores, Inc. and our wholly owned subsidiaries (including CarMax, Inc. before the separation but excluding CarMax, Inc. after the separation).

· “CarMax” refers to CarMax, Inc.

· “Circuit City” or “Circuit City business” refers to the consumer electronics business of Circuit City Stores and the related operations before the separation.

· “Circuit City group” refers to the Circuit City business and the shares of CarMax Group Common Stock reserved for the Circuit City Group or for issuance to holders of Circuit City Group Common Stock.

· “CarMax group” refers to the automotive retailing business of Circuit City Stores before the separation.

· “separation agreement” refers to the separation agreement dated May 21, 2002 between Circuit City Stores and CarMax which governs the terms of the proposed separation, including any necessary transfers of the assets and liabilities to be held by CarMax at the time of the separation, and certain payments to be made by CarMax in connection with the separation.

· “CarMax Separation” and “separation” each refer, collectively, to the transactions contemplated by the separation agreement, the redemption of CarMax Group Common Stock in exchange for shares of CarMax common stock, and the distribution of shares of CarMax common stock as a dividend to the holders of Circuit City Group Common Stock.

· “separation date” refers to the date for the redemption of the CarMax Group Common Stock as fixed in the notice of redemption given to the holders of the CarMax Group Common Stock.

TABLE OF CONTENTS

	Page
Questions and Answers about the CarMax Separation	iv
Diagrams Illustrating Current and Proposed Corporate Structures	x
Summary	1
CarMax Business	1
Circuit City Stores Business	1
The CarMax Separation	2
Circuit City Stores, Inc. Selected Historical Consolidated Financial Information	4
CarMax, Inc. Selected Historical Consolidated Financial Information	5
Circuit City Group Selected Historical Financial Information	6
CarMax, Inc. Selected Unaudited Pro Forma Consolidated Financial Information	7
Circuit City Stores, Inc. Selected Unaudited Pro Forma Consolidated Financial Information	8
Risk Factors	9
Risk Factors Relating to the Separation	9
Risk Factors Relating to CarMax, Inc. Common Stock	12
Risk Factors Relating to the CarMax Business	13
Risk Factors Relating to the Circuit City Business	16
The Special Meeting	17
Proposals to Be Considered at the Special Meeting	17
Record Date and Voting Rights	17
Voting of Shares Held in Employee Stock Purchase Plans	18
Quorum	18
Solicitation of Proxies	19
Voting Proxies	19
Revocation of Proxies	19
Proposal One:  The CarMax Separation Proposal	20
General	20
Recommendation of Circuit City Stores’ Board of Directors	22
Background and Reasons for the Separation	22
Opinion of Circuit City’s Financial Advisor	25
Certain Analyses With Respect to Circuit City Stores	28
Certain Analyses With Respect to Circuit City Stores	29
Pro Forma Combine Equity Value Analyis	31
Certain Analyses with Respect to the Special Dividend	31
Surrender of Certificates for Shares of CarMax Group Common Stock	33
Distribution of Shares to Holders of Circuit City Group Common Stock	34
Comparison of Rights of Holders of CarMax Group Common Stock before the Separation with Rights of Holders of CarMax, Inc. Common Stock after the Separation	34
Comparison of Rights of Holders of Circuit City Group Common Stock before the Separation with Rights of Holders of Circuit City Common Stock after the Separation	37
Treatment of Indebtedness and Post-Separation Financing Arrangement	39
Contingent Lease Obligations Retained by Circuit City Stores	40
No Dissenters’ Rights	40
Solicitation Agent	40
Information Agent	40
Transfer Taxes	41
Interests of Certain Persons in the Separation	41
Accounting Treatment	42
Federal Securities Law Consequences	42
U.S. Federal Income Tax Consequences of the Separation	42
Employee Benefits and Compensation Matters	45

i

	Page
Listing and Trading of CarMax, Inc. Common Stock	48
Expenses	48
Proposal Two: The Clean-Up Amendment Proposal	49
General	49
Recommendation of the Circuit City Stores Board of Directors	49
Proposal Three: CarMax, Inc. Annual Performance-Based Bonus Plan	50
The Plan	50
Recommendation of the Circuit City Stores Board of Directors	51
Proposal Four: CarMax, Inc. 2002 Stock Incentive Plan	52
The Plan	52
Recommendation of the Circuit City Stores Board of Directors	56
Proposal Five: CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan	57
The Plan	57
Recommendation of the Circuit City Stores Board of Directors	59
New Plan Benefits	60
Equity Compensation Plan Information	61
Information about CarMax	62
The CarMax Business	62
Management’s Discussion and Analysis of Financial Condition and Results of Operations of CarMax, Inc.	75
CarMax Management	85
Information about Circuit City Stores after the Separation	90
The Circuit City Business	90
Circuit City Stores Management	94
Circuit City Stores’ Relationship with CarMax after the Separation	95
Market Price and Dividend Information for Circuit City Group Common Stock and CarMax Group Common Stock	99
Beneficial Ownership of Circuit City Group Common Stock and CarMax Group Common Stock	100
Ownership of CarMax, Inc. Common Stock by Certain Beneficial Owners and Management	103
Description of CarMax, Inc. Capital Stock after the Separation	105
Description of Circuit City Stores Capital Stock after the Separation	112
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Circuit City Stores, Inc.	119
Special Note Regarding Forward-Looking Statements	138
Legal Matters	139
Experts	139
Where You Can Find More Information	139
Proposals by Shareholders for Presentation at the Circuit City Stores, Inc. 2003 Annual Meeting	141
Annex A—Amendment to Amended and Restated Articles of Incorporation to Effect the CarMax Separation Proposal	A-1
Annex B—Amendment to Amended and Restated Articles of Incorporation to Effect the Clean-Up Amendment Proposal	B-1
Annex C—Unaudited Pro Forma Consolidated Financial Statements
Unaudited Pro Forma Consolidated Financial Statements for CarMax, Inc.	C-1
Unaudited Pro Forma Consolidated Financial Statements for Circuit City Stores, Inc.	C-6
Annex D—CarMax, Inc. Historical Consolidated Financial Statements	D-1
Annex E—Circuit City Stores, Inc. Historical Consolidated Financial Statements	E-1
Annex F—Separation Agreement	F-1
Annex G—Fairness Opinion	G-1
Annex H—CarMax, Inc. Annual Performance-Based Bonus Plan	H-1

ii

	Page
Annex I—CarMax, Inc. 2002 Stock Incentive Plan	I-1
Annex J—CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan	J-1

This proxy statement/prospectus is based on information provided by Circuit City Stores, CarMax and other sources that Circuit City Stores and CarMax believe to be reliable. This proxy statement/prospectus summarizes certain documents filed as exhibits to the registration statement filed by CarMax of which this document forms a part. For more information about CarMax and the CarMax, Inc. common stock, you should refer to that registration statement and these documents. For more information on how you can obtain copies of these documents, see “Where You Can Find More Information” on page 128.

iii

QUESTIONS AND ANSWERS ABOUT THE CARMAX SEPARATION

Q: What is Circuit City Stores proposing to do?

A: We are proposing to separate the CarMax group from Circuit City Stores, Inc. so that CarMax would become an independent, separately traded public company. CarMax, currently a wholly owned subsidiary of Circuit City Stores, holds substantially all of the businesses, assets and liabilities of Circuit City Stores that currently constitute the CarMax group.

Immediately after the separation, the businesses, assets and liabilities of the CarMax group would be owned and operated by CarMax as an independent, separately traded public company. Following the separation, CarMax would initially be owned by the former holders of CarMax Group Common Stock that received CarMax, Inc. common stock in the redemption (approximately 36%) and the holders of Circuit City Group Common Stock that received CarMax, Inc. common stock as a dividend (approximately 64%). Following the redemption, the CarMax Group Common Stock would cease to exist. The businesses, assets and liabilities of the Circuit City group would continue to be owned and operated by Circuit City Stores, Inc., which would initially be owned by the holders of Circuit City Group Common Stock. Circuit City Group Common Stock would be redesignated “Common Stock” in Circuit City Store’s articles of incorporation. For a discussion of payments to be made by CarMax to Circuit City Stores in the CarMax Separation, please see “Contingent Lease Obligations Retained by Circuit City Stores” on page 30 and “Expenses” on page 39.

Q: Why is Circuit City Stores proposing the CarMax Separation?

A: The board of directors believes that the separation would provide many benefits to Circuit City Stores and all its shareholders, including allowing the Circuit City Stores management and CarMax management to better focus on their respective businesses by:

· alleviating capital restraints currently imposed on CarMax because of its affiliation with Circuit City Stores,

· allowing Circuit City Stores and CarMax to establish the most appropriate capital structures for their respective businesses,

· allowing Circuit City Stores and CarMax to create appropriate retirement arrangements for employees of each business, and

· allowing CarMax to conduct business with the most appropriate vendors.

Q: What would I receive in the CarMax Separation?

A: In the separation:

· if you are a holder of CarMax Group Common Stock: you would receive one share of CarMax, Inc. common stock in exchange for each share of CarMax Group Common Stock you hold on the date of the separation; and

· if you are a holder of Circuit City Group Common Stock: we currently estimate that you would receive approximately 0.314 of a share of CarMax, Inc. common stock for each share of Circuit City Group Common Stock you hold on the record date for the distribution. This fraction was determined by dividing 65,923,200, the number of shares of CarMax Group Common Stock reserved for issuance to the holders of the Circuit City Group Common Stock, by the number of shares of Circuit City Group Common Stock outstanding on the distribution record date, estimated to be 209,861,782. The exact fraction would be determined and announced by Circuit City Stores once the actual number of shares of Circuit City Group Common Stock outstanding on the distribution record date is known. Fractional shares of CarMax, Inc. common stock would not be issued in the distribution. Instead, a number of shares equal to the sum of all of the fractional shares would be sold

iv

by the transfer agent in the public market and the net cash proceeds from such sale would be paid on a pro- rata basis to the persons otherwise entitled to receive fractional shares. Immediately after the separation, each outstanding share of Circuit City Group Common Stock would remain outstanding, unaffected by the separation, and those shares would be the only outstanding shares of common stock of Circuit City Stores, Inc., representing the entire equity interest in Circuit City Stores, Inc. Immediately after the separation, the Circuit City Group Common Stock would be renamed “Common Stock.”

Q: Will I know before the date of the special meeting how many shares of CarMax, Inc. common stock I would receive in the distribution?

A: No. We cannot calculate the fraction of a share of CarMax, Inc. common stock that you would receive for each share of Circuit City Group Common Stock you hold until the record date for the distribution. The record date for the distribution would be after the date of the special meeting and we expect it to be approximately ten trading days before the date of the separation.

However, as indicated in the answer to the previous question, we expect that you would receive approximately 0.314 of a share of CarMax, Inc. common stock for each share of Circuit City Group Common Stock you hold.

Q: Would my shares be traded on the New York Stock Exchange?

A: Yes. Following the separation, both CarMax, Inc. common stock and Circuit City Stores, Inc. common stock would be traded on the NYSE. CarMax has applied to the NYSE for listing of the CarMax, Inc. common stock under the symbol “KMX,” the current symbol for CarMax Group Common Stock. The NYSE has approved the listing subject to official notice of issuance. Circuit City Stores, Inc. common stock would continue to trade on the NYSE under the symbol “CC,” the current symbol for Circuit City Group Common Stock.

Q: Does Circuit City Stores plan to change its dividend policy after the separation?

A: No. Circuit City Stores has no current plans to change the present dividend rate. Dividends are declared and paid both at the times and in the amounts determined by the board of directors at its discretion.

Q: Does CarMax plan to pay dividends after the separation?

A: No. CarMax intends for the foreseeable future to use any excess cash to fund its growth strategy.

v

Q: What am I being asked to approve?

A: You are being asked to approve five proposals:

· The CarMax Separation Proposal (including the Separation Amendment)—the proposal to separate the CarMax group from Circuit City Stores, Inc. on the terms described in this proxy statement/prospectus, including a special dividend payment of $28.4 million to be paid by CarMax, Inc. to Circuit City Stores and including the payment by CarMax, Inc. of the costs associated with the CarMax Separation, which are estimated to be $8 million. Approval of this proposal will include approval of an amendment to Circuit City Stores’ articles of incorporation to provide for the separation and to reduce from 30 to 10 trading days the minimum number of days required to give notice of the redemption to holders of CarMax Group Common Stock.

· The Clean-Up Amendment Proposal—the proposal to amend Circuit City Stores’ articles of incorporation to remove provisions in the articles of incorporation that provide for the two series of Circuit City Stores common stock that are currently outstanding—the Circuit City Group Common Stock and the CarMax Group Common Stock—and to provide for a single series of Circuit City Stores common stock after the CarMax Separation. The Clean-Up Amendment Proposal will not be brought before the shareholders at the special meeting unless they first approve the CarMax Separation Proposal.

· Three Benefit Plan Proposals—the proposals to approve the CarMax, Inc. Annual Performance-Based Bonus Plan, the CarMax, Inc. 2002 Stock Incentive Plan, and the CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan. These plans will not go into effect unless and until the separation is completed. These proposals will not be brought before the shareholders at the special meeting unless shareholders first approve the CarMax Separation Proposal.

Q: What does the Circuit City Stores board of directors recommend?

A: The board of directors unanimously recommends that you vote FOR approval of the CarMax Separation Proposal, FOR approval of the Clean-Up Amendment Proposal and FOR approval of each of the CarMax benefit plans. The Circuit City Stores board has carefully reviewed the terms of the separation and has determined that the separation is advisable and in the best interests of Circuit City Stores and the holders of the Circuit City Group Common Stock and the CarMax Group Common Stock.

In considering the recommendation of the board of directors to vote in favor of the CarMax Separation Proposal and the Clean-Up Amendment Proposal and the benefit plan proposals, you should be aware that some of Circuit City Stores’ directors and executive officers have interests in the separation that are in addition to or different from the interests of shareholders generally. These interests include aggregate ownership of a significantly greater amount of Circuit City Group Common Stock than CarMax Group Common Stock, ownership of options to purchase Circuit City Group Common Stock in a significantly greater number than options to purchase CarMax Group Common Stock and ownership of Circuit City group stock appreciation rights and restricted shares.

Q: What vote is required to approve each of the proposals?

A: The CarMax Separation Proposal and the Clean-Up Amendment Proposal each must be approved by:

· the holders of a majority of the outstanding Circuit City Group Common Stock voting as a separate group;

· the holders of a majority of the outstanding CarMax Group Common Stock voting as a separate group; and

· the holders of a majority of the outstanding Circuit City Group Common Stock and outstanding CarMax Group Common Stock voting together as a single group.

vi

Each of the proposals to approve the CarMax benefit plans will be approved if the votes cast in favor of each proposal by the holders of Circuit City Group Common Stock and holders of CarMax Group Common Stock voting as a single group exceed the votes cast against each proposal.

Each outstanding share of Circuit City Group Common Stock entitles the holder to one vote when voting separately as well as when voting together as a single group with the holders of CarMax Group Common Stock. Each outstanding share of CarMax Group Common Stock entitles the holder to a single vote when voting separately and to 1.349 votes when voting together as a single group with the holders of Circuit City Group Common Stock. The total number of votes that may be cast at the special meeting by:

· holders of Circuit City Group Common Stock when voting separately, is 209,861,782;

· holders of CarMax Group Common Stock when voting separately, is 37,103,670; and

· holders of Circuit City Group Common Stock and CarMax Group Common Stock when voting together as a single group is 259,914,633, consisting of 209,861,782 votes that may be cast by holders of Circuit City Group Common Stock and 50,052,851 votes that may be cast by holders of CarMax Group Common Stock.

In connection with any vote of the holders of outstanding Circuit City Group Common Stock and CarMax Group Common Stock voting together as a single group, the holders of Circuit City Group Common Stock will control 80.74% of the total voting power.

Q: Does the board of directors have to complete the CarMax Separation if shareholders approve the CarMax Separation Proposal?

A: No. Despite shareholder approval, the board of directors of Circuit City Stores retains the ability to abandon the CarMax Separation, including the redemption of the CarMax Group Common Stock and the dividend distribution on the Circuit City Group Common Stock, for any reason whatsoever, until notice of the redemption of the CarMax Group Common Stock is mailed to the holders of the CarMax Group Common Stock. After the notice is mailed, however, the board of directors will not have the power to rescind the redemption or the dividend or abandon the separation.

Q: Who is entitled to vote?

A: You are entitled to vote if you were a holder of either Circuit City Group Common Stock or CarMax Group Common Stock at the close of business on the May 22, 2002 record date.

Q: What do I need to do now to vote on the proposals?

A: You may vote by marking, signing and dating the enclosed proxy card and returning it in the enclosed prepaid envelope or, if you own your shares through a broker or other intermediary, you should follow the instructions on the voting instruction card provided to you by that broker or intermediary. A proxy, if executed and not revoked, will be voted for the proposals set forth in this proxy statement/prospectus, unless it contains specific instructions to the contrary, in which event it will be voted in accordance with those instructions. If you sign and return a proxy card but do not mark the boxes showing how you wish to vote, the proxies will vote your shares FOR the adoption of the CarMax Separation Proposal and the Clean-Up Amendment Proposal and the three benefit plan proposals (if they are presented at the meeting). Unsigned proxy cards will not be voted at all and will have the same effect as a vote against the CarMax Separation Proposal and the Clean-Up Amendment Proposal. If you were registered as a shareholder on Circuit City Stores’ books on May 22, 2002 or if you have a letter from your broker identifying you as a beneficial owner of shares, you may also vote in person by attending the meeting.

vii

Q: Can I change my vote?

A: Yes. If you are a shareholder of record, you may change your vote or revoke your proxy at any time before your shares are voted at the special meeting by:

· sending us another proxy card dated later than your last proxy card;

· notifying the secretary of Circuit City Stores in writing; or

· voting at the special meeting.

Q: If my shares are held in “street name” by my broker, will my broker vote my shares for me?

A: Your broker will vote your shares only if you provide instructions to your broker on how to vote your shares. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Without instructions to your broker, your shares will not be voted and will have the same effect as a vote against the CarMax Separation Proposal and the Clean-Up Amendment Proposal. If your broker holds your shares and you want to attend the special meeting, please take to the special meeting a letter from your broker identifying you as the beneficial owner of the shares and authorizing you to vote.

Q: What happens if I abstain or don’t vote?

A: An abstention or failure to vote will have the same effect as a vote against each proposal.

Q: Will the CarMax Separation be taxable?

A: Circuit City Stores has received a private letter ruling from the Internal Revenue Service to the effect that, for U.S. federal income tax purposes, the CarMax Separation will be tax-free to Circuit City Stores and to Circuit City Stores’ shareholders to the extent that they receive CarMax, Inc. common stock in exchange for CarMax Group Common Stock in the redemption or as a distribution with respect to Circuit City Group Common Stock. Cash proceeds received instead of fractional shares in the distribution will be taxable to holders of Circuit City Group Common Stock.

The material U.S. federal income tax consequences of the separation are described in more detail beginning on page 33. The tax consequences to you will depend on the facts of your own situation. Please consult your tax advisor for a full understanding of the tax consequences to you of the separation.

Q: Am I entitled to dissenters’ rights or appraisal rights?

A: No. You will not be entitled to dissenters’ rights or appraisal rights in connection with the separation. See “No Dissenter’s Rights” beginning on page 31 for more information.

Q: When do you expect to complete the separation?

A: If the separation is approved by our shareholders at the special meeting, we expect that the separation would be completed on or about August 1, 2002. Even if the CarMax Separation Proposal is approved by our shareholders, however, our board may decide not to proceed with the CarMax Separation.

Q: Should I send in my certificates for CarMax Group Common Stock now? Do I need to do anything with my certificates for Circuit City Group Common Stock?

A: No. After the separation is approved, you will receive instructions explaining how to exchange your certificates representing shares of CarMax Group Common Stock for certificates representing the CarMax, Inc. common stock you are entitled to receive in the redemption. Holders of Circuit City Group Common

viii

Stock will not need to do anything to receive certificates for their shares of CarMax, Inc. common stock in the distribution. After the separation, certificates representing shares of Circuit City Group Common Stock will continue to represent shares of Circuit City common stock.

Q: I recently received a different proxy statement and proxy card from Circuit City Stores. Do I need to read both proxy statements and complete and return both proxy cards?

A: Yes. On or about May 10, 2002, Circuit City Stores mailed to its shareholders the proxy statement and related proxy card for the Circuit City Stores annual meeting of shareholders to be held June 18, 2002. That proxy statement and proxy card relate to the matters to be addressed by the Circuit City Stores shareholders at the annual meeting, including the election of four Circuit City Stores directors and a shareholder proposal.

This proxy statement/prospectus and the enclosed proxy card relate to the special meeting of Circuit City Stores shareholders to be held July 12, 2002. At the special meeting, shareholders will consider only the five proposals described in this proxy statement/prospectus relating to the separation of CarMax from Circuit City Stores.

Whether or not you plan to attend the annual meeting on June 18, 2002 or the special meeting on July 12, 2002, please fill in, date, sign and return the proxy card for each of these meetings.

Q: Whom can I call with questions?

A: If you have any questions about the CarMax Separation or the special meeting or would like copies of any of the documents we refer to in this proxy statement/prospectus, you should call Morrow & Co., Inc. at  1-800-607-0088.

Q: Where can I find more information about Circuit City Stores and CarMax?

A: You can find more information from various sources described under “Where You Can Find More Information” on page 128.

ix

x

SUMMARY

The following is a summary of some of the information contained in this proxy statement/prospectus. In addition to this summary, we urge you to read the entire document carefully, including (1) the risks associated with the separation and investing in CarMax, Inc. common stock and Circuit City common stock discussed under “Risk Factors” and (2) the unaudited pro forma financial statements and historical financial statements and related notes included in Annex C, Annex D and Annex E.

CARMAX BUSINESS

In 1993, Circuit City Stores pioneered the used-car superstore concept when we opened the first CarMax location in Richmond, Virginia. CarMax purchases, reconditions and sells used vehicles. CarMax also sells new vehicles under franchise agreements with DaimlerChrysler, Mitsubishi, Nissan, Toyota, Ford and General Motors. CarMax provides customers the opportunity to purchase vehicles the same way they buy other retail products, with friendly service and non-negotiated low prices. For fiscal year 2002, CarMax generated net sales and operating revenues of $3.2 billion and net earnings of $90.8 million. Sales of used cars, which is the major part of CarMax’s business, represented approximately 82% of total vehicle sales in dollars in fiscal 2002.

As of April 30, 2002, CarMax operated 41 CarMax retail units from 39 locations, including 36 used-car superstores and three stand-alone new-car franchises. In total, CarMax operated 18 new-car franchises.

CarMax is currently a wholly owned subsidiary of Circuit City Stores. Historically, CarMax has held substantially all of the assets and liabilities of the CarMax group. The CarMax group consists of the businesses, assets and liabilities, the financial performance and economic value of which are intended to be reflected by CarMax Group Common Stock, which is a series of common stock of Circuit City Stores. Under the separation agreement, Circuit City Stores has contributed to CarMax all of the assets and liabilities of the CarMax group. After the separation, CarMax will be an independent, separately traded public company.

CarMax’s principal executive offices are located at 4900 Cox Road, Glen Allen, Virginia 23060. CarMax’s telephone number is (804) 747-0422.

CIRCUIT CITY STORES BUSINESS

Circuit City Stores’ consumer electronics business and its related operations, which will be Circuit City Stores’ entire business after the separation, is a leading national retailer of brand-name consumer electronics, personal computers and entertainment software. Circuit City sells video equipment; audio equipment; mobile electronics, including car audio, video and security systems; home office products; and other consumer electronics products, including wireless phones, digital and 35 mm cameras, entertainment software and a range of accessories. In fiscal 2001, Circuit City exited the major appliance category and expanded its selections of consumer electronics, home office products and entertainment software.

At April 30, 2002, Circuit City operated 623 Circuit City retail locations throughout the United States. Circuit City has established its presence in virtually all of the nation’s top 100 markets and expects to continue adding to the existing Circuit City store base as attractive market opportunities arise.

Circuit City’s principal executive offices are located at 9950 Mayland Drive, Richmond, Virginia 23233. Circuit City’s telephone number is (804) 527-4000.

1

THE CARMAX SEPARATION

The separation of the CarMax group from Circuit City Stores would be accomplished in two simultaneous steps, the redemption and the distribution.

Redemption

As part of the CarMax Separation, we would redeem on the separation date each outstanding share of CarMax Group Common Stock in exchange for one share of CarMax, Inc. common stock. We refer to this as the “redemption.”

Distribution

Also as part of the CarMax Separation, our board of directors would declare, as a pro-rata dividend on the Circuit City Group Common Stock, a distribution of shares of CarMax, Inc. common stock equal in total number to the shares of CarMax Group Common Stock reserved for issuance to the holders of the Circuit City Group Common Stock or otherwise reserved for the benefit of the Circuit City group. This distribution would be made simultaneously with the redemption. We refer to this as the “distribution.”

Separation Date

We currently expect that the notice of redemption will fix the separation date at approximately 10 trading days after the date the notice of redemption is first mailed. As of 9:00 a.m., Richmond, Virginia time, on the separation date, the holders of record of CarMax Group Common Stock would become holders of CarMax, Inc. common stock, and their rights as holders of CarMax Group Common Stock would cease, except for the right to receive shares of CarMax, Inc. common stock in exchange for their shares of CarMax Group Common Stock in the redemption.

Distribution Record Date

We expect the record date for the distribution of CarMax, Inc. common stock to holders of Circuit City Group Common Stock to be the close of business on or about the tenth trading day before the date of the separation.

Securities to be Exchanged and Distributed

Based on information available to us on May 22, 2002, we estimate that approximately 37.1 million shares of CarMax, Inc. common stock would be issued in exchange for CarMax Group Common Stock in the redemption and approximately 65.9 million shares would be issued in the distribution. The exact number of shares to be issued in the redemption will be determined based on the number of shares of CarMax Group Common Stock outstanding at 9:00 a.m., Richmond, Virginia time, on the separation date. As a result, we estimate that immediately after the separation, approximately 103 million shares of CarMax, Inc. common stock will be outstanding, which number does not include shares of CarMax, Inc. common stock issuable upon exercise of outstanding options granted by CarMax to directors, officers and employees under CarMax’s stock compensation plans. For further discussion of outstanding CarMax options see “CarMax Management” on page 76.

2

Contingent Lease Obligations Retained by Circuit City Stores

Circuit City Stores has contingent liability under various leases covering 23 of CarMax’s sales locations. In recognition of this ongoing contingent liability after the separation, CarMax has agreed to make a one-time special dividend payment of $28.4 million to Circuit City Stores on the separation date. For further discussion of this contingent lease obligation see “Contingent Lease Obligations Retained by Circuit City Stores” on page 30.

Circuit City Stores’ Relationship with CarMax after the CarMax Separation

Following the separation, Circuit City Stores’ and CarMax’s relationship will be governed by a number of agreements. These agreements will include a tax allocation agreement, a transition services agreement and an employee benefits agreement, each of which is described in greater detail under “Circuit City Stores’ Relationship with CarMax after the CarMax Separation” beginning on page 85.

3

CIRCUIT CITY STORES, INC.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following information is only a summary, and you should read it together with the more detailed financial information for Circuit City Stores, Inc. included elsewhere in this document.

We have derived the following selected historical consolidated financial information as of February 28 or 29, 1998 through 2002 and for each of the five fiscal years ended February 28 or 29, 1998 through 2002 from Circuit City Stores, Inc.’s consolidated financial statements for those years. Those financial statements have been audited by KPMG LLP, independent auditors. You should read the table below in conjunction with our consolidated financial statements and accompanying notes beginning on page E-1 in Annex E and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Circuit City Stores, Inc.” included on page 108 in this proxy statement/prospectus.

	Year Ended February 28 or 29,
	2002		2001		2000			1999			1998
	(In thousands, except per share data)
RESULTS OF OPERATIONS
Net sales and operating revenues	$	12,791,468	$	12,959,028	$	12,614,390		$	10,810,468		$	8,870,797
Cost of sales, buying and warehousing		10,049,793		10,135,380		9,751,833			8,354,230			6,827,133
Appliance exit costs		10,000		28,326		—			—			—
Gross profit		2,731,675		2,795,322		2,862,557			2,456,238			2,043,664
Selling, general and administrative expenses		2,372,941		2,514,912		2,309,593			2,086,838			1,815,275
Appliance exit costs		—		1,670		—			—			—
Interest expense		5,839		19,383		24,206			28,319			26,861
Total expenses		2,378,780		2,535,965		2,333,799			2,115,157			1,842,136
Earnings from continuing operations before income taxes		352,895		259,357		528,758			341,081			201,528
Provision for income taxes		134,100		98,555		200,928			129,611			76,581
Earnings from continuing operations		218,795		160,802		327,830			211,470			124,947
Discontinued operations:
Loss from discontinued operations of Divx, less income tax benefit		—		—		(16,215	)		(68,546	)		(20,636	)
Loss on disposal of Divx, less income tax benefit		—		—		(114,025	)		—			—
Loss from discontinued operations		—		—		(130,240	)		(68,546	)		(20,636	)
Net earnings	$	218,795	$	160,802	$	197,590		$	142,924		$	104,311
Net earnings (loss) attributed to:
Circuit City group stock:
Continuing operations	$	190,799	$	149,247	$	327,574		$	216,927		$	132,710
Discontinued operations		—		—		(130,240	)		(68,546	)		(20,636	)
CarMax group stock		27,996		11,555		256			(5,457	)		(7,763	)
	$	218,795	$	160,802	$	197,590		$	142,924		$	104,311
Net earnings (loss) per share attributed to:
Circuit City group stock basic:
Continuing operations	$	0.93	$	0.73	$	1.63		$	1.09		$	0.68
Discontinued operations		—		—		(0.65	)		(0.34	)		(0.11	)
Net earnings	$	0.93	$	0.73	$	0.98		$	0.75		$	0.57
Circuit City group stock diluted:
Continuing operations	$	0.92	$	0.73	$	1.60		$	1.08		$	0.67
Discontinued operations		—		—		(0.64	)		(0.34	)		(0.10	)
Net earnings	$	0.92	$	0.73	$	0.96		$	0.74		$	0.57
CarMax group stock basic	$	0.87	$	0.45	$	0.01		$	(0.24	)	$	(0.35	)
CarMax group stock diluted	$	0.82	$	0.43	$	0.01		$	(0.24	)	$	(0.35	)

	As of February 28 or 29,
	2002		2001		2000		1999		1998
	(In thousands)
BALANCE SHEET DATA
Working capital	$	2,011,384	$	1,555,580	$	1,536,456	$	1,430,710	$	1,240,523
Total assets		4,539,386		3,871,333		3,955,348		3,445,266		3,231,701
Long-term debt (including current installments)		116,137		248,525		426,585		429,292		425,593
Total liabilities		1,804,948		1,514,850		1,813,174		1,540,136		1,501,662
Total stockholders’ equity		2,734,438		2,356,483		2,142,174		1,905,130		1,730,039

4

CARMAX, INC.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following information is only a summary, and you should read it together with the more detailed financial information for CarMax, Inc. included elsewhere in this document.

The table below presents selected historical consolidated financial information of CarMax, Inc. which has been adjusted to show the historical financial condition and results of operations of CarMax, Inc. as though CarMax, Inc. were a separate company as of the dates and for the periods presented. This selected historical consolidated financial data includes the effect of the businesses, assets and liabilities of Circuit City Stores that constituted the CarMax group. The assets and liabilities of CarMax, Inc. will be accounted for at the historical value carried by Circuit City Stores prior to the separation.

We have derived the following selected historical consolidated financial information as of February 28 or 29, 1998 through 2002 and for each of the five fiscal years ended February 28 or 29, 1998 through 2002 from financial statements of the CarMax group for those years. Those financial statements have been audited by KPMG LLP, independent auditors.

You should read the selected historical consolidated financial information provided below in conjunction with CarMax’s historical consolidated financial statements and accompanying notes beginning on page D-1 in Annex D and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations of CarMax, Inc.” beginning on page 66 under “Information About CarMax.”

	Year Ended February 28 or 29,
	2002			2001			2000			1999			1998
	(In thousands, except sales change and number of stores data)
RESULTS OF OPERATIONS
Net sales and operating revenues	$	3,201,665		$	2,500,991		$	2,014,984		$	1,466,298		$	874,206
Cost of sales		2,797,962			2,171,232			1,774,619			1,294,032			800,699
Gross profit		403,703			329,759			240,365			172,266			73,507
Selling, general and administrative expenses		252,289			244,167			228,200			204,422			127,822
Interest expense		4,958			12,110			10,362			6,393			1,789
Total expenses		257,247			256,277			238,562			210,815			129,611
Earnings (loss) before income taxes		146,456			73,482			1,803			(38,549	)		(56,104	)
Income tax provision (benefit)		55,654			27,918			685			(15,035	)		(21,881	)
Net earnings (loss)	$	90,802		$	45,564		$	1,118		$	(23,514	)	$	(34,223	)
OTHER DATA
Percentage sales change from prior comparable period:
Total		28	%		24	%		37	%		68	%		71	%
Comparable stores		28	%		17	%		2	%		(2	)%		6	%
Number of stores at fiscal period end		40			40			40			31			18

	As of February 28 or 29,
	2002		2001		2000		1999		1998
	(In thousands)
BALANCE SHEET DATA
Working capital	$	354,311	$	266,970	$	229,547	$	259,200	$	177,028
Total assets		720,222		710,953		675,495		571,198		448,322
Long-term debt (including current installments)		78,608		191,208		212,866		140,970		27,386
Total liabilities		234,743		319,450		330,506		230,783		88,376
Total equity		485,479		391,503		344,989		340,415		359,946

5

CIRCUIT CITY GROUP

SELECTED HISTORICAL FINANCIAL INFORMATION

The following information is only a summary, and you should read it together with the more detailed financial information for Circuit City Stores, Inc. included elsewhere in this document.

We derived the following selected historical financial information as of February 28 or 29, 1998 through 2002 and for each of the five fiscal years ended February 28 or 29, 1998 through 2002 from our financial statements for the Circuit City group for those years. Those financial statements have been audited by KPMG LLP, independent auditors. KPMG LLP’s reports on the Circuit City group include a qualification related to the effect of not consolidating the CarMax group with the Circuit City group as required by accounting principles generally accepted in United States of America.

You should read the table below in conjunction with the historical consolidated financial statements of Circuit City Stores, Inc. and accompanying notes beginning on page E-1 in Annex E, “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Circuit City Stores, Inc.” included in this proxy statement/prospectus on page 108 and the financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Circuit City group incorporated by reference in this proxy statement/prospectus.

	Year Ended February 28 or 29,
	2002		2001		2000			1999			1998
	(In thousands)
RESULTS OF OPERATIONS
Net sales and operating revenues	$	9,589,803	$	10,458,037	$	10,599,406		$	9,344,170		$	7,996,591
Cost of sales, buying and warehousing		7,251,831		7,964,148		7,977,214			7,060,198			6,026,434
Appliance exit costs		10,000		28,326		—			—			—
Gross profit		2,327,972		2,465,563		2,622,192			2,283,972			1,970,157
Selling, general and administrative expenses		2,120,652		2,270,745		2,081,393			1,882,416			1,687,453
Appliance exit costs		—		1,670		—			—			—
Interest expense		881		7,273		13,844			21,926			25,072
Total expenses		2,121,533		2,279,688		2,095,237			1,904,342			1,712,525
Earnings from continuing operations before income taxes and income attributed to the reserved CarMax group shares		206,439		185,875		526,955			379,630			257,632
Provision for income taxes		78,446		70,637		200,243			144,646			98,462
Earnings from continuing operations before income attributed to the reserved CarMax group shares		127,993		115,238		326,712			234,984			159,170
Net earnings (loss) attributed to the reserved CarMax group shares		62,806		34,009		862			(18,057	)		(26,460	)
Net earnings from continuing operations		190,799		149,247		327,574			216,927			132,710
Discontinued operations:
Loss from discontinued operations of Divx, less income tax benefit		—		—		(16,215	)		(68,546	)		(20,636	)
Loss on disposal of Divx, less income tax benefit		—		—		(114,025	)		—			—
Loss from discontinued operations		—		—		(130,240	)		(68,546	)		(20,636	)
Net earnings	$	190,799	$	149,247	$	197,334		$	148,381		$	112,074

	As of February 28 or 29,
	2002		2001		2000		1999		1998
	(In thousands)
BALANCE SHEET DATA
Working capital	$	1,657,073	$	1,288,610	$	1,306,909	$	1,171,510	$	1,063,481
Total assets		4,133,197		3,452,559		3,537,388		3,134,826		3,061,618
Long-term debt (including current installments)		37,529		57,317		213,719		288,322		398,207
Total liabilities		1,572,852		1,195,400		1,482,668		1,309,353		1,413,286
Group net worth		2,560,345		2,257,159		2,054,720		1,825,473		1,648,332

6

CARMAX, INC.

SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following information is only a summary and you should read it together with the unaudited pro forma consolidated financial statements of CarMax, Inc., including the related notes, included in Annex C.

The following selected unaudited pro forma consolidated financial information of CarMax, Inc. gives effect to:

· the special dividend of $28.4 million to be paid on the separation date to Circuit City Stores by CarMax in recognition of Circuit City Stores’ continuing contingent liability on 23 leases assigned by Circuit City Stores to a subsidiary of CarMax (see page 30 for additional information regarding the special dividend),

· new financing arrangements for CarMax (for additional information on new financing arrangements, see “Treatment of Indebtedness and Post-Separation Financing Arrangements” on page 30),

· an expected 10% mark-up for general and administrative costs and shared services that are currently allocated at cost to the CarMax group from Circuit City Stores, Inc., which may not be the same services to be provided by Circuit City Stores to CarMax after the separation, and

· the payment of certain costs and expenses incurred by CarMax in connection with the CarMax Separation.

The selected unaudited pro forma consolidated financial information has been derived from, or prepared on a basis consistent with, the unaudited pro forma consolidated financial statements of CarMax, Inc., including the notes thereto, included in Annex C. We have presented this information for illustrative purposes only and it is not necessarily indicative of the results of operations or financial position that would have occurred had the separation and related transactions taken place at the beginning of each period presented or on the dates indicated, nor is it necessarily indicative of the future operating results or financial position of CarMax, Inc.

(Amounts in thousands, except per share data)	Year ended or as of February 28, 2002
STATEMENT OF EARNINGS INFORMATION:
Net sales and operating revenues	$	3,201,665
Net earnings	$	88,884
Net earnings per share:
Basic	$	0.87
Diluted	$	0.85
BALANCE SHEET INFORMATION:
Total assets	$	728,824
Capitalization:
Long-term obligations	$	136,351
Equity		449,079
Total capitalization	$	585,430

7

CIRCUIT CITY STORES, INC.

SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following information is only a summary and you should read it together with the unaudited pro forma consolidated financial statements of Circuit City Stores, Inc., including the related notes, included in Annex C.

The following selected unaudited pro forma consolidated financial information of Circuit City Stores, Inc. gives effect to:

· the separation of CarMax, which we will account for as a discontinued operation,

· the special dividend of $28.4 million to be paid on the separation date by CarMax to Circuit City Stores in recognition of Circuit City Stores’ continuing contingent liability on 23 leases assigned by Circuit City Stores to a subsidiary of CarMax, (see page 30 for additional information regarding the special dividend),

· an expected 10% mark-up for general and administrative costs and shared services that are currently allocated at cost to CarMax, Inc. from Circuit City Stores, Inc. which may not be the same services to be provided by Circuit City Stores to CarMax after the separation, and

· the distribution of CarMax, Inc. common stock to the holders of CarMax Group Common Stock and Circuit City Group Common Stock.

The selected unaudited pro forma consolidated financial information has been derived from, or prepared on a basis consistent with, the unaudited pro forma consolidated financial statements of Circuit City Stores, Inc., including the notes thereto, included in Annex C. We have presented this information for illustrative purposes only, and it is not necessarily indicative of the results of operations or financial position that would have occurred had the separation and related transactions taken place at the beginning of each period presented or on the dates indicated, nor is it necessarily indicative of the future operating results or financial position of Circuit City Stores, Inc.

(Amounts in thousands, except per share data)	Year ended or as of February 28, 2002
STATEMENT OF EARNINGS INFORMATION:
Net sales and operating revenues	$	9,589,803
Net earnings	$	128,191
Net earnings per share:
Basic	$	0.62
Diluted	$	0.62
BALANCE SHEET INFORMATION:
Total assets	$	3,850,211
Capitalization:
Long-term obligations (excluding current installments)	$	154,917
Equity		2,277,359
Total capitalization	$	2,432,276

8

RISK FACTORS

You should carefully consider each of the following risks and uncertainties associated with CarMax and the ownership of CarMax, Inc. common stock or associated with Circuit City Stores and the ownership of Circuit City common stock, as well as all of the other information set forth in this document or incorporated by reference into this document.

Risk Factors Relating to the Separation

After the separation CarMax may not be able to obtain suitable financing as a stand-alone entity.

Before the separation, a substantial portion of CarMax’s operations were financed by Circuit City Stores, CarMax’s parent. After the separation, CarMax will be required to raise capital on a stand-alone basis without the benefit of Circuit City Stores’ financial strength and income generating potential. Although one of the purposes of the separation is to permit CarMax to achieve what its management believes is the most appropriate capital structure for its businesses, there can be no assurance that this will be achieved, and the risk therefore exists that CarMax may not be able to secure adequate debt or equity financing on desirable terms. If future developments in the capital markets adversely affect the automotive retailing industry, CarMax will not have the benefit of Circuit City Stores’ consolidated financial strength or size to support its capital needs.

After the separation, CarMax’s access to and cost of debt financing may be different from the historical access to and cost of debt financing of Circuit City Stores. Differences in access to and cost of debt financing may result in differences in the interest rate charged to CarMax on financings, as well as the amounts of indebtedness, types of financing structures and debt markets that may be available to CarMax.

The historical financial information of the CarMax group may not be representative of the results of CarMax, Inc. as an independent entity, and, therefore, may not be reliable as an indicator of its historical or future results.

The historical financial information included in this document may not reflect what CarMax’s results of operations, financial position and cash flows would have been had CarMax been an independent entity for the periods presented. Because the financial information included in this document reflects allocations for services provided to the CarMax group by Circuit City Stores, these allocations may not reflect the costs CarMax would have incurred for similar or incremental services as an independent entity. In addition, the historical financial information included in this document does not reflect transactions that have occurred since February 28, 2002 or that are expected to occur in connection with the separation. This historical financial information also may not be reliable as an indicator of future results.

After the separation, Circuit City common stock may be removed from certain stock indices or Circuit City common stock or CarMax, Inc. common stock may fail to meet the investing guidelines of institutional investors, which may negatively affect the price of Circuit City common stock or CarMax, Inc. common stock and impair Circuit City Stores’ or CarMax’s ability to raise capital through the sale of common stock.

Some of the holders of Circuit City Group Common Stock are index funds tied to the Standard & Poor’s 500 Index or other stock indices, or are institutional investors bound by various investing guidelines. Companies are generally selected for stock indices, and in some cases selected by institutional investors, based on factors such as market capitalization, industry, trading liquidity and financial condition. The separation will reduce Circuit City Stores’ market capitalization. As a result, Circuit City common stock could be removed from one or more stock indices, including the Standard & Poor’s 500 Index. In addition, Circuit City common stock or CarMax, Inc. common stock that the holders of Circuit City Group Common Stock would receive in the separation may not meet the investing guidelines of some institutional investors. Consequently, these index funds and

9

institutional investors may be required to sell the CarMax, Inc. common stock that they receive in the separation or the Circuit City common stock. A sufficient number of buyers may not be available in the market to absorb these potential sales. Consequently, the stock price of Circuit City common stock or CarMax, Inc. common stock may fall. Any such decline could impair the ability of Circuit City Stores or CarMax to raise capital through future sales of common stock.

CarMax may not be able to engage in desirable strategic transactions and equity issuances following the separation.

Under Section 355(e) of the Internal Revenue Code, Circuit City Stores will recognize taxable gain on the separation if there are one or more acquisitions of CarMax stock representing 50% or more of CarMax stock, measured by vote or value, and the stock acquisitions are found to be part of a plan or series of related transactions that includes the separation. CarMax’s ability to issue additional equity or engage in other strategic transactions may be constrained because the issuance or acquisition of additional capital stock may cause the separation to be taxable to Circuit City Stores, and under the tax allocation agreement CarMax would be required to indemnify Circuit City Stores against that tax. For a discussion of Section 355(e) of the Internal Revenue Code, see “U.S. Federal Income Tax Consequences of the Separation” beginning on page 33.

CarMax may be unable to make the changes necessary to operate as an independent entity and may incur greater costs.

CarMax has been a wholly owned subsidiary of Circuit City Stores since CarMax’s incorporation in 1996. Following the separation, however, Circuit City Stores will have no obligation to provide financial, operational or organizational assistance to CarMax other than limited services described in the transition services agreement to be entered into between Circuit City Stores and CarMax. Without that assistance, CarMax may not be able to implement successfully the changes necessary to operate independently. CarMax also may incur increased costs relating to operating independently that would cause its cash flow and results of operations to decline materially. In addition, although CarMax may be able to participate in some of Circuit City Stores’ supplier arrangements where those arrangements permit or the vendors agree, those arrangements may not be as economically favorable as has historically been the case.

Circuit City Stores will continue to be contingently liable on certain CarMax location leases after the separation.

CarMax currently operates 23 of its sales locations pursuant to various leases under which Circuit City Stores was the original tenant and primary obligor. Prior to the separation, Circuit City Stores assigned each of these leases to CarMax. Despite the assignment and pursuant to the terms of the leases, Circuit City Stores retained contingent liability under the leases. For example, if CarMax were to fail to make lease payments under one or more of the leases, Circuit City Stores may be required to make those payments on CarMax’s behalf. In recognition of this ongoing contingent liability, CarMax has agreed to make a one-time special dividend to Circuit City Stores of approximately $28.4 million.

Circuit City Stores’ financial results may be subject to increased variability after the separation.

Circuit City Stores and CarMax operate in different industries, which are driven by distinct market dynamics and economics. CarMax’s business is sensitive to general economic conditions, consumer confidence, interest rates and credit availability. CarMax’s business is also subject to the level of personal discretionary income, although to a substantially lesser degree than the Circuit City Stores’ business. CarMax’s business is subject to seasonality, with each location experiencing more of its net sales in the first half of the fiscal year than in the second half of the year. During the fall quarter, new-model-year introductions and discounting on close-out vehicles can cause rapid depreciation of used-car prices, especially on late-model vehicles.

10

Circuit City Stores’ business is sensitive to trends in consumer retail spending, trends in technology and to levels of personal discretionary income. Circuit City Stores’ business also is subject to seasonality, with greater sales historically being recorded in the fourth quarter of the fiscal year than in other periods of the year because of holiday buying patterns. Seasonal fluctuations also affect Circuit City Stores’ inventory levels, since Circuit City Stores usually orders merchandise in advance of peak selling periods and sometimes before new trends are confirmed by customer purchases. Circuit City Stores must carry a significant amount of inventory, especially before the holiday season.

The diversification that is provided by operating businesses in distinct industries tends to moderate financial and operational volatility. Following the separation, that diversification will no longer exist within Circuit City Stores, and Circuit City Stores may experience increased variability and less diversification in terms of cash flow, seasonality, working capital and financing requirements.

After the separation, Circuit City Stores’ growth rate will be based on the Circuit City business only, which is expected to show only modest sales growth and limited earnings growth during fiscal 2003 and, as a mature business, is thereafter unlikely to have a growth rate comparable to CarMax, which is a developing business.

After the separation, Circuit City Stores’ growth rate will be based on the Circuit City business only, whereas before that time, the Circuit City Group Common Stock reflects the performance of the Circuit City business and a contribution from the CarMax business. For fiscal 2002, approximately one-third ($62.8 million) of the $190.8 million of earnings of the Circuit City Group were attributed to the contribution from the CarMax business.

Assuming relatively stable gross margins, mid-single digit comparable store sales growth, remodeling costs for approximately 300 stores and relocation costs associated with approximately 10 stores, management anticipates that the Circuit City business will produce only limited earning growth from fiscal 2002 to fiscal 2003. While the remodeling and relocation program, which is expected to continue for some time, is being implemented, it is likely to have an adverse effect on Circuit City’s sales and earnings growth rates. Further, as a mature business, Circuit City is unlikely to have a growth rate comparable to that of CarMax, which is a developing business. Consequently, the separation will result in the higher growth portion of the consolidated business being eliminated from Circuit City Stores.

The sum of the market values of a share of Circuit City common stock and the fraction of a share of CarMax, Inc. common stock paid as a dividend on the Circuit City Group Common Stock in the separation might be less than the market value of a share of Circuit City Group Common Stock before the separation.

If we complete the separation as we currently contemplate, holders of Circuit City Group Common Stock will, after the separation, hold a combination of Circuit City common stock and CarMax, Inc. common stock. The aggregate market value of these securities could be less than the market value of Circuit City Group Common Stock before the separation. The trading price of Circuit City common stock or CarMax, Inc. common stock may decline as a result of the separation or as a result of other factors. The CarMax, Inc. common stock issued in the separation would be trading publicly for the first time. Until, and possibly even after, orderly trading markets develop for this stock, there may be significant fluctuations in price.

CarMax and Circuit City Stores may be unable to achieve all of the benefits sought by the separation.

The full strategic and financial benefits of the separation may be delayed or may never occur at all. The following are factors that may prevent CarMax and Circuit City Stores from realizing these benefits:

· CarMax may be unable to alleviate the capital restraints imposed on it as a result of its affiliation with Circuit City Stores due to changed lending policies of banks or other lenders or because CarMax is unable to meet the financial requirements imposed by those lenders.

11

· Circuit City Stores and CarMax may be unable to establish the most appropriate capital structures for their respective businesses because of credit constraints, tax implications, decreased liquidity or accessibility to debt or equity markets or contractual restraints.

· CarMax may be unable to conduct business with the most appropriate vendors because of credit or other concerns relating to CarMax as an independent company.

For a list of the other considerations that may affect the future results of CarMax or Circuit City Stores, see “Special Note Regarding Forward-Looking Statements” on page 127.

Stock ownership and other economic interests could cause our directors to favor the Circuit City group over the CarMax group.

Our board of directors has a duty to act in its good faith business judgment of the best interests of Circuit City Stores, taking into consideration the interests of all common shareholders regardless of class or series. However, in general, our directors have a greater economic interest in Circuit City Group Common Stock than in CarMax Group Common Stock. The fact that the actual value of their collective interests in Circuit City Group Common Stock is greater than their collective interests in CarMax Group Common Stock and the fact that two of our directors are, and are expected to continue to be, executive officers of Circuit City Stores, could give rise to claims of conflict of interest when our board of directors makes decisions on matters where the interests of the Circuit City group and the CarMax group diverge.

Risk Factors Relating to CarMax, Inc. Common Stock

The market value of a share of CarMax, Inc. common stock received in the redemption might be less than the market value of a share of CarMax Group Common Stock before the separation.

If we complete the separation as we currently contemplate, holders of CarMax Group Common Stock will, after the separation, hold CarMax, Inc. common stock. The market value of CarMax, Inc. common stock could be less than the market value of CarMax Group Common Stock before the separation. The trading price of CarMax, Inc. common stock may decline as a result of the separation or as a result of other factors. The CarMax, Inc. common stock issued in the separation would be trading publicly for the first time. Until, and possibly even after, orderly trading markets develop for this stock, there may be significant fluctuations in price.

The market price and trading volume of CarMax, Inc. common stock may be volatile and may face negative pressure.

Before the separation, CarMax has been a wholly owned subsidiary of Circuit City Stores, and accordingly there has been no trading market for the shares of CarMax, Inc. common stock. Investors may decide to dispose of some or all of the shares of CarMax, Inc. common stock they receive in the redemption or the distribution. The action of investors who receive CarMax, Inc. common stock in the separation cannot be accurately predicted at this time, and may lead to a trading market or a market price for CarMax, Inc. common stock that is more volatile than the trading market or market price for CarMax Group Common Stock before the separation. The market price of CarMax, Inc. common stock could fluctuate significantly for many reasons, including the risks identified in this document or reasons unrelated to CarMax’s performance. These factors may result in short- or long-term negative pressure on the trading price of shares of CarMax, Inc. common stock.

Risk Factors Relating to the CarMax Business

Failure to open and operate new CarMax stores successfully could adversely affect CarMax’s future results of operations.

CarMax’s business strategy calls for the expansion of the CarMax store base to generate additional revenues without increasing overhead proportionately. CarMax expects to open approximately four to six stores in fiscal

12

2003 and six to eight stores in each of fiscal 2004, 2005 and 2006. CarMax cannot assure you that it will be able to open and operate new stores effectively without substantial costs, delays or operational or financial problems, including those resulting from:

· the lack of availability of suitable store sites at reasonable costs;

· the possibility that CarMax’s standard store prototype may not be effective in new mid-sized markets;

· the possibility that CarMax’s satellite store prototype may not be effective in some of CarMax’s existing multi-store or mid-sized markets;

· difficulties CarMax may encounter in obtaining necessary additional capital; and

· difficulties CarMax may encounter in attracting and retaining additional qualified personnel.

These factors could have a material adverse effect on the expansion of the CarMax store base and, as a result, CarMax’s future operating results.

CarMax operates in a highly competitive industry and new entrants to the industry could adversely affect CarMax’s business.

Automotive retailing in the United States is highly competitive. In the used-vehicle market, CarMax competes with existing franchised and independent dealers, rental companies and private parties. CarMax believes that companies could decide to enter the market because of the potential for high sales volume per location as well as the fragmentation and the relatively high gross margins that exist in the industry. In addition, many franchised new-car dealerships have increased their focus on the used-vehicle market in recent years. Part of CarMax’s business strategy is to position CarMax as a low-price, low-cost operator in the industry. However, increased competition, particularly from new entrants adopting non-traditional selling methods similar to those that CarMax uses, may result in increased wholesale costs for used cars and lower-than-expected retail sales prices and margins.

The inability to obtain funding through sale-leaseback transactions, securitization facilities or other sources may adversely affect CarMax and CarMax’s expansion plans.

CarMax will continue to need substantial capital to fund the opening and operation of new CarMax stores. Most of CarMax’s capital expenditures have been funded through sale-leaseback transactions and allocated short- and long-term debt. In addition, CarMax finances automobile installment loan receivables through asset securitization facilities. CarMax’s ability to continue undertaking both sale-leaseback and securitization transactions, and to do so on economically favorable terms, depends in large part on factors that are beyond CarMax’s control. These factors include:

· conditions in the securities and finance markets generally;

· prevailing interest rates; and

· conditions in the markets for securitized instruments and lease financings.

Any reduction in inventory availability or increase in inventory costs that are not reflected in retail market prices would adversely affect CarMax’s business.

CarMax acquires a significant proportion of its used-vehicle inventory through CarMax’s appraisal process and through auctions. To a lesser extent, CarMax also acquires used vehicles from wholesalers, franchised and

13

independent dealers and fleet owners, such as leasing companies and rental companies. CarMax may not be able to obtain sufficient inventory to meet its needs, at least not at comparable costs, if competitive pressures increase as a result of new entrants to the used-car market or if changes occur in the type or proportion of used vehicles that are sold through these sources. A reduction in the availability of inventory from these sources or an increase in inventory costs that cannot be reflected in retail market prices would adversely affect CarMax’s business.

If CarMax cannot dispose of vehicles acquired through the appraisal process at prices that allow CarMax to recover its costs, CarMax’s profitability will be adversely affected.

Because more than half of the cars CarMax purchases through the appraisal process fail to meet CarMax’s retail quality standards, CarMax sells these vehicles through CarMax’s own onsite wholesale auctions. CarMax cannot assure you that the sales prices CarMax receives at these auctions will be sufficient to cover the prices CarMax paid for these vehicles or that the auctions will not be interrupted by adverse economic conditions or be affected by a reduction in, or the diminished purchasing ability of, attendees at the auctions.

Aggressive discounting by new-car manufacturers may adversely affect CarMax’s results of operations.

Aggressive discounting by manufacturers of new cars may result in lower retail sales prices and margins for used vehicles. Discounting typically occurs or intensifies in the Fall during the close-out of prior year models. CarMax’s inventory includes a significant proportion of late-model used vehicles that are particularly affected by this discounting. As a result, aggressive or prolonged discounting by manufacturers may adversely affect CarMax’s results of operations for the periods in which it occurs.

General economic conditions and the local nature of automobile sales may adversely affect CarMax’s business.

The automotive retail industry, particularly the new-vehicle market, historically has experienced periodic downturns characterized by oversupply and weak demand. Many factors affect the industry, including general economic conditions, consumer confidence, the level of personal discretionary income, interest rates and credit availability. CarMax cannot assure you that the industry will not experience sustained periods of decline in vehicle sales in the future. Any decline could have an adverse effect on CarMax’s business.

Economic, competitive and other conditions at regional and local levels also affect the performance of CarMax’s stores. CarMax’s stores are currently located in California, Florida, Georgia, Illinois, Indiana, Maryland, North Carolina, South Carolina, Tennessee, Texas, Virginia and Wisconsin. Adverse changes, such as price-cutting by dealers or a general economic downturn, affecting some or all of the markets in these states or the new markets CarMax enters, could adversely affect CarMax’s business, although the automotive retail industry as a whole might not be affected.

A decrease in the quality of the CarMax finance operation’s contract portfolio or the availability of credit for CarMax’s customers could lead to a decrease in CarMax’s vehicle sales and profitability.

Payments on some of the installment sales contracts originated by CarMax’s finance operation become delinquent from time to time and some contracts end up in default. CarMax cannot assure you that the current credit performance of the CarMax finance operation’s customers will be maintained or that general economic conditions will not worsen and lead to higher rates of delinquency and default. A general decline in the quality of CarMax’s contract portfolio could lead CarMax to reduce the credit available through CarMax’s finance operation. A reduction in the availability of credit could adversely affect CarMax’s sales and profitability. In particular, if one or more of CarMax’s non-prime financing sources become unavailable to provide credit to CarMax’s customers, CarMax may sell fewer used vehicles, which would adversely affect CarMax’s earnings.

14

CarMax cannot guarantee that all of its franchise agreements will be renewed or that the terms of the renewals will be favorable to CarMax.

Each of CarMax’s new-vehicle locations operates pursuant to a franchise agreement with the applicable manufacturer or authorized distributor. These franchise agreements, compliance with which is closely monitored by the manufacturers, impose various requirements on CarMax. Each of CarMax’s franchise agreements provides for termination or non-renewal for a variety of causes, including any unapproved change of ownership or management of CarMax’s subsidiary that entered into the agreement and other material breaches of the agreement. CarMax cannot guarantee that all of these franchise agreements will be renewed or that the terms of the renewals will be favorable to CarMax.

Adverse conditions affecting one or more automobile manufacturers may negatively impact CarMax’s new-vehicle operations.

CarMax currently operates new-car dealerships under franchise agreements with DaimlerChrysler, Mitsubishi, Nissan, Toyota, Ford and General Motors. Events such as labor disputes and other production disruptions or negative publicity affecting a particular manufacturer or vehicle model could adversely affect these new-vehicle operations. In addition, the late delivery of vehicles from a manufacturer, which may occur particularly during periods when new products are being introduced, can reduce CarMax’s sales of new vehicles.

Manufacturer awards of additional franchises in CarMax’s markets could adversely affect CarMax’s new-vehicle sales and profitability.

CarMax’s franchise agreements do not give CarMax the exclusive right to sell a manufacturer’s products within a given geographic area. CarMax’s new-vehicle sales and profitability could be adversely affected if any of CarMax’s manufacturers awards franchises to others in the markets where CarMax operates.

Compliance with environmental and other governmental regulations may result in significant additional costs to CarMax.

CarMax is subject to a wide range of federal, state and local laws and regulations, such as local licensing requirements and consumer protection laws. These laws regulate, among other things, the manner in which CarMax conducts business, including advertising, sales and consumer lending practices. Violation of these laws and regulations could result in civil and criminal penalties being levied against CarMax or could result in a cease and desist order being issued for operations that are not in compliance. Future laws and regulations may be more stringent and require CarMax to incur significant additional costs.

CarMax’s business involves the use and disposal of hazardous or toxic materials and the operation and removal of aboveground and underground storage tanks. As a result, CarMax is subject to federal, state and local laws and regulations governing the handling, storage and disposal of these materials as well as wastewater discharges, air emissions and the cleanup of contaminated property or water. CarMax may be required by these laws to pay the full amount of the costs of investigation and/or cleanup of contaminated properties, even if CarMax were not at fault for disposal of the materials or if disposal were legal at the time. Compliance with new laws and regulations, stricter interpretations of existing laws and regulations or the discovery of contamination at CarMax’s existing or future store locations could require CarMax to incur significant additional costs.

15

Risk Factors Relating to the Circuit City Business

Failure to successfully implement sales and profitability improvement programs for the Circuit City Superstores could mean unsatisfactory results in this business.

Circuit City Stores focuses significant attention on programs to improve the sales and profitability of its Circuit City business, which declined in portions of the last two fiscal years. Circuit City Stores reported losses for the Circuit City business for the third quarter of fiscal 2001 and for the first two quarters and first nine months of fiscal 2002. During fiscal 2001, Circuit City exited the appliance business and also began remodeling its Superstores using designs it believes offers better product placements and a more contemporary shopping experience. In July 2001, Circuit City introduced a new marketing campaign. In addition, Circuit City continues to improve its sales counselor training and implement customer service enhancements and process improvements. Circuit City Stores cannot assure you that it will be able to implement these programs effectively or that they will result in the financial improvement to the extent that Circuit City Stores anticipates. There are various risks associated with them, including the following:

· the remodeling process for each store may disrupt sales until it is completed;

· the remodels are capital intensive, with expenditures of $130 million on remodeling of approximately 300 stores and relocations of approximately 10 stores anticipated for fiscal 2003 activity, and Circuit City may not be able to achieve its expected return on investment;

· the remodels may not be effective in achieving Circuit City’s goal of providing the customer with a more desirable shopping experience;

· the marketing campaign may not be effective in increasing the amount of foot traffic in the stores; and

· Circuit City’s training programs may not be successful or its sales counselors may not accomplish the strong customer service delivery Circuit City needs.

These factors could result in unsatisfactory results for the Circuit City business or delays or additional costs in implementing Circuit City’s plans to improve sales and profitability.

Circuit City operates in a highly competitive industry and continued strong performance by its competitors could adversely affect its business.

The consumer electronics industry is highly competitive. Circuit City’s competitors include large specialty, discount or warehouse retailers as well as local, regional and non-brick-and-mortar retailers. Because of the strong performance by some of Circuit City’s competitors, they may be better able to discount aggressively and sustain these discounts for longer periods of time. This price competition could adversely affect Circuit City’s business to a greater degree than it affects Circuit City’s competitors’ businesses.

Circuit City’s industry is sensitive to trends in consumer retail spending, both in general and in its product categories, and negative trends have affected and could in the future adversely affect the Circuit City business.

Circuit City’s business has been adversely affected by a general slowdown in consumer spending and an industry-wide softening in the desktop personal computer business. Both of these trends continued into fiscal 2002, adversely affecting Circuit City Stores’ results. In addition, trends in consumer retail spending have caused fluctuations in Circuit City’s inventory, which, if not managed effectively, could adversely affect working capital.

16

THE SPECIAL MEETING

This proxy statement/prospectus is being furnished in connection with the solicitation by the board of directors of Circuit City Stores of proxies for use at the special meeting of Circuit City Stores shareholders.

Proposals to Be Considered at the Special Meeting

At the special meeting, holders of Circuit City Group Common Stock and CarMax Group Common Stock will be asked to consider and vote upon the following proposals:

· The CarMax Separation Proposal—a proposal to approve the separation of the CarMax group from Circuit City Stores in the manner contemplated in the separation agreement, including a special dividend of $28.4 million to be paid by CarMax, Inc. to Circuit City Stores on the separation date and including the payment by CarMax, Inc. of the costs of the CarMax Separation, which are estimated to be $8 million, by means of the redemption of the CarMax Group Common Stock in exchange for shares of CarMax, Inc. common stock and the distribution of shares of CarMax, Inc. common stock as a pro-rata dividend on the Circuit City Group Common Stock, all as described in this proxy statement/prospectus. Approval would include authorization of the Separation Amendment, which would amend Circuit City Stores’ articles of incorporation to provide that CarMax, Inc. common stock will be exchanged for CarMax Group Common Stock in the redemption, and to reduce from 30 to 10 trading days the minimum number of days required to give notice of the redemption to holders of CarMax Group Common Stock. The text of this Separation Amendment is set forth in Annex A.

· The Clean-Up Amendment Proposal—a proposal to authorize the Clean-Up Amendment, which would amend Circuit City Stores’ articles of incorporation to remove the provisions in the articles of incorporation that provide for the two currently outstanding series of Circuit City’s common stock—the Circuit City Group Common Stock and the CarMax Group Common Stock—with language providing for a single class of common stock not issuable in series, and to redesignate the Circuit City Group Common Stock as “Common Stock” of Circuit City Stores. The Clean-Up Amendment would be effective immediately after the separation. The text of this Clean-Up Amendment is set forth in Annex B.

· A proposal to approve the CarMax, Inc. Annual Performance-Based Bonus Plan, a copy of which is set forth in Annex H.

· A proposal to approve the CarMax, Inc. 2002 Stock Incentive Plan, a copy of which is set forth in Annex I.

· A proposal to approve the CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan, a copy of which is set forth in Annex J.

The Clean-Up Amendment Proposal and the proposals to approve the Annual Performance-Based Bonus Plan, 2002 Stock Incentive Plan and 2002 Non-employee Directors Stock Incentive Plan will not be brought before the shareholders at the special meeting unless shareholders first approve the CarMax Separation Proposal.

Record Date and Voting Rights

Circuit City Stores’ board of directors established the close of business on May 22, 2002 as the record date for determining the holders of Circuit City Group Common Stock and CarMax Group Common Stock entitled to notice of and to vote at the special meeting. On the record date, 209,861,782 shares of Circuit City Group Common Stock and 37,103,670 shares of CarMax Group Common Stock were outstanding and entitled to vote. With respect to the CarMax Separation Proposal and the Clean-Up Amendment Proposal, the holders of Circuit City Group Common Stock and CarMax Group Common Stock will vote both as separate groups and together as a single group at the meeting. With respect to each of the CarMax benefit plan proposals, the holders of Circuit City Group Common Stock and CarMax Group Common Stock will vote together as a single group. Each outstanding share of Circuit City Group Common Stock entitles the holder to one vote when voting separately as

17

well as when voting together as a single group with the holders of CarMax Group Common Stock. Each outstanding share of CarMax Group Common Stock entitles the holder to one vote when voting separately and to · of a vote when voting together as a single group with the holders of Circuit City Group Common Stock. The total number of votes that may be cast at the special meeting by:

· holders of Circuit City Group Common Stock, when voting separately, is 209,861,782;

· holders of CarMax Group Common Stock, when voting separately, is 37,103,670; and

· holders of Circuit City Group Common Stock and CarMax Group Common Stock, when voting together as a single group, is 259,914,633;

in each case based on shares outstanding on the record date. The voting rights of the CarMax Group Common Stock when voting together with Circuit City Group Common Stock have been determined from the recent market values of the CarMax Group Common Stock and the Circuit City Group Common Stock in accordance with the formula set forth in Circuit City Stores’ articles of incorporation. When holders of Circuit City Group Common Stock and holders of CarMax Group Common Stock vote together as a single voting group, holders of Circuit City Group Common Stock will be entitled to a total of 209,861,782 votes, representing 80.74% of the total vote, and holders of CarMax Group Common Stock will be entitled to a total of 50,052,851 votes, representing 19.26% of the total vote.

Under the rules of the NYSE, brokers who hold shares in “street name” for customers are precluded from exercising their voting discretion with respect to the approval of non-routine matters, such as the CarMax Separation Proposal, the Clean-Up Amendment Proposal and the proposals concerning the CarMax benefit plans. Therefore, without specific instructions from the beneficial owner of such shares, brokers may not vote those shares at the special meeting. Your broker will vote your shares only if you direct your broker regarding how to vote your shares by following the instructions provided to you by your broker.

Because the required vote for the adoption of the CarMax Separation Proposal and the Clean-Up Amendment Proposal is based on a percentage of the shares outstanding, abstentions and broker non-votes will have the same effect as a vote against the proposals. Conversely, since the required vote for approval of each of the benefit plan proposals is based on the number of votes cast at the special meeting, abstentions and broker non-votes will not affect the approval of those proposals.

Voting of Shares Held in Employee Stock Purchase Plans

Participants in the 1984 Circuit City Stores, Inc. Employee Stock Purchase Plan will receive a request for voting instructions for the shares of Circuit City Group Common Stock held on each participant’s behalf by Computershare Trust Co., Inc., as service provider for that plan. Participants in the 1997 Employee Stock Purchase Plan for CarMax Group Employees also will receive a request for voting instructions for the shares of CarMax Group Common Stock held on each participant’s behalf by Computershare, as service provider for that plan. Voting instructions should be returned, properly executed, in the envelope provided. Computershare will vote in accordance with participants’ instructions. If a participant does not return his or her voting instructions, Computershare will vote those shares in accordance with recommendations of the Circuit City Stores board of directors and in accordance with NYSE rules.

Quorum

A majority of the total votes entitled to be cast at the special meeting constitutes a quorum. When the holders of Circuit City Group Common Stock and CarMax Group Common Stock vote as separate groups, a quorum must exist with respect to each group. If a share is represented for any purpose at the meeting, it is

18

deemed to be present for quorum purposes and for all other matters as well. Abstentions and shares held of record by a broker or its nominee, which we refer to as “broker shares,” that are voted on any matter are included in determining the number of votes present or represented at the meeting. Broker shares that are not voted on any matter at the meeting will not be included in determining whether a quorum is present at the meeting.

Solicitation of Proxies

In addition to the solicitation of proxies by mail, Circuit City Stores’ officers and regular employees, without compensation other than regular compensation, may solicit proxies by telephone, electronic means and personal interviews. Circuit City Stores also has retained Morrow & Co., Inc. to assist in the solicitation of proxies of shareholders whose shares are held in street name by brokers, banks and other institutions at an approximate cost of $10,000 plus out-of-pocket expenses. CarMax will bear the cost of all solicitation.

Voting Proxies

You may vote your proxy by marking, signing and dating your proxy card and returning it in the enclosed postage-paid envelope. A proxy, if executed and not revoked, will be voted FOR the proposals set forth in this proxy statement/prospectus, unless it contains specific instructions to the contrary, in which event it will be voted in accordance with those instructions.

If your shares are held in “street name” by your broker, do not follow the above instructions. Rather, follow the separate instructions provided by your broker.

If necessary, unless you have indicated on your proxy card that you wish to vote against one or more of the proposals, your proxy may be voted in favor of any motion in respect of an adjournment of the special meeting to a later date in order to solicit and obtain sufficient votes for any of the proposals.

Revocation of Proxies

If you are a shareholder of record, you may revoke your proxy or change your vote at any time before it is voted at the special meeting by:

· completing and mailing to us another proxy card dated later than your last proxy;

· submitting a written revocation to the secretary of Circuit City Stores, Inc. at 9950 Mayland Drive, Richmond, Virginia 23233; or

· appearing in person and voting at the special meeting.

If your shares are held in “street name” by your broker, you may revoke your proxy or change your vote only by following the separate instructions provided by your broker.

In order to vote in person at the special meeting, shareholders of record must attend the meeting and cast their votes in accordance with the voting provisions established for the special meeting. Attendance at the special meeting without voting in accordance with the voting procedures will not in and of itself revoke a proxy. If your broker holds your shares and you want to attend the special meeting, please take to the special meeting a letter from your broker identifying you as the beneficial owner of the shares and authorizing you to vote.

19

PROPOSAL ONE:    THE CARMAX SEPARATION PROPOSAL

General

The holders of the Circuit City Group Common Stock and the CarMax Group Common Stock are being asked to consider and approve the CarMax Separation Proposal which, if approved, would allow Circuit City Stores to separate the CarMax group from the rest of Circuit City Stores. The CarMax Group Common Stock is intended to reflect the separate performance of the CarMax business and its related operations. As a result of the separation, all the businesses, assets and liabilities of the CarMax group would be held by CarMax, Inc., currently a wholly owned subsidiary of Circuit City Stores, which would then be an independent, separately traded public company.

Circuit City Stores and CarMax, Inc. have entered into a separation agreement dated May 21, 2002. The separation agreement sets forth the terms of the proposed separation, including any necessary transfers of assets and liabilities required at the time of the separation and including any subsequent transfer to CarMax, Inc. of any assets or liabilities arising after the separation. The separation agreement also provides for certain payments to be made by CarMax, Inc. in connection with the separation and for certain post-separation arrangements between Circuit City Stores and CarMax, Inc. For a discussion of payments to be made by CarMax, Inc. to Circuit City Stores in the CarMax Separation, see “Contingent Lease Obligations Retained by Circuit City Stores” on page 30 and “Expenses” on page 39.

If approved by the shareholders, the separation is expected to occur at 9:00 a.m., Richmond, Virginia time, approximately 10 trading days after Circuit City Stores first mails the notice of redemption. The separation would be effected in two simultaneous steps:

· Redemption of CarMax Group Common Stock.    In accordance with its articles of incorporation, Circuit City Stores would redeem all of the shares of CarMax Group Common Stock outstanding on the separation date in exchange for shares of CarMax, Inc. common stock. Specifically, each holder of record of CarMax Group Common Stock as of 9:00 a.m., Richmond, Virginia time, on the separation date, would receive the right to receive one share of CarMax, Inc. common stock in exchange for each share of CarMax Group Common Stock then held. Circuit City Stores’ articles of incorporation provide that the Circuit City Stores board of directors may redeem all of the outstanding shares of CarMax Group Common Stock in exchange for shares of one or more Circuit City Stores subsidiaries that hold all of the assets and liabilities attributed to the CarMax group (and hold no other assets or liabilities). Pursuant to the Separation Amendment, which would be authorized if Proposal One is adopted, CarMax, Inc. will hold all of the assets and liabilities attributed to the CarMax group (and hold no other assets or liabilities). The exact number of shares of CarMax, Inc. common stock to be issued in the redemption will be equal to the number of shares of CarMax Group Common Stock outstanding at 9:00 a.m., Richmond, Virginia time, on the separation date.

· Dividend Distribution on Circuit City Group Common Stock.    At 9:00 a.m., Richmond, Virginia time, on the separation date, Circuit City Stores would distribute as a dividend to the holders of Circuit City Group Common Stock a number of shares of CarMax, Inc. common stock equal to the number of shares of CarMax Group Common Stock reserved for the Circuit City group or for issuance to the holders of Circuit City Group Common Stock. These reserved shares under Circuit City Stores’ articles of incorporation are treated as representing the interest in the businesses of the CarMax group reserved for the benefit of the Circuit City group or for the holders of Circuit City Group Common Stock. The total number of shares of CarMax, Inc. common stock to be delivered in the distribution would be 65,923,200; but the fraction of a share to be delivered per share of Circuit City Group Common Stock will depend upon the number of shares of Circuit City Group Common Stock outstanding on the distribution record date, which date will be set by the board of directors. To be entitled to receive shares

20

of CarMax, Inc. Common Stock in the distribution, holders of Circuit City Group Common Stock must be shareholders at the close of business on the distribution record date. The distribution record date is expected to be approximately 10 trading days before the separation date. If the distribution record date were May 22, 2002, each holder of Circuit City Group Common Stock would receive approximately 0.314 of a share of CarMax, Inc. common stock for each share of Circuit City Group Common Stock held.

Circuit City Stores will round the distribution ratio to the nearest thousandth of a share, or in other words, to three decimal places (for example: 0.001). Immediately after the separation, CarMax expects to have approximately 103,026,870 shares of CarMax, Inc. common stock outstanding.

In summary, in the CarMax Separation:

· if you are a holder of CarMax Group Common Stock: you would receive one share of CarMax, Inc. common stock in exchange for each share of CarMax Group Common Stock you hold on the separation date; and

· if you are a holder of Circuit City Group Common Stock: we currently estimate that you would receive approximately 0.314 of a share of CarMax, Inc. common stock for each share of Circuit City Group Common Stock you hold on the distribution record date. The distribution will not affect the number of outstanding shares of Circuit City Group Common Stock.

Based upon the number of shares of CarMax Group Common Stock that were, as of May 22, 2002,

· issued and outstanding, and

· reserved for issuance to the holders of the Circuit City Group Common Stock or otherwise reserved for the benefit of the Circuit City group

we estimate that approximately

· 37.1 million shares of CarMax, Inc. common stock would be issued in exchange for CarMax Group Common Stock in the redemption, and

· 65.9 million shares would be issued in the distribution.

As a result, we estimate that immediately after the separation, approximately 103 million shares of CarMax, Inc. common stock would be outstanding, excluding 11,100,000 shares of CarMax, Inc. common stock that would be issuable upon exercise of options granted by CarMax to directors, officers and employees under CarMax's stock compensation plans.

Disregarding the effect of options, if the separation becomes effective the former holders of the CarMax Group Common Stock who receive CarMax, Inc. common stock in the distribution, on the one hand, and the holders of Circuit City Group Common Stock who receive CarMax, Inc. common stock in the distribution, on the other hand, would initially have the same proportionate interests in the issued CarMax, Inc. common stock as they currently have with respect to the CarMax Group Common Stock (considering both the outstanding shares and the shares reserved for issuance to holders of Circuit City Group Common Stock or for the benefit of the Circuit City group). Immediately following the separation, based upon the number of shares of CarMax Group Common Stock outstanding as of May 22, 2002, former holders of CarMax Group Common Stock who receive CarMax, Inc. common stock in the redemption would initially own approximately 36% of CarMax, Inc. and holders of Circuit City Group Common Stock who receive CarMax, Inc. common stock in the distribution would initially own approximately 64% of CarMax, Inc. The exercise of options for CarMax Group Common Stock from the date of this proxy statement/prospectus to the redemption date would increase the proportionate interest of the former holders of CarMax Group Common Stock and decrease that of the holders of Circuit City Group Common Stock who receive CarMax, Inc. common stock in the distribution.

21

Subject to shareholder approval, the Circuit City Stores board of directors presently intends to effect the redemption and the distribution.

As part of the CarMax Separation Proposal and to facilitate the CarMax Separation, you are being asked to consider and approve the CarMax Separation Amendment, as set forth in Annex A, which expressly enables Circuit City Stores’ board of directors to carry out the CarMax Separation in the manner set forth in the separation agreement between Circuit City Stores and CarMax and as described in this proxy statement/prospectus. The CarMax Separation Amendment also will reduce from 30 to 10 trading days the minimum number of days required to give notice of the redemption to the holders of the CarMax Group Common Stock. This reduction is only applicable to redeeming such stock as part of the CarMax Separation and not to any other redemption that might occur in the future if the CarMax Separation does not take place. Despite approval of the CarMax Separation Proposal by the shareholders, Circuit City Stores’ board of directors may decide not to proceed with the CarMax Separation if it determines that such course is not in the interest of Circuit City Stores or its shareholders. In that case, the CarMax Separation Amendment will not become effective.

If the CarMax Separation Proposal is approved by the shareholders, the Circuit City Stores board of directors presently intends to take the following steps:

· file with the State Corporation Commission of Virginia articles of amendment to effect the CarMax Separation Amendment;

· authorize the redemption of the CarMax Group Common Stock pursuant to Circuit City Stores’ articles of incorporation, as amended by the CarMax Separation Amendment, and cause the appropriate notice of redemption to be mailed to the holders of the CarMax Group Common Stock; and

· authorize the distribution by declaring the dividend of CarMax, Inc. common stock.

At any time before the first mailing of the notice of redemption, Circuit City Stores’ board of directors may abandon the CarMax Separation for any reason.

CarMax will not issue fractional shares of CarMax, Inc. common stock to holders of Circuit City Group Common Stock as part of the distribution. Instead of receiving fractional shares, each holder of Circuit City Group Common Stock who would otherwise be entitled to receive a fractional share of CarMax, Inc. common stock will receive cash for that holder’s fractional interest, which will be taxable to that holder. For an explanation of the tax consequences of the distribution, please see “—U.S. Federal Income Tax Consequences of the Separation.” The transfer agent will, as soon as practicable after the date of the separation, aggregate fractional shares that would have otherwise been issuable to holders of record of Circuit City Group Common Stock into whole shares and sell them in the open market at the prevailing market prices and distribute the aggregate proceeds ratably to holders otherwise entitled to fractional interests. The amount of this payment will depend on the prices at which the aggregated fractional shares are sold by the transfer agent in the open market shortly after the date of the separation. CarMax will be responsible for any payment of brokerage fees. The amount of these brokerage fees is not expected to be material to CarMax.

Recommendation of Circuit City Stores’ Board of Directors

Circuit City Stores’ board of directors has determined that the adoption of the CarMax Separation Proposal (including the amendments to Circuit City Stores’ articles of incorporation that are a part of the proposal) is in the best interests of Circuit City Stores and its shareholders and, accordingly, unanimously recommends that holders of Circuit City Group Common Stock and holders of CarMax Group Common Stock vote FOR the CarMax Separation Proposal.

Background and Reasons for the Separation

The Circuit City Stores board of directors has reviewed Circuit City Stores’ organizational structure to better address the strategic, operational and financial requirements of a large retail company operating in two distinct lines of business. After a thorough review of the various alternatives to restructure Circuit City Stores, the board believes that the separation of CarMax would be in the best interests of holders of Circuit City Group Common Stock and holders of CarMax Group Common Stock.

22

Circuit City and CarMax Operate in Significantly Different Industries

Circuit City and CarMax operate in different industries that are driven by distinct market dynamics and economics. The consumer electronics industry is generally sensitive to specific trends in consumer retail spending, both in general and in specific product categories. These trends have limited if any effect on the used automobile market. The popularity of consumer electronics products is largely driven by technology trends and the broad consumer acceptance of those trends. The pricing and perceived value concept of a given consumer electronics technology can highly influence consumer spending, which for such electronics products is largely discretionary. In contrast, the used-car market is unaffected by technology trends in consumer electronics and a used-vehicle purchase is not as discretionary a decision for most buyers as a purchase of consumer electronics.

Many factors affect the automobile industry, including general economic conditions, consumer confidence, interest rates and credit availability. Economic, competitive and other conditions at regional and local levels also affect the performance of CarMax’s used-car superstores. Adverse changes such as price-cutting by dealers, affecting some or all of CarMax’s markets or the new markets that CarMax enters, could adversely affect the business, although the consumer electronics business as a whole might not be affected. In addition, other factors particular to CarMax’s operating model may affect the specific operations and financial results of CarMax and would likely not affect the operations of the consumer electronics business. Such factors include: new entrants into the used-car market, inability to obtain funding through sale-leaseback transactions, securitization facilities or other sources, reduction in inventory availability or increase in inventory costs not reflected in retail prices, inability to dispose of vehicles acquired through the appraisal process, and decrease in the quality of the finance operation’s contract portfolio.

Continued Affiliation Burdens Management of Both Circuit City Stores and CarMax

Due to the difficulty inherent in overseeing an operation largely unrelated to its core consumer electronics business, Circuit City Stores’ management allocates significant time, expense and resources to monitoring the operations of CarMax. Overseeing CarMax dilutes Circuit City Stores management’s attention by diverting its focus from the consumer electronics business. CarMax’s management also is constrained in implementing its business plan because it operates as a subsidiary of Circuit City Stores.

As its operations have grown more mature, CarMax’s business needs have diverged from those of Circuit City Stores. As a result, the expertise of Circuit City Stores’ management (i.e., superstore inventory management and customer service), which was important when CarMax first began operations, is of less relevance to the future growth of the used-car business, which, instead, demands management focus on expansion and financing strategies. Although initially beneficial to establishing the used-car superstore business model, Circuit City Stores’ influence over all matters affecting CarMax (including financing, strategy and corporate governance) is no longer optimal for implementing CarMax’s business plan. CarMax is structurally hindered from freely exercising financial, operational and management flexibility to the same extent as its automotive retail competitors not affiliated with a diversified retailer.

The separation will permit Circuit City Stores management to focus completely on its consumer electronics business without the resource allocation burden that maintaining ownership in a fundamentally different business creates. The separation will allow CarMax management to pursue its different business needs without the constraints imposed by being part of Circuit City Stores.

CarMax Expansion and Circuit City Store Remodeling Compete for Resources and Management Time

Circuit City Stores expects to undergo a major remodeling of the video departments in approximately 300 stores, while at the same time opening 10 new stores and relocating 10 others. With total costs of a national remodeling program estimated to be in the hundreds of millions of dollars, there may be constraints on the ability to concurrently finance CarMax’s expansion.

23

At the same time Circuit City Stores is pursuing the remodeling program, CarMax is preparing for an aggressive expansion program. In order to maximize its economic return, achieve greater economy of scale and leverage its advertising and operating model, it is imperative that CarMax move quickly to increase market share and expand to new markets. Accordingly, critical strategic decisions are continuously required. Such demands directly compete for the focus and attention of the senior management team and Circuit City Stores’ board of directors and detract from the focus on the remodeling program.

The separation will permit management to focus its efforts on the Circuit City remodeling and relocation efforts without the burden of also focusing on CarMax’s expansion.

Circuit City and CarMax Currently Compete for Capital with Sub-Optimal Capital Structures

The consumer electronics business and the automotive retail business have significant capital needs that must be financed in different ways due to the inherent differences in their respective business models. CarMax is a high growth business, but is limited in its access to the most appropriate sources of capital because of Circuit City Stores’ more conservative capital structure and restrictions under its credit agreements. Conversely, Circuit City is a mature business, but its access to capital is constrained because of capital demands at CarMax.

Consumer electronics businesses typically fund their working capital, mainly inventory, with trade credit (accounts payable) and have bank facilities in place for times of credit need. In contrast, used-car retailers typically fund their working capital needs, mainly used automobiles, with floor plan financing. No trade credit exists to used-car retailers and bank loans typical to retailers are generally not available. Being part of Circuit City Stores, CarMax is not able to fund its day-to-day operations and growth by the most efficient means available to the used-car industry, and is therefore at a disadvantage relative to its competitors.

CarMax’s ability to optimize its floor plan financing and overall leverage has been limited by its affiliation with Circuit City Stores and has competitively disadvantaged, and management believes will continue to competitively disadvantage, CarMax.

Circuit City and CarMax Currently Have Constraints on Retirement Plans

Employees of Circuit City and CarMax currently participate in the same retirement plans. To minimize the disruption to employees from the separation, CarMax will adopt retirement plans that are identical to Circuit City Stores’ existing retirement plans. After the separation, each company will have more flexibility to establish retirement plans that are the most appropriate for its employees without the constraints of the federal tax rules that currently apply to CarMax as a subsidiary of Circuit City Stores. Because of differences in the workforces at Circuit City and CarMax, CarMax anticipates that it may make changes in its retirement plans in the future to provide benefits that are more attractive to its employees.

Other Considerations

The Circuit City Stores board of directors considered other factors relating to the separation, including its expectation that the separation will not be taxable for U.S. federal income tax purposes to Circuit City Stores or CarMax, or to holders of Circuit City Group Common Stock or CarMax Group Common Stock. Circuit City Stores has received a private letter ruling from the Internal Revenue Service confirming this tax-free treatment. Furthermore, the Circuit City Stores board of directors was aware and considered that both Circuit City Stores’ and CarMax’s ability to engage in significant stock transactions could be limited or restricted after the separation to preserve the tax-free nature of the separation to Circuit City Stores. For further discussion, see “U.S. Federal Income Tax Consequences of the Separation” on page 33.

24

The Circuit City Stores board of directors also considered the opinion it received from the company’s financial advisor concerning the separation. See “Opinion of Circuit City’s Financial Advisor” and Annex G—Fairness Opinion. The board believes that its reliance on the fairness opinion and the underlying financial information and other data supplied by management to the board and to the company’s financial advisor are warranted, based on the competence and experience of the financial advisor and management and the absence of any information known to the board that would make such reliance inappropriate.

The Circuit City Stores board of directors also considered other potential risks and consequences to CarMax and to Circuit City Stores associated with the separation, including those described in “Risk Factors—Risk Factors Relating to the Separation,” but believed that the considerations described above outweighed those risks.

Opinion of Circuit City’s Financial Advisor

Pursuant to a letter agreement dated as of November 29, 2001 (the “Engagement Letter”), Morgan Stanley was engaged by Circuit City Stores to provide financial advisory services to Circuit City Stores in connection with the separation. Morgan Stanley was selected by Circuit City Stores to act as Circuit City Stores’ financial advisor based on Morgan Stanley’s qualifications, expertise and reputation and its knowledge of the business and affairs of Circuit City Stores and CarMax. At the meeting of the Circuit City Stores board on May 21, 2002, Morgan Stanley rendered its oral opinion, subsequently confirmed in writing, that as of that date, and subject to and based on the considerations in its opinion, the financial effects, taken as a whole, of the proposed separation as described in the separation agreement and the preliminary proxy statement/prospectus, contained in the Registration Statement on Form S-4, filed by CarMax with the Securities and Exchange Commission on March 29, 2002 and amended on May 14, 2002 (the “preliminary proxy statement/prospectus”), are fair, from a financial point of view, to the holders of Circuit City Group Common Stock and the holders of the CarMax Group Common Stock.

The full text of Morgan Stanley’s opinion, dated as of May 21, 2002, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Morgan Stanley is attached as Annex G to this proxy statement/prospectus. Morgan Stanley has consented to the use and summary of its opinion in this proxy statement/prospectus. Morgan Stanley urges you to read this opinion carefully and in its entirety. Morgan Stanley’s opinion is directed to the board of directors of Circuit City Stores and addresses only the fairness from a financial point of view of the financial effects, taken as a whole, of the proposed separation as described in the separation agreement and the preliminary proxy statement/prospectus to the holders of Circuit City Group Common Stock and the holders of the CarMax Group Common Stock. Morgan Stanley’s opinion does not address any other aspect of the transaction or any related transaction and does not constitute a recommendation to any shareholder with respect to any matters relating to the proposed transaction. This summary of the opinion of Morgan Stanley set forth in this proxy statement/prospectus is qualified in its entirety by reference to the full text of the opinion.

In connection with rendering its opinion, Morgan Stanley, among other things:

· reviewed certain publicly available financial statements and other business and financial information of Circuit City Stores, the Circuit City group and the CarMax group;

· reviewed certain internal financial statements and other financial and operating data concerning Circuit City Stores, the Circuit City group and the CarMax group prepared by management of Circuit City Stores, the Circuit City group and the CarMax group, respectively;

· reviewed certain financial forecasts prepared by the managements of the Circuit City group and the CarMax group, respectively;

· reviewed information relating to certain strategic, financial and operational benefits anticipated from the separation, prepared by the managements of the Circuit City group and the CarMax group, respectively;

25

· discussed with senior executives of the Circuit City group the past and current operations and financial condition and the prospects of the Circuit City group, including information relating to certain strategic, financial and operational benefits anticipated from the separation;

· discussed with senior executives of the CarMax group the past and current operations and financial condition and the prospects of the CarMax group, including information relating to certain strategic, financial and operational benefits anticipated from the separation;

· discussed with senior executives of the Circuit City group and the CarMax group the strategic and structural rationales for the separation;

· reviewed the pro forma impact of the separation on Circuit City Stores’ and CarMax’s earnings per share;

· reviewed the reported prices and trading activity for the Circuit City Group Common Stock and the CarMax Group Common Stock;

· compared the financial performance of the CarMax group with that of certain other comparable companies with publicly traded securities;

· compared the financial performance of Circuit City Stores (excluding the CarMax group) with that of certain other comparable companies with publicly traded securities;

· reviewed certain information relating to Circuit City Stores’ contingent liability on various leases covering 23 of CarMax’s sales locations assigned by Circuit City Stores to a subsidiary of CarMax (the “Leased Properties”), including, but not limited to, analyses prepared by management of the Circuit City group and the CarMax group and analyses and real estate appraisals prepared by certain third parties;

· discussed with management of Circuit City Stores and the CarMax group certain alternatives with respect to the Leased Properties and their discussions relating to the payment of the special dividend (the “Special Dividend”) by CarMax to Circuit City Stores in recognition of Circuit City Stores’ continuing contingent liability on the Leased Properties;

· discussed with certain third parties the possibility of insuring Circuit City Stores from liability arising from Circuit City Stores’ obligations associated with the Leased Properties;

· reviewed the signed Internal Revenue Service private letter ruling, dated April 10, 2002 (PLR-105619-02) (the “Private Letter Ruling”) stating, among other things, that the separation will not be a taxable transaction to Circuit City Stores, CarMax or their respective shareholders under U.S. federal income tax laws (except to the extent of any cash distributed in lieu of fractional shares of CarMax common stock);

· participated in discussions among representatives of Circuit City Stores, CarMax and their legal advisors;

· reviewed the separation agreement, the preliminary proxy statement/prospectus and certain documents related thereto; and

· performed such other analyses and considered such other factors as Morgan Stanley deemed appropriate.

In rendering its opinion, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information supplied or otherwise made available to Morgan Stanley by Circuit City Stores, the Circuit City group and the CarMax group. With respect to financial forecasts, including information relating to certain strategic, financial and operational benefits anticipated from the separation, Morgan Stanley assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Circuit City group and the CarMax group.

26

Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of the Circuit City group or the CarMax group, nor was Morgan Stanley furnished with any such appraisals; however, Morgan Stanley reviewed certain analyses prepared by management of Circuit City Stores and the CarMax group and analyses and real estate appraisals prepared by certain third parties and relied without independent verification upon such analyses and appraisals for the purposes of its opinion. Morgan Stanley also relied upon the assessment of management of Circuit City Stores and the CarMax group of (i) alternatives with respect to the Leased Properties, including Circuit City Stores’ ability to extricate itself from the obligations associated with the Leased Properties and the potential costs associated therewith and Circuit City Stores’ ability to obtain third- party insurance related to such obligations, (ii) the Special Dividend as the best alternative practicable with respect to the Leased Properties, (iii) the amount of the Special Dividend, and (iv) the tax consequences (or lack thereof) associated with the Special Dividend. In rendering its opinion, Morgan Stanley did not analyze the impact to Circuit City Stores or CarMax in the event that Circuit City Stores defaults on the leases and thereby minimizes its loss in the case of a default by CarMax. Morgan Stanley assumed that the separation will be consummated in accordance with the terms set forth in the separation agreement, without waiver, amendment or modification of any material term, condition or agreement set forth in that agreement. Morgan Stanley also assumed that the separation agreement, and the other related documents, when executed, will conform to the drafts reviewed by Morgan Stanley in all respects material to its analyses.

Morgan Stanley further relied upon the Private Letter Ruling and assumed that the separation will not be a taxable transaction to Circuit City Stores, CarMax or their respective shareholders under U.S. federal income tax laws (except to the extent of any cash distributed in lieu of fractional shares of CarMax common stock). Morgan Stanley further assumed the correctness of the conclusions set forth in such ruling. Morgan Stanley further assumed that the separation will comply with all applicable laws, except for any noncompliance with such other applicable laws that would not have a material adverse effect on Circuit City Stores or CarMax.

In rendering its opinion, Morgan Stanley, with the consent of the board of directors of Circuit City Stores, did not consider the effect of any terms or arrangements relating to the separation (other than as set forth in the second paragraph of the opinion letter or as described in the preliminary proxy statement/prospectus), including the terms of any tax, employee benefits or other similar agreement or arrangement, or any amendment or modification to any existing such agreement or arrangement, except that Circuit City Stores informed Morgan Stanley and Morgan Stanley assumed that (i) the existing tax consolidation between Circuit City Stores and CarMax will be terminated as of the date of the separation and (ii) the effects of such termination will be as represented to Morgan Stanley by the respective managements of Circuit City Stores and CarMax. In addition, in rendering its opinion, Morgan Stanley did not take into account the effects of the 10% mark-up for certain costs and services currently allocated at cost to the CarMax group by Circuit City Stores. Morgan Stanley was not requested to opine as to, and its opinion does not in any manner address, the solvency of Circuit City Stores or CarMax after giving effect to the separation. Further, Morgan Stanley was not requested to opine as to, and its opinion does not in any manner address, Circuit City Stores’ underlying business decision to proceed with or effect the proposed separation or the manner of such separation. Morgan Stanley did not participate in the negotiation of any terms of the separation agreement, including, without limitation, the amount of the Special Dividend. Morgan Stanley expresses no opinion as to (i) whether the terms of the separation are the most favorable terms that could have been obtained by either the holders of Circuit City Group Common Stock or the CarMax Group Common Stock or (ii) the relative fairness of the financial effects of the proposed separation to the holders of Circuit City Group Common Stock or the CarMax Group Common Stock. Morgan Stanley was not authorized to solicit, and has not solicited, any indications of interest or proposals for the acquisition of, or any business combination or extraordinary transaction involving, either the stock or assets of Circuit City Stores, the Circuit City group or the CarMax group, nor has Morgan Stanley made any determination as to whether any such indications of interest or proposals could be obtained, if solicited.

Morgan Stanley’s opinion was rendered on the basis of securities markets, economic and general business and financial conditions prevailing as of the date of the opinion and the conditions and prospects, financial and otherwise, of the Circuit City group and the CarMax group as they were represented to Morgan Stanley as of the

27

date of the opinion or as they were reflected in the information and documents received by Morgan Stanley. Morgan Stanley’s opinion assumes that the separation will be completed on the basis set forth in the first and second paragraphs of the opinion letter and that the shares of Circuit City Stores common stock and CarMax, Inc. common stock are fully and widely distributed among investors and are subject only to normal trading activity. Morgan Stanley noted that trading in the Circuit City Group Common Stock and the CarMax Group Common Stock for a period commencing with the public announcement of the separation and, with respect to Circuit City Stores common stock and CarMax, Inc. common stock, continuing for a time following completion of the separation, may involve a redistribution of such securities among Circuit City Stores’ and CarMax’s shareholders and other investors and, accordingly, during such period, such securities may trade at prices below those at which they traded prior to the public announcement of the separation and those at which they would trade on a fully distributed basis after the separation. The estimation of market trading prices of newly distributed securities is subject to uncertainties and contingencies, all of which are difficult to predict and beyond the control of the firm making such estimates. In addition, the market prices of such securities will fluctuate with changes in market conditions, the conditions and prospects, financial and otherwise, of Circuit City Stores and CarMax, and other factors which generally influence the prices of securities. In rendering its opinion, Morgan Stanley did not opine as to the price at which the Circuit City Group Common Stock, the CarMax Group Common Stock, the Circuit City Stores common stock or the CarMax, Inc. common stock will actually trade at any time.

The following is a summary of the material financial analyses performed by Morgan Stanley in connection with its oral opinion and the preparation of its written opinion. These summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses.

Certain Analyses With Respect to Circuit City Stores

Historical and Comparative Stock Price Performance Analysis

Morgan Stanley reviewed the historical price performance and trading volumes of Circuit City Group Common Stock and Circuit City Group Common Stock excluding the value of CarMax, which is referred to as “Core Circuit City”, for the two-year period ending May 10, 2002. In addition, Morgan Stanley compared the historical price performance of the Circuit City Group Common Stock and Core Circuit City for the two-year period ending May 10, 2002 with that of the Standard and Poor’s 500 Index (“S&P 500”), the CarMax Group Common Stock and a group of selected companies comparable to Core Circuit City and to the CarMax group. The group of selected companies comparable to the CarMax group (the “CarMax Peers”) consisted of Wal-Mart Stores, Inc., The Home Depot, Inc., Costco Wholesale Corporation, Staples, Inc., AutoZone Inc., Kohl’s Corporation, Bed Bath & Beyond Inc., and Best Buy Co., Inc. The group of selected companies comparable to Core Circuit City (the “Circuit City Peers”) included Best Buy Co., Inc. and RadioShack Corporation. Morgan Stanley noted that for the two year period ending May 10, 2002, each of the S&P 500, the CarMax group, the CarMax Peers and the Circuit City Peers outperformed both the Circuit City Group Common Stock and Core Circuit City.

Morgan Stanley also reviewed the historical price performance and trading volumes for Core Circuit City for the twelve-month period ending May 10, 2002. In addition, Morgan Stanley compared the historical price performance of Core Circuit City for the period from February 20, 2002, two days prior to the public announcement that Circuit City Stores planned to pursue the separation, to May 10, 2002 (the “Public Announcement Period”) with that of the S&P 500 and the Circuit City Peers. Morgan Stanley noted that for the Public Announcement Period, each of the S&P 500 and the Circuit City Peers outperformed Core Circuit City.

Securities Research Analysts’ Future Price Targets Analysis

Morgan Stanley reviewed for Circuit City Stores the implied share price targets for Core Circuit City contained in certain publicly available securities analysts’ research reports. To derive the range of implied Core

28

Circuit City share price targets, Morgan Stanley extracted the value of the CarMax group from the Circuit City Stores share price targets and then discounted to present value the implied Core Circuit City share price targets using a discount rate of 11.0%. Based on this analysis and the assumptions set forth above, Morgan Stanley calculated per share price targets for Core Circuit City ranging from approximately $11.00 to $17.50. Morgan Stanley noted that the closing price of Circuit City Group Common Stock on May 10, 2002 was $23.05, $12.88 of which was attributable to Core Circuit City.

Comparable Company Analysis

Morgan Stanley compared certain financial information, both publicly available and based on financial projections prepared by management of the Circuit City group, for Core Circuit City, both including and excluding the expected cost of the proposed Circuit City remodeling program, with certain publicly available financial information of certain comparable companies, including, Best Buy Co., Inc., RadioShack Corporation, BJ’s Wholesale Club, Inc., and Office Depot, Inc., which are referred to collectively as the “Core Circuit City Peers”.

For this analysis Morgan Stanley examined a range of estimates for the companies in the Core Circuit City Peers contained in certain publicly available securities analysts’ research reports. Morgan Stanley calculated aggregate value to earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the twelve months ending May 10, 2002 (“LTM EBITDA”) and estimated price to earnings multiples for calendar years 2002 and 2003, based on estimates contained in publicly available securities analysts’ research reports. The following table presents, as of May 10, 2002, the median multiples of the Core Circuit City Peers and the trading multiples of Core Circuit City and Core Circuit City excluding the remodeling costs:

Ratio	Core Circuit City	Core Circuit City (Excluding Remodeling Costs)	Core Circuit City Peers Median
Aggregate Value to LTM EBITDA	4.2x	4.0x	10.5x
2002E Price to Earnings	20.9x	16.4x	18.6x
2003E Price to Earnings	18.1x	15.4x	15.8x

No company utilized in the comparable company analysis is identical to Circuit City Stores or Core Circuit City. In evaluating the peer groups, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Circuit City Stores or Core Circuit City, such as the impact of competition on the business of Circuit City Stores or Core Circuit City or the industry generally, industry growth and the absence of any material adverse change in the financial condition and prospects of Circuit City Stores or Core Circuit City or the industry or in the financial markets in general. Mathematical analysis, such as determining the median, is not in itself a meaningful method of using peer group data.

Discounted Cash Flow Analysis

Morgan Stanley performed a discounted cash flow analysis of Core Circuit City to determine a range of present values for Core Circuit City based on financial projections prepared by the management of Circuit City Stores. Unlevered free cash flow was calculated as the after-tax operating earnings of Core Circuit City (excluding any interest income and interest expense) plus depreciation and amortization, plus deferred taxes, plus (or minus) net changes in non-cash working capital, minus capital expenditures. Morgan Stanley calculated terminal values by applying a range of multiples to EBITDA in fiscal 2007 from 4.5x to 5.5x. The unlevered free cash flows and terminal values were then discounted to present values as of June 1, 2002 using discount rates of 11.0% to 13.0%. Based on this analysis and the assumptions set forth above, Morgan Stanley calculated per share equity value estimates ranging from approximately $14.50 to $16.50. Morgan Stanley noted that the closing price of Circuit City Group Common Stock on May 10, 2002 was $23.05, $12.88 of which was attributable to Core Circuit City.

29

Certain Analyses With Respect to CarMax

Historical and Comparative Stock Price Performance Analysis

Morgan Stanley compared the historical price performance of CarMax Group Common Stock for the two-year period ending May 10, 2002 with that of the S&P 500, the CarMax Peers, Circuit City Group Common Stock, Core Circuit City, and the Circuit City Peers. Morgan Stanley noted that CarMax Group Common Stock for the two-year period ending May 10, 2002, outperformed the S&P 500, the CarMax Peers, the Circuit City Group Common Stock, Core Circuit City, and the Circuit City Peers.

Morgan Stanley reviewed the historical price performance and trading volumes of CarMax Group Common Stock for the twelve-month period ending May 10, 2002. In addition, Morgan Stanley compared the historical price performance for the Public Announcement Period with that of the S&P 500 and the CarMax Peers. Morgan Stanley noted that for the Public Announcement Period CarMax Group Common Stock outperformed the S&P 500 and the CarMax Peers.

Securities Research Analysts’ Future Price Targets Analysis

Morgan Stanley reviewed share price targets for CarMax Group Common Stock contained in certain publicly available securities analysts’ research reports. For this analysis Morgan Stanley discounted to present value the range of CarMax Group Common Stock share price targets using a discount rate of 11.0%. Based on this analysis and the assumptions set forth above, Morgan Stanley calculated per share price targets for CarMax Group Common Stock ranging from approximately $28.25 to $30.00. Morgan Stanley noted that the closing price of CarMax Group Common Stock on May 10, 2002 was $32.22.

Comparable Companies Analysis

Morgan Stanley compared certain publicly available financial information of the CarMax group with certain publicly available financial information of the CarMax Peers as well as an adjusted group of CarMax Peers (“Adjusted CarMax Peers”) consisting of only Wal-Mart Stores, Inc., The Home Depot, Inc., Kohl’s Corporation and Bed Bath & Beyond Inc.

For this analysis Morgan Stanley examined a range of estimates for the companies in the CarMax Peers and the Adjusted CarMax Peers contained in certain publicly available securities analysts’ research reports. Morgan Stanley calculated aggregate value to LTM EBITDA, estimated price to earnings multiples for calendar years 2002 and 2003, and estimated price to earnings multiples for calendar year 2003 to long-term earnings per share (“EPS”) growth rate targets based on estimates contained in publicly available securities analysts’ research reports. The following table presents, as of May 10, 2002, the median multiples of the CarMax Peers and the Adjusted CarMax Peers and the trading multiples of CarMax Group Common Stock:

Ratio/Statistic	CarMax	CarMax Peers Median	Adjusted CarMax Peers Median
Aggregate Value to LTM EBITDA	21.1x	15.7x	21.0x
2002E Price to Earnings	33.6x	28.4x	35.0x
2003E Price to Earnings	27.1x	24.1x	29.3x
2003E P/E to Long-Term EPS Growth Rate Targets	1.4x	1.4x	1.4x

30

No company utilized in the comparable company analysis as a comparison is identical to CarMax. In evaluating the peer groups, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of CarMax, such as the impact of competition on the business of CarMax or the industry generally, industry growth and the absence of any material adverse change in the financial condition and prospects of CarMax or the industry or in the financial markets in general. Mathematical analysis, such as determining the median, is not in itself a meaningful method of using peer group data.

Discounted Cash Flow Analysis

Morgan Stanley performed a discounted cash flow analysis of CarMax to determine a range of present values for CarMax Group Common Stock based on financial projections prepared by the management of CarMax. Unlevered free cash flow was calculated as the after-tax operating earnings of CarMax (excluding any interest income and interest expense) plus depreciation and amortization, plus deferred taxes, plus (or minus) net changes in non-cash working capital, minus capital expenditures. Morgan Stanley calculated terminal values by applying a range of multiples to EBITDA in fiscal 2007 from 13.5x to 15.5x. The unlevered free cash flows and terminal values were then discounted to present values as of June 1, 2002 using discount rates of 11.0% to 13.0%. Based on this analysis and the assumptions set forth above, Morgan Stanley calculated per share equity value estimates ranging from approximately $28.25 to $35.00. Morgan Stanley noted that closing price of the CarMax Group Common Stock on May 10, 2002 was $32.22.

Pro Forma Combined Equity Value Analysis

Morgan Stanley performed a pro forma combined equity value analysis, based on financial projections prepared by the management of Circuit City Stores and CarMax to determine the potential impact of the separation on the share price of the Circuit City Group Common Stock and the CarMax Group Common Stock. Morgan Stanley compared the current stock price for Circuit City Group Common Stock and CarMax Group Common Stock with that of the implied pro forma share price for the Circuit City Stores common stock and the CarMax, Inc. common stock assuming that pro forma for the separation their respective price to earnings multiples for 2002 were to remain the same as on the date of May 10, 2002. Morgan Stanley noted that based on this analysis and the assumptions set forth above, the pro forma combined equity value analysis illustrates that the effects of the separation would be neutral to each of the holders of Circuit City Group Common Stock and the CarMax Group Common Stock.

Certain Analyses With Respect to the Special Dividend

Corporate Credit Default Analysis

Morgan Stanley performed a corporate credit default analysis to estimate the costs to Circuit City Stores of self-insuring against potential future losses arising from its obligations relating to the leases for the Leased Properties. Morgan Stanley estimated such costs by applying average historical default rates (ranging from 1.1-2.6% annually, depending on the year) and recovery rates (36.4-53.3%) for debt issuances/obligations (based on information contained in a third-party credit study) for companies with a similar credit profile to CarMax, to the annual obligations relating to the Leased Properties as provided by the managements of Circuit City Stores and the CarMax group. Morgan Stanley calculated the present value of the estimated annual net losses assuming Circuit City Stores would self-insure against such losses by escrowing the amounts in advance in U.S. government securities (with the income earned on such amounts being taxed at 38%, as provided by management of Circuit City Stores). Morgan Stanley calculated the following range of such costs on both a pre-tax and post-tax basis:

	Pre-Tax Cost ($MM)		Post-Tax Cost ($MM)
Low	$	40.6	$	25.2
High	$	55.2	$	34.2

31

Real Estate Default Analysis

Morgan Stanley performed a real estate default analysis to estimate the costs to Circuit City Stores of self-insuring against potential future losses arising from its obligations related to the leases for the Leased Properties. Morgan Stanley estimated such costs by applying certain average historical default rates, as referenced in the preceding paragraph, to the obligations and deducting estimated recoveries, assuming that Circuit City Stores would be able to re-lease such locations to third parties, based on certain re-leasing assumptions discussed with management and based on certain analyses prepared by a third-party real estate advisory/appraisal firm. Morgan Stanley calculated the present value of the estimated annual net losses assuming Circuit City Stores would self-insure against such losses by escrowing the amounts in advance in U.S. government securities (with the income earned on such amounts being taxed at 38%, as provided by management of Circuit City Stores). Morgan Stanley calculated the following range of such costs on both a pre-tax and post-tax basis:

	Pre-Tax Cost ($MM)		Post-Tax Cost ($MM)
Low	$	45.9	$	28.5
High	$	52.5	$	32.5

Lease Buyout/Reset Price Analysis

Morgan Stanley performed a lease buyout/reset price analysis to estimate the cost associated with replacing Circuit City Stores with CarMax as sole lessee (with no recourse to Circuit City Stores) for the Leased Properties. Morgan Stanley estimated such cost by applying a rent premium of 20% (which was indicated in certain correspondence between Circuit City Stores and a landlord for certain Leased Properties as well as input from Circuit City Stores that other landlords requested a similar premium) to the contract rent for the Leased Properties. Such annual rent premia were then discounted at rates of 10.75-11.25% to calculate a present value. Additionally, Morgan Stanley calculated a separate cost by applying a range of premia (12.9-16.1%), indicated in correspondence between Circuit City Stores and a landlord for certain Leased Properties to the current appraised values (as provided by a third-party real estate advisory/appraisal firm) to arrive at the present value cost in order to replace Circuit City Stores with CarMax as lessee. Morgan Stanley calculated the following range of such costs on both a pre-tax and post-tax basis:

	Pre-Tax Cost ($MM)		Post-Tax Cost ($MM)
Low	$	34.7	$	21.5
High	$	45.4	$	28.1

In addition to the corporate credit default, real estate default and lease buyout/reset price analyses, Morgan Stanley also considered two other methodologies: a mark-to-market analysis and a credit-based real estate valuation analysis. The mark-to-market analysis was performed to estimate the theoretical incremental cost to CarMax if the leases for the Leased Properties were marked-to-market with CarMax as sole lessee. The credit-based real estate valuation analysis was performed to estimate the theoretical incremental value to the landlords of the Leased Properties associated with Circuit City Stores’ remaining contingently liable on the leases for the Leased Properties versus CarMax as sole lessee for the Leased Properties. However, based on the actual terms of the leases for the Leased Properties and discussions with and correspondence provided by management of Circuit City and CarMax, Morgan Stanley excluded these two analyses from its consideration because the related course of action was deemed to be neither executable nor practical.

Finally, Morgan Stanley reviewed the materiality of the Special Dividend in the context of the overall separation. Based on the facts that

· the Special Dividend, on a per share basis (a transfer of $0.27 per share of CarMax Group Common Stock and receipt of $0.05 per share of Circuit City Group Common Stock), represents less that 1% of the trading value of a share of each of Circuit City Group Common Stock or CarMax Group Common Stock as of May 10, 2002, and

32

· as a result of the Circuit City group’s approximate 62% interest in the CarMax group, the net transfer between shareholders is only 38% of the Special Dividend, or $10.7 million,

Morgan Stanley considered the Special Dividend to be immaterial within the context of the overall separation.

In connection with the preparation of the fairness opinion, Morgan Stanley performed a variety of financial and comparative analyses. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered by it. Morgan Stanley believes that the summary provided and the analyses described above must be considered as a whole and that selecting portions of these analyses, without considering all of them, would create an incomplete view of the process underlying its analyses and opinion. In addition, certain elements of the separation are not susceptible to precise quantification and, in preparing its opinion, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors and may have deemed various assumptions more or less probable than other assumptions.

In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Circuit City Stores and CarMax. Any estimates contained in Morgan Stanley’s analysis are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by these estimates. The analyses performed were prepared solely as a part of Morgan Stanley’s analysis of the fairness from a financial point of view of the financial effects, taken as a whole, of the proposed separation as described in the separation agreement and the preliminary proxy statement/prospectus to the holders of Circuit City Group Common Stock and the holders of the CarMax Group Common Stock and were conducted in connection with the delivery by Morgan Stanley of its opinion dated May 21, 2002 to the board of directors of Circuit City Stores. Morgan Stanley’s analyses do not purport to be appraisals and do not necessarily reflect the prices at which the businesses may be sold in the future or at which their shares of common stock might actually trade in the future.

Morgan Stanley is an internationally recognized investment banking and advisory firm. Morgan Stanley, as part of its investment banking and financial advisory business, is continuously engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. In the past, Morgan Stanley and its affiliates have provided financial advisory and financing services to Circuit City Stores, including in respect of the Circuit City group and the CarMax group, and have received customary fees for the rendering of these services. In the ordinary course of business, Morgan Stanley may from time to time trade in the securities of or indebtedness of Circuit City Stores for its own account, the accounts of investment funds and other clients under the management of Morgan Stanley and for the accounts of its customers and, accordingly, may at any time hold a long or short position in these securities or indebtedness.

Circuit City Stores has agreed to pay Morgan Stanley a financial advisory fee of $4 million upon completion of the separation. Circuit City Stores has also agreed to reimburse Morgan Stanley for its expenses incurred in performing its services and to indemnify Morgan Stanley and its affiliates, their respective directors, officer, agents and employees and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses, including certain liabilities under federal securities laws, related to or arising out of Morgan Stanley’s engagement and any related transactions. Pursuant to the separation agreement, CarMax will bear the cost of Morgan Stanley’s financial advisory fee and expenses and has agreed to indemnify Circuit City Stores under certain circumstances. See “Circuit City Stores’ Relationship with CarMax after the Separation—Agreements between Circuit City Stores and CarMax Relating to the Separation—Separation Agreement” beginning on page 85.

33

Surrender of Certificates for Shares of CarMax Group Common Stock

Holders of CarMax Group Common Stock who hold physical certificates will be required to surrender their share certificates to receive certificates for their shares of CarMax, Inc. common stock. In connection with the notice of redemption, CarMax will deliver to the holders of record of CarMax Group Common Stock a letter of transmittal containing written instructions for exchanging their share certificates of CarMax Group Common Stock for shares of CarMax, Inc. common stock. From and after the date of the first mailing of the notice of redemption, letters of transmittal also will be available from the information agent. Certificates for shares of CarMax Group Common Stock should not be surrendered for redemption before the date of the separation and will not be accepted by Circuit City Stores if so surrendered.

Pursuant to Circuit City Stores’ articles of incorporation, from and after the date of the separation, holders of CarMax Group Common Stock will become holders of CarMax, Inc. common stock, and their rights as holders of CarMax Group Common Stock will cease, except for the right to receive share certificates of CarMax, Inc. common stock. For example, a holder of shares of CarMax Group Common Stock that does not surrender its share certificates following the date of the separation will not be entitled to receive dividends or distributions, if any, paid on CarMax, Inc. common stock until its share certificates are surrendered to the transfer agent. From and after the date of the separation, CarMax will be entitled to treat certificates for shares of CarMax Group Common Stock that have not been surrendered as certificates for shares of CarMax, Inc. common stock for all relevant purposes.

Distribution of Shares to Holders of Circuit City Group Common Stock

Holders of Circuit City Group Common Stock will not be required to take any action to receive their distribution of shares of CarMax, Inc. common stock in the separation.

For shareholders who own Circuit City Group Common Stock through a broker or other nominee, their shares of CarMax, Inc. common stock will be credited to these shareholders’ accounts by the broker or other nominee. Fractional shares will not be distributed.

Comparison of Rights of Holders of CarMax Group Common Stock before the Separation with Rights of Holders of CarMax, Inc. Common Stock after the Separation

The following is a comparison of the rights of holders of CarMax Group Common Stock and rights of holders of CarMax, Inc. common stock after the CarMax Separation. This summary should be read together with the more detailed information contained in this proxy statement/prospectus under “Description of CarMax Capital Stock after the Separation” beginning on page 94.

	CarMax Group Common Stock	CarMax, Inc. Common Stock (after the separation)
Dividends:	Circuit City Stores currently does not, and does not expect to, pay dividends on the CarMax Group Common Stock for the foreseeable future.	CarMax, Inc. currently does not intend to pay dividends on the CarMax, Inc. common stock for the foreseeable future.

34

	CarMax Group Common Stock	CarMax, Inc. Common Stock (after the separation)
	Dividends on the CarMax Group Common Stock may be paid at the discretion of Circuit City Stores’ board of directors based primarily upon the financial condition, results of operations and business requirements of the CarMax group and Circuit City Stores as a whole. Dividends are payable out of the lesser of: ·   the assets of Circuit City Stores legally available for the payment of dividends, and ·   the assets that would be available for payment of dividends on the CarMax Group Common Stock under Virginia law if the CarMax group were a separate company.	Dividends on the CarMax, Inc. common stock will be limited to legally available assets under Virginia law and will be payable at the discretion of the CarMax board of directors. Payment will be based primarily upon the financial condition, results of operations and business requirements of CarMax after the separation.
Voting Rights:	Except when voting as a separate group with respect to significant corporate events, holders of CarMax Group Common Stock and Circuit City Group Common Stock generally vote together as a single group. When voting together, each share of CarMax Group Common Stock has a variable vote based on the relative average market value of a share of CarMax Group Common Stock compared to a share of Circuit City Group Common Stock.	One vote per share.
Proceeds Received by Shareholders Upon Disposition of 80% or More of the Properties and Assets Attributed to the CarMax Group:	Holders would either (1) receive a distribution, either by dividend or the redemption of shares, in an amount equal to their proportionate interest in the fair value of the net proceeds of the disposition or (2) their shares would be converted into the number of shares of Circuit City Group Common Stock equaling 110% of the relative market values of the CarMax Group Common Stock and Circuit City Group Common Stock.	None

35

	CarMax Group Common Stock	CarMax, Inc. Common Stock (after the separation)
Conversion at the Option of the Board of Directors:	Convertible into the number of shares of Circuit City Group Common Stock equaling 115% of the relative average market values of CarMax Group Common Stock and Circuit City Group Common Stock.	Not convertible
Redemption in Exchange for the Stock of a Subsidiary at the Option of the Board of Directors:	Redeemable for common stock of one or more Circuit City Stores subsidiaries holding all of the assets and liabilities attributed to the CarMax group.	Not redeemable
Liquidation:	Receive remaining assets on a per share basis in proportion to liquidation units per share. Each share of CarMax Group Common Stock presently has one liquidation unit, subject to adjustment if shares of either group are subdivided, combined or distributed as a dividend.	Receive the net assets of CarMax in equal amounts per share if a distribution of assets is made to holders of CarMax, Inc. common stock.
Management and Allocation Policies:	The Circuit City Stores board of directors follows certain allocation policies with respect to both groups, including: ·   the centralized management of most financial activities, ·   the allocation of indebtedness or preferred stock between the groups,	Not applicable
	·   the accounting for transfers of cash or property from one group to the other, ·   the financial impacts of issuances of additional shares of stock, and ·   the allocation of federal income taxes and tax benefits.
Shareholders of Separate Companies:	Holders of CarMax Group Common Stock are subject to the risks associated with an investment in Circuit City Stores and all of our businesses, assets and liabilities. The financial results and position of the Circuit City group can affect the results of operations and financial position of the CarMax group.	CarMax and Circuit City Stores will be independent, separately traded public companies.

36

	CarMax Group Common Stock	CarMax, Inc. Common Stock (after the separation)
Listing:	Listed on the NYSE under the symbol “KMX.”	The NYSE has approved, subject to official notice of issuance, the listing of the CarMax, Inc. common stock under the symbol “KMX.”

Comparison of Rights of Holders of Circuit City Group Common Stock before the Separation with Rights of Holders of Circuit City Common Stock after the Separation

The following is a comparison of the rights of holders of Circuit City Group Common Stock and rights of holders of Circuit City common stock after the CarMax Separation. This summary should be read together with the more detailed information contained in this proxy statement/prospectus under “Description of Circuit City Stores Capital Stock after the separation” beginning on page 101.

	Circuit City Group Common Stock	Circuit City Common Stock (after the separation)
Dividends:	The Circuit City group’s quarterly dividend rate is currently $0.0175 per share of Circuit City Group Common Stock.	Circuit City Stores intends to pay dividends on the Circuit City common stock after the separation at an initial quarterly rate of $0.0175 per share.
	Dividends on the Circuit City Group Common Stock are paid at the discretion of our board of directors based primarily upon the financial condition, results of operations and business requirements of the Circuit City group, the CarMax group and Circuit City Stores as a whole. Dividends are payable out of the lesser of: ·   the assets of Circuit City Stores legally available for the payment of dividends, and ·   the assets that would be available for payment of dividends on the Circuit City Group Common Stock under Virginia law if the Circuit City group were a separate company.	Dividends on the Circuit City common stock will be limited to legally available assets under Virginia law and will be payable at the discretion of the Circuit City Stores board of directors. Payment will be based primarily upon the financial condition, results of operations and business requirements of Circuit City Stores after the CarMax Separation.
Voting Rights:	Except when voting as a separate group with respect to significant corporate events, holders of Circuit City Group Common Stock and CarMax Group Common Stock generally vote together as a single group. The Circuit City Group Common Stock has one vote per share.	One vote per share.

37

	Circuit City Group Common Stock	Circuit City Common Stock (after the separation)
Proceeds Received by Shareholders Upon Disposition of 80% or More of the Properties and Assets Attributed to the Circuit City Group:	Holders would either receive a distribution, either by a dividend or the redemption of their shares, in an amount equal to their proportionate interest in the fair value of the net proceeds of the disposition or their shares would be converted into the number of shares of CarMax Group Common Stock equaling 110% of the relative market values of the Circuit City Group Common Stock and CarMax Group Common Stock.	None
Conversion at the Option of the Board of Directors:	Convertible into the number of shares of CarMax Group Common Stock equaling 115% of the relative average market values of Circuit City Group Common Stock and CarMax Group Common Stock.	Not convertible
Redemption in Exchange for the Stock of a Subsidiary at the Option of the Board of Directors:	Redeemable for common stock of one or more Circuit City Stores subsidiaries holding all of the assets and liabilities attributed to the Circuit City group.	Not redeemable
Liquidation:	Receive remaining assets on a per share basis in proportion to liquidation units per share. Each share of Circuit City Group Common Stock has one liquidation unit, subject to adjustment if shares of either group are subdivided, combined or distributed as a dividend.	Receive the net assets of Circuit City Stores in equal amounts per share if a distribution of assets is made to holders of Circuit City common stock.

38

	Circuit City Group Common Stock	Circuit City Common Stock (after the separation)
Management and Allocation Policies:	The Circuit City Stores board of directors follows certain allocation policies with respect to both groups, including: ·    the centralized management of most financial activities, ·    the allocation of indebtedness or preferred stock between the groups, ·    the accounting for transfers of cash or property from one group to the other, ·    the financial impacts of issuances of additional shares of stock, and ·    the allocation of federal income taxes and tax benefits.	Not applicable
Shareholders of Separate Companies:	Holders of Circuit City Group Common Stock are subject to the risks associated with an investment in Circuit City Stores and all of our businesses, assets and liabilities. The financial results and position of the CarMax group can affect the results of operations and financial position of the Circuit City group.	Circuit City Stores and CarMax will be independent, separately traded public companies.
Listing:	Listed on the NYSE under the symbol “CC.”	Will continue to be listed on the NYSE under the symbol “CC.”

Treatment of Indebtedness and Post-Separation Financing Arrangement

In May 2002, CarMax Auto Superstores, Inc., a wholly owned subsidiary of CarMax, entered into a $200,000,000 secured credit facility with various lenders. The credit facility consists of a $100,000,000 revolving line of credit and a $100,000,000 term loan. The aggregate principal amount outstanding under the credit facility on any date may not exceed 150% of the value of CarMax’s eligible motor vehicle inventory as of that date. The credit facility bears interest at a variable rate equal to one-month LIBOR plus 1.50% per annum and is currently scheduled to expire in May 2004.

CarMax and certain of CarMax’s subsidiaries have unconditionally guaranteed the obligations of CarMax Auto Superstores, Inc. under the credit facility. In addition, these obligations are secured by CarMax’s motor vehicle inventory and certain related property. The credit facility contains customary representations, warranties, covenants, and events of default, including covenants restricting CarMax’s ability to incur indebtedness or engage in various corporate transactions. In addition, the credit facility contains various financial covenants tied to CarMax’s financial performance. The credit facility has been filed as an exhibit to the registration statement,

39

of which this proxy statement/prospectus is a part. For more information on how you can obtain a copy of the credit facility, see “Where You Can Find More Information.”

As of May 31, 2002, $100,000,000 was outstanding under the credit facility. The proceeds from this facility were used to pay Circuit City Stores for the repayment of debt that was previously allocated to CarMax from Circuit City Stores. Future proceeds from the credit facility will be used to pay:

· a one-time special dividend of $28.4 million to Circuit City Stores on the separation date in recognition of Circuit City Stores’ continuing contingent liability on 23 leases assigned by Circuit City Stores to a subsidiary of CarMax and

· approximately $8 million of transaction expenses incurred in connection with the separation.

See “Contingent Lease Obligations Retained by Circuit City Stores” below for additional information regarding the special dividend.

Contingent Lease Obligations Retained by Circuit City Stores

CarMax currently operates 23 of its sales locations pursuant to various leases under which Circuit City Stores was the original tenant and primary obligor. Circuit City Stores, and not CarMax, had originally entered into these leases so that Circuit City Stores could take advantage of the favorable economic terms available to it as a large retailer. Prior to the separation, however, Circuit City Stores assigned each of these leases to CarMax. Despite the assignment and pursuant to the terms of the leases, Circuit City Stores retained contingent liability under the leases. For example, if CarMax were to fail to make lease payments under one or more of the leases, Circuit City Stores may be forced to make those payments on CarMax’s behalf. In recognition of this ongoing contingent liability, CarMax has agreed to make a one-time special dividend payment to Circuit City Stores on the separation date. CarMax currently expects this special dividend to be $28.4 million.

No Dissenters’ Rights

Under the Virginia Stock Corporation Act, holders of shares of CarMax Group Common Stock and Circuit City Group Common Stock will not have dissenters’ rights in connection with the CarMax Separation Proposal or the separation. From and after the date of the separation, all rights of holders of CarMax Group Common Stock will cease, except for the right to receive shares of CarMax, Inc. common stock in exchange for their shares of CarMax Group Common Stock as part of the redemption.

Solicitation Agent

Morrow & Co., Inc. has been appointed as the solicitation agent for the special meeting. Questions and requests for assistance and requests for additional copies of this document should be directed to the information agent at:

Morrow & Co., Inc.

445 Park Avenue, 5th Floor

New York, New York 10022

1-800-607-0088

Information Agent

Morrow & Co., Inc. also has been appointed as the information agent for the redemption. After the date the notice of redemption is first mailed to holders of CarMax Group Common Stock, questions and requests for assistance and requests for additional copies of the letter of transmittal should be directed to the information agent at the phone number set forth in the notice of redemption. Certificates for shares should not be surrendered to the information agent.

40

Transfer Taxes

Holders who surrender their shares in the redemption will not be obligated to pay any transfer taxes in connection with the separation.

Interests of Certain Persons in the Separation

In considering the recommendation of Circuit City Stores’ board of directors to vote in favor of the separation, shareholders of Circuit City Stores should be aware that directors and executive officers of Circuit City Stores have interests in the separation that may be in addition to or different from the interests of shareholders generally. The Circuit City Stores board of directors was aware of these interests and considered them, among other factors, in approving the separation.

Stock Ownership

All of our directors and executive officers currently own Circuit City Group Common Stock and/or CarMax Group Common Stock and will receive CarMax, Inc. common stock in the separation. All of the Circuit City Stores directors and most of the Circuit City Stores executive officers currently own more shares of Circuit City Group Common Stock than CarMax Group Common Stock. Accordingly, they will have a larger proportionate interest in Circuit City Stores after the separation. See “Beneficial Ownership of Circuit City Group Common Stock and CarMax Group Common Stock” on page 90.

Treatment of Options, Stock Appreciation Rights and Restricted Shares

Our directors and executive officers hold options to purchase Circuit City Group Common Stock and/or CarMax Group Common Stock and own restricted shares of Circuit City Group Common Stock and/or CarMax Group Common Stock. As of March 18, 2002, our directors and executive officers beneficially owned an aggregate of 8,546,600 shares of Circuit City Group Common Stock and 1,526,841 shares of CarMax Group Common Stock, including options to purchase Circuit City Group Common Stock and/or CarMax Group Common Stock. See “Beneficial Ownership of Circuit City Group Common Stock and CarMax Group Common Stock” on page 90. In the separation, each unexercised and unexpired option to purchase CarMax Group Common Stock will be converted into an option to purchase CarMax, Inc. common stock and each unexercised and unexpired option to purchase Circuit City Group Common Stock will remain outstanding and represent an option to purchase Circuit City common stock. Each option to purchase CarMax, Inc. common stock and Circuit City common stock will be subject to the same terms and conditions (including vesting) as the option to purchase CarMax Group Common Stock and Circuit City Group Common Stock, respectively, except that the exercise price and the number of shares for the options to purchase Circuit City common stock will be adjusted to reflect the separation. For further details, see “Proposal One: The CarMax Separation Proposal—Employee Benefits and Compensation Matters” on page 35. Circuit City Stores anticipates that a portion of the options to purchase Circuit City Group Common Stock held by Richard Sharp, Chairman of the board of Circuit City Stores and former Chief Executive Officer will be converted into options to purchase CarMax Group Common Stock or CarMax, Inc. common stock. The conversion would be made in recognition of Mr. Sharp's service on the Circuit City Stores board and his anticipated service on the CarMax board. For further details, see footnote (8) under the “New Plan Benefits” on page 61.

In addition, our directors and executive officers hold stock appreciation rights (“SARs”) that were issued in connection with some of the stock options granted to them. Those SARs will become SARs with the same terms and conditions as were applicable to the SARs immediately prior to the separation. However, the exercise price for SARs with respect to Circuit City Group Common Stock and the number of those SARs will be adjusted to reflect the separation. For further details, see “Proposal One: The CarMax Proposal—Employee Benefits and Compensation Matters” on page 35.

In the separation, each restricted share of CarMax Group Common Stock will be converted into a restricted share of CarMax, Inc. common stock and each restricted share of Circuit City Group Common Stock will remain outstanding and represent a restricted share of Circuit City common stock. The dividend of CarMax, Inc. common stock issued in the distribution with respect to restricted shares of Circuit City Group Common Stock will be subject to the same restrictions as the underlying shares of Circuit City Group Common Stock. After the

41

separation, those restricted shares of CarMax, Inc. common stock and Circuit City common stock (and the shares of CarMax, Inc. common stock issued in the distribution) will be subject to the same terms and conditions (including with respect to vesting) as were applicable to the restricted shares of CarMax Group Common Stock or restricted shares of Circuit City Group Common Stock, respectively, immediately before the separation.

Directorships

Upon completion of the separation, Hugh G. Robinson and John W. Snow, each of whom is currently a director of Circuit City Stores, are expected to resign as directors of Circuit City Stores and become directors of CarMax. Richard L. Sharp also is currently a director of Circuit City Stores but has declined to stand for reelection at the annual meeting of shareholders of Circuit City Stores to be held June 18, 2002. As directors of CarMax, Messrs. Robinson, Sharp and Snow will be entitled to receive directors’ compensation from CarMax in the amount that CarMax provides to its non-employee directors. For a description of the compensation to be paid by CarMax to its non-employee directors, see “Information about CarMax—CarMax Management—Director Compensation” on page 77.

Accounting Treatment

We will account for the separation as a discontinuance of the businesses that currently constitute the CarMax group. The measurement date for discontinued operations for accounting purposes will be on the separation date. The assets and liabilities of CarMax, Inc. will be accounted for at the historical values carried by Circuit City Stores prior to the separation. Total costs relating to the separation, including the special dividend to be paid by CarMax to Circuit City Stores and other expenses, are estimated at $36 million, which will be borne by CarMax. CarMax has incurred approximately $2.2 million of these costs through April 30, 2002.

Regulatory Requirements

Circuit City Stores is not aware of any material governmental approvals or actions that may be required for consummation of the separation.

Federal Securities Law Consequences

The issuance of the CarMax, Inc. common stock in the separation to holders of Circuit City Group Common Stock and CarMax Group Common Stock has been registered under the Securities Act of 1933, as amended. Upon issuance, these shares of CarMax, Inc. common stock may be traded freely and without restriction, except that the CarMax, Inc. common stock received by persons who are deemed to be “affiliates” (as such term is defined under the Securities Act of 1933) of Circuit City Stores prior to the separation, or of CarMax, Inc. after the separation, may be resold by them only in transactions permitted by the resale provisions of Rule 145 promulgated under the Securities Act of 1933 (or Rule 144, in the case of such persons who become affiliates of CarMax, Inc.) or as otherwise permitted under the Securities Act of 1933. Persons who may be deemed to be affiliates of Circuit City Stores or CarMax, Inc. are generally defined as individuals or entities that control, are controlled by, or are under common control with, Circuit City Stores or CarMax, Inc. and may include certain executive officers and directors of Circuit City Stores or CarMax, Inc.

U.S. Federal Income Tax Consequences of the Separation

In General

This summary of the material U.S. federal income tax consequences of the separation is based on a private letter ruling issued by the IRS to Circuit City Stores in April 2002. The continuing validity of the IRS ruling is subject to the accuracy of certain factual representations and assumptions. Circuit City Stores and CarMax are not aware of any facts or circumstances that would cause the representations and assumptions on which the ruling is based to be incorrect.

42

This summary is also based upon the Internal Revenue Code of 1986, as amended, the Treasury regulations promulgated thereunder and interpretations of the Code and Treasury regulations by the courts and the IRS, all as they exist as of the date of this document and all of which are subject to change at any time, possibly with retroactive effect. Any such change could alter the tax consequences of the separation to Circuit City Stores, CarMax and the holders of Circuit City Group Common Stock and CarMax Group Common Stock.

This summary does not discuss all tax considerations that may be relevant to shareholders in light of their particular circumstances, nor does it address the consequences to shareholders subject to special treatment under the U.S. federal income tax laws, such as tax-exempt entities, non-resident alien individuals, foreign entities, foreign trusts and estates and beneficiaries thereof, persons who acquire CarMax, Inc. common stock pursuant to the exercise of employee stock options or otherwise as compensation, insurance companies, and dealers in securities. In addition, this summary does not address the U.S. federal income tax consequences to shareholders who do not hold Circuit City Group Common Stock or CarMax Group Common Stock as a capital asset. This summary does not address any state, local or foreign tax consequences.

All shareholders should consult their own tax advisors concerning the tax consequences of the redemption of CarMax Group Common Stock for CarMax, Inc. common stock and the distribution of CarMax, Inc. common stock to holders of Circuit City Group Common Stock in light of their particular circumstances. This summary is not intended to be, nor should it be construed to be, legal or tax advice to any particular investor.

Holders who have blocks of CarMax Group Common Stock or Circuit City Group Common Stock with different per share tax bases should consult their own tax advisors regarding the possible tax basis consequences to them of the separation.

The Ruling

The material U. S. federal income tax consequences of the separation set forth in the IRS ruling are as follows:

Redemption

With respect to the redemption, the IRS ruling provides in substance that:

· no gain or loss will be recognized by, and no amount will be included in the income of, Circuit City Stores upon the redemption;

· no gain or loss will be recognized by, and no amount will be included in the income of, holders of CarMax Group Common Stock upon their receipt of shares of CarMax, Inc. common stock in the redemption;

· the aggregate tax basis of the shares of CarMax, Inc. common stock received by shareholders in the redemption, immediately after the redemption, will be the same as the aggregate tax basis of the shares of CarMax Group Common Stock exchanged therefor; and

· the holding period of the shares of CarMax, Inc. common stock received by shareholders in the redemption will include the holding period of the shares of CarMax Group Common Stock with respect to which the shares of CarMax, Inc. common stock were received.

Distribution

With respect to the distribution, the IRS ruling provides in substance that:

· no gain or loss will be recognized by, and no amount will be included in the income of, Circuit City Stores upon the distribution;

43

· no gain or loss will be recognized by, and no amount will be included in the income of, holders of Circuit City Group Common Stock upon their receipt of shares of CarMax, Inc. common stock in the distribution;

· a holder of Circuit City Group Common Stock on which CarMax, Inc. common stock is distributed will apportion its tax basis in that Circuit City Group Common Stock between:

· that Circuit City Group Common Stock, which will become Circuit City common stock in the holder’s hands, and

· the CarMax, Inc. common stock received in the distribution (including any fractional shares of CarMax, Inc. common stock deemed received),

in proportion to the relative fair market values of that Circuit City Group Common Stock and the CarMax, Inc. common stock on the date of the distribution; and

· the holding period of the shares of CarMax, Inc. common stock received by a holder of Circuit City Group Common Stock in the distribution will include the period during which that holder held the Circuit City Group Common Stock on which the CarMax, Inc. common stock is distributed.

Effect of Certain Acquisitions of Circuit City Stores or CarMax

The separation may become taxable to Circuit City Stores pursuant to Section 355(e) of the Internal Revenue Code if 50% or more of the shares of either Circuit City common stock or CarMax, Inc. common stock are found to have been acquired, directly or indirectly, as part of a plan or series of related transactions that include the separation. For this purpose, acquisitions of Circuit City common stock or CarMax, Inc. common stock within the two years before or after the separation are presumed to be part of such a plan. However, recently promulgated Treasury regulations provide for a number of safe harbor provisions that could be used to rebut that presumption. If an acquisition occurs pursuant to a plan or series of related transactions that includes the separation, Circuit City Stores would have to pay a corporate tax based on the excess of the fair market value of the shares of CarMax, Inc. common stock issued in the redemption and the distribution over Circuit City Stores’ tax basis for such shares. The party who would bear the burden of the corporate tax would be determined under the tax allocation agreement. See the discussion below in “Circuit City Stores’ Relationship with CarMax after the Separation—Tax Allocation Agreement.” Even if Section 355(e) were to apply to cause the separation to be taxable to Circuit City Stores, it would remain tax-free to the holders of Circuit City Group Common Stock and CarMax Group Common Stock.

Receipt of Cash Instead of Fractional Shares

No fractional shares of CarMax, Inc. common stock will be issued in the distribution. All fractional shares resulting from the distribution will be aggregated and sold by the transfer agent, and the net proceeds will be distributed pro-rata to the shareholders otherwise entitled to those such fractional shares.

A shareholder who receives cash instead of a fractional share interest in the distribution will generally recognize gain or loss in an amount equal to the difference between the amount of cash received and the portion of that shareholder’s tax basis allocable to that fractional share interest. That gain or loss will generally be treated as capital gain or loss. For taxpayers who are individuals, if their fractional share interest has a holding period for U.S. federal income tax purposes of more than one year, any such capital gain will generally be subject to a stated maximum rate of 20%. In general, for purposes of the distribution, a person’s holding period for a fractional share interest will include the period during which that person held the Circuit City Group Common Stock with respect to which the fractional share interest was received.

44

Backup Withholding

Under the Code, if you receive cash in lieu of a fractional share interest, you may be subject, under certain circumstances, to backup withholding at a 30% rate with respect to that cash unless you provide proof of an applicable exemption or a correct taxpayer identification number, and otherwise comply with applicable requirements of the backup withholding rules. Any amounts withheld under the backup withholding rules are not an additional tax and may be refunded or credited against your U.S. federal income tax liability, provided you furnish the required information to the IRS.

Reporting Requirements

Current Treasury regulations require each holder of CarMax Group Common Stock or Circuit City Group Common Stock who receives CarMax, Inc. common stock pursuant to the separation to attach to his or her federal income tax return for the year in which the separation occurs, a detailed statement setting forth such data as may be appropriate in order to show the applicability of Section 355 of the Code to the separation. Circuit City Stores will provide the appropriate information to each shareholder of record.

Employee Benefits and Compensation Matters

CarMax Group Common Stock Options and Restricted Shares

If the CarMax, Inc. 2002 Stock Incentive Plan is approved by the shareholders, CarMax will assume, under the plan, the obligations with respect to options on CarMax Group Common Stock and restricted shares of CarMax Group Common Stock previously issued under Circuit City Stores stock incentive plans. To find more information about the proposed plan, see “Proposal Four: CarMax, Inc. 2002 Stock Incentive Plan” on page 43. The following description assumes the approval of the CarMax, Inc. 2002 Stock Incentive Plan. Options to purchase shares of CarMax Group Common Stock held by CarMax employees outstanding on the date of the separation will be converted into a similar option to purchase shares of CarMax, Inc. common stock. The exercise price, the number of shares covered by the option and the other terms and conditions of the options, including vesting, will be the same immediately before and after the separation.

Restricted shares of CarMax Group Common Stock will be converted into restricted shares of CarMax, Inc. common stock. After the separation, those restricted shares of CarMax, Inc. common stock will be subject to the same terms and conditions (including with respect to vesting) as were applicable to the restricted shares of CarMax Group Common Stock immediately before the separation.

Adjustment to Circuit City Group Common Stock Options, Stock Appreciation Rights and Restricted Shares

Options to purchase Circuit City Group Common Stock held by Circuit City employees will be adjusted to reflect the effect on the Circuit City Group Common Stock of the issuance of the CarMax, Inc. common stock in the distribution. The exercise price and number of shares subject to the option will be adjusted and all other terms will be preserved. The adjustment to each option is intended to preserve both the same intrinsic value and the same exercise price to market value ratio of the options immediately before and after the separation. The intrinsic value is the difference between the exercise price of an option on a share of stock and the market value of the stock subject to the option. The exercise price to market value ratio is a fraction, the numerator of which is the exercise price of an option and denominator of which is the market value of the stock subject to the option.

Circuit City SARs (all of which have been granted in connection with options to purchase Circuit City Group Common Stock) will become SARs with respect to Circuit City common stock on the same terms and conditions as were applicable to the SARs immediately prior to the separation, except that the exercise price for the SARs and the number of SARs will be adjusted to reflect the separation. The adjustment to each SAR will be made under the same methodology as the stock options.

45

Restricted shares of Circuit City Group Common Stock will remain outstanding and represent restricted shares of Circuit City common stock. The dividend of CarMax, Inc. common stock issued in the distribution with respect to restricted shares of Circuit City Group Common Stock will be subject to the same restrictions as the underlying shares of Circuit City Group Common Stock. After the separation, those restricted shares of Circuit City common stock (and the shares of CarMax, Inc. common stock issued in the distribution) will be subject to the same terms and conditions (including with respect to vesting) as were applicable to the restricted shares of Circuit City Group Common Stock immediately before the separation.

New CarMax Benefits Plans

CarMax intends initially to offer its eligible employees benefits that are essentially identical to the benefits currently being provided to the CarMax group employees. The following briefly summarizes the benefits that will be provided:

Pension Plan.    Effective March 1, 2002, Circuit City Stores established the CarMax pension plan for the benefit of eligible CarMax employees. The pension plan is a noncontributory defined benefit pension plan that covers employees who are at least age 21 and have completed one year of service. Benefits are based on a designated percentage of the average of compensation for the five highest of the last 10 consecutive years of employment, weighted according to years of credited service, and integrated with Social Security covered compensation. Years of credited service will include years of employment with Circuit City Stores before the date of the separation and through March 1, 2003. For CarMax pension plan purposes, compensation of participants includes base pay, bonuses, overtime and commissions and excludes amounts realized under any employee stock purchase plan or stock incentive plan. Participants may receive distribution of their benefits at normal or early retirement in the form of a life annuity based on the life of the participant, a joint and survivor annuity based on the lives of the participant and his or her beneficiary or certain other variations of the life annuity and joint and survivor annuity.

Effective as of the close of business on February 28, 2002, the Circuit City Stores pension plan transferred the assets and liabilities attributable to all CarMax employees and retirees under the Circuit City Stores pension plan to the CarMax pension plan. The assets and liabilities attributable to Circuit City Stores employees and retirees will remain in the Circuit City Stores pension plan. As of the date of the separation, CarMax will become the sponsor of the CarMax pension plan.

401(k) Plan.    The CarMax 401(k) plan will be a contributory defined contribution plan that covers employees who are at least age 21 and have completed one year of service. Under the 401(k) plan, eligible employees will be able to contribute up to 15% of their eligible compensation per year. For the first 5% of compensation contributed, employees will receive a company matching contribution equal to 25% of the amount contributed. Employee contributions and matching contributions will be maintained in a separate account in the plan. Participants will direct the investment of the contributions in the account into various investment alternatives selected by the plan administrative committee to be available under the plan. Participants will be able to change their investment selection on a daily basis. Upon a participant’s reaching age 59 ¹/2, retirement or termination of employment, the participant will be able to receive a lump sum distribution of the amount in his/her account.

Employee Stock Purchase Plan.    Under the employee stock purchase plan, eligible CarMax employees who complete one year of service will be able to purchase shares of CarMax, Inc. common stock, subject to certain limitations. Employees who are considered insiders under Section 16 of the Securities Exchange Act of 1934, as amended, and officers of CarMax will not be eligible to participate. Eligible employees will be able to purchase, through payroll deduction, CarMax, Inc. common stock equal to 2% to 10% of eligible compensation, up to a maximum of $7,500 per year. For each $1.00 contributed by eligible employees, CarMax will match $0.15. The CarMax, Inc. common stock purchased with the contributions will be held in an account maintained for each

46

participating employee. Participating employees will have all the rights of shareholders with respect to shares of

CarMax, Inc. common stock acquired under the plan, including the right to vote such shares and receive annual reports. A participating employee will at any time be able to terminate participation in the plan. At that time, the employee will receive, at his election, either the shares in his account, or the cash value of the shares in his account.

Stock Incentive Plans.    CarMax will maintain a stock incentive plan or plans for its management, key-employees and non-employee directors. The CarMax, Inc. 2002 Stock Incentive Plan for management and key employees is being presented for approval by shareholders. To find more information about the proposed plan, see “Proposal Four: CarMax, Inc. 2002 Stock Incentive Plan” on page 43. The CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan for non-employee directors is also being presented for approval by shareholders. To find more information about the proposed plan, see “Proposal Five: CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan” on page 48. The plans will be administered by the compensation committee of the CarMax board of directors. The compensation committee will be able to make incentive awards in the form of stock options, stock appreciation rights or restricted stock. The compensation committee will have the discretion to determine when to grant incentive awards, which eligible employees will receive incentive awards, whether the awards will be options, stock appreciation rights or restricted stock and the number of shares allocated to each incentive award.

Options to purchase shares of CarMax, Inc. common stock may be incentive stock options or nonstatutory stock options. The option price will not be less than 100% of the fair market value of the CarMax, Inc. common stock on the date of the option grant. Options will only be exercisable at the times specified by the compensation committee, provided however, that incentive stock options will only be exercisable within the periods permitted by the Internal Revenue Code.

Restricted stock issued pursuant to the employee plan will be subject to the following general restrictions:

· no shares will be permitted to be sold, transferred, pledged, or otherwise encumbered or disposed of until the restrictions have lapsed or been removed, and

· if a holder of restricted stock ceases to be employed by CarMax or any of its affiliates, any shares of restricted stock on which the restrictions have not lapsed or been otherwise removed will be forfeited.

Welfare Benefit Plans.    CarMax will implement welfare benefit plans that will provide benefits that are substantially similar to the benefits that CarMax employees are currently receiving. These plans will provide eligible employees with various benefits, including health benefits, dental benefits, short- and long-term disability benefits, life and supplemental life insurance benefits, travel accident benefits, dependent care assistance and educational assistance plans. The CarMax welfare plans will give CarMax employees service credited under the Circuit City Stores employee benefit plans for purposes of eligibility, vesting, or other waiting period requirements. In addition, the CarMax plans will waive, with respect to CarMax employees, their spouses and dependents who are eligible to participate in the Circuit City Stores employee benefit plans, all limitations with respect to pre-existing medical conditions and exclusions, and will give such employees credit for any moneys paid toward the annual deductibles under the Circuit City Stores employee benefit plans as of the date the CarMax plans are effective.

Executive Plans.    CarMax will implement a retirement benefit restoration plan to maintain compensation competitiveness and to create a retirement program that restores benefits for CarMax’s more senior executives who are affected by Internal Revenue Code limits on benefits provided under the CarMax pension plan. Subject to an annual benefit limit, the benefit restoration plan and the pension plan together will provide benefits to all employees affected by the Internal Revenue Code limits at approximately the same percentage of compensation as for other employees. CarMax’s Chief Executive Officer and the four other most highly compensated officers of CarMax will also participate in this plan.

47

CarMax will also implement an annual performance-based bonus plan to provide an annual performance-based cash incentive for the executive officers of CarMax who are in a position to contribute materially to the success of CarMax and its subsidiaries. Under the annual performance-based bonus plan, awards payable to any eligible executive may range from 0% to 200% of the executive’s base salary, depending upon whether, or the extent to which, certain pre-established pre-tax earnings and or earnings per share goals have been achieved. An independent committee of the board of directors of CarMax will administer the annual performance-based bonus plan and will select the eligible executives to receive awards and to determine for each executive the terms and conditions and the amount of each award.

Employment Agreements and Change-In-Control Arrangements.    CarMax has employment agreements with each of its executive officers and other management employees that will continue after the separation. Generally, these agreements provide for annual salary review and participation in CarMax’s bonus, stock incentive and other employee benefits programs. These agreements, except for Mr. Ligon’s agreement, also provide for continuation of base salary for one year following termination by CarMax without cause, including a termination by the employee due to a reduction in base salary, significant reduction in responsibilities, or a required job transfer to another market area. Except for Mr. Ligon, CarMax’s salary continuation obligation will decrease by up to 50% if the individual secures alternative employment. Mr. Ligon’s agreement provides for continuation of base salary, target bonus and continued participation in employee benefit plans for two years following termination without cause. In such circumstances, Mr Ligon’s agreement also provides that he will be paid any prorata bonus to which he would otherwise be entitled for that year. The aforementioned benefits extend for another year under the agreement if, following a change in control, Mr. Ligon is terminated, demoted or voluntarily terminates employment in the thirteenth month. Each agreement contains provisions confirming the employee’s obligation to maintain the confidentiality of proprietary information and not to compete with CarMax for a specified period after the termination of his employment (two years for Mr. Ligon, one year for the other named executive officers) or solicit CarMax employees for two years. The employment agreements with the executive officers became effective as follows: Mr. Ligon—2002, Mr. Browning—1996, Mr. Folliard—1996, Mr. Dolan—1996, and Mr. Kunkel—1998.

Listing and Trading of CarMax, Inc. Common Stock

Currently, there is no public market for CarMax, Inc. common stock. CarMax has applied to list CarMax, Inc. common stock on the New York Stock Exchange under the symbol “KMX.” The NYSE has approved the listing subject to official notice of issuance. “KMX” is the same symbol under which CarMax Group Common Stock has traded on the NYSE. However, trading in CarMax Group Common Stock under that symbol will end at the close of trading on the trading day before the date of the separation, and trading in CarMax, Inc. common stock under that symbol will begin at the start of trading on the date of the separation.

Expenses

Excluding the special dividend, the expenses of the separation are estimated to be approximately $8 million. CarMax will bear these expenses.

48

PROPOSAL TWO:    THE CLEAN-UP AMENDMENT PROPOSAL

General

In addition to the CarMax Separation Proposal, you are also being asked to consider and approve the Clean-Up Amendment to Circuit City Stores’ articles of incorporation, as set forth in Annex B, which will become effective after the CarMax Separation. This Clean-Up Amendment would remove the provisions of the Circuit City Stores articles of incorporation that provide for the two currently outstanding series of Circuit City common stock—the CarMax Group Common Stock and the Circuit City Group Common Stock—and would provide for a single series of common stock in substantially the manner set forth in Circuit City Stores’ articles of incorporation before they were amended to authorize the CarMax Group Common Stock.

If the Clean-Up Amendment Proposal is approved and the Circuit City Stores board of directors proceeds with the CarMax Separation, Circuit City Stores will file with the State Corporation Commission of Virginia, once the CarMax Group Common Stock has been redeemed, articles of amendment to the articles of incorporation to effect the Clean-Up Amendment. As a result of the filing of the Clean-Up Amendment, the Circuit City Group Common Stock will become the only series of common stock of Circuit City Stores and will be redesignated as “Common Stock” of Circuit City Stores, Inc.

If the CarMax Separation Proposal is not approved by our shareholders at the special meeting, we will not present the Clean-Up Amendment Proposal to shareholders for their approval at the special meeting. Despite approval of the Clean-Up Amendment by the shareholders, we will not file the Clean-Up Amendment with the State Corporation Commission of Virginia, and the Clean-Up Amendment will not become effective, if the CarMax Separation does not occur. Thus, if the Circuit City Stores board of directors decides not to proceed with the CarMax Separation, then the Clean-Up Amendment will not be filed, and the CarMax Group Common Stock will continue as a series of Circuit City Stores, Inc. common stock.

Recommendation of the Circuit City Stores Board of Directors

Following the redemption of all of the CarMax Group Common Stock in the separation, there will no longer be any CarMax Group Common Stock outstanding. In addition, following the separation, Circuit City Stores will no longer own the CarMax group business. As a result, there will no longer be a need for a series of common stock for the CarMax group. Therefore, Circuit City Stores’ board of directors has determined that the Clean-Up Amendment is in the best interests of Circuit City Stores and its shareholders and, accordingly, unanimously recommends that holders of Circuit City Group Common Stock and CarMax Group Common Stock vote FOR the Clean-Up Amendment Proposal.

49

PROPOSAL THREE:    CARMAX, INC. ANNUAL PERFORMANCE-BASED BONUS PLAN

The Plan

Introduction

The board of directors of Circuit City Stores has adopted the CarMax, Inc. Annual Performance-Based Bonus Plan (the “Bonus Plan”). CarMax is the sponsor of the Bonus Plan. The purpose of the Bonus Plan is to provide an annual performance-based cash incentive for the executive officers of CarMax who are in a position to contribute materially to the success of CarMax and its subsidiaries. The board of directors recommended that the Bonus Plan be submitted for approval by the Circuit City Stores shareholders to meet the requirements of Section 162(m) of the Internal Revenue Code so that following the separation, CarMax’s ability to deduct payments under the Bonus Plan for federal income tax purposes would not be limited by the provisions of Section 162(m). This recommendation is consistent with the board’s policy concerning Section 162(m). The Bonus Plan will apply to each of CarMax’s fiscal years, each referred to as a “plan year,” while the Bonus Plan is in effect, beginning with the fiscal year that began March 1, 2002. The Bonus Plan is intended to operate substantially in the same manner as the Circuit City Annual Performance-Based Bonus Plan as it applies to executive officers. The principal features of the Bonus Plan are summarized below. The summary is qualified by reference to the complete text of the Bonus Plan, which is attached as Annex H.

Administration

Following the separation, the Bonus Plan will be administered by an independent committee consisting solely of two or more outside directors of CarMax. The committee is expected to be the Compensation and Personnel Committee.

Eligibility

All executive officers of CarMax are eligible under the Bonus Plan. The committee will select which executive officers will be participants each plan year and will set the terms and conditions of annual awards to participants. Initially five employees will be eligible to participate in the Bonus Plan.

Operation of the Bonus Plan

For each plan year, the committee will select the performance criteria to be used for that plan year. The permissible performance criteria under the Bonus Plan are CarMax’s pre-tax earnings and CarMax’s earnings per share. For purposes of the performance criteria, “CarMax” includes CarMax’s subsidiaries on a consolidated basis. Either or both of the performance criteria may be used for a plan year. The committee will also determine the appropriate weight to be given to any applicable performance criteria for a plan year. For each of the performance criteria, the committee will establish one or more performance goals. During a plan year, the committee may increase, but not decrease, a performance goal. For attainment of each level of performance goal, the committee will establish a performance adjustment percentage to be applied to the target bonuses of the plan participants for that plan year. The performance adjustment percentage may be between 0% and 200%. The committee may limit the maximum performance adjustment for a plan year to less than 200%. The performance criteria, performance goals and performance adjustments may vary among participants for a plan year. The committee will also establish a target bonus for each participant for each plan year. After the end of a plan year, the committee will certify in writing the level of performance that was attained for the prior plan year. A participant’s bonus under the plan will be obtained by multiplying the performance adjustment for the attained performance goal times the participant’s target bonus. The maximum bonus award for a participant for a plan year will be the lesser of 200% of the participant’s base salary for the plan year or $2 million. Bonuses for participants are payable in cash after the committee certifies the achievement of the performance goal.

50

Termination; Amendments

The plan will terminate on February 29, 2012, unless it is terminated earlier by the CarMax board of directors. The board may amend the plan, provided that any amendment to change the performance criteria or materially increase the maximum potential benefits for participants must be approved by the shareholders of CarMax (except for amendments necessary to meet the requirements of Section 162(m) of the Internal Revenue Code).

Recommendation of the Circuit City Stores Board of Directors

The Circuit City Stores board of directors believes that approval of the Bonus Plan is in the best interest of CarMax and all shareholders and, accordingly, unanimously recommends that holders of Circuit City Group Common Stock and CarMax Group Common Stock vote FOR the proposed CarMax, Inc. Annual Performance-Based Bonus Plan.

51

PROPOSAL FOUR:    CARMAX, INC. 2002 STOCK INCENTIVE PLAN

The Plan

Introduction

The board of directors of Circuit City Stores has adopted the CarMax, Inc. 2002 Stock Incentive Plan (the “2002 Plan”). The 2002 Plan is designed to encourage and motivate selected employees of CarMax and its affiliates to contribute to the successful performance of CarMax. The board of directors believes that stock ownership by employees promotes a unity of purpose between employees and shareholders. The 2002 Plan supports the achievement of CarMax’s primary long-term performance objectives by stimulating the efforts of employees and strengthening their desire to remain with CarMax and its affiliates.

The Circuit City Stores board of directors recommended that the 2002 Plan be submitted for approval by the Circuit City Stores shareholders to meet the requirements of Section 162(m) of the Internal Revenue Code so that following the separation, CarMax’s ability to deduct payments under the 2002 Plan for federal income tax purposes would not be limited by the provisions of Section 162(m). This recommendation is consistent with the Circuit City Stores board’s policy concerning Section 162(m). The 2002 Plan will apply to each of CarMax’s fiscal years while the 2002 Plan is in effect, beginning with the fiscal year that began on March 1, 2002. The 2002 Plan is intended to operate substantially in the same manner as the Circuit City 1994 Stock Incentive Plan. The principal features of the 2002 Plan are summarized below. The summary is qualified by reference to the complete text of the 2002 Plan, which is attached as Annex I.

General

The 2002 Plan authorizes 10,000,000 shares of CarMax, Inc. common stock for issuance pursuant to incentive awards made under the 2002 Plan. Incentive awards under the 2002 Plan may be in the form of stock options, stock appreciation rights or restricted stock. The number of shares available for incentive awards under the 2002 Plan will be increased due to incentive awards that are forfeited or otherwise terminated without issuance of shares, shares withheld by or tendered to CarMax in connection with the exercise of an option or other award or satisfaction of tax withholding obligations. Adjustments will be made in the aggregate number of shares that may be issued under the 2002 Plan in the event of a change affecting shares of CarMax, Inc. common stock, such as stock dividends, recapitalization, reorganization, or mergers. No more than 1,500,000 shares may be allocated for incentive awards to any one employee.

Administration

The 2002 Plan will be administered by an independent committee of the CarMax board of directors. The committee is expected to be the Compensation and Personnel Committee. This committee will be comprised of at least two CarMax directors, and each member must be a “non-employee director,” as defined for purposes of Section 16 of the Securities Exchange Act of 1934, and an “outside director,” as defined for purposes of Section 162(m) of the Internal Revenue Code. The committee will have the power and complete discretion to administer the 2002 Plan, including the power to determine when to grant incentive awards, which eligible employees will receive incentive awards, whether the award will be an option, stock appreciation right or restricted stock, whether stock appreciation rights will be attached to options, and the number of shares to be allocated to each incentive award. The committee may impose conditions on the exercise of options and stock appreciation rights and upon the transfer of restricted stock received under the plan, and may impose such other restrictions and requirements as it may deem appropriate, including reserving the right for CarMax to reacquire shares issued pursuant to an incentive award. The committee will also be expressly authorized to make an award under the plan conditioned upon the surrender for cancellation of an existing incentive award.

52

Stock Options

Options to purchase shares of CarMax, Inc. common stock granted under the 2002 Plan may be “incentive stock options” or nonstatutory stock options. Incentive stock options qualify for favorable income tax treatment under Section 422 of the Internal Revenue Code, while nonstatutory stock options do not. The option price of CarMax, Inc. common stock covered by an incentive stock option may not be less than 100% (or, in the case of an incentive stock option granted to a 10% shareholder, 110%) of the fair market value of the CarMax, Inc. common stock on the date of the option grant. The option price of CarMax, Inc. common stock covered by a nonstatutory option may not be less than 100% of the fair market value of the CarMax, Inc. common stock on the date of grant.

The value of incentive stock options, based on the aggregate exercise price, that can be exercisable for the first time in any calendar year under the 2002 Plan or any other similar plan maintained by CarMax is limited to $100,000.

Options may only be exercised at the times specified by the committee, provided, however, that incentive stock options may not be exercised after the first to occur of (i) ten years (or, in the case of an incentive stock option granted to a 10% shareholder, five years) from the date on which the incentive stock option was granted, (ii) three months from the optionee’s termination of employment with CarMax or its affiliates for reasons other than death or disability, or (iii) one year from the optionee’s termination of employment because of death or disability.

If the option so provides, an optionee exercising an option may pay the purchase price in cash; by delivering mature shares of CarMax, Inc. common stock; by delivering a promissory note; or by delivering an exercise notice together with irrevocable instructions to a broker to promptly deliver to CarMax the amount of sale or loan proceeds from the option shares to pay the exercise price. The 2002 Plan authorizes the committee also to include a reload feature in options granted under the plan. If an option with a reload feature is exercised by delivering mature shares of CarMax, Inc. common stock to pay the exercise price, the optionee is automatically granted a new option to purchase the number of mature shares delivered (a “reload option”). The reload option will have the same restrictions on exercisability as existed in the underlying option and the exercise price will be the fair market value of the CarMax, Inc. common stock on the date of grant of the reload option. The reload option may not have a reload feature.

Change of Control

The committee may, in its discretion, include provisions in stock options granted under the 2002 Plan that will make the options become fully exercisable upon a “change of control” of CarMax, or upon the occurrence of one or more events subsequent to a change of control, notwithstanding other conditions on exercisability in the option. A change of control will be deemed to have taken place if: (i) a third person, including a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934 becomes, or acquires the right to become, the beneficial owner of CarMax’s securities having 20% or more of the combined voting power of the then outstanding securities of CarMax that may be cast for the election of the board of directors of CarMax (other than as a result of an issuance of securities initiated by CarMax in the ordinary course of business); or (ii) as a result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, the persons who were directors of CarMax before those transactions cease to constitute a majority of the board of directors of CarMax or any successor to CarMax.

Stock Appreciation Rights

The committee may award stock appreciation rights under the 2002 Plan either with or without related options, or the committee may subsequently award and attach stock appreciation rights to a previously awarded

53

nonstatutory option, and impose such conditions upon their exercise as it deems appropriate. When the stock appreciation right is exercisable, the holder may surrender to CarMax all or a portion of the unexercised stock appreciation right and receive in exchange an amount equal to the difference between (i) the fair market value on the date of exercise of the CarMax, Inc. common stock covered by the surrendered portion of the stock appreciation right and (ii) the exercise price of the CarMax, Inc. common stock under the related option or, if not related to an option, the fair market value of CarMax, Inc. common stock on the date the stock appreciation right was awarded. The committee may limit the amount that can be received when a stock appreciation right is exercised. When a stock appreciation right related to an option is exercised, the underlying option, to the extent that the stock appreciation right is surrendered, will no longer be exercisable. Similarly, when an option is exercised, any stock appreciation rights attached to the option will no longer be exercisable. CarMax’s obligation arising upon exercise of a stock appreciation right may be paid in CarMax, Inc. common stock or in cash, or in any combination of the two, as the committee may determine.

Stock appreciation rights may only be exercised when the underlying option is exercisable or, if there is no underlying option, at the times specified by the committee.

Restricted Stock

Restricted stock issued pursuant to the plan is subject to the following general restrictions: (i) none of such shares may be sold, transferred, pledged, or otherwise encumbered or disposed of until the restrictions on such shares have lapsed or been removed under the provisions of the plan, and (ii) if a holder of restricted stock ceases to be employed by CarMax or one of its affiliates, he will forfeit any shares of restricted stock on which the restrictions have not lapsed or been otherwise removed. The committee is also authorized to impose further restrictions on restricted stock awards, including additional events of forfeiture.

The committee will establish as to each share of restricted stock issued under the 2002 Plan the terms and conditions upon which the restrictions on those shares will lapse; provided that, except in limited circumstances, the period of restriction must be at least three years from the date of grant. The terms and conditions may include, without limitation, the lapsing of those restrictions at the end of a specified period of time, as a result of the disability, death or retirement of the participant, or as a result of the occurrence of a change of control. In addition, the committee may at any time, in its sole discretion, accelerate the time at which any or all restrictions will lapse or remove any and all restrictions.

During the period of restriction, participants holding shares of restricted stock may exercise full voting rights with respect to those shares and are entitled to receive all dividends and other distributions paid with respect to those shares.

Transferability of Incentive Awards

No options or stock appreciation rights granted under the plan, and during the applicable period of restriction no shares of restricted stock, may be sold, transferred, pledged, or otherwise disposed of, other than by will or by the laws of descent and distribution. All rights granted to a participant under the plan will be exercisable during his lifetime only by such participant or, if permissible under applicable law, by his guardians or legal representatives. Upon the death of a participant, his personal representative or beneficiary may exercise his rights under the plan.

Term; Modification of 2002 Plan

The plan will be effective as of the separation date. The grant of incentive awards will be generally contingent on shareholder approval of the plan and meeting federal or state securities laws requirements. Furthermore, employees cannot exercise any options or stock appreciation rights granted under the plan until these same conditions are met. The plan will terminate ten years after the effective date, unless the CarMax board of directors terminates it prior to that date.

54

The CarMax board of directors may amend, alter or terminate the 2002 Plan in such respects as it deems advisable; provided that the CarMax shareholders must approve any amendment that would (i) materially increase the benefits accruing to participants under the 2002 Plan, (ii) materially increase the number of shares of CarMax, Inc. common stock that may be issued under the 2002 Plan, or (iii) materially modify the requirements of eligibility for participation in the 2002 Plan. Incentive awards granted under the 2002 Plan may be amended with the consent of the participant so long as the amended award is consistent with the terms of the plan.

Coordination with Circuit City Stores, Inc. 2002 Stock Incentive Plan

If approved, the 2002 Plan will assume all outstanding options and restricted stock awards previously made to CarMax employees under the Circuit City Stores, Inc. 2002 Stock Incentive Plan. The terms of the options will not be changed, except to substitute CarMax, Inc. common stock for CarMax Group Common Stock. The restricted stock awards will remain subject to the same restrictions, with the CarMax Group Common Stock being exchanged for CarMax, Inc. common stock. The New Plan Benefits table below shows the stock options and restricted stock awards that have been previously granted under the Circuit City Stores, Inc. Stock Incentive Plan that will be assumed by the 2002 Plan, if approved. If the 2002 Plan is not approved, these stock options and restricted stock will remain outstanding under the Circuit City Stores, Inc. 2002 Stock Incentive Plan with any necessary adjustments.

Federal Income Tax Information

The following is a general summary of the current federal income tax treatment of incentive awards, which would be authorized to be granted under the 2002 Plan, based upon the current provisions of the Internal Revenue Code and regulations promulgated thereunder. The rules governing the tax treatment of such awards are quite technical, so the following discussion of tax consequences is necessarily general in nature and does not purport to be complete. In addition, statutory provisions are subject to change, as are their interpretations, and their application may vary in individual circumstances. Finally, this discussion does not address the tax consequences under applicable state and local law.

Incentive Stock Options.    A participant will not recognize income on the grant or exercise of an incentive stock option. However, the difference between the exercise price and the fair market value of the stock on the date of exercise is an adjustment item for purposes of the alternative minimum tax. If a participant does not exercise an incentive stock option within certain specified periods after termination of employment, the participant will recognize ordinary income on the exercise of an incentive stock option in the same manner as on the exercise of a nonqualified stock option, as described below.

The general rule is that gain or loss from the sale or exchange of shares acquired on the exercise of an incentive stock option will be treated as capital gain or loss. If certain holding period requirements are not satisfied, however, the participant generally will recognize ordinary income at the time of the disposition. Gain recognized on the disposition in excess of the ordinary income resulting therefrom will be capital gain, and any loss recognized will be a capital loss.

Nonqualified Stock Options and Stock Appreciation Rights.    A participant generally is not required to recognize income on the grant of a nonqualified stock option or a stock appreciation right. Instead, ordinary income generally is required to be recognized on the date the nonqualified stock option or stock appreciation right is exercised. In general, the amount of ordinary income required to be recognized, (a) in the case of a nonqualified stock option, is an amount equal to the excess, if any, of the fair market value of the shares on the exercise date over the exercise price, and (b) in the case of a stock appreciation right, the amount of cash and/or the fair market value of any shares received upon exercise plus the amount of taxes withheld from such amounts.

55

Restricted Stock.    Unless a participant who receives an award of restricted stock makes an election under Section 83(b) of the Internal Revenue Code as described below, the participant generally is not required to recognize ordinary income on the award of restricted stock. Instead, on the date the shares vest (that is, become transferable and no longer subject to forfeiture), the participant will be required to recognize ordinary income in an amount equal to the excess, if any, of the fair market value of the shares on that date over the amount, if any, paid for those shares. If a participant makes a Section 83(b) election to recognize ordinary income on the date the shares are awarded, the amount of ordinary income required to be recognized is an amount equal to the excess, if any, of the fair market value of the shares on the date of award over the amount, if any, paid for those shares. In that case, the participant will not be required to recognize additional ordinary income when the shares vest.

Gain or Loss on Sale or Exchange of Shares.    In general, gain or loss from the sale or exchange of shares granted under the 2002 Plan will be treated as capital gain or loss, provided that the shares are held as capital assets at the time of the sale or exchange. However, if certain holding period requirements are not satisfied at the time of a sale or exchange of shares acquired upon exercise of an incentive stock option (a “disqualifying disposition”), a participant generally will be required to recognize ordinary income upon that disposition.

Deductibility by CarMax.    CarMax generally is not allowed a deduction in connection with the grant or exercise of an incentive stock option. However, if a participant is required to recognize income as a result of a disqualifying disposition, CarMax will be entitled to a deduction equal to the amount of ordinary income so recognized. In general, in the case of a nonqualified stock option (including an incentive stock option that is treated as a nonqualified stock option, as described above), a stock appreciation right, or restricted stock, CarMax will be allowed a deduction in an amount equal to the amount of ordinary income recognized by a participant, provided that certain income tax reporting requirements are satisfied.

Performance-Based Compensation.    Subject to certain exceptions, Section 162(m) of the Internal Revenue Code disallows federal income tax deductions for compensation paid by a publicly-held corporation to certain executives to the extent the amount paid to an executive exceeds $1 million for the taxable year. The 2002 Plan has been designed to allow the committee to grant stock options and stock appreciation rights that qualify under an exception to the deduction limit of Section 162(m) for “performance-based compensation.”

Accounting Treatment.    Under present accounting rules, the grant of options at an exercise price equal to or greater than market value on the date of grant does not result in a charge against CarMax’s earnings. However, the excess, if any, from time to time of the fair market value of CarMax, Inc. common stock subject to stock appreciation rights, over the exercise price of the stock appreciation rights, will result in a charge against CarMax’s earnings. The amount of the charge will increase or decrease based on changes in the market value of the CarMax, Inc. common stock and will decrease to the extent stock appreciation rights are cancelled. CarMax has not issued any stock appreciation rights to date.

Recommendation of the Circuit City Stores Board of Directors

The Circuit City Stores board of directors believes that approval of the 2002 Plan is in the best interest of CarMax and all shareholders and, accordingly, unanimously recommends that the holders of Circuit City Group Common Stock and CarMax Group Common Stock vote FOR the proposed CarMax, Inc. 2002 Stock Incentive Plan.

56

PROPOSAL FIVE:    CARMAX, INC. 2002 NON-EMPLOYEE DIRECTORS  STOCK INCENTIVE PLAN

The Plan

Introduction

The board of directors of Circuit City Stores has adopted the CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan (the “2002 Directors Plan”). The 2002 Directors Plan is intended to encourage ownership in CarMax by members of the CarMax board of directors who are not full-time employees of CarMax, in order to promote long-term shareholder value and to provide these individuals with an additional incentive to continue as directors of CarMax.

The 2002 Directors Plan is intended to operate substantially in the same manner as the Circuit City 2000 Non-employee Directors Stock Incentive Plan. The principal features of the 2002 Directors Plan are summarized below. The summary is qualified by reference to the complete text of the 2002 Directors Plan, which is attached as Annex J.

General

The 2002 Directors Plan authorizes incentive awards to directors who are not full-time employees of CarMax in the form of stock options, stock appreciation rights, stock grants or restricted stock.

Amount of Stock Available for Awards

The 2002 Directors Plan authorizes · shares of CarMax, Inc. common stock reserved for issuance pursuant to incentive awards made under the 2002 Directors Plan. The number of shares available for incentive awards under the 2002 Directors Plan will be increased due to incentive awards that are forfeited or otherwise terminated without issuance of shares, shares withheld by or tendered to CarMax in connection with the exercise of an option or other award or satisfaction of tax withholding obligations. Adjustments will be made in the aggregate number of shares that may be issued under the 2002 Directors Plan in the event of a change affecting shares of CarMax, Inc. common stock, such as a stock dividend, recapitalization, reorganization or mergers.

Administration

The CarMax board of directors will administer the 2002 Directors Plan and has the complete discretion to determine when to grant incentive awards, which eligible non-employee directors will receive incentive awards, whether the award will be an option, stock appreciation right, stock grant or restricted stock and the number of shares to be allocated to each incentive award. The CarMax board of directors may impose conditions on the exercise of options and stock appreciation rights and upon the transfer of restricted stock received under the 2002 Directors Plan and may impose such other restrictions and requirements as it may deem appropriate. The 2002 Directors Plan is intended to conform to the provisions of Rule 16b-3 under the Securities exchange Act of 1934, as amended.

Options

All options to purchase shares of CarMax, Inc. common stock granted under the 2002 Directors Plan are nonstatutory stock options. The option price of the CarMax, Inc. common stock may not be less than 100% of the fair market value of the CarMax, Inc. common stock on the date of grant. Fair market value is determined by the CarMax board of directors based on the then prevailing price of the shares of CarMax, Inc. common stock on the exchange on which it generally has the greatest trading volume. Options may be exercised only at such times as are specified by the CarMax board of directors. If the option provides, an optionee exercising an option may pay

57

the purchase price in cash, by delivering shares of CarMax, Inc. common stock, or by delivering an exercise notice together with irrevocable instructions to a broker to promptly deliver to CarMax the amount of sale or loan proceeds from the option shares to pay the exercise price.

Stock Appreciation Rights

The CarMax board of directors may award stock appreciation rights under the 2002 Directors Plan. When the stock appreciation right is exercisable, the holder may surrender to CarMax all or a portion of the unexercised stock appreciation right and receive in exchange an amount equal to the difference between (i) the fair market value on the date of exercise of the CarMax, Inc. common stock covered by the surrendered portion of the stock appreciation right and (ii) the fair market value of such CarMax, Inc. common stock on the date the stock appreciation right was awarded. CarMax’s obligation arising upon exercise of a stock appreciation right may be paid in CarMax, Inc. common stock to which the right relates or in cash, or in any combination of the two, as the CarMax board of directors may determine.

Stock Grants

The CarMax board of directors may make stock grants under the 2002 Directors Plan. Generally such stock grants should be grants of CarMax, Inc. common stock without restrictions. The board has complete discretion to make such stock grants and to do so whenever the board considers it appropriate. The board may permit eligible non-employee directors to elect to receive a stock grant in lieu of retainer, meeting fees and other fees to which these directors would otherwise be entitled. The CarMax, Inc. common stock to be issued in connection with such a stock grant will have a fair market value equal to the fees otherwise payable, determined as of the date which the fees would otherwise become payable to the director.

Restricted Stock

Restricted stock may be issued pursuant to the 2002 Directors Plan. Restricted stock is subject to the following general restrictions: (i) no shares may be sold, transferred, pledged, or otherwise encumbered or disposed of until the restrictions have lapsed or been removed under the provisions of the 2002 Directors Plan, and (ii) if a holder of restricted stock ceases to serve as a CarMax director, any shares of restricted stock on which the restrictions have not lapsed or been otherwise removed will be forfeited. The CarMax board of directors may impose further restrictions on restricted stock awards, including additional events of forfeiture.

Transferability of Awards

Options and stock appreciation rights may be transferable by a participant and exercisable by a person other than a participant, but only to the extent specifically provided in the terms of the award.

Modification of the Plan

The CarMax board of directors may terminate or amend the 2002 Directors Plan in such respects as it deems advisable, provided that no change will be made that increases the total number of shares of Common Stock reserved for issuance under the 2002 Directors Plan unless that change is approved by the CarMax shareholders. If not sooner terminated by the CarMax board, the 2002 Directors Plan will terminate at the close of business on February 28, 2012.

Coordination with Circuit City Stores, Inc. Non-Employee Directors Stock Plans

If approved, the 2002 Directors Plan will assume all outstanding options previously issued under the Circuit City Stores, Inc. Amended and Restated 1989 Non-Employee Directors Stock Option Plan and Circuit City Stores, Inc. 2000 Non-Employee Directors Stock Incentive Plan. The terms of the options will not be changed, except to substitute CarMax, Inc. common stock for CarMax Group Common Stock. The New Plan Benefits table below shows the previous grants that will be assumed by the 2002 Directors Plan, including certain options made under the Circuit City Stores, Inc. Stock Incentive Plan. If the 2002 Directors Plan is not approved, these stock options will remain outstanding under the respective Circuit City Stores plans.

Federal Income Tax Consequences

A non-employee director does not recognize federal income tax when granted a nonstatutory stock option, a stock appreciation right or restricted stock. Upon exercise of a nonstatutory option or a stock appreciation right, a non-employee director generally will recognize ordinary compensation income equal to the difference between

58

the fair market value of the CarMax, Inc. common stock on the date of the exercise and the option price. A non-employee director may deliver shares of CarMax, Inc. common stock instead of cash to acquire shares under a nonstatutory stock option without having to recognize taxable gain on any appreciation in value of the shares delivered. A director who has received shares in connection with a stock grant will include in gross income as compensation income an amount equal to the fair market value of the shares of stock at the time of the grant. This amount will be included in income in the tax year in which the grant occurs. In general, a non-employee director who has received shares of restricted stock will include in gross income as compensation income an amount equal to the fair market value of the shares of restricted stock at the time the restrictions lapse or are removed. That amount will be included in income in the tax year in which the event occurs. A non-employee director will recognize ordinary compensation income when granted a stock grant equal to the fair market value of the shares of CarMax, Inc. common stock on the date of grant. CarMax will be entitled to a deduction equal to the amount of ordinary income recognized by the non-employee director. This summary of federal income tax consequences of incentive awards granted under the 2002 Directors Plan does not purport to be complete. State, local and foreign income taxes also may be applicable to the transactions described above.

Recommendation of the Circuit City Stores Board of Directors

The Circuit City Stores board of directors believes that approval of the 2002 Directors Plan is in the best interest of all shareholders and, accordingly, recommends a vote FOR the proposed CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan.

59

NEW PLAN BENEFITS

The following table shows the amounts that will be allocated to the listed individuals and groups under the three plans submitted for shareholder approval if the plans are approved: CarMax, Inc. Annual Performance-Based Bonus Plan (“Bonus Plan”), CarMax, Inc. 2002 Stock Incentive Plan (“2002 Stock Incentive Plan”), and CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan (“2002 Directors Plan”). As explained above, the amounts shown for the 2002 Stock Incentive Plan and the 2002 Directors Plan are those under existing awards previously made to the listed individuals and groups under the corresponding Circuit City Stores plans.

	BONUS PLAN (1)		2002 STOCK INCENTIVE PLAN				2002 DIRECTORS PLAN
Name and Position	Dollar Value ($)		Dollar Value ($) (2)		Number of Units		Dollar Value ($) (2)		Number of Units
W. Austin Ligon	$	562,500		$11,779,150	445,000	(3)		N/A	N/A
President
Thomas J. Folliard	$	285,000	$	6,485,150	245,000	(4)		N/A	N/A
Executive Vice President Store Operations
Keith D. Browning	$	262,500	$	4,896,950	185,000	(5)		N/A	N/A
Executive Vice President and Chief Financial Officer
Michael K. Dolan	$	173,250	$	9,529,200	360,000	(6)		N/A	N/A
Senior Vice President and Chief Information Officer
Joseph S. Kunkel	$	165,375	$	6,207,215	234,500	(7)		N/A	N/A
Senior Vice President Marketing and Strategy
Executive Group	$	1,448,625	$	38,897,665	1,469,500			N/A	N/A
Non-Executive Director Group		N/A		N/A	N/A		$	100,110	3,782	(8)
Non-Executive Officer Employee Group		N/A	$	78,212,179	2,954,748	(9)		N/A	N/A

(1) The Bonus Plan column represents the cash awards received by the individuals and groups identified below for the 2002 fiscal year under the Circuit City Stores, Inc. Annual Performance-Based Bonus Plan that it is assumed would have been made under the Bonus Plan if it had been adopted and in effect for the 2002 fiscal year and the Circuit City Stores, Inc. Annual Performance-Based Bonus Plan were not in effect.

(2) Value based on the closing price of CarMax Group Common Stock on May 31, 2002 ($26.47).

(3) The total units listed consist of 100,000 non-qualified options at a per share exercise price of $6.0625 and an expiration date of June 15, 2006; 70,000 non-qualified options at a per share exercise price of $1.6250 and an expiration date of March 1, 2007; 175,000 non-qualified options at a per share exercise price of $4.8850 and an expiration date of March 1, 2008; and 100,000 non-qualified options at a per share exercise price of $26.8300 and an expiration date of March 1, 2009.

(4) The total units listed consist of 35,000 non-qualified options at a per share exercise price of $6.0625 and an expiration date of June 15, 2006; 25,000 non-qualified options at a per share exercise price of $1.6250 and an expiration date of March 1, 2007; 50,000 non-qualified options at a per share exercise price of $3.3130 and an expiration date of July 14, 2007; 85,000 non-qualified options at a per share exercise price of $4.8850 and an expiration date of March 1, 2008; and 50,000 non-qualified options at a per share exercise price of $26.8300 and an expiration date of March 1, 2009.

60

(5) The total units listed consist of 25,000 non-qualified options at a per share exercise price of $6.0625 and an expiration date of June 15, 2006; 25,000 non-qualified options at a per share exercise price of $1.6250 and an expiration date of March 1, 2007; 85,000 non-qualified options at a per share exercise price of $4.8850 and an expiration date of March 1, 2008; and 50,000 non-qualified options at a per share exercise price of $26.8300, and an expiration date of March 1, 2009.

(6) The total units listed consist of 40,000 non-qualified options at a per share exercise price of $15.000 and an expiration date of April 11, 2004; 25,000 non-qualified options at a per share exercise price of $9.1870 and an expiration date of February 17, 2005; 100,000 non-qualified options at a per share exercise price of $6.0625 and an expiration date of June 15, 2006; 50,000 non-qualified options at a per share exercise price of $1.6250 and an expiration date of March 1, 2007; 75,000 options at a per share exercise price of $4.8850 and an expiration date of March 1, 2008; 45,000 non-qualified options at a per share exercise price of $26.8300 and an expiration date of March 1, 2009; and 25,000 shares of restricted stock with restrictions lapsing on June 16, 2002.

(7) The total units listed consist of 40,000 non-qualified options at a per share exercise price of $9.1870 and an expiration date of February 17, 2005; 45,000 non-qualified options at a per share exercise price of $6.0625 and an expiration date of June 15, 2006; 34,500 non-qualified options at a per share exercise price of $1.6250 and an expiration date of March 1, 2007; 70,000 non-qualified options at a per share exercise price of $4.8850 and an expiration date of March 1, 2008; and 45,000 options at a per share exercise price of $26.8300 and an expiration date of March 1, 2009.

(8) The total units listed consist of 856 non-qualified options with a tandem stock appreciation right at a per share exercise price of $14.0000 and an expiration date of June 17, 2004; 710 non-qualified options with a tandem stock appreciation right at a per share exercise price of $8.8130 and an expiration date of June 16, 2005; 418 non-qualified options at a per share exercise price of $6.0625 and an expiration date of June 15, 2006; 528 non-qualified options at a per share exercise price of $3.2200 and an expiration date of June 13, 2008; and 1270 non-qualified options with a per share exercise price of $13.0500 and an expiration date of June 15, 2009. In addition, Circuit City Stores expects that a portion of the 775,500 outstanding stock options on Circuit City Group Common Stock held by Richard Sharp will be converted to options for CarMax, Inc. common stock. The conversion would be made in recognition of Mr. Sharp’s service on the board of Circuit City Stores and his anticipated service on the board of CarMax. The conversion would be made under a formula to be determined by the Compensation and Personnel Committee of the board of Circuit City Stores. The conversion would be based on the relative market values of the Circuit City Group Common Stock and the CarMax Group Comon Stock on the date of the conversion. The conversion would be made at the date of Mr. Sharp’s resignation from the board of Circuit City Stores to the extent that sufficient shares are available under the Circuit City Stock Incentive Plan. The remaining shares would be issued under the 2002 Directors Plan.

(9) The total units listed include 2,952,648 non-qualified options and 2,100 shares of restricted stock.

61

EQUITY COMPENSATION PLAN INFORMATION

The following table gives information about Circuit City Group Common Stock and CarMax Group Common Stock that may be issued upon the exercise of options, warrants and rights under all existing equity compensation plans as of February 28, 2002.

Equity Compensation Plan Information

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)			(c)
Equity compensation plans approved by security holders
a.  Plans which issue Circuit City Group Common Stock:
Options (1)	11,990,914		$	23.60		7,736,657	(2)
b.  Plans which issue CarMax Group Common Stock:
Options	3,631,422		$	4.81		1,150,779	(2)
Equity compensation plans not approved by security holders (3)
a.  Plan which issues Circuit City Group Common Stock	59,301	(4)	$	17.88	(5)	1,635,207
b.  Plan which issues CarMax Group Common Stock	10,647	(6)	$	26.55	(7)	397,717
Total	15,692,284					10,920,360

(1) Certain options were granted with tandem stock appreciation rights that may be exercised in limited circumstances.

(2) The stock remaining under these plans may be issued under options, restricted stock or stock appreciation rights.

(3) Under the 1984 Circuit City Stores, Inc. Employee Stock Purchase Plan for Circuit City Group Employees and the 1997 Circuit City Stores, Inc. Employee Stock Purchase Plan for CarMax Group Employees, most employees who have been employed for one year can participate. Executives are excluded. A participating employee may authorize payroll deductions of 2% to 10% of compensation, up to an annual maximum of $7,500. Once each month, the payroll deductions are used to purchase Circuit City Group Common Stock or CarMax Group Common Stock, depending on the plan. The purchase price is either the average cost of all shares purchased for a particular month on the open market or the closing price of the stock on the New York Stock Exchange on the last business day of the month when the shares are purchased from Circuit City Stores. To encourage participation, the employer matches 15% of the employee’s contribution. An eligible employee may change, cease or restart contributions for any payroll period without any penalty. The employers pay all costs of the plans.

(4) Shares purchased for February 2002.

(5) Purchase price per share for shares purchased for February 2002.

(6) Shares purchased for February 2002.

(7) Purchase price per share for shares purchased for February 2002.

62

INFORMATION ABOUT CARMAX

The CarMax Business

Overview

CarMax is a leading retailer of used cars and light trucks in the United States with 41 retail units as of April 30, 2002, operated from 39 locations, including 36 used-car superstores and three stand-alone new-car franchises. As of April 30, 2002, CarMax operated 18 new-car franchises, 15 of which were co-located or integrated with its used-car superstores. Used-car sales, which are the major part of CarMax’s business, represented approximately 82% of its total vehicle sales in dollars in fiscal 2002. CarMax stores are located in the Southeast, Midwest, Mid-Atlantic and West.

CarMax purchases, reconditions and sells used vehicles. In addition, CarMax sells new vehicles under franchise agreements with DaimlerChrysler, Mitsubishi, Nissan, Toyota, Ford and General Motors. CarMax provides its customers the opportunity to purchase vehicles the same way they buy other retail products, with friendly service and non-negotiated, low prices. CarMax has separated the practice of trading in a used vehicle in conjunction with the purchase of another vehicle into two distinct and independent transactions. CarMax provides an appraisal that allows current vehicle owners to sell their cars to CarMax regardless of their intent to purchase a vehicle from CarMax. CarMax also provides its customers with a full range of related services, including the financing of vehicle purchases through its own finance operation and third-party lenders, the sale of extended warranties and vehicle repair service. Since Circuit City Stores’ initial public offering of CarMax Group Common Stock in fiscal 1997, net sales and operating revenue have grown from $510.2 million in fiscal 1997 to $3.2 billion in fiscal 2002, representing a 44% compound annual growth rate. Net earnings have increased from a net loss in fiscal 1997 of $9.3 million to net income of $90.8 million in fiscal 2002.

History and Background

Circuit City Stores, a leading U.S. consumer electronics retailer, established the CarMax used-vehicle business in 1993 to revolutionize the highly fragmented used-vehicle retail market. CarMax was the first used-vehicle retailer to offer a large selection of quality used vehicles at low, “no-haggle” prices using a customer-friendly sales process in an attractive, modern sales facility.

CarMax has designed a strategy to better serve this market by addressing what CarMax believes to be the major sources of dissatisfaction with traditional used-car retailing and to maximize operating efficiencies with sophisticated systems and standardized operating procedures and store formats. Circuit City’s focus on customer satisfaction and operating efficiency has enabled it to become one of the largest consumer electronics retailers in the United States. At its inception, CarMax leveraged Circuit City’s operational expertise, innovative systems and resources to develop the used-vehicle retailing concept, to develop store prototypes and proprietary systems and to implement effective financial and operational controls.

Industry Overview

Automotive retailing, with approximately $755 billion in calendar year 2001 sales, is the largest consumer retail market in the United States, representing approximately 8% of the U.S. gross domestic product. Used-vehicle sales in 2001 were estimated at approximately $375 billion, of which approximately $267 billion were generated by franchised and independent dealers and the balance in privately negotiated transactions. CarMax is focused on the late-model segment of the used-car market, which primarily includes one-year-old to six-year-old used cars. CarMax believes that conditions in the used-vehicle retail market, coupled with CarMax’s operating and growth strategies, provide it with the opportunity for substantial growth.

CarMax believes that although the number of franchised dealers has declined to approximately 22,000 over the last four years, further consolidation of franchised dealers could occur as megadealers continue to put

63

competitive pressures on undercapitalized dealers, individual dealership owners reach retirement age and manufacturers continue to press for greater efficiency in their distribution networks. Notwithstanding this trend, the industry today remains highly fragmented, with few large dealers. According to Automotive News, the top 100 franchised dealer groups in calendar year 2001 accounted for less than 4% of used-vehicle unit sales and less than 15% of new-car unit sales in the United States. CarMax believes that the size and fragmented nature of the used-vehicle industry and the historically high rate of customer dissatisfaction with the traditional used-car sales process offer CarMax significant opportunities for market share growth.

Competitive Strengths

CarMax has pioneered and implemented operating strategies and a unique consumer offer that CarMax believes enhances customer satisfaction and loyalty and maximizes operating efficiency. CarMax believes it has the following competitive strengths.

Low, “No-Haggle” Prices

CarMax has implemented an everyday low-price strategy under which CarMax sets “no-haggle” prices on its used and new vehicles. Its used-car prices are, on average, $1,700 below retail Kelley Blue Book price. CarMax believes most prices are at or below the best negotiated price in the market. Prices on all vehicles are clearly displayed on each vehicle’s information sticker, on CarMax.com and in CarMax’s newspaper advertising. CarMax has extended its “no-haggle” philosophy to every stage of the vehicle transaction, including trade-ins, financing rates, accessories, extended warranty pricing and its low vehicle documentation fees.

Broad Selection of High-Quality Vehicles

Each CarMax used-car location features a broad selection of top-quality domestic and imported used cars and trucks, with a wide range of prices appealing to a large range of potential customers. CarMax stores vary in inventory size from 250 to 750 vehicles depending on local market size and consumer demand. CarMax’s used-car selection covers popular brands by manufacturers such as DaimlerChrysler, Ford, General Motors, Honda, Mitsubishi, Nissan and Toyota and specialty brands like BMW and Lexus. To ensure that CarMax’s quality standards are maintained, vehicles undergo a comprehensive, certified quality inspection by its service technicians as well as a thorough reconditioning process. CarMax backs its commitment to quality with a five-day or 250-mile money-back guarantee and an industry-leading 30-day limited warranty.

Efficient, Customer-Friendly Sales Process

CarMax has developed a streamlined, innovative sales process that redefines the way consumers buy vehicles. CarMax believes that the major causes of consumer dissatisfaction with the traditional car-buying experience include:

· dealers’ attempts to combine the vehicle purchase transaction with the trade-in transaction, financing and the sale of related products;

· confrontational negotiations between the customer and the dealer;

· difficulty the customer experiences in obtaining sufficient information to make informed decisions;

· interaction with multiple personnel at different stages of the buying process; and

· hidden costs and inflated prices embedded in the sales process.

By contrast, the CarMax process enables customers to evaluate separately each step of the sales process described below and to make informed decisions at each step based on complete information about their options and associated prices. To increase efficiency, the same sales consultant, as well as the customer-friendly, proprietary CarMax point-of-sale system, assists the customer throughout the CarMax sales process. CarMax

64

designed the elements of the CarMax offer to create a customer-friendly experience. CarMax’s “no-haggle” pricing allows its sales consultants to focus solely on its customers’ needs. The entire purchase process, including a test-drive and financing, can be completed in less than one hour. CarMax conducts extensive market research to measure its customer service record and to refine its consumer offer.

· Selection and Price.    Customers can use CarMax’s in-store information system or CarMax’s Web site to electronically search CarMax’s inventory for vehicles that meet their model and feature requirements and price range. The CarMax information system displays a color picture of each vehicle and optionally generates a vehicle information sheet with the vehicle price and selected features for the customer’s reference and a map directing the customer to the vehicle’s location on the lot. Prices are clearly displayed, along with selected vehicle features, on each vehicle’s price and information window sticker. The CarMax low, “no-haggle” price policy assures all customers the same low price and avoids confrontational price negotiations.

· Trade-ins.    CarMax has replaced the traditional “trade-in” transaction with a process in which CarMax trained 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. An appraisal is available to everyone free of charge, whether or not the individual is purchasing a vehicle from CarMax. In contrast to traditional dealers who seek to combine the vehicle purchase and trade-in transactions, the CarMax sales process enables the customer to separately evaluate and make an informed decision with respect to each transaction.

· Financing.    CarMax’s sales consultants use the CarMax information system to electronically submit financing applications and receive responses on prime financing from either CarMax’s finance operation or Bank of America, or both, typically in less than five minutes. Non-prime financing is also provided through the CarMax information system by a variety of third-party lenders. Customers are then able to review online with the sales consultant financing options and terms from each financing source that CarMax uses, including the amount financed, interest rate, term and monthly payment. CarMax believes that, by contrast, traditional dealers frequently offer inflated financing terms to customers and do not clearly separate the components of the financing transaction.

· Extended Warranties.    CarMax offers extended warranties that have been designed to its specifications. CarMax believes that superior coverage and low, fixed prices distinguish its extended warranties from those of its competitors. Through the CarMax information system, the customer can review online with the sales consultant all available extended warranty options and costs and make an informed, unpressured decision. In contrast, at many traditional dealers, customers may feel pressured into buying extended warranties they do not want at inflated prices.

· CarMax.com.    The CarMax Web site, CarMax.com, offers complete inventory and pricing search capabilities. Inventory information on the more than 14,000 cars available in the CarMax nationwide inventory is updated daily. CarMax.com includes all the detailed vehicle information available at the store such as pictures of each vehicle, prices, features, specifications and store locations as well as sorting and comparison features that allow consumers to easily compare vehicles. The site also includes features such as detailed vehicle reviews, payment calculators and an option to estimate trade-in values via a link with Kelley Blue Book. CarMax believes these features make it easier for consumers to meet all of their auto research needs on CarMax.com. Both used-car and new-car customers can contact dedicated Internet sales consultants online via CarMax.com, by telephone or by fax. Customers can work with these sales consultants from the comfort of home— including applying for financing—and need only visit the store to sign the paperwork and pick up their vehicle.

CarMax’s sales consultants play a significant role in ensuring a customer-friendly sales process. Sales consultants, including both full- and part-time employees, are compensated on a commission basis. The amount

65

of the commission is a fixed dollar amount per vehicle sold. By contrast, sales and finance personnel at traditional dealerships often receive higher commissions for negotiating higher prices and for steering customers toward vehicles with higher gross margins. Most of CarMax’s sales consultants have had prior retail experience before joining CarMax, and CarMax places great emphasis on integrity and customer-relations skills in its hiring policies and training programs. Few of CarMax’s sales consultants have had prior experience in automobile sales.

Sophisticated Information Systems and Inventory Management Systems and Controls

CarMax’s stores are supported by an advanced information system that improves the customer experience while providing tightly integrated automation of all operating functions. Customers can select a range of vehicles using touch-screen computers that display their choices and provide a map of the lot to assist them in their selection of a vehicle. CarMax’s inventory management system includes bar codes on each vehicle and each on-site parking place. Daily scanning tracks movement of vehicles on the lot and an electronic gate helps track test drives for vehicles and sales consultants. Online financing and computer-assisted document preparation ensure rapid completion of the sales transaction. Behind the scenes, CarMax’s proprietary store technology provides its management with real-time intelligence about every aspect of store operation, such as inventory management, pricing, vehicle transfers, wholesale auctions and sales consultant productivity.

Through CarMax’s inventory management systems and controls, CarMax minimizes inventory carrying costs. The CarMax information system enables each vehicle to be tracked throughout the sales process. Using the information provided by the CarMax information system and applying sophisticated statistical modeling techniques, CarMax is able to optimize its inventory mix and display by store, anticipate future inventory needs at each store, evaluate sales consultant performance and refine its vehicle pricing strategy.

Business Strategy

CarMax has established a strong foundation for future growth based upon its unique knowledge of the used-car market, its established presence in key locations and its ability to execute its business plan in a market subject to continuous change. Since Circuit City Stores’ initial public offering of CarMax Group Common Stock in February 1997, CarMax has refined its operating strategies and has emerged as a leading retailer of used cars and light trucks in the United States. CarMax believes that it is well-positioned to succeed in the highly competitive automotive retail industry. Specifically, CarMax has enhanced its ability to identify profitable markets, determine the appropriate store formats to fit those markets and effectively manage pricing and inventory mix.

Since 1997, CarMax has modified and re-established its new-store growth model to move away from large-format superstores. Despite the success of its large-format superstores in Norcross, Georgia, and Laurel, Maryland, in its Miami, Tampa, Houston, Dallas and Chicago markets, this format proved less effective. CarMax found that customers in these metropolitan markets were unwilling to travel great distances to its large-format superstores, resulting in stores that were too large and that underserved CarMax’s target customer base. Rather, customers preferred to patronize stores that were closer to their homes. Consequently, CarMax plans to expand its number of stores by adding standard superstores (formerly referred to as “A” superstores) in new, mid-sized markets that can be served effectively with one CarMax superstore, together with satellite fill-in superstores in existing multi-store markets. In fully-developed, mid-sized markets, CarMax intends to test whether increased penetration may be achieved by adding a satellite superstore. CarMax believes that by focusing on mid-sized markets and satellite fill-in superstores over the near term, it can achieve a higher return on its investment with lower risk. This approach also allows CarMax to postpone entering large multi-store markets until its hub-and-satellite model in existing large multi-store markets has matured further and provides CarMax the opportunity to better anticipate the number, location and types of stores that will be required in such markets.

CarMax plans to open 22 to 30 stores over the next four years. CarMax opened two superstores late in fiscal 2002, a standard-sized superstore in the new market of Greensboro, North Carolina, and a satellite superstore in

66

the greater Chicago market. In April 2002, CarMax opened a standard-sized superstore in Roseville, California, in the Sacramento market. CarMax intends to open an additional three to five superstores in fiscal 2003. These stores, approximately one half of which are expected to be satellite stores, will be a combination of superstores in new mid-sized markets and additional satellite superstores in existing markets. CarMax expects to open six to eight new stores, including superstores and satellite superstores, in each of fiscal 2004, 2005 and 2006. CarMax expects that the following business strategies will help it improve its sales growth and enhance its profit margins.

Enter New Mid-Sized Markets

CarMax has defined “mid-sized market” as a market with a population of approximately 1.0 to 2.5 million people. CarMax is currently in nine mid-sized markets including Richmond, Raleigh, Charlotte, Orlando, San Antonio, Greenville (South Carolina), Nashville, Greensboro and Sacramento. CarMax believes that more than 30 additional mid-sized markets may be suitable for its standard store prototype. The standard store prototype is approximately 40,000 to 60,000 square feet on 10 to 14 acres with approximately 24 service and reconditioning bays. CarMax believes that focusing on mid-sized markets enhances its sales growth and profitability due to the following factors:

· site selection and real estate acquisition typically are simpler in mid-sized markets;

· establishing consumer awareness is easier in a mid-sized market because all forms of media can be used economically to achieve broad consumer reach; and

· as a group, CarMax’s mid-sized markets have the highest average return on investment of all store types.

Expand Presence in Existing Markets Using CarMax’s Hub-and-Satellite Fill-in Store Strategy

Under CarMax’s hub-and-satellite strategy, a satellite superstore uses the reconditioning, purchasing and business office operations of a nearby full-sized hub superstore. The consumer offer is identical in both hub superstores and satellite superstores. These hub stores have service facilities that provide regular maintenance and warranty service typical of most new-car dealerships and also recondition all used vehicles prior to sale at both the hub superstore and any related satellite superstore. A prototypical satellite superstore operates on a five-to six-acre site with an approximately 14,000 square-foot facility. The satellite facility houses offices, a showroom and four to seven service bays for regular maintenance and warranty service.

In addition to entering new mid-sized markets, CarMax plans to focus on adding satellite fill-in superstores in underserved trade areas in its existing multi-store markets, which include Washington/Baltimore, Chicago, Atlanta, Dallas, Houston, Miami and Tampa. CarMax has identified approximately 10 underserved trade areas to target in these markets. CarMax is focusing on the addition of satellite fill-in superstores in existing markets because:

· satellite superstores leverage existing facilities and management in those markets;

· satellite superstores present the same consumer offer, including size of inventory, on one-half to one-third the acreage of a standard superstore; and

· satellite superstores require little or no incremental advertising.

CarMax also plans to test adding satellite superstores in existing mid-size markets to determine whether CarMax can profitably add market share in those markets.

The three prototypical satellite fill-in superstores CarMax has opened so far in multi-store markets, located in Rockville, Maryland; Plano, Texas; and Houston, Texas, were profitable in their first year.

67

Continue to Develop and Take Advantage of CarMax’s Sophisticated Information Systems and Controls

Advanced information systems, which are a key to CarMax’s successful inventory management, provide CarMax stores with the ability to anticipate future inventory needs and manage its pricing strategy. Through this centralized system, CarMax is able to immediately integrate new stores into its network of CarMax stores, allowing the new stores to rapidly achieve operating efficiency. CarMax continues to enhance and refine its information systems, which CarMax believes to be a core competitive strength.

Enhance Margins

Late in fiscal 1999, CarMax curtailed its geographic expansion program and initiated a profit improvement program that targeted the following elements:

· gross margin improvement;

· reduction of non-store overhead;

· reduction of costs through improved operational effectiveness and sales and store productivity; and

· incremental sales opportunities through retail service and accessory sales.

The profit improvement program helped CarMax achieve profitability in fiscal 2000 and contributed towards increased profits in fiscal 2001. Increases in comparable store sales were the primary contributor to increased profits in fiscal 2002.

CarMax Used-Vehicle Operations

Vehicles

CarMax offers its customers a broad selection of makes and models of used vehicles, including both domestic and imported cars and light trucks, at competitive prices. CarMax’s used-car selection covers popular brands from manufacturers such as DaimlerChrysler, Ford, General Motors, Honda, Mitsubishi, Nissan and Toyota and specialty brands like BMW and Lexus. To appeal to the vast array of consumer preferences and budgets, CarMax offers used vehicles under two programs—the CarMax program and the ValuMax program. CarMax program used cars are less than six years old, have fewer than 60,000 miles and generally range in price from $8,500 to $30,000. ValuMax program used cars are more than six years old or have 60,000 miles or more and generally range in price from $5,500 to $19,000.

CarMax performs a comprehensive, certified quality inspection of each used vehicle. CarMax’s commitment to quality is demonstrated to the customer through a five-day or 250 mile money-back guarantee and an industry-leading 30-day limited warranty. Each CarMax program vehicle must pass a comprehensive quality inspection that covers all major and minor mechanical systems and all safety functions as well as cosmetic criteria. Each ValuMax program vehicle must pass a quality inspection covering most major mechanical systems and all safety functions. For ValuMax, concentration is placed on providing good, basic, mechanically-sound transportation. Cosmetic corrections or repairs of convenience or luxury items, such as electric mirrors or electric antennas, are generally not performed.

Sourcing

CarMax acquires its used-vehicle inventory directly from consumers through its unique appraisal process and through other sources, including local and regional auctions, wholesalers, franchised and independent dealers and fleet owners, such as leasing companies and rental companies. In stores open for more than one year, CarMax acquires a larger portion of its used-vehicle inventory from consumers than from any other source. This buying strategy provides an inventory of makes and models that reflects the tastes of the market.

68

CarMax has replaced the traditional trade-in transaction with a process in which trained CarMax buyers appraise any vehicle 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 the individual is purchasing a vehicle from CarMax. CarMax believes that this process enables it to access the private market as a significant additional source for used vehicles. In addition, many vehicles purchased directly from consumers are among the highest quality used vehicles available in the market because they have been maintained by their owners. Because CarMax’s operating strategy is to build customer confidence and satisfaction by offering only high-quality vehicles, fewer than half of the vehicles acquired through the appraisal process meet the CarMax retail standard. CarMax sells those vehicles that do not meet its retail standards at its own on-site wholesale auctions, generally at its cost.

All used vehicles are evaluated on the basis of their wholesale and reconditioning costs, and, for off-site purchases, cost of delivery to the store where they will be reconditioned. Buyers based at the stores purchase most of CarMax’s inventory. CarMax’s buyers, in collaboration with its headquarters staff, rely on the extensive inventory and sales trend data available through the CarMax information system.

CarMax utilizes an in-house training and mentoring program to develop employees skilled in the distinctive CarMax approach to evaluating and purchasing used vehicles. CarMax has found that individuals without prior experience in automobile wholesaling are the most receptive to the skills and values imparted by this training. CarMax believes that development of this unique training program for buyers has provided it with an advantage over its competitors. All significant purchasing decisions are made by trained personnel. CarMax uses data from the CarMax information system to monitor and evaluate the performance of its buyers on an ongoing basis.

Based on consumer acceptance of the appraisal process at existing CarMax stores and CarMax’s experience and success to date in acquiring vehicles from auctions and other sources, CarMax believes that its sources of used vehicles will continue to be sufficient to meet current needs and to support planned expansion.

Vehicle Inventory Management

CarMax has developed and implemented the CarMax information system, a sophisticated, computerized inventory management and point-of-sale system, that is unique to the automobile retailing business. This proprietary system allows headquarters and store personnel to effectively manage vehicle inventory mix to reflect local demand at each store and minimize inventory carrying costs

From the time CarMax appraises a used vehicle until the vehicle is sold, all relevant information relating to that vehicle is captured by the CarMax information system. This information includes the make, model and features of the vehicle, the wholesale cost, the nature and cost of the reconditioning services performed, the retail price, how long the vehicle has been on display and its location on the lot. The system utilizes vehicle sensors and electronic gates erected around each parking lot, as well as bar codes placed on each vehicle and parking place, to effectively track both vehicle location and movement on and off the lot as well as test drives, which are identified both by vehicle and sales consultant. Using this information, and applying sophisticated statistical modeling techniques, CarMax is able to optimize its inventory mix and display, anticipate future inventory needs at each store, evaluate sales consultant performance and refine its vehicle pricing strategy. To make inventory decisions, CarMax supplements information provided by the CarMax information system with data from customer and market surveys and from private and governmental reports analyzing local, regional and national vehicle-purchasing trends.

Inventory is reevaluated weekly by CarMax’s headquarters analytical team with respect to mix, price, store location and other factors. If warranted, appropriate adjustments to those factors are recommended to the store’s purchasing manager. Based on an average of fiscal year-end inventory values, during fiscal 2002 CarMax turned its used-vehicle inventory approximately eight times. CarMax disposes of any vehicle that has not been sold at retail in accordance with its strict inventory aging policy. During fiscal 2002, less than one percent of the number of units available for retail sale were ultimately sold at wholesale.

69

Reconditioning

An integral part of CarMax’s used-car consumer offer is the reconditioning process. This process includes a comprehensive, certified quality inspection of the engine, cooling and fuel system, drive axle, transmission, electronic systems, suspension, brake system, steering, air conditioning, interior and optional equipment. Based on this quality inspection, CarMax determines the reconditioning necessary to bring the vehicle up to CarMax’s high quality standards. Cars in the ValuMax program must meet the same mechanical, electrical and safety standards, but fewer cosmetic and optional equipment standards. Vehicle inspections are completed by CarMax’s mechanics, approximately half of whom are Automotive Service Excellence (A.S.E.) certified. 

CarMax performs most routine mechanical and minor body repairs in-house; however, for some reconditioning services, CarMax engages third parties specializing in those services. Over the past several years, CarMax has been performing an increasing percentage of reconditioning services in-house and, based on the cost savings realized, CarMax expects that trend to continue.

Service

All CarMax used-car locations provide vehicle repair service, including used-car warranty service. Factory-authorized service is also provided at all new-car franchises. In fiscal 2000 and fiscal 2001, CarMax expanded its retail service operations as its customer base increased. In fiscal 2002, CarMax continued its retail service expansion through additional marketing and growth in its customer base. CarMax has developed systems and procedures that are intended to ensure that its retail repair service operations are conducted in the same customer-friendly and efficient manner as its other operations. CarMax offers retail repair service to the public at all existing locations.

CarMax believes that the efficiency of its service and reconditioning operations are enhanced by its use of technician support groups, as well as by its compensation programs. These support groups and compensation programs are designed to increase the productivity of its service technicians and result in reduced costs and higher-quality repairs and reconditioning. Each group contains a small number of service professionals with different skills and levels of experience. The experienced technicians in the group perform the more complicated repairs with assistance from the apprentices, who also perform simpler functions on their own. Rather than paying technicians on an hourly basis, each technician receives a flat rate for each repair or service performed. CarMax is able to track the productivity of each technician through the CarMax information system.

CarMax places special emphasis on attracting, developing and retaining qualified technicians and believes that its favorable working conditions and compensation programs allow it to attract and retain highly qualified technicians in each market CarMax enters. CarMax also has implemented an apprentice training program in an effort to provide a stable future supply of qualified technicians. All technicians attend in-house training programs designed to develop their skills in performing routine repair services on the diverse makes and models of vehicles CarMax sells. Technicians at CarMax’s new-car franchises also attend manufacturer-sponsored training programs to stay abreast of current diagnostic, repair and maintenance techniques for those manufacturers’ vehicles. In addition, utilization of technician support groups allows for greater on-the-job training opportunities for new technicians.

CarMax New-Vehicle Operations

CarMax operates new-car dealerships under separate franchise or dealer agreements with DaimlerChrysler, Mitsubishi, Nissan, Toyota, Ford and General Motors. CarMax employs the same efficient customer-friendly sales process in its new-car operations as it does in its used-car operations. New cars are offered with a full range of related services, at low, “no-haggle” prices. CarMax uses the CarMax information system to provide complete information to the customer regarding vehicle inventory, as well as financing and extended warranty options.

70

Vehicle Financing

CarMax offers its qualified customers an opportunity to obtain prime credit for vehicle purchases through its own finance operation or Bank of America. In addition, Chrysler Financial, Ford Motor Credit, General Motors Acceptance, Mitsubishi Motors Credit, Nissan Motors Acceptance and Toyota Motors Financial Services offer prime financing to customers purchasing new vehicles at applicable CarMax locations. Non-prime financing is offered by TransSouth Financial, Wells Fargo Financial Acceptance and AmeriCredit Financial Services, with no financial recourse to CarMax. Sales consultants use CarMax’s proprietary CarMax point-of-sale system to electronically submit financing applications and receive responses from multiple lenders, generally in less than five minutes from prime lenders. Financings are typically installment sale contracts secured by the vehicles financed. Customers are permitted to refinance their loans within three days of a purchase without incurring any finance or related charges.

The CarMax finance operation generates income solely from the financing CarMax provides to its customers through the sale and servicing of the contract receivables originated by CarMax. In addition, the finance operation enables CarMax to make credit decisions based on overall business considerations and thus helps to ensure the reasonable availability of credit to support CarMax’s vehicle sales, while retaining its credit standards, in the event third-party lenders should curtail credit availability due to market considerations. CarMax believes that the high quality of its used vehicles as well as the broad scope of the extended warranties CarMax sells reduces default rates on its customers’ loans by helping to keep the purchased vehicles operational. The lower default rates enable CarMax to provide and arrange financing at competitive rates. In addition to the income generated from CarMax’s finance operation, CarMax generates income from arrangements with third-party lenders. These arrangements provide for payment of a fee to CarMax at the time of financing, provided the loan is not refinanced within three days. CarMax has no recourse liability on loans arranged with third-party lenders. For further discussion regarding securitization transactions involving receivables generated by the CarMax finance operation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of CarMax, Inc.—Liquidity and Capital Resources—Financing Activities” on page 72.

As an alternative to loan financing, CarMax also arranges lease financing for its new-vehicle customers through manufacturers.

Extended Warranty Sales

At the time CarMax sells a vehicle, it offers to sell to the customer an extended warranty. CarMax offers these extended warranties at low, fixed prices. All extended warranties CarMax sells (other than manufacturers’ warranties) have been designed to its specifications and are administered by Consumer Program Administrators, Inc. and by Automotive Warranty Services of Florida, Inc., subsidiaries of AON Corporation, through a private-label arrangement under which CarMax receives a fee from the administrator at the time the extended warranty is sold. CarMax offers comprehensive extended warranties on CarMax program vehicles and comprehensive power train extended warranties on ValuMax program vehicles.

All CarMax used-car locations provide vehicle repair service, including warranty service. CarMax’s extended warranty customers also have access to an additional 14,000 independent service providers nationwide. CarMax believes that the quality of the services provided by this provider network, as well as the broad scope of its extended warranties, helps promote customer satisfaction and loyalty and thus increases the likelihood of repeat and referral business.

Currently, in all the states in which CarMax operates, it sells warranties on behalf of unrelated third parties who are the primary obligors. Under these third-party warranty programs, CarMax has no contractual liability to the customer. Contracts usually have terms of coverage between 12 and 72 months.

Training

CarMax is committed to providing exceptional training to its associates. New store associates are offered structured, self-paced training programs that introduce them to company policies and their specific job

71

responsibilities. Associate participation and performance in each training program are measured by a unique, intranet-based testing and tracking system. Most new associates are assigned mentors who provide on-the-job guidance and support. Many of CarMax’s compensation programs reward associates for continuously improving their skills.

CarMax also offers comprehensive, facilitated classroom training courses to sales consultants, buyers, automotive technicians and managers. All sales consultants receive extensive customer service training and ongoing training as new products become available. Each buyer undergoes a 12- to 24-month apprenticeship under the tutelage of an experienced buyer and appraises thousands of cars before making his or her first independent purchase. Approximately half of CarMax’s service technicians are A.S.E.-certified—the industry standard for technician training. At April 30, 2002, CarMax’s 39 general managers averaged five years of CarMax experience and more than nine years of prior management experience.

Marketing and Advertising

CarMax’s marketing strategies are focused on developing awareness of the advantages of shopping at CarMax, attracting customers who are already in the market to purchase a vehicle and targeting specific segments of the market through special promotions. CarMax’s marketing strategies are implemented primarily through newspaper, television, radio advertising and CarMax.com. Television and radio broadcast advertisements are designed to enhance consumer awareness of the CarMax name, CarMax.com and key components of the CarMax offer. Newspaper advertisements promote CarMax’s broad selection of vehicles and price leadership, targeting consumers with immediate purchase intentions. Following the separation, in cases where CarMax and Circuit City Stores have jointly contracted for newspaper advertising and where the contracts permit, CarMax will continue to participate with Circuit City Stores in placing newspaper advertising until the joint contracts expire, at which time CarMax will independently purchase all newspaper advertising. Both broadcast and newspaper advertisements are designed to drive customers to the CarMax Web site and to its stores. The style and substance of CarMax’s advertisements are distinctly different from those placed by most automobile dealers. The third major marketing support for CarMax is its Web site, CarMax.com, which acts as a marketing tool for communicating its consumer offer in detail, a sophisticated search engine for finding the right vehicle and a sales channel for customers who prefer to complete a part of the shopping and sales process on-line with one of CarMax’s internet sales consultants.

In fiscal 2001, CarMax further refined its advertising approach by eliminating spending that research showed to be unprofitable and by increasing the efficiency of its television advertising. In fiscal 2002, CarMax continued to refine its advertising approach implemented in fiscal 2001. CarMax employs a targeted, high-frequency, low-cost-per-impression television strategy, coupled with more targeted newspaper advertising. Advertising expenditures were 1.5% of net sales and operating revenues in fiscal 2002, 1.8% of net sales and operating revenues in fiscal 2001 and 2.4% of net sales and operating revenues in fiscal 2000. CarMax’s fiscal 2002, 2001 and 2000 advertising expense ratios reflect leverage from the total and comparable store sales increases and changes in media buying strategy.

CarMax also targets specific segments of the used-vehicle market through special promotions. Such promotions may focus on a particular type of vehicle (e.g., “Minivan Month”) or a particular price point (e.g., $9,999 or less) for a large number of vehicles. Promotions are closely coordinated by CarMax’s marketing staff with purchasing departments at selected locations to ensure that appropriate quantities of targeted inventory are purchased and displayed, thus maximizing the benefits of the promotion.

CarMax expects to further leverage its advertising expenses in that market over a number of stores. CarMax utilizes market awareness and customer satisfaction surveys to help tailor its marketing efforts to the purchasing habits and preferences of customers in each market area.

72

Properties

CarMax’s operations were conducted in 41 retail units from 39 store locations as of April 30, 2002. The following table summarizes its retail units as of April 30, 2002:

	Superstores			Co-located and Stand-Alone New-Car Stores	Total
	Mega	Standard	Prototypical Satellite
California	1	1	–	2	4
Florida	3	3	–	1	7
Georgia	1	2	–	–	3
Illinois	3	1	–	–	4
Indiana	–	–	1	–	1
Maryland	1	1	1	1	4
North Carolina	–	3	–	–	3
South Carolina	–	1	–	–	1
Tennessee	–	1	–	–	1
Texas	4	3	2	–	9
Virginia	–	2	–	–	2
Wisconsin	–	–	1	1	2
	13	18	5	5	41

CarMax owns its satellite superstore located in Merrillville, Indiana and its standard superstores located in Greensboro, North Carolina and Roseville, California. The remaining CarMax stores are leased. CarMax also leases its headquarters, which is located in suburban Richmond, Virginia, near the site of the first CarMax retail store.

Circuit City Stores has contingent liability under various leases covering 23 of CarMax’s sales locations. In recognition of this ongoing contingent liability, CarMax has agreed to make a one-time special dividend payment of $28.4 million to Circuit City Stores on the separation date. For further discussion of this contingent lease obligation, see “Contingent Lease Obligation Retained by Circuit City Stores” on page 30.

New-Car Franchise Agreements

CarMax operates new-car dealerships under separate franchise or dealer agreements with manufacturers. These agreements generally allow CarMax to sell manufacturers’ brands, perform warranty work on these vehicles and sell related parts and services within a specified market area. Designation of specified market areas generally does not guarantee exclusivity within a specified territory. These agreements generally impose operational requirements and restrictions, including inventory levels, working capital, monthly financial reporting, signage and cooperation with marketing strategies. A manufacturer may terminate a dealer agreement under certain circumstances, including a change in ownership without prior manufacturer approval, failure to maintain adequate customer satisfaction ratings or a material breach of other provisions of the agreement. CarMax also has entered into framework agreements with several major vehicle manufacturers. These agreements generally contain provisions relating to the acquisition, ownership structure, advertising and management of a dealership franchised by those manufacturers.

Various U.S. federal and state laws governing the relationship between automotive dealerships and vehicle manufacturers also might affect CarMax. These laws include statutes prohibiting manufacturers from terminating or failing to renew franchise agreements without proper cause and unreasonably withholding approval for proposed ownership changes.

73

Competition

The used- and new-car retail business is highly competitive. Consumers typically have many choices when deciding where to purchase a used or new vehicle. In both the used- and new-vehicle markets, CarMax seeks to distinguish itself from traditional dealerships through its consumer offer, sales approach and other innovative operating strategies. In the used-vehicle market, CarMax competes with existing franchised and independent dealers, rental companies and private parties. Many franchised new-car dealerships also have increased their focus on the used-vehicle market.

CarMax believes that the principal competitive factors in used-vehicle sales are the following:

· price;

· ability to offer a wide selection of vehicles, including the more popular makes and models;

· quality of the vehicles;

· location of retail sites; and

· degree of customer satisfaction with the car-buying experience.

Other competitive factors include the ability to offer or arrange customer financing on competitive terms and the quality and cost of primary and extended warranties. CarMax believes that it is competitive in all of these areas and enjoys advantages over competitors that employ traditional selling methods.

Part of CarMax’s business strategy is to position itself as a low-price operator in the industry. In fiscal 1999, CarMax’s used-car sales were negatively impacted by the initiation of intensely competitive price incentives in the new-car industry and insufficient customer traffic at CarMax locations in a number of multi-store metropolitan markets, particularly those affected by CarMax’s primary used-car superstore competitor. Late in fiscal 2000, that competitor exited the used-car superstore business. CarMax believes this competitor’s exit from five multi-store markets helped eliminate consumer confusion about the two consumer offers.

In the new-vehicle market, CarMax competes with other franchised dealers offering vehicles produced by the same or other manufacturers and with auto brokers and leasing companies. As is typical of such arrangements, CarMax’s existing franchise agreements do 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 prices and margins for used vehicles during such discounting. In fiscal 2002, 2001 and 2000, CarMax’s new-car sales were strong, resulting in part from the highly promotional climate in the new-car industry. In the second half of fiscal 2002, new-car manufacturers introduced zero-percent financing incentives to counteract an industry-wide slowdown in new-car sales. For CarMax, the result was increased traffic, not only for new cars, but also for used cars as consumers cross-shopped the two businesses. CarMax’s consumer offer enabled it to convert this added traffic into higher used- and new-car sales growth.

CarMax believes that the principal competitive factors in new-vehicle sales are the following:

· price;

· dealer sales promotions;

· ability of dealerships to offer a wide selection of the most popular vehicles;

· location of retail sites; and

· quality of customer service.

74

Given that the new-vehicle market has historically been served primarily by dealerships employing traditional high-pressure, negotiation-oriented sales techniques, CarMax believes that its customer friendly, low-pressure sales methods will create additional competitive factors in which it may have an advantage.

Seasonality

CarMax’s business is seasonal, with each location generally experiencing more of its net sales in the first half of the fiscal year. During the fall quarter, new-model-year introductions and discounting on close-out vehicles can cause rapid depreciation of used-car prices, especially on late-model vehicles. CarMax anticipates that the seasonality of the business may vary from region to region as its operations expand geographically.

Governmental Regulation

CarMax’s operations are subject to ongoing regulation, supervision and licensing under various U.S. federal, state and local statutes, ordinances and regulations. Among other things, these laws require that CarMax obtain a license in order to establish, operate or relocate a dealership or to operate an automotive repair facility. These laws also regulate the manner in which CarMax conducts its business, including its advertising and sales practices.

CarMax’s financing activities with its customers are subject to U.S. federal truth in lending, consumer lending and equal credit opportunity regulations as well as state and local motor vehicle finance laws, installment finance laws, usury laws and other installment sales laws. Some states regulate finance fees that may be paid as a result of vehicle sales.

As with automobile dealerships generally, and service operations in particular, CarMax’s business involves the use, handling and disposal of hazardous or toxic substances, including motor oil, gasoline, transmission fluid, solvents, lubricants and other materials. The business also involves the past and current operation and/or removal of aboveground and underground storage tanks containing such substances. Accordingly, CarMax is subject to U.S. federal, state and local laws and regulations governing air and water quality and the handling, storage and disposal of hazardous or toxic substances. CarMax believes that it does not have any material environmental liabilities and that compliance with such laws and regulations will not, individually or in the aggregate, have a material adverse effect on its results of operations or financial condition. However, environmental laws and regulations are complex and subject to frequent change. There can be no assurance that compliance with amended, new or more stringent laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions at current or future locations will not require additional expenditures by CarMax, or that such expenditures would not be material.

CarMax believes that it is in substantial compliance with all laws affecting its business. Possible penalties for violation of any of these laws include revocation of licenses and imposition of fines. In addition, many laws may give customers a private cause of action.

Litigation and Contingent Liabilities

In the normal course of business, CarMax is involved in various legal proceedings. Based upon CarMax’s evaluation of information currently available, it believes that the ultimate resolution of any such proceedings will not have a material adverse effect on CarMax’s financial position, liquidity or results of operations.

Employees

On April 30, 2002, CarMax had 5,258 hourly and salaried employees and 2,230 sales employees who worked on a commission basis. No CarMax employee is subject to a collective bargaining agreement. Additional CarMax personnel are employed during peak selling seasons.

75

Management’s Discussion and Analysis of Financial Condition

and Results of Operations of CarMax, Inc.

The following discussion describes the financial condition and results of operations of CarMax. This discussion includes the effect of the businesses, assets and liabilities of Circuit City Stores that constituted the CarMax group. Circuit City Stores has contributed to CarMax all of the businesses, assets and liabilities that constituted the CarMax group. The assets and liabilities of CarMax, Inc. will be accounted for at the historical values carried by Circuit City Stores prior to the separation.

For additional information relating to the CarMax group or the Circuit City group, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Circuit City Stores, Inc.” starting on page 108.

Critical Accounting Policies

In Management’s Discussion and Analysis, CarMax discusses the results of operations and financial condition as reflected in its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of financial statements requires CarMax to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. CarMax uses its historical experience and other relevant factors when developing its estimates and assumptions. CarMax continually evaluates these estimates and assumptions. Note 2 to the CarMax financial statements includes a discussion of significant accounting policies. The accounting policy discussed below is one CarMax considers critical to an understanding of its financial statements because its application places the most significant demands on CarMax’s judgment. CarMax’s financial results might have been different if different assumptions had been used or other conditions had prevailed.

Calculation of the Value of Retained Interests in Securitization Transactions

CarMax securitizes automobile loan receivables. The fair value of retained interests from securitization activities is based on the present value of expected future cash flows. The present value is determined by using management’s projections of key factors, such as finance charge income, default rates, payment rates and discount rates appropriate for the type of asset and risk. These projections are derived from historical experience, projected economic trends and anticipated interest rates. Adjustments to one or more of these projections may have a material impact on the fair value of the retained interests. These projections may be affected by external factors, such as changes in the behavior patterns of CarMax customers, changes in the strength of the economy and developments in the interest rate markets. Note 2(A) to the CarMax financial statements includes a discussion of accounting policies related to securitizations. Note 10 to the CarMax financial statements includes a discussion of automobile loan securitizations.

Results of Operations

Net Sales and Operating Revenues

Total sales for CarMax increased 28% in fiscal 2002 to $3.20 billion. In fiscal 2001, total sales increased 24% to $2.50 billion from $2.01 billion in fiscal 2000.

Percent Sales Change From Prior Year

Fiscal	Total		Comparable (1)
2002	28	%	28	%
2001	24	%	17	%
2000	37	%	2	%
1999	68	%	(2	)%
1998	71	%	6	%

(1) CarMax stores are included in comparable store sales after the store has been open for a full year.

76

Comparable Store Sales Change

Fiscal	2002	2001		2000
Vehicle dollars:
Used vehicles	30%	19	%	(4	)%
New vehicles	24%	9	%	50	%
Total	28%	17	%	2	%
Vehicle units:
Used vehicles	24%	13	%	(8	)%
New vehicles	21%	9	%	49	%
Total	23%	12	%	(4	)%

Average Retail Selling Prices

Fiscal	2002		2001		2000
Used vehicles	$	15,100	$	14,400	$	13,700
New vehicles	$	23,100	$	22,600	$	22,500
Blended average	$	16,200	$	15,500	$	14,900

Vehicle Sales Mix

Fiscal	2002		2001		2000
Vehicle dollars:
Used vehicles	82	%	81	%	79	%
New vehicles	18		19		21
Total	100	%	100	%	100	%
Vehicle units:
Used vehicles	87	%	87	%	86	%
New vehicles	13		13		14
Total	100	%	100	%	100	%

The fiscal 2002 total sales growth primarily resulted from a 28% increase in the comparable store vehicle dollar sales of the CarMax business. Carmax opened two used-car superstores in fiscal 2002 during the last month of the fiscal year, and so they were not significant contributors to total sales growth in fiscal 2002. The growth in comparable store vehicle dollar sales reflects increased store traffic that, combined with better in-store execution, resulted in comparable store unit sales growth for both used and new cars. CarMax believes that the higher traffic levels were driven by the effectiveness of its marketing programs, CarMax.com and word-of-mouth customer referrals. In addition, traffic was bolstered in October, November and December by cross-shopping from zero-percent financing incentive programs introduced by new car manufacturers to counteract an industry-wide slowdown in new-car sales. New-car manufacturers returned to more conventional sales and financing incentives in January 2002. Increased average retail prices resulting from a higher mix of later-model used cars, luxury vehicles and sport utility vehicles and higher new-car average retail prices also contributed to the sales growth.

In late February 2002, CarMax opened one standard-sized used-car superstore and one satellite used-car superstore. During fiscal 2002, CarMax also relinquished the franchise rights for one stand-alone new-car franchise and one new-car franchise that had been integrated with a used-car superstore and sold one new-car stand-alone franchise and one new-car franchise that had been integrated with a used-car superstore. Although new-car stores that are integrated or co-located with used-car superstores have performed at or above

77

expectations, the three remaining stand-alone new-car stores are still performing below expectations. CarMax intends to integrate or co-locate these stores with used-car superstores. CarMax expects this integration or co-location to occur within the next fiscal year for the store located in Orlando, Florida, and CarMax expects to co-locate the two remaining new-car stores, which are in Los Angeles, California, with one used-car superstore within the next two fiscal years.

The fiscal 2001 total sales increase reflects a 17% increase in the comparable store vehicle dollar sales of the CarMax business, driven by higher-than-anticipated used-car sales, and the net addition of two used-car superstores, two prototype satellite stores and six new-car franchises since the end of fiscal 1999. The new stores and four of the franchises moved into the comparable store sales base throughout fiscal 2001. In fiscal 2001, CarMax also added two new-car franchises, integrating them with existing used-car superstores. CarMax believes its fiscal 2001 sales performance primarily reflects the improved execution of the CarMax offer at individual stores, increased consumer awareness and use of CarMax.com and the exit of CarMax’s primary used-car superstore competitor late in fiscal 2000. CarMax believes this competitor’s exit from five multi-store markets helped eliminate consumer confusion over the two offers. CarMax’s used-car comparable store vehicle dollar and unit sales growth has remained strong in all these CarMax markets since this competitor’s exit from the used-car superstore business.

Geographic expansion of CarMax used-car superstores and the addition of new-car franchises generated the total sales growth in the first half of fiscal 2000 and, along with comparable store sales growth for the last two quarters and for the fiscal year, contributed to total sales growth for the full year. During fiscal 2000, CarMax opened two used-car superstores, two prototype satellite used-car superstores, five stand-alone new-car stores and one new-car franchise that was integrated with a used-car superstore. CarMax also converted one existing store into a satellite operation and relocated one new-car franchise next to a used-car superstore. In the second half of fiscal 2000, CarMax limited its geographic expansion to focus on building sales and profitability in existing markets.

Retail Units

	Retail Units at Year-End
Fiscal	2002	2001	2000
Mega superstores(1)	13	13	13
Standard superstores(2)	17	16	16
Prototype satellite superstores	5	4	4
Co-located new-car stores(3)	2	2	2
Stand-alone new-car stores	3	5	5
Total	40	40	40

(1) Formerly “C” and “B” stores; 70,000 to 100,000 square feet.  

(2) Formerly “A” stores; 40,000 to 60,000 square feet.  

(3) Formerly included as “A” and “C” stores.

New-Car Franchises

	New-Car Franchises at Year-End
Fiscal	2002	2001	2000
Integrated/co-located new-car franchises	15	17	15
Stand-alone new-car franchises	3	5	5
Total	18	22	20

CarMax sells extended warranties on behalf of unrelated third parties who are the primary obligors. Under these third-party warranty programs, CarMax has no contractual liability to the customer. Extended warranty

78

revenue, which is reported in total sales, was 1.7% of total sales in fiscal 2002, 1.8% in fiscal 2001 and 1.6% in fiscal 2000. Used cars achieve a higher warranty penetration rate than new cars.

Impact Of Inflation.    Inflation has not been a significant contributor to results. For the CarMax business, profitability is based on achieving specific gross profit dollars per vehicle rather than on average retail prices. Because the wholesale market generally adjusts to reflect retail price trends, CarMax believes that if the stores meet inventory turn objectives, then changes in average retail prices will have only a short-term impact on the gross margin and thus profitability.

Cost of Sales

The gross profit margin was 12.6% in fiscal 2002, 13.2% in fiscal 2001 and 11.9% in fiscal 2000. Although CarMax achieved its specific gross profit dollar targets per vehicle, increased average retail prices resulting from a higher mix of later-model used cars, luxury vehicles and sport utility vehicles generated the decline in gross profit as a percentage of sales in fiscal 2002. Used-car gross profit dollars are similar across makes and models. Consequently, the gross profit on a higher-priced used car is a lower percentage of the retail selling price than on a more modestly priced car. In fiscal 2001, the increase in used-car sales as a percentage of total sales mix and strong inventory management throughout the year, especially during the second half when the model-year transition occurs in the new-car industry, contributed to a higher gross margin.

In addition, the net margin or loss from the disposal of wholesale vehicles is included in cost of sales. The wholesale function is an incidental part of CarMax’s vehicle procurement strategy. Those vehicles not meeting CarMax’s retail standards are sold at its own on-site wholesale auctions, generally at cost. Total wholesale sales were $318.9 million in fiscal 2002, $248.2 million in fiscal 2001 and $178.6 million in fiscal 2000. The overall net reduction (increase) to cost of sales for the disposal of wholesale vehicles was $2.6 million in fiscal 2002, $3.8 million in fiscal 2001 and $(1.5) million in fiscal 2000.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were 7.9% of sales in fiscal 2002, 9.8% in fiscal 2001 and 11.3% in fiscal 2000. Profits generated by CarMax’s finance operation, fees received for arranging customer automobile financing through third parties and interest income are recorded as reductions to selling, general and administrative expenses. The profits generated by CarMax’s finance operation were $66.5 million in fiscal 2002, $42.8 million in fiscal 2001 and $30.0 million in fiscal 2000. Fees received from arranging customer automobile financing through third parties were $15.7 million in fiscal 2002, $11.5 million in fiscal 2001 and $9.8 million in fiscal 2000. A lower cost of funds increased yield spreads and contributed to higher profits from the finance operation in fiscal 2002. In both fiscal 2002 and fiscal 2001, the increases in profits from the CarMax finance operation and in third-party fees reflect a greater number of automobile loans, resulting from CarMax’s strong vehicle sales growth.

The improvement in the fiscal 2002 expense ratio reflects significant expense leverage generated by strong comparable store sales growth and continued expense management, particularly of non-store expenses, the benefit of which more than offset higher second half expenses related to renewed geographic expansion. The decline in the fiscal 2001 expense ratio reflects leverage from strong comparable store sales growth, more efficient advertising expenditures and overall improvements in store productivity, including those achieved through the hub-and-satellite operating strategy that CarMax adopted in multi-store markets. Advertising expense was 1.5% of sales in fiscal 2002, 1.8% in fiscal 2001 and 2.4% in fiscal 2000.

In fiscal 2001, the improvement in the expense ratio was partly offset by an $8.7 million write-off of goodwill associated with two underperforming stand-alone new-car franchises. Excluding these costs, the fiscal 2001 expense ratio would have been 9.4%. The fiscal 2000 expense ratio reflects $4.8 million in charges related to lease termination costs on undeveloped property and a write-down of assets associated with excess property for sale. Excluding these costs, the fiscal 2000 expense ratio would have been 11.1%.

Interest Expense

Interest expense was 0.2% of sales in fiscal 2002 and 0.5% in both fiscal 2001 and fiscal 2000. In fiscal 2002, interest expense primarily was incurred on allocated debt used to fund new store growth and working

79

capital, including inventory. In fiscal 2001 and 2000, interest expense primarily was incurred on allocated debt used to fund working capital, including inventory, and franchise acquisitions. The fiscal 2002 decline in the interest expense ratio reflects a reduction in allocated debt levels and lower interest rates. The reduction in allocated debt reflects a decline in total debt of Circuit City Stores during fiscal 2002. Refer to the “Financing Activities” section below for further information on changes in debt.

Earnings Before Income Taxes

Earnings before income taxes were $146.5 million in fiscal 2002, compared with $73.5 million in fiscal 2001 and $1.8 million in fiscal 2000. Excluding the write-off of goodwill, earnings before income taxes would have been $82.2 million in fiscal 2001. Excluding lease termination costs and the write-down of assets, earnings before income taxes would have been $6.6 million in fiscal 2000.

Income Taxes

The effective income tax rate was 38.0 percent in fiscal 2002, fiscal 2001 and fiscal 2000.

Net Earnings

Net earnings were $90.8 million in fiscal 2002, $45.6 million in fiscal 2001 and $1.1 million in fiscal 2000. Excluding the write-off of goodwill, net earnings would have been $51.0 million in fiscal 2001. Excluding lease termination costs and the write-down of assets, net earnings would have been $4.1 million in fiscal 2000.

Operations Outlook

Over the past two years, CarMax has demonstrated that its consumer offer and business model can produce strong sales and earnings growth and can support its growth independently. In fiscal 2003, CarMax’s geographic expansion will continue to focus on entries into mid-sized markets and satellite store opportunities in existing markets. CarMax has identified more than 30 additional markets that could support a standard superstore, the principal store size going forward. CarMax also believes that it can add approximately 10 satellite stores in its existing markets. In fiscal 2003, CarMax plans to open four to six stores, approximately one half of which are expected to be satellite stores.

CarMax believes comparable store used-car unit sales growth, which drives its profitability, will be in the low- to mid-teens in the first half of fiscal 2003, moderating to high-single to low-double digits in the second half. Fiscal 2003 will be a year of transition for CarMax as it ramps up its growth pace. Additional growth-related costs such as training, recruiting and employee relocation for new stores will moderate earnings growth. In addition, CarMax anticipates a reduction in yield spreads from its finance operation as interest rates rise above the low levels experienced in fiscal 2002. Earnings expectations for CarMax also include preliminary estimates of expenses expected to be incurred in the second half of fiscal 2003 if the planned separation is approved. CarMax expects the expense leverage improvement achieved from total and comparable store sales growth to be substantially offset by these three factors. Based on these factors, CarMax anticipates that its net earnings for fiscal 2003 will be approximately 13% to 19% higher than net earnings for fiscal 2002, excluding the non-recurring costs of separation, which are not tax deductible and are estimated to be approximately $8 million.

CarMax plans to open six to eight stores per year in fiscal 2004 through fiscal 2006, including openings in mid-sized markets and satellite stores in existing markets.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, “Business Combinations,” effective for business combinations initiated after June 30, 2001, and SFAS No. 142, “Goodwill and Other Intangible Assets,” effective for fiscal years beginning after December 15, 2001. Under SFAS No. 141, the pooling of interests method of accounting for business combinations is

80

eliminated, requiring that all business combinations initiated after the effective date be accounted for using the purchase method. Also under SFAS No. 141, identified intangible assets acquired in a purchase business combination must be separately valued and recognized on the balance sheet if they meet certain requirements. Under the provisions of SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the pronouncement. Other intangible assets that are identified to have finite useful lives will continue to be amortized in a manner that reflects the estimated decline in the economic value of the intangible asset and will be subject to review when events or circumstances arise which indicate impairment. For CarMax goodwill totaled $20.1 million and covenants not to compete totaled $1.5 million as of February 28, 2002. In fiscal 2002, goodwill amortization totaled $1.8 million, and amortization of covenants not to compete totaled $931,000. Covenants not to compete will continue to be amortized on a straight-line basis over the life of the covenant, not to exceed five years. Application of the nonamortization provisions of SFAS No. 142 in fiscal 2003 is not expected to have a material impact on the financial position, results of operations or cash flows of CarMax. During fiscal 2003, CarMax will perform the first of the required impairment tests of goodwill, as outlined in the new pronouncement. Based on preliminary estimates, as well as ongoing periodic assessments of goodwill, CarMax does not expect to recognize any material impairment losses from these tests.

In August 2001, the FASB issued SFAS No. 143, “Accounting For Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. CarMax has not yet determined the impact, if any, of adopting this standard.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes both SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” related to the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. CarMax is required to adopt SFAS No. 144 no later than the fiscal year beginning after December 15, 2001, and plans to adopt the provisions in the first quarter of fiscal 2003. CarMax does not expect the adoption of SFAS No. 144 to have a material impact on its financial position, results of operations or cash flows.

Liquidity and Capital Resources

Cash Flow Highlights

	Years Ended February 28 or 29
(Amounts in millions)	2002			2001			2000
Net earnings	$	90.8		$	45.6		$	1.1
Depreciation and amortization	$	16.3		$	18.1		$	15.2
Provision for deferred income taxes	$	3.2		$	8.8		$	1.2
Cash used for working capital, net	$	(71.0	)	$	(63.7	)	$	(49.0	)
Cash provided by (used in) operating activities	$	42.6		$	18.0		$	(23.6	)
Purchases of property and equipment	$	(41.4	)	$	(10.8	)	$	(45.4	)
Proceeds from sales of property and equipment, net	$	99.0		$	15.5		$	25.3
Net (decrease) increase in allocated short-term and long-term debt	$	(103.7	)	$	(22.2	)	$	68.8

81

Cash Provided by or Used in Operations.    CarMax generated net cash from operating activities of $42.6 million in fiscal 2002 and $18.0 million in fiscal 2001. Net cash used in operating activities was $23.6 million in fiscal 2000. The fiscal 2002 improvement primarily resulted from a $45.2 million increase in net earnings, partly offset by an increase in accounts receivable, which resulted from increased sales generating increased automobile loans and increased yield spreads from the finance operation. The fiscal 2001 increase reflects a $44.4 million increase in net earnings, partly offset by an increase in working capital.

Investing Activities.    Net cash provided by investing activities was $57.5 million in fiscal 2002 and $3.3 million in fiscal 2001. Net cash used in investing activities was $54.9 million in fiscal 2000. CarMax’s capital expenditures were $41.4 million in fiscal 2002, $10.8 million in fiscal 2001 and $45.4 million in fiscal 2000. Fiscal 2002 capital expenditures included spending for the construction of two standard-sized used-car superstores, one of which opened during the first quarter of fiscal 2003, and one satellite used-car superstore. In fiscal 2001, capital expenditures were related to equipment purchases. Fiscal 2000 capital expenditures included spending for the construction of four used-car superstores.

Capital expenditures have been funded primarily through sale-leaseback transactions, short- and long-term debt of Circuit City Stores allocated to CarMax and internally generated funds. Net proceeds from sales of property and equipment, including sale-leasebacks, totaled $99.0 million in fiscal 2002, $15.5 million in fiscal 2001 and $25.3 million in fiscal 2000. In August 2001, CarMax entered into a sale-leaseback transaction covering nine superstore properties for an aggregate sale price of $102.4 million. This transaction, which represented the first sale-leaseback entered into by CarMax without a Circuit City Stores guarantee, was structured at competitive rates with an initial lease term of 15 years and two 10-year renewal options.

In fiscal 2003, CarMax anticipates capital expenditures of approximately $175 million. Planned expenditures primarily relate to new store construction, including furniture, fixtures and equipment and land purchases, and leasehold improvements to existing properties. CarMax expects to open four to six stores during fiscal 2003, approximately one half of which will be satellite stores, and, assuming the business continues to meet expectations, 22 to 30 stores over the following four years. CarMax expects the initial cash investment per store to be in the range of $20 million to $27 million for a standard superstore and $10 million to $15 million for a satellite store. If CarMax takes full advantage of building and land sale-leasebacks, then CarMax expects the net cash used to fund a new store will be $8 million to $12 million for a standard superstore and $5 million to $7 million for a satellite superstore. As a new store matures, sales financed through CarMax’s finance operation will require additional use of capital in the form of a seller’s interest in the receivables or reserves. For a standard used-car superstore, CarMax would expect the cash investment for the seller’s interest to range from $0.8 million to $1.5 million at the end of the first year of operation, growing to $2.2 million to $3.4 million after five years of operation.

CarMax expects that proceeds from an anticipated credit agreement secured by vehicle inventory, sale-leaseback transactions and cash generated by operations will be sufficient to fund capital expenditures for the foreseeable future.

Financing Activities.    Most of CarMax’s financial activities, including the investment of surplus cash and the issuance and repayment of short-term and long-term debt, are managed by Circuit City Stores on a centralized basis. Circuit City Stores allocates debt to CarMax based on usage of funds. Debt that is specific only to the CarMax business or the Circuit City business is allocated in its entirety to that business. For shared funds obtained from bank debt (pooled debt), CarMax’s portion is determined by applying to CarMax’s intercompany debt due to Circuit City Stores the percentages that short-term bank debt, long-term bank debt and the current portion of long-term bank debt are of the total pooled debt. The remainder of any debt is then applied to the Circuit City business. This pooled debt bears interest at a rate based on the average pooled debt balance. Expenses related to increases in pooled debt are reflected in the weighted average interest rate of the pooled debt.

82

In December 2001, CarMax entered into an $8.5 million secured promissory note in conjunction with the purchase of land for new store construction. This note, which is payable in August 2002, was included in short-term debt as of February 28, 2002.

As scheduled, Circuit City Stores used existing working capital to repay a $130 million term loan in fiscal 2002 and a $175 million term loan in fiscal 2001. At February 28, 2002, a $100 million outstanding term loan due in July 2002 was classified as a current liability. Although Circuit City Stores has the ability to refinance this debt, it intends to repay it using existing working capital. Payment of Circuit City Stores pooled debt does not necessarily result in a reduction of CarMax allocated debt.

At February 28, 2002, Circuit City Stores allocated cash of $3.3 million and debt of $88.4 million to CarMax. Circuit City Stores maintains a $150 million unsecured revolving credit facility that expires on August 31, 2002. Circuit City Stores does not anticipate renewing this facility. Circuit City Stores also maintains $195 million in committed seasonal lines of credit that are renewed annually with various banks. At February 28, 2002, total balances of $1.8 million were outstanding under these facilities.

CarMax anticipates that during the first quarter of fiscal 2003, CarMax will enter into a multi-year, $200 million credit agreement secured by vehicle inventory. CarMax anticipates that some of the proceeds from the agreement will be used for the repayment of allocated debt; the payment on the separation date of a one-time special dividend to Circuit City Stores, of $28.4 million; the payment of transaction expenses incurred in connection with the separation; and general corporate purposes. Refer to “Contractual Obligations” for further discussion of the special dividend payment.

Receivables generated by the CarMax finance operation are funded through securitization transactions in which the finance operation sells its receivables while retaining servicing rights. These securitization transactions provide an efficient and economical means of funding automobile loan receivables. For transfers of receivables that qualify as sales under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” CarMax recognizes gains and losses as a component of the profits of its finance operation.

On a monthly basis, CarMax’s finance operation sells its automobile loan receivables to a special purpose subsidiary, which, in turn, transfers the receivables to a group of third-party investors. The investors sell commercial paper backed by the transferred receivables, and the proceeds are distributed through the special purpose subsidiary to CarMax’s finance operation. The special purpose subsidiary retains a subordinated interest in the transferred receivables. CarMax’s finance operation continues to service the transferred receivables for a fee. The investors are generally entitled to receive monthly interest payments and have committed to acquire additional undivided interests in the transferred receivables up to a stated amount through June 27, 2002. CarMax expects that the commitment termination date will be extended. If certain events were to occur, the commitment to acquire additional undivided interests would terminate and the investors would begin to receive monthly principal payments until paid in full. At February 28, 2002, the unused capacity of this program was $211.0 million.

CarMax’s finance operation periodically refinances its automobile loan receivables through the public issuance of asset-backed securities. The finance operation sells the receivables to be refinanced to a special purpose subsidiary, which, in turn, transfers the purchased receivables to a securitization trust. The securitization trust then issues asset-backed securities secured by the transferred receivables in public offerings, and the proceeds are distributed through the special purpose subsidiary to CarMax’s finance operation. CarMax continues to service the transferred receivables for a fee. Asset-backed securities were issued totaling $644.0 million in October 1999, $655.4 million in January 2001 and $641.7 million in November 2001.

At February 28, 2002, the aggregate principal amount of securitized automobile loan receivables totaled $1.54 billion. At February 28, 2002, there were no provisions providing recourse to Circuit City Stores for credit

83

losses on the securitized automobile loan receivables. CarMax anticipates that it will be able to expand or enter into new securitization arrangements to meet the future needs of the automobile loan finance operation.

Contractual Obligations (1)

(Amounts in millions)	Total		1 Year		2 to 3 Years		4 to 5 Years		After 5 Years
Allocated contractual obligations:
Long-term debt	$	78.6	$	78.6	$	—	$	—	$	—
Promissory note		8.5		8.5		—		—		—
Operating leases		723.0		43.1		86.7		84.7		508.5
Lines of credit		1.4		1.4		—		—		—
Total	$	811.5	$	131.6	$	86.7	$	84.7	$	508.5

(1) Amounts are based on the capital structure of Circuit City Stores as of February 28, 2002. Future obligations depend upon the final outcome of the proposed separation of CarMax.

CarMax currently operates 23 of its sales locations pursuant to various leases under which Circuit City Stores was the original tenant and primary obligor. Circuit City Stores and not CarMax, had originally entered into these leases so that CarMax could take advantage of the favorable economic terms available to Circuit City Stores as a large retailer. Circuit City Stores has assigned each of these leases to CarMax. Despite the assignment and pursuant to the terms of the leases, Circuit City Stores remains contingently liable under the leases. For example, if CarMax were to fail to make lease payments under one or more of the leases, Circuit City Stores may be required to make those payments on CarMax’s behalf. In recognition of this ongoing contingent liability, CarMax has agreed to make a one-time special dividend payment to Circuit City Stores on the separation date, assuming the separation is completed. CarMax currently expects this special dividend to be $28.4 million.

Market Risk

Receivables Risk

Circuit City Stores manages the market risk associated with the automobile installment loan portfolio of CarMax’s finance operation. A portion of this portfolio has been securitized in transactions accounted for as sales in accordance with SFAS No. 140 and, therefore, is not presented on the CarMax balance sheets.

Automobile Installment Loan Receivables.    At February 28, 2002, and February 28, 2001, all loans in the portfolio of automobile loan receivables were fixed-rate installment loans. Financing for these automobile loan receivables is achieved through asset securitization programs that, in turn, issue both fixed- and floating-rate securities. Receivables held for investment or sale are financed with working capital. The total principal amount of receivables securitized or held for investment or sale as of February 28, 2002, and February 28, 2001, was as follows:

(Amounts in millions)	2002		2001
Fixed-rate securitizations	$	1,122	$	984
Floating-rate securitizations synthetically altered to fixed		413		299
Floating-rate securitizations		1		1
Held for investment(1)		12		9
Held for sale		2		3
Total	$	1,550	$	1,296

(1) Held by a bankruptcy-remote special purpose subsidiary.

84

Interest Rate Exposure.    Interest rate exposure relating to the securitized automobile loan receivables represents a market risk exposure that Circuit City Stores manages with matched funding and interest rate swaps matched to projected payoffs. The market and credit risks associated with financial derivatives are similar to those relating to other types of financial instruments. Refer to Note 11 to the CarMax financial statements in Annex D for a description of these items. Market risk is the exposure created by potential fluctuations in interest rates. CarMax does not anticipate significant market risk from swaps because they are used on a monthly basis to 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 bank counterparties.

Forward-Looking Statements

CarMax statements that are not historical facts, including statements about management’s expectations for fiscal year 2003 and beyond, are forward-looking statements and involve various risks and uncertainties. For a description of these risks and uncertainties, please refer to “Special Note Regarding Forward-Looking Statements” on page 127.

85

CarMax Management

Directors and Officers

The following table sets forth information as to persons who serve or who are expected to serve as CarMax directors and executive officers immediately following the separation. CarMax’s board of directors will be comprised of seven directors, divided into three classes. It is expected that William R. Tiefel and Jeffrey E. Garten will be Class 1 directors, with a term expiring at the annual meeting of shareholders to be held in 2003, Richard L. Sharp, Hugh G. Robinson, and Keith D. Browning will be Class 2 directors, with terms expiring at the annual meeting of shareholders to be held in 2004, and W. Austin Ligon and John W. Snow will be Class 3 directors, with terms expiring at the annual meeting of shareholders to be held in 2005.

Mr. Robinson and Mr. Snow are current directors of Circuit City Stores, Inc. and are expected to serve as directors of CarMax, Inc. At the time of separation, these directors would resign from the Circuit City Stores board of directors. Mr. Sharp is the current Chairman of the board of Circuit City Stores and is expected to serve as Chairman of the board of CarMax. He has declined to stand for reelection as Chairman of the board of Circuit City Stores. His term will expire at the June 2002 Circuit City Stores annual meeting. In addition, Mr Ligon is expected to serve as Chief Executive Officer and Mr. Browning is expected to serve as Secretary following the separation.

Name	Age	Title
Executive Officers:
W. Austin Ligon	51	President
Thomas J. Folliard	37	Executive Vice President, Store Operations
Keith D. Browning	49	Executive Vice President, Chief Financial Officer
Michael K. Dolan	52	Senior Vice President, Chief Information Officer
Joseph S. Kunkel	39	Senior Vice President, Marketing and Strategy
Director Nominees:
Jeffrey E. Garten	55	Dean of The Yale School of Management
Hugh G. Robinson	69	Chairman and Chief Executive Officer, The Tetra Group
Richard L. Sharp	55	Chairman of the Board, Circuit City Stores, Inc.
John W. Snow	62	Chairman, President and Chief Executive Officer, CSX Corporation
William R. Tiefel	68	Chairman Emeritus, Ritz-Carlton Hotel Company

Mr. Ligon joined Circuit City Stores in 1990 as Vice President of Corporate Planning and was named Senior Vice President in 1991. Along with Circuit City Stores’ Chairman Richard Sharp, Mr. Ligon was the co-developer of the CarMax concept and has been integrally involved in the leadership of the business since its inception. He was named President of CarMax in 1995 and led CarMax during the initial offering of the CarMax Group Common Stock in 1997. Mr. Ligon came to Circuit City Stores from Marriott Corporation where he was Senior Vice President of Strategic Planning for Marriott Hotels and Resorts. Mr. Ligon has served as a director of CarMax since January 2, 1997 and will continue to serve as a director after the separation.

Mr. Folliard joined CarMax in 1993 as Senior Buyer and became Director of Purchasing in 1994. Mr. Folliard was promoted to Vice President of Merchandising of CarMax in 1996, Senior Vice President of Store Operations in July 2000, and Executive Vice President of Store Operations in April 2001. He was responsible for the design and development of the unique CarMax purchasing process, the buyer training program and in-store wholesale auction system.

Mr. Browning joined Circuit City Stores in 1982. He was Controller for the West Coast division from 1984 to 1987. He was appointed Assistant Controller for Circuit City Stores in 1987, was promoted to Corporate Controller in 1990 and was made a Vice President of Circuit City Stores in 1992. Mr. Browning had extensive experience with the rollout of the Circuit City Stores concept, beginning with the initial Circuit City Superstore rollout for the West Coast division. Mr. Browning joined CarMax in early 1996 and has been involved in the development of accounting procedures, systems and internal controls for CarMax since its inception. Mr. Browning was named Executive Vice President in April 2001. Mr. Browning has served as a director of CarMax since January 2, 1997 and will continue to serve as a director after the separation.

86

Mr. Dolan joined CarMax in 1997 as Vice President and Chief Information Officer. Mr. Dolan was named Senior Vice President in April 2001. Mr. Dolan had prior executive experience in information systems with H.E.B. Stores, a privately held grocery retailer, where he was Vice President and Chief Information Officer.

Mr. Kunkel joined CarMax in 1998 as Vice President, Marketing and Strategy. Mr. Kunkel was named Senior Vice President in April 2001. Prior to joining CarMax, Mr. Kunkel was President of Wholesome Kidfoods, Inc. Mr. Kunkel was previously a Senior Manager with McKinsey and Company.

Mr. Garten has been Dean of the Yale School of Management since 1995. Mr. Garten was Undersecretary of Commerce for International Trade from 1993 to 1995, and previously spent 13 years in investment banking with Lehman Brothers and the Blackstone Group. He is a director of Aetna Corporation, Calpine Corporation and Credit Suisse Asset Management.

Mr. Robinson has been Chairman and Chief Executive Officer of The Tetra Group, a consulting firm that provides construction management and business development services, since 1989. Mr. Robinson is a retired Major General from the United States Army. He is a director of A.H. Belo Corporation, TXU Electric Company and Imco Recycling, Inc. He has been a director of Circuit City Stores since 1995.

Mr. Sharp joined Circuit City Stores as an Executive Vice President in 1982. He was President of Circuit City Stores from 1984 to 1997, Chief Executive Officer from 1986 to 2000 and became Chairman of the Board in 1994. He is a director of Flextronics International, Ltd. and has been a director of Circuit City Stores since 1983.

Mr. Snow has been Chairman, President and Chief Executive Officer of CSX Corporation, a transportation company, since 1991. He is a director of Johnson & Johnson, Verizon Communications Inc. and United States Steel Corporation. He has been a director of Circuit City Stores since 1996.

Mr. Tiefel is Chairman Emeritus of Ritz-Carlton Hotel Company. Mr Tiefel joined Marriott Corporation in 1961. He was named President of Marriott Hotels and Resorts in 1989, President of Marriott Lodging in 1993 and Vice-Chairman of Marriott International and Chairman of Ritz-Carlton Hotel Company in 1998. He is a director of Bulgari Hotels and Resorts.

W. Alan McCollough, Michael T. Chalifoux and Philip J. Dunn currently serve as directors of CarMax and Mr. Chalifoux also serves as Secretary of CarMax. Messrs. McCollough, Chalifoux and Dunn will resign these positions effective upon the separation.

Committees of the Board of Directors

Shortly after the separation, CarMax’s board of directors intends to establish an audit committee, a compensation and personnel committee and a nominating and governance committee. In addition, CarMax’s board, by resolution, may from time to time establish other committees of the board, consisting of one or more of its directors. Any committee so established will have the powers delegated to it by resolution of the board, subject to applicable law.

Director Compensation

Currently, all of CarMax’s directors are also CarMax or Circuit City Stores employees and do not receive compensation for their service on the board of directors. After the separation, directors who are not employees will receive a combination of equity-based and cash compensation. The cash portion of the annual retainer will be $28,500, with committee chairmen receiving an additional $2,500. Committee and board meeting attendance fees of $1,500 per meeting will be paid. The non-employee directors’ equity-based compensation will be comprised of a stock grant with a fair market value at the date of grant of $10,000 and a stock option grant with a value as of the date of grant (based on the Black-Scholes method) of $43,300. Non-employee directors will have the right to defer the receipt of compensation under a CarMax deferred compensation plan.

Executive Compensation

The following table sets forth information relating to compensation for the CarMax chief executive officer and its four other most highly compensated executive officers for the fiscal year ended February 28, 2002. These executive officers are collectively referred to as CarMax’s “named executive officers.”

87

At the completion of the separation, the options and other employee benefits of the CarMax named executive officers will be subject to adjustment to reflect the effect of the separation. See “Circuit City Stores’ Relationship with CarMax after the Separation—Agreements between Circuit City Stores and CarMax Relating to the Separation—Employee Benefits Agreement.” See also “Proposal One: The CarMax Separation Proposal— Employee Benefits and Compensation Matters—Employment Agreements and Change-In-Control Agreements” for a description of employment agreements with CarMax’s executive officers.

Summary Compensation Table

	Fiscal Year	Annual Compensation		Long-term Compensation Awards
Name and Principal Position		Salary $	Bonus $	Securities Underlying Options #
W. Austin Ligon	2002	603,653	562,500	175,000
President	2001	545,488	412,500	70,000
	2000	489,615	371,250	100,000
Thomas J. Folliard	2002	371,461	285,000	85,000
Executive Vice President Store Operations
Keith D. Browning	2002	335,769	262,500	85,000
Executive Vice President and Chief Financial Officer
Michael K. Dolan	2002	321,361	173,250	75,000
Senior Vice President and Chief Information Officer
Joseph S. Kunkel	2002	303,615	165,375	70,000
Senior Vice President Marketing and Strategy

88

Option Grants in Last Fiscal Year

The table below sets forth for the fiscal year ended February 28, 2002, the grants of CarMax Group Common Stock options to the named executive officers.

	Number of Securities Underlying Options Granted	% of Total Options Granted to Employees		Exercise Price (1)		Expiration Date	Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
							5%		10%
W. Austin Ligon	175,000	10.61	%	$	4.885	3/1/2008	$	345,558	$	807,624
Thomas J. Folliard	85,000	5.15	%	$	4.885	3/1/2008	$	167,842	$	392,275
Keith D. Browning	85,000	5.15	%	$	4.885	3/1/2008	$	167,842	$	392,275
Michael K. Dolan	75,000	4.55	%	$	4.885	3/1/2008	$	148,096	$	346,125
Joseph S. Kunkel	70,000	4.24	%	$	4.885	3/1/2008	$	138,223	$	323,050

(1) The exercise price for all of the options is the fair market value of the CarMax Group Common Stock on the date of grant.

Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values

The following table sets forth information concerning CarMax Group Common Stock option exercises and fiscal year-end option values as of February 28, 2002 for the CarMax named executive officers.

	Number of Shares Acquired on Exercise	Value Realized		Number of Securities Underlying Unexercised Options at February 28, 2002		Value of Unexercised Options at February 28, 2002
				Exercisable	Unexercisable	Exercisable		Unexercisable
W. Austin Ligon	0	$	0	67,500	277,500	$	1,472,375	$	6,172,875
Thomas J. Folliard	400,000	$	5,457,480	36,250	158,750	$	811,119	$	3,566,569
Keith D. Browning	400,000	$	7,369,730	18,750	116,250	$	415,156	$	2,585,306
Michael K. Dolan	0	$	0	127,500	162,500	$	2,254,325	$	3,612,375
Joseph S. Kunkel	0	$	0	71,125	118,375	$	1,382,914	$	2,643,169

Pension Plans

The CarMax named executive officers participate in the CarMax defined benefit pension plan. As of the close of business on February 28, 2002, the Circuit City Stores pension plan transferred the assets and liabilities attributable to all CarMax employees and retirees under the Circuit City Stores pension plan into a newly established CarMax pension plan. The assets and liabilities attributable to Circuit City Stores employees and retirees remained in the Circuit City Stores pension plan. The benefits provided under the CarMax pension plan “mirror” the Circuit City Stores pension plan to the extent possible. See “Circuit City Stores’ Relationship with CarMax after the Separation—Agreements between Circuit City Stores and CarMax Relating to the Separation—Employee Benefits Agreement.” As of the date of the separation, CarMax will become the sponsor of the CarMax pension plan. The following table illustrates estimated annual retirement benefits that CarMax anticipates will be payable under the CarMax pension plan to persons in specified compensation and years of service classifications calculated as a straight life annuity with no Social Security or other offsets.

89

Highest Consecutive Five-Year Average Compensation	Estimated* Annual Pension for Representative Years of Credited Service
	15	20	25	30	35
$700,000	153,654	204,872	256,090	307,308	358,526
$800,000	176,154	234,872	293,590	352,308	411,026
$900,000	198,654	264,872	331,090	397,308	463,526
$1,000,000	221,154	294,872	368,590	442,308	516,026
$1,100,000	243,654	324,872	406,090	487,308	568,526
$1,200,000	266,154	354,872	443,590	532,308	621,026
$1,300,000	288,654	384,872	481,090	577,308	673,526
$1,400,000	311,154	414,872	518,590	622,308	726,026
$1,500,000	333,654	444,872	556,090	667,308	778,526

* For 2002, the Internal Revenue Code limit on the annual retirement benefits that may be paid from the pension plan was $160,000 and the limit on the amount of compensation that may be recognized by the pension plan was $200,000. The maximum benefit payable under the Benefit Restoration Plan as described on page 38 is $400,000 in 2002. The benefits shown on this table have not been limited by these caps.

The CarMax pension plan will cover employees who satisfy certain age and service requirements. Benefits will be based on a designated percentage of the average of compensation for the five highest of the last 10 consecutive years of employment, weighted according to years of credited service, and integrated with Social Security covered compensation. Years of credited service will include years of employment with Circuit City Stores before the date of the separation. For CarMax pension plan purposes, compensation of participants will include base pay, bonuses, overtime and commissions and exclude amounts realized under any employee stock purchase plan or stock incentive plan. For CarMax pension plan purposes, compensation for those individuals listed in the Summary Compensation Table is substantially the same as the amounts listed under the Salary and Bonus headings.

For purposes of the CarMax pension plan, credited years of past and future service will be 25 years for Mr. Ligon; 37, for Mr. Folliard; 35, for Mr. Browning; 17, for Mr. Dolan; and 30, for Mr. Kunkel at age 65.

To maintain compensation competitiveness and to create a retirement program that restores benefits for CarMax’s more senior executives who are affected by Internal Revenue Code limits on benefits provided under the CarMax pension plan, CarMax plans to implement a retirement benefit restoration plan. Subject to an annual limit, the benefit restoration plan and the Pension Plan together would provide benefits to all employees affected by the Internal Revenue Code limits at approximately the same percentage of compensation as for other employees. CarMax expects that the CarMax named executive officers will participate in this plan.

90

INFORMATION ABOUT CIRCUIT CITY STORES AFTER THE SEPARATION

After the separation, the Circuit City consumer electronics business and its related operations will be the entire business of Circuit City Stores.

The Circuit City Business

Overview

Circuit City’s consumer electronics business is a leading national retailer of brand-name consumer electronics, personal computers and entertainment software. Circuit City sells video equipment, including televisions, digital satellite systems, DVD players, video cassette recorders, camcorders and cameras; audio equipment, including home and portable audio systems and compact disc players; mobile electronics, including car audio, video and security systems; home office products, including personal computers, printers, peripherals, software and facsimile machines; entertainment software, including video games, DVD movies and music; and other consumer electronic products, including wireless phones and corded and cordless telephones and accessories. During fiscal 2001, Circuit City exited the major appliance business. As of February 28, 2002, Circuit City operated 604 Circuit City Superstores in 159 markets throughout the United States and 20 Circuit City Express mall stores. Circuit City has established a presence in virtually all of the nation’s top 100 markets and expects to continue adding to the existing store base as attractive market opportunities arise.

Outlook

Circuit City believes that increased consumer interest in products and services such as big-screen televisions, including digital televisions, plasma televisions and liquid-crystal-display panels; multi-channel video programming devices; digital imaging; wireless communications; and Broadband Internet access will drive profitability in the consumer electronics business during this decade. For that reason, Circuit City is focusing significant resources on store remodeling, sales counselor training, customer service enhancements, marketing programs and supply chain initiatives to take advantage of the growth opportunities these products provide and thus improve the sales and profitability of the Circuit City business.

Over the past two years, Circuit City has experimented with several remodel designs and product category tests to expand the benefits of the new store design to the existing store base. In fiscal 2003, Circuit City plans to draw on these remodel and product category tests to roll out a remodeled video department and lighting upgrades to approximately 300 Superstores, spending an average of $325,000 to $350,000 per store. Circuit City believes that rolling out this remodeled department will enable it to increase its market share in the growing and highly profitable big-screen television category and further solidify its position in the overall video category. The Consumer Electronics Association projects that big-screen television sales will grow at a double-digit rate in calendar 2002. The fiscal 2003 remodeling plan will allow Circuit City to affect a large number of Superstores in a manner that has significant potential for incremental benefits, while minimizing the disruptive impact of the remodeling process. Circuit City expects the remodeling activities will take approximately two weeks to complete in each store. Circuit City will continue testing design ideas for other departments in its Superstores. Circuit City also plans to relocate approximately 10 Superstores in fiscal 2003. In fiscal 2003, Circuit City expects expenditures for remodeling and relocations to total approximately $130 million, of which Circuit City expects to capitalize approximately $70 million and expense approximately $60 million, or 18 cents per share of Circuit City Group Common Stock. Circuit City plans to continue improving the store base in fiscal 2004 and fiscal 2005 by completing the remodel of these 300 stores and relocating additional stores to provide a shopping experience that Circuit City believes is more consistent with the preferences of today’s consumer.

With existing Circuit City initiatives, additional efforts to enhance the business and a relatively stable economy, Circuit City believes it can achieve comparable store sales growth in the mid-single digits for fiscal

91

2003. Circuit City expects that categories where it expanded selections following the exit from the appliance business and categories, such as big-screen televisions, that are benefiting from digital product innovation, will contribute to this growth. Circuit City plans to open approximately 10 Superstores in fiscal 2003. Given our presence in virtually all of the nation’s top metropolitan markets, new Superstores are being added in one- or two-store markets or to increase Circuit City’s presence in existing major markets. Because of the limited planned geographic expansion, Circuit City expects its total sales growth to only slightly exceed comparable store sales growth. Circuit City expects relatively stable gross margins in fiscal 2003. Circuit City also expects a modest increase in its expense ratio in fiscal 2003, despite the anticipated increase in comparable store sales. Planned increases in remodeling and relocation expenses, advertising and systems enhancements are among the anticipated contributors to the higher expense ratio. For the full year, Circuit City expects the fiscal 2003 profit contribution from its finance operation to be similar to the contribution in fiscal 2002.

Circuit City currently expects its business to contribute 75 cents per share to 85 cents per share to the earnings of the Circuit City group in fiscal 2003, before remodeling and relocation expenses. Including these expenses, Circuit City expects its business to contribute 57 cents per share to 67 cents per share to the earnings of the Circuit City group.

Operating Procedures; Merchandising

Each Circuit City store location follows detailed operating procedures and merchandising programs. Included are procedures for inventory maintenance, customer relations, store administration, merchandise display, store security and the demonstration and sale of products. Most merchandise is supplied directly to the stores from one of Circuit City’s eight automated distribution centers, which are strategically located around the country, and from a centrally located automated entertainment software distribution center. Circuit City’s operating regions use a centralized buying organization. The central buying staff reduces costs by purchasing in large volumes and structuring a sound basic merchandising program. 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 varies by market to reflect local competitive conditions.

Suppliers

During fiscal 2002, Circuit City’s 10 largest suppliers accounted for approximately 68% of merchandise purchased. Circuit City’s major suppliers include Sony Electronics, Hewlett Packard, Compaq, Panasonic, JVC, Thomson, Hitachi, Toshiba, Philips and Universal. Brand-name advertised products are sold by all of the Circuit City retail locations. Circuit City has no significant long-term contracts for the purchase of merchandise.

Advertising

Circuit City’s business relies on considerable amounts of advertising to maintain high levels of consumer awareness. Advertising expenditures from continuing operations were 3.8% of net sales and operating revenues in fiscal 2002, 4.0% of net sales and operating revenues in fiscal 2001 and 3.7% of net sales and operating revenues in fiscal 2000. The Circuit City business is generally one of the largest newspaper advertisers in the markets that it serves. Circuit City uses multi-page vehicles and run-of-press newspaper advertisements, network and cable television advertising, magazine advertising, direct mail and interactive media. The multi-page vehicles provide an extensive presentation of the broad selection of products and price ranges Circuit City carries. As part of its competitive strategy, Circuit City advertises low prices and provides customers with a low-price guarantee. For every product that Circuit City sells, with some restrictions, we will meet any advertised price from a local store stocking the same new item. In most cases, if a customer finds a lower advertised price, including Circuit City’s own sale price, within 30 days, Circuit City will refund the difference plus 10% of the difference to the customer.

92

Competition

The consumer electronics industry is highly competitive. Circuit City’s competitors include large specialty, discount or warehouse retailers as well as local, regional and non-brick-and-mortar retailers. Circuit City uses service, selection and pricing to differentiate its stores from the competition. As part of Circuit City’s competitive strategy, the Circuit City Superstores offer a broad selection of brand-name merchandise. Professionally trained sales counselors, convenient credit options, factory-authorized product repair, home delivery, installation centers for automotive electronics, exchange and no-lemon policies and extended warranties reflect a strong commitment to customer service. Circuit City strives to maintain highly competitive prices and offers customers a low-price guarantee.

Employees; Training

Circuit City Superstores are staffed with commissioned and hourly sales associates; sales support personnel such as customer service associates, merchandise specialists and stockpersons; a store manager; one or more sales managers, an operations manager and one or more customer service managers. At April 30, 2002, Circuit City had 28,994 hourly and salaried employees and 12,685 employees who worked on a commission basis. None of these employees are subject to a collective bargaining agreement. Additional personnel are employed during peak selling seasons.

Store associates receive continuous training delivered by customized Web-based interactive courses, supported with in-store mentoring. Courses include product knowledge with an emphasis on new technology, customer service and store operations. Associates also receive online tutoring with links to vendor Web sites for additional resources. Management training programs are designed to prepare future leaders and include Web-based training, in-store activities, online tutoring and classroom instruction.

Consumer Credit

Because consumer electronics and personal computers 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 1991, Circuit City established a credit card finance operation to issue a private-label credit card. In fiscal 2002, approximately 15% of Circuit City’s total sales were made through its private-label credit card and approximately 50% through third-party credit sources. The finance operation’s credit extension, customer service and collection operations are fully automated with state-of-the-art technology to maintain a high level of profitability and customer service. The credit card finance operation also manages a MasterCard and Visa bankcard portfolio. Receivables generated by both the private-label credit card and bankcard programs are financed through asset securitization programs. In fiscal 2003, Circuit City plans to offer a co-branded Circuit City/Visa credit card that will be issued by its finance operation.

E-commerce

Circuit City’s e-Superstore Web site provides broad product selection, convenient purchase and delivery options and in-depth product comparison information. Internet customers can check the inventory of up to three Circuit City Superstores in nearby locations, in addition to the in-stock availability from the e-Superstore. The Web site inventory is also accessible from any store location. Products can be shipped through the e-Superstore for normal shipping charges or they can be picked up using the Express Pickup service at a local Superstore. Products purchased through the e-Superstore are shipped from an existing distribution center directly to the customer. Products purchased through the Web site can be serviced, exchanged or returned to any Circuit City Superstore location. In addition to Circuit City’s own Website, it has partnered with Amazon.com to offer electronic merchandise for immediate in-store pickup at Circuit City stores nationwide to shoppers on the Amazon.com Website.

93

Distribution

At April 30, 2002, Circuit City operated seven automated regional Circuit City electronics distribution centers, each designed to serve stores within a 500-mile range. These centers use 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 larger non-conveyable electronics products. Circuit City believes that for most merchandise the use of the distribution centers enables it to distribute efficiently a broad selection of merchandise to its stores, reduce inventory requirements at individual stores, benefit from volume purchasing and maintain accounting control. Additionally, Circuit City operates an automated centralized entertainment software distribution center that serves all stores. Most of Circuit City’s store merchandise is distributed through its distribution centers, although it expects to add direct-to-store delivery in fiscal 2003 for key products where timely delivery to the store is critical to sales.

Service

Circuit City offers service and repairs for most of the hard goods it sells. Customers also are able to purchase extended warranties on most of the merchandise that it sells. Circuit City sells extended warranty programs on behalf of unrelated third parties that are the primary obligors. Under these programs, Circuit City has no contractual liability to the customer. In states where third-party warranty sales are not permitted, a warranty is sold for which Circuit City is the primary obligor. During fiscal 2001, Circuit City initiated the Replacement Protection Plan, a third-party program, which covers various types of electronics merchandise, including some types of TVs, VCRs, MP3 players and Mini Disc players. If the customer purchases an RPP, the customer can return the defective merchandise during the plan period and receive a check for the original purchase price of the merchandise, plus any shipping and handling.

94

Circuit City Stores Management

The table below sets forth the executive officers of Circuit City Stores, Inc.:

Name	Age	Office
W. Alan McCollough	52	President and Chief Executive Officer
Michael T. Chalifoux	55	Executive Vice President, Chief Financial Officer and Corporate Secretary
John W. Froman	48	Executive Vice President, Chief Operating Officer
Kim D. Maguire	46	Executive Vice President, Merchandising
Ann-Marie Austin-Stephens	43	Senior Vice President, Store Innovation and Development
Dennis J. Bowman	48	Senior Vice President and Chief Information Officer
W. Stephen Cannon	50	Senior Vice President and General Counsel
Fiona P. Dias	36	Senior Vice President, Marketing
Philip J. Dunn	49	Senior Vice President, Treasurer and Controller
W. Austin Ligon*	51	Senior Vice President, Automotive
Gary M. Mierenfeld	51	Senior Vice President, Distribution and National Service
Jeffrey S. Wells	56	Senior Vice President, Human Resources and Training

* After the separation, Mr. Ligon will no longer be an executive officer of Circuit City Stores, Inc.

95

CIRCUIT CITY STORES’ RELATIONSHIP WITH CARMAX AFTER THE SEPARATION

The specific terms and conditions of the separation are set forth in the separation agreement between Circuit City Stores and CarMax.

The CarMax group has been, and until the separation will be, a part of Circuit City Stores. As a result, in the ordinary course of CarMax’s business, the CarMax group incurs expenses in connection with miscellaneous corporate, legal, finance, planning, strategy, marketing, human resource, cash management, payment processing and other services, which expenses are either reimbursed by the CarMax group to Circuit City Stores or charged to the CarMax group as part of the general allocation of the Circuit City Stores consolidated corporate overhead expenses. Following the separation, the relationship between Circuit City Stores and CarMax will be governed by a number of agreements. These agreements include:

· a tax allocation agreement,

· an employee benefits agreement, and

· a transition services agreement.

The material terms of the separation agreement and these other agreements are described below. The separation agreement, the tax allocation agreement, the employee benefits agreement and the transition services agreement have been filed as exhibits to the registration statement filed by CarMax of which this proxy statement/prospectus forms a part, and the summaries of these documents that follow are qualified in their entirety by reference to the full text of those documents, which are incorporated into this document by reference. For more information on how you can obtain copies of these documents, see “Where You Can Find More Information.”

Agreements between Circuit City Stores and CarMax Relating to the Separation

Separation Agreement

The separation agreement provides that, to the extent not previously transferred to CarMax, Circuit City Stores will transfer all of its remaining CarMax group assets to CarMax or to one of its subsidiaries before the redemption date. Similarly, to the extent not previously assumed by CarMax, CarMax or one of its subsidiaries will assume all of Circuit City Stores’ remaining CarMax group liabilities before the redemption date. CarMax has agreed to take each CarMax group asset and to assume and perform each CarMax group liability on an “as is, where is” basis, and Circuit City Stores has made no representations or warranties with respect to any aspect of the CarMax assets or the CarMax liabilities.

Other matters governed by the separation agreement are joint insurance arrangements, non-solicitation of employees, provision and retention of records, access to information and confidentiality, cooperation with respect to governmental filings, access to property, rights to corporate names and trademarks, control of ongoing litigation, and restrictions on competitive activities. In addition, the separation agreement provides that CarMax will pay to Circuit City Stores, in recognition of Circuit City Stores’ continuing contingent liability on 23 leases assigned by Circuit City Stores to a subsidiary of CarMax, a special dividend of approximately $28.4 million on the separation date.

Pursuant to the separation agreement, CarMax and its subsidiaries have agreed to indemnify Circuit City Stores and its affiliates, representatives and security holders for any losses arising out of any breach of the separation agreement, the tax allocation agreement, the transition services agreement, the employee benefits agreement, any instrument conveying any of the CarMax group assets or CarMax group liabilities to CarMax or any failure by CarMax to assume and perform any of the CarMax group liabilities. In addition, CarMax and its subsidiaries have agreed to indemnify Circuit City Stores and its affiliates and security holders for any losses arising out of any liability relating to the separation, redemption and distribution. CarMax has also agreed to

96

indemnify Circuit City Stores against any liabilities relating to the business or financial information of CarMax included in this proxy statement/prospectus. Circuit City Stores and its subsidiaries have agreed to indemnify CarMax and its affiliates, representatives and security holders for any losses arising out of any breach of the separation agreement, the tax allocation agreement, the transition services agreement, the employee benefits agreement, any instrument conveying any of the CarMax group assets or CarMax group liabilities to CarMax or any failure by Circuit City Stores to perform any of the Circuit City group liabilities. Circuit City Stores has also agreed to indemnify CarMax against any liabilities relating to the business or financial information of Circuit City Stores included in this proxy statement/prospectus.

The separation agreement may be terminated and the redemption and distribution may be abandoned by Circuit City Stores’ board of directors, in its sole discretion, at any time before the first mailing of the notice of redemption to holders of CarMax Group Common Stock. After that time, the separation agreement may only be terminated upon the issuance by a governmental authority of an injunction or order prohibiting or preventing the consummation of the separation.

Tax Allocation Agreement

The tax allocation agreement governs Circuit City Stores’ and CarMax’s respective rights, responsibilities and obligations after the separation with respect to taxes for the periods ending on or before the separation. Generally, the tax allocation agreement provides that pre-separation taxes that are attributable to the business of one party will be borne solely by that party.

If the separation fails to qualify as a tax-free transaction to Circuit City Stores, among other possible tax consequences, Circuit City Stores would recognize taxable gain equal to the excess of the fair market value of the CarMax, Inc. common stock distributed in exchange for CarMax Group Common Stock over Circuit City Stores’ tax basis in such CarMax, Inc. common stock. Please see “Proposal One: The CarMax Separation Proposal—U.S. Federal Income Tax Consequences of the Separation” on page 33 for a more detailed discussion of the U.S. federal income tax consequences of the separation to Circuit City Stores and its shareholders. If the separation fails to qualify as a tax-free distribution because of some action of CarMax (including certain acquisitions of CarMax stock or assets), then under the tax allocation agreement, CarMax will be solely liable for any resulting corporate taxes to Circuit City Stores.

Under U.S. federal income tax laws, CarMax and Circuit City Stores are severally liable for all of Circuit City Stores’ federal income taxes attributable to the periods prior to and including the current taxable year of Circuit City Stores, which ends on February 28, 2003. This means that if Circuit City Stores fails to pay the taxes attributable to it under the tax allocation agreement for periods prior to and including the current taxable year of Circuit City Stores, CarMax may be responsible for these tax liabilities.

Employee Benefits Agreement

The employee benefits agreement will cover a wide range of compensation and benefit issues related to the separation. In general, Circuit City Stores is responsible before the separation for all employment and benefit-related obligations and liabilities of CarMax employees, Circuit City Stores employees transferred to CarMax in the separation, and their dependents and beneficiaries, except for liabilities transferred to CarMax under the employee benefits agreement. CarMax is responsible for these employment and benefit-related obligations and liabilities after the separation and for any other liabilities transferred to it under the employee benefits agreement. Circuit City Stores will continue to be responsible for the employment and benefit-related obligations and liabilities of Circuit City Stores employees following the separation. For purposes of this discussion, CarMax employees and Circuit City Stores employees transferred to CarMax in the separation both will be referred to as CarMax employees.

97

For a period up to one year following the separation, Circuit City Stores will assist CarMax in the administration of benefits for CarMax employees, including the administration of CarMax’s employee benefit plans and payroll processes. CarMax will reimburse Circuit City Stores for the cost of these services in the manner and in the amounts provided for in the transition services agreement.

After the separation, CarMax no longer will participate in Circuit City Stores’ employee benefit plans but will have established its own employee benefit plans that are substantially similar to the plans sponsored by Circuit City Stores prior to the separation. For more information, see “Proposal One: The CarMax Separation Proposal—Employee Benefits and Compensation Matters—New CarMax Benefit Plans” beginning on page 35. The following paragraphs briefly summarize the other provisions of the employee benefits agreement regarding this transition.

Employee Benefit Plans.    No later than the date of the separation, CarMax will assume sponsorship of the Retirement Plan of CarMax, Inc., which was established as described above under the caption “Proposal One: The CarMax Separation Proposal—Employee Benefits and Compensation Matters—New CarMax Benefit Plans—Pension Plan,” and certain other benefit plans. Any Circuit City Stores employee who is transferred to CarMax on or before February 28, 2003 and who has an accrued benefit under the Retirement Plan of Circuit City Stores, Inc. will have his or her accrued benefit transferred to the Retirement Plan of CarMax, Inc. as soon as possible after he or she becomes a CarMax employee. Circuit City Stores and CarMax also will transfer accounts for CarMax employees from the Circuit City Stores 401(k) Savings Plan to the CarMax, Inc. 401(k) Savings Plan, and CarMax will assume the sponsorship of and liability for the CarMax, Inc. 401(k) Savings Plan and all benefits payable under the plan. CarMax will ensure that all service, compensation, and other benefit-affecting determinations recognized under Circuit City Stores’ plans prior to the separation are fully recognized and credited under CarMax’s plans, except when duplicate benefits would result.

For employees who transfer between Circuit City Stores and CarMax after the separation and on or before February 28, 2003, Circuit City Stores and CarMax will mutually credit service recognized by the other under the terms of their employee benefit plans, except for benefit accruals under their pension plans, the treatment of which is described above. Circuit City Stores and CarMax also will provide coordinated coverage and benefits under health and welfare plans during this period for individuals who cease employment with Circuit City Stores and immediately become employees of CarMax, and for individuals who cease employment with CarMax and immediately become employees of Circuit City Stores.

As described under the caption “Proposal One: The CarMax Separation Proposal Employee Benefits and Compensation Matters—New CarMax Benefit Plans—Welfare Benefit Plans” above, CarMax will implement health and welfare benefit plans that will provide benefits after the separation that are essentially identical to the benefits that CarMax employees currently receive. The employee benefits agreement contains transitional rules to ensure that CarMax employees’ coverage, costs and benefits are not adversely affected or duplicated in connection with the separation.

Executive and Other Benefits.    Circuit City Stores has entered into individual agreements with certain executives who are CarMax employees that establish the rights of the covered individuals to special executive compensation and benefits, such as supplemental pension benefits, deferred compensation, and severance agreements. Some of these individual agreements provide for the payment of compensation and benefits in the event of the covered individual’s termination of employment. CarMax will assume all liabilities and benefits under these individual agreements. The transfer of a CarMax employee or a Circuit City Stores employee to the other corporation in connection with the separation will not be deemed to be a termination for purposes of these agreements, the Circuit City Stores Supplemental Executive Retirement Plan, or other similar programs.

Prior to the separation, CarMax will adopt the CarMax Stock Incentive Plan, the CarMax Annual Performance-Based Bonus Plan, and the CarMax Supplemental Executive Retirement Plan, all of which will be substantially similar to the corresponding Circuit City Stores plan. CarMax will also assume the CarMax

98

Employee Stock Purchase Plan. The CarMax Stock Incentive Plan and the CarMax Performance-Based Bonus Plan are subject to approval of shareholders. For more information, see “Proposal Four: CarMax, Inc. 2002 Incentive Plan” beginning on page 43 and “Proposal Three: CarMax, Inc. Annual Performance-Based Bonus Plan” beginning on page 41.

In connection with the separation, Circuit City Stores will adjust options on Circuit City Group Common Stock held by Circuit City Stores employees under the 1994 Stock Incentive Plan to reflect the effect on the Circuit City Group Common Stock of the dividend of CarMax, Inc. common stock. This adjustment is described above under the caption “Employee Benefits and Compensation Matters.” Similarly, Circuit City Stores stock appreciation rights outstanding under the Circuit City Stores Stock Incentive Plans will be adjusted to reflect the effect of the dividend of CarMax, Inc. common stock. Options on CarMax, Inc. common stock held by CarMax employees will not be adjusted in connection with the separation and, after the separation, will be settled by CarMax pursuant to its Stock Incentive Plan. Additionally, the restricted shares of Circuit City Group Common Stock that are outstanding under the Circuit City Stores Stock Incentive Plans will receive the dividend of CarMax, Inc. common stock but will not otherwise be adjusted in connection with the separation. Circuit City Stores will hold the shares issued in the dividend of CarMax, Inc. common stock subject to the same restrictions that are applicable to the restricted shares of Circuit City Group Common Stock on which the dividend is paid.

CarMax will be responsible for determining all awards payable under the CarMax Annual Performance-Based Bonus Plan for the year of the separation and thereafter, including determining the extent to which the established performance criteria have been met and the payment level for employees who transferred from Circuit City Stores. CarMax also will be liable for any awards payable under the plan.

CarMax will implement the CarMax Employee Stock Purchase Plan as the successor to the 1997 Circuit City Stores, Inc. Employee Stock Purchase Plan for CarMax Group Employees. All amounts credited to CarMax employees’ accounts in the plan at the separation will be applied on the next exercise date following the separation toward the purchase of CarMax, Inc. common stock. The CarMax Employee Stock Purchase Plan will continue in effect following the separation.

All liabilities relating to CarMax employees under the Circuit City Stores Supplemental Retirement Plan will be transferred to the CarMax Supplemental Executive Retirement Plan. CarMax will assume all liabilities under the CarMax Supplemental Executive Retirement Plan and certain other nonqualified pension plans and arrangements for periods before and after the separation and will make all benefit payments to CarMax employees whenever required pursuant to the terms of the plans and arrangements.

Transition Services Agreement

Under the transition services agreement Circuit City Stores will provide the following services to CarMax:

· Category I Services: payroll, human resources, benefits administration, purchasing of television advertising and car stereo installation and car stereo displays. The initial term for these services will be six months with two three month renewal options.

· Category II Services: tax sharing services, cafeteria services and telecommunications. The initial term for these services is twelve months with two six month renewal options.

· Category III Services: computer center support, special technical services, security services, relocation services and administrative services. The initial term for these services is twenty-four months with four six-month renewal options.

CarMax will pay Circuit City Stores the allocable portion of all direct and indirect costs for providing these services plus 10%.

Except with respect to the Category III services, CarMax has a general obligation to use reasonable efforts to establish alternative sources for these services and CarMax may terminate any or all services for any reason upon thirty days’ notice to Circuit City Stores. With respect to Category III Services, CarMax may terminate any or all services for any reason upon six months notice to Circuit City Stores.

99

MARKET PRICE AND DIVIDEND INFORMATION FOR

CIRCUIT CITY GROUP COMMON STOCK AND CARMAX GROUP COMMON STOCK

The following table sets forth the intra-day high and low sale prices per share of the Circuit City Group Common Stock and CarMax Group Common Stock as quoted on the NYSE. The quarterly dividend data shown below applies to the Circuit City Group Common Stock for the applicable periods. No dividend data is shown for the CarMax Group Common Stock because no dividends have been paid on CarMax Group Common Stock.

	Circuit City Group Common Stock						CarMax Group Common Stock
	High		Low		Dividend		High		Low
Fiscal 2001
First Quarter	$	65.19	$	37.25	$	.0175	$	4.25	$	1.56
Second Quarter	$	56.63	$	21.00	$	.0175	$	4.88	$	2.63
Third Quarter	$	28.25	$	11.56	$	.0175	$	5.38	$	3.38
Fourth Quarter	$	19.90	$	8.69	$	.0175	$	5.50	$	3.69
Dividend Total					$	.0700
Fiscal 2002
First Quarter	$	16.85	$	10.34	$	.0175	$	15.49	$	4.70
Second Quarter	$	20.25	$	14.50	$	.0175	$	20.50	$	11.50
Third Quarter	$	17.84	$	9.55	$	.0175	$	21.00	$	9.20
Fourth Quarter	$	31.40	$	16.08	$	.0175	$	29.02	$	19.35
Dividend Total					$	.0700
Fiscal 2003
First Quarter	$	24.59	$	16.99	$	.0175	$	34.00	$	24.91
Second Quarter (through June 4, 2002)	$	22.98	$	21.32			$	26.65	$	23.80

On February 21, 2002, the last full trading day prior to Circuit City Stores’ public announcement of the separation, the closing price of the Circuit City Group Common Stock was $23.59 and the closing price of CarMax Group Common Stock was $28.51. On June 4, 2002, the closing price of the Circuit City Group Common Stock was $22.06 and the closing price of the CarMax Group Common Stock was $24.62.

As of May 22, 2002, there were approximately 8,200 holders of record of Circuit City Group Common Stock and approximately 400 holders of record of CarMax Group Common Stock.

100

BENEFICIAL OWNERSHIP OF CIRCUIT CITY GROUP COMMON STOCK

AND CARMAX GROUP COMMON STOCK

The following table sets forth beneficial ownership information as of March 18, 2002 for the Circuit City Group Common Stock and the CarMax Group Common Stock owned by:

· the Circuit City Stores Chief Executive Officer and the four other most highly compensated officers of Circuit City Stores,

· each director of Circuit City Stores,

· directors and executive officers of Circuit City Stores as a group, and

· each person who is known by Circuit City Stores to beneficially own more than 5% of the outstanding shares of Circuit City Group Common Stock or CarMax Group Common Stock.

Unless otherwise noted, each shareholder has sole voting power and sole investment power with respect to securities shown in the table below.

Name	Circuit City Group Option Shares Which May be Acquired Within 60 Days After March 18, 2002		Shares of Circuit City Group Common Stock Beneficially Owned as of March 18, 2002 (1)		Percent of Series		CarMax Group Option Shares Which May Be Acquired Within 60 Days After March 18, 2002	Shares of CarMax Group Common Stock Beneficially Owned as of March 18, 2002 (2)		Percent of Series
Circuit City Stores Named Executive Officers
W. Alan McCollough**	845,000		1,009,377	(3)	*		—	—		*
John W. Froman	147,500		263,433	(3)(4)	*		—	—		*
Michael T. Chalifoux**	447,500		670,683	(3)	*		—	—		*
Dennis J. Bowman	157,750		179,289	(3)	*		—	—		*
W. Austin Ligon***	—		26,388	(5)	*		128,750	1,363,250	(6)	3.7%
Directors
Carolyn H. Byrd	—		503		*		—	60		*
Richard N. Cooper	11,902		67,656		*		871	962		*
Barbara S. Feigin	12,774		20,227		*		871	871		*
James F. Hardymon	844		6,316		*		—	600		*
Robert S. Jepson, Jr.	8,034		39,042		*		895	986		*
Hugh G. Robinson	12,036		13,147		*		871	962		*
Paula G. Rosput	—		342		*		—	60		*
Mikael Salovaara	7,836		88,309	(7)	*		871	24,062	(8)	*
Richard L. Sharp	1,450,000	(9)	1,753,737		*		—	—		*
John W. Snow	11,902		18,510		*		871	962		*
Carolyn Y. Woo	—		594		*		—	66		*
All directors and executive officers as a group (23 persons)	3,665,328		4,881,272	(3)(10)	2.3	%	134,000	1,392,841	(11)	3.8	%
Beneficial Owners of More than 5%
Wellington Management Company, LLP	N/A		17,814,108	(12)	8.5	%	N/A	N/A		N/	A
75 State Street Boston, MA 02109
Capital Research and Management Company	N/A		20,465,000	(13)	9.8	%	N/A	1,825,000	(14)	4.9	%
333 South Hope Street Los Angeles, CA 90071
Ronald Juvonen	N/A		N/A		N/	A	N/A	3,431,800	(15)	9.3	%
c/o Downtown Associates, LLC 674 Unionville Road, Suite 105 Kennett Square, PA 19348
Orbis Holdings Limited     34 Bermudiana Road     Hamilton HM11 Bermuda	N/A		N/A		N/	A	N/A	2,530,393	(16)	6.8	%
FMR Corporation     82 Devonshire Street Boston, MA 02109	N/A		N/A		N/	A	N/A	2,098,010	(17)	5.7	%
Stephen F. Mandel, Jr.,	N/A		N/A		N/	A	N/A	1,928,500	(18)	5.2	%
Two Greenwich Plaza,
Greenwich, CT 06830

* Less than 1% of class, based on the total number of shares of Circuit City Group Common Stock and CarMax Group Common Stock outstanding on May 22, 2002.

** Mr. McCollough and Mr. Chalifoux are also directors of Circuit City Stores, Inc.

101

*** After the separation, Mr. Ligon will no longer be an executive officer of Circuit City Stores, Inc.

(1) Includes shares of Circuit City Group Common Stock that could be acquired through the exercise of stock options within 60 days after March 18, 2002.

(2) Includes shares of CarMax Group Common Stock that could be acquired through the exercise of stock options within 60 days after March 18, 2002.

(3) Includes restricted shares of Circuit City Group Common Stock as follows: Mr. McCollough 25,250; Mr. Froman 55,690 ; Mr. Chalifoux 20,250 and Mr. Bowman 9,355; and 71,332 awarded to other executive officers.

(4) Includes 5,500 shares of Circuit City Group Common Stock held by Mr. Froman’s wife.

(5) Includes 15,000 shares of Circuit City Group Common Stock held by Mr. Ligon’s wife. Mr. Ligon disclaims beneficial ownership of these shares.

(6) Includes 50,700 shares of CarMax Group Common Stock held by Mr. Ligon’s children. Mr. Ligon disclaims beneficial ownership of these shares.

(7) Includes 34,465 shares of Circuit City Group Common Stock held by Trewstar LLC. Mr. Salvovaara disclaims beneficial ownership of these shares.

(8) Includes 23,100 shares of CarMax Group Common Stock held by Trewstar LLC. Mr. Salvovaara disclaims beneficial ownership of these shares.

(9) As of May 31, 2002, Mr. Sharp had 775,500 stock options (including shares that cannot be acquired within 60 days) on shares of Circuit City Group Common Stock. Circuit City Stores expects that a portion of Mr. Sharp’s 775,500 outstanding stock options on Circuit City Group Common Stock will be converted into options to purchase CarMax Group Common Stock or CarMax, Inc. common stock in connection with his retirement as Chairman of Circuit City Stores and his anticipated service on the CarMax board of directors. For further details, see footnote (8) under the “New Plan Benefits” on page 61.

(10) Beneficial ownership is disclaimed for a total of 40,365 shares.

(11) Beneficial ownership is disclaimed for a total of 88,800 shares.

(12) Information concerning the Circuit City Group Common Stock beneficially owned by Wellington Management Company, LLP (“Wellington”) as of December 31, 2001, was obtained from a Schedule 13G dated February 12, 2002. The filing indicates that of the 17,814,108 shares beneficially owned, Wellington has shared voting power for 10,957,830 shares and shared dispositive power for 17,814,108 shares. The filing indicates that Wellington is a parent holding company and may be deemed to beneficially own the 17,814,108 shares in its capacity as a registered investment adviser.

(13) Information concerning the Circuit City Group Common Stock beneficially owned as of December 31, 2001, by Capital Research and Management Company was obtained from a Schedule 13G/A dated February 11, 2002. According to this filing, Capital Research and Management Company, an investment adviser registered under the Investment Advisers Act of 1940, has sole dispositive power for 20,465,000 shares, has no voting power for these shares and disclaims beneficial ownership of any shares.

(14) Information concerning the CarMax Group Common Stock beneficially owned as of December 31, 2001, by Capital Research and Management Company was obtained from a Schedule 13G/A dated February 11, 2002. According to this filing, Capital Research and Management Company, an investment adviser registered under the Investment Advisers Act of 1940, has sole dispositive power for 1,825,000 shares, has no voting power for these shares and disclaims beneficial ownership of any shares.

(15) Information concerning the CarMax Group Common Stock beneficially owned by Ronald Juvonen as of December 31, 2001, was obtained from a Schedule 13G/A dated February 8, 2002. According to this filing, the shares are held by Downtown Associates I, L.P.; Downtown Associates II, L.P.; Downtown Associates III, L.P.; Downtown Associates IV, L.P. and Downtown Foundations, L.P. (collectively, the “Downtown Funds”) and Ronald Juvonen individually. The general partner of the Downtown Funds is Downtown Associates, L.L.C. Ronald Juvonen, as the managing member of the general partner, has sole voting power and sole dispositive power with respect to the shares.

(16) Information concerning the CarMax Group Common Stock beneficially owned by Orbis Holdings Limited (“Orbis Holdings”), a parent holding company, as of December 31, 2001, was obtained from a Schedule 13G/A dated February 14, 2002, filed by: Orbis Holdings, Orbis Asset Management Limited (“Orbis Asset”) and Orbis Investment Management Limited (“Orbis Investment”), an investment adviser. According to this filing, of the 2,530,393 shares beneficially owned: Orbis Holdings has shared voting and

102

dispositive power for all of the shares, but disclaims beneficial ownership of these shares, Orbis Investment has shared voting and dispositive power for 2,350,000 shares but disclaims beneficial ownership of these shares and Orbis Asset has shared voting and dispositive power for 180,393 shares, but disclaims beneficial ownership of these shares. The filing indicates that Orbis Holdings, Orbis Investment and Orbis Asset may be deemed to constitute a “group” for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended.

(17) Information concerning the CarMax Group Common Stock beneficially owned by FMR Corp. (“FMR”) as of December 31, 2001, was obtained from a Schedule 13G dated February 14, 2002. According to the Schedule 13G, FMR Corp. is a parent holding company and certain members of the family of Edward C. Johnson 3rd may be deemed members of a group that controls FMR. The Schedule 13G indicates that of the 2,098,010 shares beneficially owned: (i) 1,398,400 shares are beneficially owned by Fidelity Management & Research Company, a wholly owned subsidiary of FMR and a registered investment adviser (“Fidelity Research”); (ii) 480,510 shares are beneficially owned by Fidelity Management Trust Company, a wholly owned subsidiary of FMR Corp. and a bank which serves as investment manager for certain institutional accounts (“Fidelity Trust”); and (iii) 219,100 shares are beneficially owned by Fidelity International Limited (“Fidelity International”), a foreign-based subsidiary and investment adviser for certain institutional investors. FMR and Mr. Johnson have sole power to dispose of the shares beneficially owned by Fidelity Research and Fidelity Trust and sole power to vote the shares beneficially owned by Fidelity Trust. However, the trustees of the mutual funds managed by Fidelity Research have sole power to vote the shares that are beneficially owned by Fidelity Research. FMR and Fidelity International believe that they are not acting as a “group” for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, and therefore believe that they are not otherwise required to attribute to each other the “beneficial ownership” of the securities “beneficially owned” by the other corporation within the meaning of Rule 13d-3 of the Exchange Act.

(18) Information concerning the CarMax Group Common Stock beneficially owned by Stephen F. Mandel, Jr. as of March 18, 2002, was obtained from a Schedule 13G filed March 27, 2002. According to the Schedule 13G, Mr. Mandel, Jr., as the managing member of the general partner of certain limited partnerships that own CarMax Group Common Stock and as managing member of an entity whose client owns CarMax Group Common Stock, shares power to vote or dispose of shares directly owned as follows: (i) 69,426 shares owned by Lone Spruce, L.P.; (ii) 152,352 shares owned by Lone Balsam, L.P.; (iii) 127,281 shares owned by Lone Sequoia, L.P.; and (iv) 1,579,441 shares owned by Lone Pine Capital LLC. Each of Lone Spruce, Lone Balsam, Lone Sequoia and Lone Pine Capital has shared voting and shared dispositive power for the shares they hold.

103

OWNERSHIP OF CARMAX, INC. COMMON STOCK

BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Before the separation, all of the outstanding shares of CarMax, Inc. common stock are and will be held beneficially and of record by Circuit City Stores. The following table sets forth information concerning expected beneficial ownership of the CarMax, Inc. common stock after giving effect to the separation by:

· each person or entity known to CarMax who will beneficially own more than 5% of the outstanding shares of CarMax, Inc. common stock;

· each person who CarMax currently knows will be one of its directors or named executive officers at the time of the separation; and

· as a group, all persons who CarMax currently knows will be its directors and executive officers at the time of the separation.

The following information:

· assumes that each person or entity listed has the same ownership of CarMax on May 22, 2002 as on March 18, 2002;

· gives effect to the separation for the percentage ownership information as if it had occurred on May 22, 2002;

· in the case of percentage ownership information, assumes that immediately after the separation there are 103,026,870 shares of CarMax, Inc. common stock outstanding, which is the number that would have been outstanding if the separation had occurred on May 22, 2002;

· reflects a redemption ratio of one share of CarMax, Inc. common stock for each share of CarMax Group Common Stock held by persons listed in the table below;

· assumes a distribution ratio of 0.314 of a share of CarMax, Inc. common stock for each share of Circuit City Group Common Stock held on the distribution record date; and

· gives effect to the conversion, at an assumed conversion ratio of one to one, of each option to purchase shares of CarMax Group Common Stock issued under employee stock incentive plans and outstanding on the date of the separation into an option on substantially the same terms to purchase shares of CarMax, Inc. common stock.

The actual number of shares of CarMax, Inc. common stock outstanding as of the date of the separation may differ to the extent that outstanding stock options are exercised between May 22, 2002 and the date of the separation and to the extent the assumed distributions and conversion ratios differ from the actual ratios.

104

Unless otherwise noted, CarMax believes each person or entity listed below has sole voting power and sole investment power with respect to securities shown in the table below.

Name	Number of Shares Beneficially Owned Immediately After Separation		Percentage of Shares Beneficially Owned Immediately After Separation
Named Executive Officers
W. Austin Ligon**	1,371,539	(1)	*
Thomas J. Folliard	205,991		*
Keith D. Browning**	232,545		*
Michael K. Dolan	115,938	(2)	*
Joseph S. Kunkel	19,416		*
Directors/Director Nominees
Jeffrey E. Garten	0		*
Hugh G. Robinson	5,092		*
Richard L. Sharp	550,896	(3)	*
John W. Snow	6,776		*
William R. Tiefel	0		*
All directors and executive officers as a group (8 persons)	2,508,192	(4)	*
Beneficial Owners of More than 5%
Wellington Management Company, LLP	5,595,888	(5)	5.4%
Capital Research Management	8,253,604	(6)(7)	7.9%

* Less than 1% of class, based on the total number of shares of CarMax, Inc. common stock outstanding as of May 22, 2002.

** Mr. Ligon and Mr. Browning are also directors of CarMax, Inc.

(1) Includes 50,700 deemed shares of CarMax, Inc. held by Mr. Ligon’s children. Mr. Ligon disclaims beneficial ownership of these shares.

(2) Includes 25,000 restricted deemed shares of CarMax, Inc.

(3) Circuit City Stores expects that a portion of Mr. Sharp’s 775,500 outstanding options on Circuit City Group Common Stock will be converted into options to purchase CarMax Group Common Stock or CarMax, Inc. common stock. These options are not included in the 550,896 shares of CarMax, Inc. common stock expected to be beneficially owned by Mr. Sharp after the separation. For further details, see footnote (8) under the “New Plan Benefits” table on page 61.

(4) Beneficial ownership is disclaimed for a total of 50,700 deemed shares.

(5) Information concerning the CarMax, Inc. deemed shares that will be beneficially owned by Wellington Management Company, LLP (“Wellington”), was derived from a Schedule 13G dated February 12, 2002 filed by Wellington concerning the Circuit City Group Common Stock beneficially owned by Wellington as of December 31, 2001. Based on this filing, of the 5,595,888 deemed shares beneficially owned, Wellington has shared voting power for 3,442,148 deemed shares and shared dispositive power for 5,595,888 deemed shares. The filing indicates that Wellington is a parent holding company and may be deemed to beneficially own the 5,595,888 deemed shares in its capacity as a registered investment adviser.

(6) Information concerning the CarMax, Inc. deemed shares that will be beneficially owned by Capital Research and Management Company was derived from a Schedule 13G/A dated February 11, 2002 concerning the Circuit City Group Common Stock beneficially owned by Capital Research and Management Company as of December 31, 2001. Based on this filing, Capital Research and Management Company, an investment adviser registered under the Investment Advisers Act of 1940, has sole dispositive power for 6,428,604 deemed shares, has no voting power for these shares and disclaims beneficial ownership of any shares.

(7) Information concerning the CarMax, Inc. deemed shares that will be beneficially owned by Capital Research and Management Company was derived from a Schedule 13G/A dated February 11, 2002 concerning the CarMax Group Common Stock beneficially owned by Capital Research and Management Company as of December 31, 2001. Based on this filing, Capital Research and Management Company, an investment adviser registered under the Investment Advisers Act of 1940, has sole dispositive power for 1,825,000 deemed shares, has no voting power for these shares and disclaims beneficial ownership of any shares.

105

DESCRIPTION OF CARMAX, INC. CAPITAL STOCK AFTER THE SEPARATION

The following is a description of the material terms of CarMax, Inc.’s capital stock. The forms of CarMax, Inc.’s articles of incorporation and bylaws, as these documents are expected to be in effect at the time of the separation, have been filed as exhibits to the registration statement, of which this document is a part. For more information on how you can obtain copies of these documents, see “Where You Can Find More Information.” You are urged to read the forms of CarMax’s articles of incorporation and bylaws in their entirety.

Authorized Capital Stock

CarMax, Inc.’s authorized capital stock will consist of 20,000,000 shares of preferred stock, par value $20.00 per share, and 350,000,000 shares of common stock, par value $0.50 per share. Based on information available to CarMax as of May 22, 2002, it is estimated that approximately 103 million shares of CarMax, Inc. common stock will be outstanding immediately after the separation (assuming no options to purchase shares of CarMax Group Common Stock are exercised before the separation). No shares of CarMax preferred stock would be outstanding.

CarMax Common Stock

The holders of CarMax, Inc. common stock will be entitled to one vote for each share on all matters voted on by shareholders, including elections of directors, and, except as otherwise required by law or provided in any resolution adopted by the CarMax board of directors with respect to any series of preferred stock (a “preferred stock designation”), the holders of CarMax, Inc. common stock will possess all of the voting power. The CarMax articles of incorporation will not provide for cumulative voting in the election of directors. Subject to any preferential rights of any outstanding series of CarMax preferred stock created by the CarMax board of directors from time to time, the holders of CarMax, Inc. common stock will be entitled to such dividends as may be declared from time to time by the CarMax board of directors from funds legally available for the payment of dividends, and, upon liquidation, dissolution or winding up, will be entitled to receive pro rata all assets available for distribution to the holders of CarMax, Inc. common stock after payment of a proper amount to the holders of any series of preferred stock that may be issued in the future. For a more complete discussion of the CarMax dividend policy, see the subheading “Dividends” in the comparison of rights table on page 25 .

CarMax Preferred Stock

CarMax’s articles of incorporation authorize the CarMax board of directors to establish one or more series of preferred stock and to determine, with respect to any series of preferred stock, the terms and rights of such series, including, but not limited to:

· the designation of the series;

· the number of shares of the series, which number the CarMax board of directors may later, except where otherwise provided in the preferred stock designation, increase or decrease, but not below the number of shares of that series then outstanding;

· whether dividends, if any, will be cumulative or noncumulative, and, in the case of shares of any series having cumulative dividend rights, the date or dates or method of determining the date or dates from which dividends on the shares of the series having cumulative dividend rights shall be cumulative;

· the rate of any dividends, or method of determining the dividends, payable to the holders of the shares of the series, any conditions upon which the dividends will be paid and the date or dates or the method for determining the date or dates upon which the dividends will be payable;

· the redemption rights and price or prices, if any, for shares of the series;

106

· the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series;

· the amounts payable on and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of CarMax’s affairs;

· whether the shares of the series will be convertible or exchangeable into shares of any other class or series, or any other security, of CarMax or any other corporation, and, if so, the specification of the other class or series or the other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates as of which the shares will be convertible or exchangeable and all other terms and conditions upon which the conversion or exchange may be made;

· restrictions on the issuance of shares of the same series or of any other class or series; and

· the voting rights, if any, of the holders of the shares of the series.

CarMax believes that the ability of its board of directors to issue one or more series of preferred stock will provide it with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. The authorized shares of CarMax preferred stock, as well as shares of CarMax, Inc. common stock, will be available for issuance without further action by its shareholders unless required by applicable law or the rules of any stock exchange or automated quotation system on which CarMax securities may be listed or traded. The NYSE currently requires shareholder approval as a prerequisite to listing shares in several instances, including where the present or potential issuance of shares could result in an increase of at least 20% in the number of outstanding shares of common stock, or in the amount of voting securities, outstanding. The NYSE does not require approval for issuances for cash in public offerings and some private offerings. If the approval of CarMax’s shareholders is not required for the issuance of shares of its preferred stock or common stock, the CarMax board of directors may determine not to seek shareholder approval.

Although CarMax believes its board of directors will have no intention of immediately doing so, it could issue a series of preferred stock that could, depending on the terms of the series, impede the completion of a merger, tender offer or other takeover attempt. The CarMax board of directors will make any determination to issue the shares of preferred stock based on its judgment as to the best interests of CarMax and its shareholders. The CarMax board of directors, in so acting, could issue preferred stock having terms that could discourage an acquisition attempt through which an acquiror may be able to change the composition of the CarMax board of directors, including a tender offer or other transaction that some, or a majority, of CarMax shareholders might believe to be in their best interests or in which its shareholders might receive a premium for their stock over the then-current market price of CarMax, Inc. common stock.

CarMax expects that, as of the completion of the separation, 120,000 shares of its Series A Preferred Stock will be reserved for issuance upon exercise of the rights issued under its shareholders rights plan. For a more complete discussion of the CarMax rights plan, see “Shareholders Rights Plan.”

Preemptive Rights

Neither the holders of common stock nor of any series of preferred stock of CarMax, Inc. will be entitled to any preemptive or other subscription rights.

Shareholders Rights Plan

Under CarMax’s shareholders rights plan, each outstanding share of CarMax, Inc. common stock will have associated with it a right to purchase one one-thousandth of a share of CarMax’s Series A Preferred Stock at a purchase price of $140, subject to adjustment.

107

The purpose of the rights plan would be to:

· give the CarMax board of directors the opportunity to negotiate with any persons seeking to obtain control of CarMax;

· deter acquisitions of CarMax, Inc. common stock, without assurance of fair and equal treatment of all of CarMax’s shareholders; and

· prevent a person from acquiring in the market a sufficient number of shares of CarMax, Inc. common stock, to be in a position to block an action sought to be taken by CarMax’s shareholders, as applicable.

The exercise of the rights would cause substantial dilution to a person attempting to acquire CarMax on terms not approved by CarMax’s board of directors and therefore would significantly increase the price that person would have to pay to acquire CarMax. CarMax’s rights plan may deter a potential hostile acquisition or tender offer.

Until a distribution date occurs, the rights:

· will not be exercisable; and

· will be represented by the same certificate that represents the shares with which the rights are associated and will trade together with those shares.

Following a “distribution date,” the rights would become exercisable and CarMax would issue separate certificates representing the rights, which would trade separately from CarMax, Inc. common stock.

A “distribution date” would occur upon the earlier of:

· the 10th day following a public announcement that a person or group of affiliated persons has become an acquiring person, or

· the 10th business day (or such later time as the CarMax board of directors may determine prior to any person or group of persons becoming an acquiring person) following the commencement of, or first public announcement of the intent of any person or group of affiliated persons to commence, a tender offer or exchange offer that, if successful, would result in the person or group of persons becoming an acquiring person.

Under CarMax’s shareholders rights plan, a person or group of persons becomes an “acquiring person” if such person or group has acquired or obtained the right to acquire beneficial ownership of 15% or more of the outstanding shares of CarMax, Inc. common stock.

If any person or group of persons becomes an acquiring person, then, following the distribution date, each holder of a right, other than the acquiring person (whose rights are thereafter void), will be entitled to receive, upon the exercise of such right, a number of shares of CarMax, Inc. common stock having a market value two times the exercise price.

At any time following the date on which a person or group of persons becomes an acquiring person, if:

· CarMax merges or enters into any similar business combination and CarMax is not the surviving corporation,

· another entity merges or enters into any similar transaction with CarMax, and CarMax is the surviving corporation but all or part of CarMax, Inc. common stock is converted or exchanged for other securities, cash or property,

108

· CarMax enters into a statutory share exchange, or

· 50% or more of the assets or earning power of CarMax is sold or transferred,

then following the distribution date, each holder of a right would be entitled to receive, upon the exercise of such right, a number of shares of common stock of the acquiring entity having a market value two times the exercise price.

At any time prior to the time a person or group of persons becomes an acquiring person, CarMax’s board of directors may redeem all of the rights at a redemption price of $.01 per right. On the redemption date, the rights will expire, and the only entitlement of the holders of rights will be to receive the redemption price.

At any time after a person or group of persons would become an acquiring person, and before any acquiring person acquires 50% or more of the outstanding shares of CarMax, Inc. common stock, CarMax may require a holder to exchange all or any portion of its rights at an exchange ratio of one share of CarMax, Inc. common stock or one one-thousandth of a share of Series A preferred stock per CarMax right.

Until a right is exercised, the holder of a right would have no rights as a shareholder of CarMax, including, without limitation, the right to vote or to receive dividends. After exercise, each one one-thousandth of a share of Series A preferred stock would be entitled to:

· a quarterly dividend equal to the greater of the quarterly dividend declared on the CarMax, Inc. common stock or $1 divided by 1,000,

· upon liquidation, a minimum preferential liquidation payment equal to the greater of $140 or the market price of the CarMax, Inc. common stock at the time of liquidation, plus accrued and unpaid dividends, and

· in the event of a merger, consolidation or other transaction in which CarMax, Inc. common stock is exchanged, the same amount received per share of CarMax, Inc. common stock.

The rights will expire on May 21, 2012 unless earlier exercised by a holder or redeemed by CarMax.

Provisions of CarMax’s shareholders rights plan relating to the principal economic terms of the rights generally may not be amended at any time. At any time prior to the time any person or group of persons becomes an acquiring person, CarMax may supplement or amend other provisions of the shareholders rights plan in any manner, without the approval of any holders of rights, whether or not such supplement or amendment is or would be adverse to any holders of the rights. Thereafter, CarMax may, without the approval of any holders of rights, supplement or amend the shareholders rights plan only:

· to cure any ambiguity, defect or inconsistency, or

· in any manner that would not adversely affect the interests of the holders of rights, other than interests of an acquiring person.

Although the issuance of the rights will not be taxable to shareholders or to CarMax, shareholders may, depending upon the circumstances, recognize taxable income at such time as the rights become exercisable or are

exercised for common stock or other consideration of CarMax or for common stock of an acquiring person, as described above, or are redeemed.

Anti-Takeover Considerations, CarMax’s Articles of Incorporation and Bylaws

The following discussion concerns material provisions of Virginia law and CarMax’s articles of incorporation and bylaws that could be viewed as having the effect of discouraging an attempt to obtain control of CarMax. The anti-takeover aspects of the CarMax shareholders rights plan have been described above.

109

Anti-Takeover Statutes

CarMax is subject to the Virginia anti-takeover law regulating “control share acquisitions.” A control share acquisition is an acquisition of voting shares by a person that, when added to all the other voting shares beneficially owned by that person, would cause that person’s voting strength with respect to an election of directors to meet or exceed any of the following thresholds:

· one-fifth,

· one-third, or

· a majority.

Under Virginia law, shares acquired in a control share acquisition have no voting rights unless granted by a majority vote of all outstanding shares other than those held by the acquiring person or any officer or employee director of the corporation, or the articles of incorporation or bylaws of the corporation provide that this regulation does not apply to acquisitions of its shares. An acquiring person that owns 5% or more of the corporation’s voting stock may require that a special meeting of the shareholders be held, within 50 days of the acquiring person’s request, to consider the grant of voting rights to the shares acquired or to be acquired in the control share acquisition. If voting rights are not granted and the corporation’s articles of incorporation or bylaws permit, the acquiring person’s shares acquired in a control share acquisition may be repurchased by the corporation, at its option, at a price per share equal to the acquiring person’s cost. Virginia law grants dissenters’ rights to any shareholder who objects to a control share acquisition that is approved by a vote of disinterested shareholders and that gives the acquiring person control of a majority of the corporation’s voting shares.

CarMax is also subject to the Virginia law regulating “affiliated transactions.” Material acquisition transactions between a Virginia corporation and any holder of more than 10% of any class of its outstanding voting shares are required to be approved by:

· the holders of at least two-thirds of the remaining voting shares, and

· a majority of the disinterested directors if the acquisition transaction occurs within three years after the acquiring person became a 10% holder.

Affiliated transactions subject to this approval requirement include mergers, share exchanges, material dispositions of corporate assets not in the ordinary course of business, any dissolution of the corporation proposed by or on behalf of a 10% holder or any reclassification, including reverse stock splits, recapitalization or merger of the corporation with its subsidiaries, that increases the percentage of voting shares owned beneficially by a 10% holder by more than 5%. There are certain exceptions to these approval requirements, including an exception for acquisition transactions with a 10% holder whose acquisition of its 10% interest was pre-approved by a majority of the disinterested directors.

Financing Arrangements

Some of CarMax’s financing arrangements permit the termination of those arrangements and the acceleration of CarMax’s borrowings or other obligations thereunder if:

· any person or group becomes, or acquires the right to become, the beneficial owner of stock representing 20% or more of the combined voting power of CarMax’s outstanding voting stock, or

· a transaction occurs as a result of which the directors immediately prior to the transaction (together with persons elected or nominated by not less than a majority of those directors) cease to constitute a majority of the CarMax board of directors.

110

Board of Directors; Duties; Classification; Removal; Vacancies

Under Virginia law, directors must discharge their duties in accordance with their good faith business judgment of the best interest of the corporation. Directors may rely on the advice or acts of others, including officers, employees, attorneys, accountants and board committees if they have a good faith belief in their competence. Directors’ actions are not subject to a reasonableness or prudent person standard. Virginia’s federal and state courts have focused on the process involved with directors’ decision-making and are generally supportive of directors if they have based their decision on an informed process. These elements of Virginia law could make it more difficult to take over a Virginia corporation than corporations in other states.

CarMax’s board of directors is divided into three classes of directors serving staggered three-year terms. Each class consists of, as nearly as possible, one-third of the total number of directors. The classification of directors makes it more difficult for shareholders to change the composition of CarMax’s board of directors. At least two annual meetings of shareholders, instead of one, generally will be required to change the majority of CarMax’s board of directors. The classification provisions of CarMax’s articles of incorporation could discourage a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of CarMax.

CarMax’s bylaws provide that the number of members of its board of directors shall be nine. Under Virginia law, CarMax’s board of directors may amend the bylaws from time to time to increase or decrease the number of directors by up to 30% of the number of directors in office immediately following the most recent election of directors by its shareholders; provided, that any decrease in the number of directors may not shorten an incumbent director’s term or reduce any quorum or voting requirements until the person ceases to be a director. However, under CarMax’s articles of incorporation, its total number of directors may not exceed 14, and the aggregate number of vacancies resulting from an increase in the number of directors which may be created and filled by action of the board of directors between annual meetings of shareholders may not exceed two.

Under Virginia law, a member of CarMax’s board of directors may be removed with or without cause by a majority of the votes entitled to be cast at a meeting of shareholders called expressly for that purpose at which a quorum is present. If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove the director.

CarMax’s bylaws provide that any vacancy occurring on its board of directors, including a vacancy resulting from the removal of a director or an increase in the number of directors, may be filled:

· by CarMax’s shareholders,

· by the remaining directors, or

· by the affirmative vote of a majority of the remaining directors, though less than a quorum.

Special Meetings of Shareholders

CarMax’s bylaws provide that special meetings of shareholders may be called only by the chairman of its board of directors, its president or its board of directors.

Shareholder Nominations and Proposals

CarMax’s bylaws provide that a shareholder may nominate one or more persons for election as directors at a meeting only if advance notice of such nomination has been delivered to the secretary of CarMax, by personal delivery or United States mail, not later than:

· with respect to an election to be held at an annual meeting of shareholders, 120 days in advance of such meeting, or

111

· with respect to a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is given to shareholders.

That notice must include:

· the name and address of the shareholder making the nomination and of the person or persons being nominated,

· a representation that the shareholder is a holder of record of stock in CarMax entitled to vote at such meeting and intends to appear in person or by proxy at the meeting,

· a description of all the arrangements or understandings between the shareholder and each nominee and any other person pursuant to which the nomination is being made by the shareholder,

· any other information regarding each nominee that would be required by the Securities and Exchange Commission to be included in a proxy statement had the nominee been nominated or intended to be nominated by the board of directors, and

· the consent of each nominee to serve as a director of CarMax if so elected.

CarMax’s bylaws provide that a shareholder may present business before an annual meeting of shareholders if advance notice of such proposal has been delivered to the secretary of CarMax, by personal delivery or United States mail:

· on or after February 1st and before March 1st of the year in which the meeting will be held, or

· not less than 90 days before the date of the meeting if the date of such meeting has been changed by more than 30 days.

That notice must include:

· the name and address of the shareholder proposing business,

· the class and number of shares of stock of CarMax beneficially owned by such shareholder,

· a brief description of the business desired to be brought before the meeting, including the complete text of any resolution and the reasons for conducting such business at the meeting, and

· any interest that the shareholder may have in such business.

These procedural requirements could have the effect of delaying or preventing the submission of matters proposed by any shareholder to a vote of the shareholders.

Liability of Officers and Directors

The CarMax articles of incorporation limit or eliminate the liability of its directors and officers to the fullest extent permitted by Virginia law.

Stock Transfer Agent and Registrar

Wells Fargo Bank Minnesota, N.A. will act as the stock transfer agent, rights agent and registrar for CarMax, Inc. common stock.

112

DESCRIPTION OF CIRCUIT CITY STORES CAPITAL STOCK AFTER THE SEPARATION

The following is a description of the material terms of Circuit City Stores capital stock. You are urged to also read the our articles of incorporation and bylaws in their entirety. For information on how you can obtain copies of these documents, see “Where You Can Find More Information.”

Authorized Capital Stock

After the separation and the effectiveness of the Clean-Up Amendment, Circuit City Stores’ authorized capital stock will consist of 2,000,000 shares of preferred stock, par value $20 per share, and 525,000,000 shares of common stock, par value $0.50 per share. Based on information available to Circuit City Stores as of May 22, 2002, it is estimated that approximately 209,861,782 million shares of Circuit City common stock will be outstanding immediately after the separation (assuming no options to purchase shares of Circuit City Group Common Stock are exercised before the separation). No shares of Circuit City preferred stock would be outstanding.

Circuit City Common Stock

The holders of Circuit City common stock will be entitled to one vote for each share on all matters voted on by shareholders, including elections of directors, and, except as otherwise required by law or provided in any resolution adopted by the Circuit City Stores board of directors with respect to any series of preferred stock (a “preferred stock designation”), the holders of Circuit City common stock will possess all of the voting power. The Circuit City Stores articles of incorporation will not provide for cumulative voting in the election of directors. Subject to any preferential rights of any outstanding series of Circuit City preferred stock created by the Circuit City Stores board of directors from time to time, the holders of Circuit City common stock will be entitled to such dividends as may be declared from time to time by the Circuit City Stores board of directors from funds legally available for the payment of dividends, and, upon liquidation, dissolution or winding up, will be entitled to receive pro rata all assets available for distribution to the holders of Circuit City common stock after payment of a proper amount to the holders of any series of preferred stock that may be issued in the future. For a more complete discussion of the Circuit City Stores dividend policy, see the subheading “Dividends” in the comparison of rights table on page 28.

Circuit City Preferred Stock

Circuit City Stores’ articles of incorporation authorize the Circuit City Stores board of directors to establish one or more series of preferred stock and to determine, with respect to any series of preferred stock, the terms and rights of such series, including, but not limited to:

· the designation of the series;

· the number of shares of the series, which number the Circuit City Stores board of directors may later, except where otherwise provided in the preferred stock designation, increase or decrease, but not below the number of shares of that series then outstanding;

· whether dividends, if any, will be cumulative or noncumulative, and, in the case of shares of any series having cumulative dividend rights, the date or dates or method of determining the date or dates from which dividends on the shares of the series having cumulative dividend rights shall be cumulative;

· the rate of any dividends, or method of determining the dividends, payable to the holders of the shares of the series, any conditions upon which the dividends will be paid and the date or dates or the method for determining the date or dates upon which the dividends will be payable;

· the redemption rights and price or prices, if any, for shares of the series;

· the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series;

113

· the amounts payable on and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of Circuit City Stores’ affairs;

· whether the shares of the series will be convertible or exchangeable into shares of any other class or series, or any other security, of Circuit City Stores or any other corporation, and, if so, the specification of the other class or series or the other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates as of which the shares will be convertible or exchangeable and all other terms and conditions upon which the conversion or exchange may be made;

· restrictions on the issuance of shares of the same series or of any other class or series; and

· the voting rights, if any, of the holders of the shares of the series, subject to the limit that no share may have more than one vote.

Circuit City Stores believes that the ability of its board of directors to issue one or more series of preferred stock will provide it with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. The authorized shares of Circuit City preferred stock, as well as shares of Circuit City common stock, will be available for issuance without further action by its shareholders unless required by applicable law or the rules of any stock exchange or automated quotation system on which Circuit City Stores’ securities may be listed or traded. The NYSE currently requires shareholder approval as a prerequisite to listing shares in several instances, including where the present or potential issuance of shares could result in an increase of at least 20% in the number of outstanding shares of common stock, or in the amount of voting securities, outstanding. The NYSE does not require approval for issuances for cash in public offerings and some private offerings. If the approval of Circuit City Stores’ shareholders is not required for the issuance of shares of its preferred stock or common stock, the Circuit City Stores board of directors may determine not to seek shareholder approval.

Although Circuit City Stores believes its board of directors will have no intention of immediately doing so, it could issue a series of preferred stock that could, depending on the terms of the series, impede the completion of a merger, tender offer or other takeover attempt. The Circuit City Stores board of directors will make any determination to issue the shares of preferred stock based on its judgment as to the best interests of Circuit City Stores and its shareholders. The Circuit City Stores board of directors, in so acting, could issue preferred stock having terms that could discourage an acquisition attempt through which an acquiror may be able to change the composition of the Circuit City Stores board of directors, including a tender offer or other transaction that some, or a majority, of Circuit City Stores’ shareholders might believe to be in their best interests or in which its shareholders might receive a premium for their stock over the then-current market price of Circuit City common stock. For a more complete discussion of the Circuit City Stores rights plan, see “Shareholders Rights Plan.”

Preemptive Rights

Neither the holders of common stock nor of any series of preferred stock of Circuit City Stores will be entitled to any preemptive or other subscription rights.

Shareholders Rights Plan

The following discussion of Circuit City Stores’ shareholders rights plan assumes that, effective upon the CarMax Separation, the plan will have been amended to remove all provisions relating to the CarMax Group Common Stock and will, therefore, relate to only one series of common stock.

Under Circuit City Stores’ shareholders rights plan, each outstanding share of Circuit City common stock has associated with it a right to purchase one eight-hundredth of a share of Circuit City Stores’ Series E Preferred Stock at a purchase price of $125, subject to adjustment.

114

The purpose of the rights plan is to:

· give the Circuit City Stores board of directors the opportunity to negotiate with any persons seeking to obtain control of Circuit City Stores;

· deter acquisitions of Circuit City common stock, without assurance of fair and equal treatment of all of Circuit City Stores’ shareholders; and

· prevent a person from acquiring in the market a sufficient number of shares of Circuit City common stock, to be in a position to block an action sought to be taken by Circuit City Stores’ shareholders, as applicable.

The exercise of the rights would cause substantial dilution to a person attempting to acquire Circuit City Stores on terms not approved by Circuit City Stores’ board of directors and therefore would significantly increase the price that person would have to pay to acquire Circuit City Stores. Circuit City Stores’ rights plan may deter a potential hostile acquisition or tender offer.

Until a distribution date occurs, the rights:

· will not be exercisable; and

· will be represented by the same certificate that represents the shares with which the rights are associated and will trade together with those shares.

Following a “distribution date,” the rights would become exercisable and Circuit City Stores would issue separate certificates representing the rights, which would trade separately from Circuit City common stock.

A “distribution date” would occur upon the earlier of:

· the 10th day following a public announcement that a person or group of affiliated persons has become an acquiring person, or

· the 10th business day (or such later time as the Circuit City Stores board of directors may determine prior to any person or group of persons becoming an acquiring person) following the commencement of, or first public announcement of the intent of any person or group of affiliated persons to commence, a tender offer or exchange offer that, if successful, would result in the person or group of persons becoming an acquiring person.

Under Circuit City Stores’ shareholders rights plan, a person or group of persons becomes an “acquiring person” if such person or group has acquired or obtained the right to acquire beneficial ownership of 15% or more of the outstanding shares of Circuit City common stock.

If any person or group of persons becomes an acquiring person, then, following the distribution date, each holder of a right, other than the acquiring person (whose rights are thereafter void), will be entitled to receive, upon the exercise of such right, a number of shares of Circuit City common stock having a market value two times the exercise price.

At any time following the date on which a person or group of persons becomes an acquiring person, if:

· Circuit City Stores merges or enters into any similar business combination and Circuit City Stores is not the surviving corporation,

· another entity merges or enters into any similar transaction with Circuit City Stores, and Circuit City Stores is the surviving corporation but all or part of Circuit City’s common stock is converted or exchanged for other securities, cash or property,

115

· Circuit City Stores enters into a statutory share exchange, or

· 50% or more of the assets or earning power of Circuit City Stores is sold or transferred,

then following the distribution date, each holder of a right will be entitled to receive, upon the exercise of such right, a number of shares of common stock of the acquiring entity having a market value two times the exercise price.

At any time prior to the time a person or group of persons becomes an acquiring person, Circuit City Stores’ board of directors may redeem all of the rights at a redemption price of $0.005 per right. On the redemption date, the rights will expire, and the only entitlement of the holders of rights will be to receive the redemption price.

At any time after a person or group of persons becomes an acquiring person, and before any acquiring person acquires 50% or more of the outstanding shares of Circuit City common stock, Circuit City Stores may require a holder to exchange all or any portion of its rights at an exchange ratio of one share of Circuit City common stock or one eight-hundredth of a share of Series E preferred stock per Circuit City right.

Until a right is exercised, the holder of a right will have no rights as a shareholder of Circuit City Stores, including, without limitation, the right to vote or to receive dividends. After exercise, each one eight-hundredth of a share of Series E preferred stock will be entitled to:

· a quarterly dividend equal to the greater of the quarterly dividend declared on the Circuit City common stock or $0.005,

· upon liquidation, a minimum preferential liquidation payment equal to the greater of $125 or the market price of the Circuit City common stock at the time of liquidation, plus accrued and unpaid dividends, and

· in the event of a merger, consolidation or other transaction in which Circuit City common stock is exchanged, the same amount received per share of Circuit City common stock.

The rights will expire on April 14, 2008, unless earlier exercised by a holder or redeemed by Circuit City Stores.

Provisions of Circuit City Stores’ shareholders rights plan relating to the principal economic terms of the rights generally may not be amended at any time. At any time prior to the time any person or group of persons becomes an acquiring person, Circuit City Stores may supplement or amend other provisions of the shareholders rights plan in any manner, without the approval of any holders of rights, whether or not such supplement or amendment is or would be adverse to any holders of the rights. Thereafter, Circuit City Stores may, without the approval of any holders of rights, supplement or amend the shareholders rights plan only:

· to cure any ambiguity, defect or inconsistency, or

· in any manner that would not adversely affect the interests of the holders of rights, other than interests of an acquiring person.

Although the issuance of the rights will not be taxable to shareholders or to Circuit City Stores, shareholders may, depending upon the circumstances, recognize taxable income at such time as the rights become exercisable or are exercised for common stock or other consideration of Circuit City Stores or for common stock of an acquiring person, as described above, or are redeemed.

Anti-Takeover Considerations, Circuit City Stores’ Articles of Incorporation and Bylaws

The following discussion concerns material provisions of Virginia law and Circuit City Stores’ articles of incorporation and bylaws that could be viewed as having the effect of discouraging an attempt to obtain control

116

of Circuit City Stores. The anti-takeover aspects of the Circuit City Stores shareholders rights plan have been described above.

Anti-Takeover Statutes

Circuit City Stores is subject to the Virginia anti-takeover law regulating “control share acquisitions.” A control share acquisition is an acquisition of voting shares by a person that, when added to all the other voting shares beneficially owned by that person, would cause that person’s voting strength with respect to an election of directors to meet or exceed any of the following thresholds:

· one-fifth,

· one-third, or

· a majority.

Under Virginia law, shares acquired in a control share acquisition have no voting rights unless granted by a majority vote of all outstanding shares other than those held by the acquiring person or any officer or employee director of the corporation, or the articles of incorporation or bylaws of the corporation provide that this regulation does not apply to acquisitions of its shares. An acquiring person that owns 5% or more of the corporation’s voting stock may require that a special meeting of the shareholders be held, within 50 days of the acquiring person’s request, to consider the grant of voting rights to the shares acquired or to be acquired in the control share acquisition. If voting rights are not granted and the corporation’s articles of incorporation or bylaws permit, the acquiring person’s shares acquired in a control share acquisition may be repurchased by the corporation, at its option, at a price per share equal to the acquiring person’s cost. Virginia law grants dissenters’ rights to any shareholder who objects to a control share acquisition that is approved by a vote of disinterested shareholders and that gives the acquiring person control of a majority of the corporation’s voting shares.

Circuit City Stores is also subject to the Virginia law regulating “affiliated transactions.” Material acquisition transactions between a Virginia corporation and any holder of more than 10% of any class of its outstanding voting shares are required to be approved by:

· the holders of at least two-thirds of the remaining voting shares, and

· a majority of the disinterested directors if the acquisition transaction occurs within three years after the acquiring person became a 10% holder.

Affiliated transactions subject to this approval requirement include mergers, share exchanges, material dispositions of corporate assets not in the ordinary course of business, any dissolution of the corporation proposed by or on behalf of a 10% holder or any reclassification, including reverse stock splits, recapitalization or merger of the corporation with its subsidiaries, that increases the percentage of voting shares owned beneficially by a 10% holder by more than 5%. There are certain exceptions to these approval requirements, including an exception for acquisition transactions with a 10% holder whose acquisition of its 10% interest was pre-approved by a majority of the disinterested directors.

Financing Arrangements

Some of Circuit City Stores’ financing arrangements permit the termination of those arrangements and the acceleration of Circuit City Stores’ borrowings or other obligations thereunder if:

· any person or group becomes, or acquires the right to become, the beneficial owner of stock representing 50% or more of the combined voting power of Circuit City Stores’ outstanding voting stock, or

· a transaction occurs as a result of which the directors immediately prior to the transaction (together with persons elected or nominated by not less than two-thirds of those directors) cease to constitute a majority of the Circuit City Stores board of directors.

117

Board of Directors; Duties; Classification; Removal; Vacancies

Under Virginia law, directors must discharge their duties in accordance with their good faith business judgment of the best interest of the corporation. Directors may rely on the advice or acts of others, including officers, employees, attorneys, accountants and board committees if they have a good faith belief in their competence. Directors’ actions are not subject to a reasonableness or prudent person standard. Virginia’s federal and state courts have focused on the process involved with directors’ decision-making and are generally supportive of directors if they have based their decision on an informed process. These elements of Virginia law could make it more difficult to take over a Virginia corporation than corporations in other states.

Circuit City Stores’ board of directors is divided into three classes of directors serving staggered three-year terms. Each class consists of, as nearly as possible, one-third of the total number of directors. The classification of directors makes it more difficult for shareholders to change the composition of Circuit City Stores’ board of directors. At least two annual meetings of shareholders, instead of one, generally will be required to change the majority of Circuit City Stores’ board of directors. The classification provisions of Circuit City Stores’ articles of incorporation could discourage a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of Circuit City Stores.

Circuit City Stores’ bylaws provide that the number of members of its board of directors shall be 13. Under Virginia law, Circuit City Stores’ board of directors may amend the bylaws from time to time to increase or decrease the number of directors by up to 30% of the number of directors in office immediately following the most recent election of directors by its shareholders; provided, that any decrease in the number of directors may not shorten an incumbent director’s term or reduce any quorum or voting requirements until the person ceases to be a director. However, under Circuit City Stores’ articles of incorporation, its total number of directors may not exceed 17, and the aggregate number of vacancies resulting from an increase in the number of directors which may be created and filled by action of the board of directors between annual meetings of shareholders may not exceed two.

Under Virginia law, a member of Circuit City Stores’ board of directors may be removed with or without cause by a majority of the votes entitled to be cast at a meeting of shareholders called expressly for that purpose at which a quorum is present. If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove the director.

Circuit City Stores’ bylaws provide that any vacancy occurring on its board of directors, including a vacancy resulting from the removal of a director or an increase in the number of directors, may be filled:

· by Circuit City Stores’ shareholders,

· by the remaining directors, or

· by the affirmative vote of a majority of the remaining directors, though less than a quorum.

Special Meetings of Shareholders

Circuit City Stores’ bylaws provide that special meetings of shareholders may be called only by the chairman of its board of directors, its president or its board of directors.

Shareholder Nominations and Proposals

Circuit City Stores’ bylaws provide that a shareholder may nominate one or more persons for election as directors at a meeting only if advance notice of such nomination has been delivered to the secretary of Circuit City Stores, by personal delivery or United States mail, not later than:

· with respect to an election to be held at an annual meeting of shareholders, 120 days in advance of such meeting, or

118

· with respect to a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is given to shareholders.

That notice must include:

· the name and address of the shareholder making the nomination and of the person or persons being nominated,

· a representation that the shareholder is a holder of record of stock in Circuit City Stores entitled to vote at such meeting and intends to appear in person or by proxy at the meeting,

· a description of all the arrangements or understandings between the shareholder and each nominee and any other person pursuant to which the nomination is being made by the shareholder,

· any other information regarding each nominee that would be required by the Securities and Exchange Commission to be included in a proxy statement had the nominee been nominated or intended to be nominated by the board of directors, and

· the consent of each nominee to serve as a director of Circuit City Stores if so elected.

Circuit City Stores’ bylaws provide that a shareholder may present business before an annual meeting of shareholders if advance notice of such proposal has been delivered to the secretary of Circuit City Stores, by personal delivery or United States mail:

· on or after February 1st and before March 1st of the year in which the meeting will be held, or

· not less than 90 days before the date of the meeting if the date of such meeting has been changed by more than 30 days.

That notice must include:

· the name and address of the shareholder proposing business,

· the class and number of shares of stock of Circuit City Stores beneficially owned by such shareholder,

· a brief description of the business desired to be brought before the meeting, including the complete text of any resolution and the reasons for conducting such business at the meeting, and

· any interest that the shareholder may have in such business.

These procedural requirements could have the effect of delaying or preventing the submission of matters proposed by any shareholder to a vote of the shareholders.

Liability of Officers and Directors

The Circuit City Stores articles of incorporation limit or eliminate the liability of its directors and officers to the fullest extent permitted by Virginia law.

Stock Transfer Agent and Registrar

Wells Fargo Bank Minnesota, N.A. will act as the stock transfer agent, rights agent and registrar for Circuit City common stock.

119

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS OF CIRCUIT CITY STORES, INC.

The common stock of Circuit City Stores consists of two common stock series that are intended to reflect the performance of Circuit City Stores’ two businesses. The Circuit City Group Common Stock is intended to reflect the performance of the Circuit City stores and related operations and the shares of CarMax Group Common Stock reserved for the Circuit City group or for issuance to holders of Circuit City Group Common Stock. The fiscal 2000 financial results for Circuit City Stores and the Circuit City group also include Circuit City Stores’ investment in Digital Video Express, which was discontinued. The CarMax Group Common Stock is intended to reflect the performance of the CarMax stores and related operations. The reserved CarMax group shares are not outstanding CarMax Group Common Stock. The net earnings attributed to the reserved CarMax group shares are included in the Circuit City group’s net earnings and per share calculations. These earnings are not included in the CarMax group per share calculations.

Excluding shares reserved for CarMax employee stock incentive plans, the reserved CarMax group shares represented 64.1% of the total outstanding and reserved shares of CarMax Group Common Stock at February 28, 2002; 74.6% at February 28, 2001; and 74.7% at February 29, 2000. The reserved CarMax group shares at February 28, 2002, reflect the effect of the public offering of CarMax Group Common Stock completed during the second quarter of fiscal 2002. Since both the attribution of earnings and the outstanding CarMax group shares were adjusted to reflect the impact of this sale, the net earnings per CarMax group share were not diluted by this transaction. Refer to the “Earnings from Continuing Operations” and “Financing Activities” sections below for further discussion of the public offering.

Holders of Circuit City Group Common Stock and holders of CarMax Group Common Stock are shareholders of Circuit City Stores and as such are subject to all of the risks associated with an investment in Circuit City Stores and all of its businesses, assets and liabilities. The results of operations or financial condition of one group could affect the results of operations or financial condition of the other group. The discussion and analysis for Circuit City Stores, Inc. presented below should be read in conjunction with the discussion and analysis presented for each group and in conjunction with all Circuit City Stores’ SEC filings.

Critical Accounting Policies

In Management’s Discussion and Analysis, we discuss the results of operations and financial condition as reflected in Circuit City Stores’ consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of financial statements requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. We use our historical experience and other relevant factors when developing our estimates and assumptions. We continually evaluate these estimates and assumptions. Note 2 to Circuit City Stores’ consolidated financial statements includes a discussion of our significant accounting policies. The accounting policies discussed below are those we consider critical to an understanding of Circuit City Stores’ consolidated financial statements because their application places the most significant demands on our judgment. Our financial results might have been different if different assumptions had been used or other conditions had prevailed.

Calculation of the Value of Retained Interests in Securitization Transactions

Circuit City Stores securitizes credit card and automobile loan receivables. The fair value of retained interests from securitization activities is based on the present value of expected future cash flows. The present value is determined by using management’s projections of key factors, such as finance charge income, default rates, payment rates, forward interest rate curves and discount rates appropriate for the type of asset and risk. These projections are derived from historical experience, projected economic trends and anticipated interest rates. Adjustments to one or more of these projections may have a material impact on the fair value of the

120

retained interests. These projections may be affected by external factors, such as changes in the behavior patterns of our customers, changes in the strength of the economy and developments in the interest rate markets. Note 2(C) to Circuit City Stores’ consolidated financial statements includes a discussion of our accounting policies related to securitizations. Note 11 to Circuit City Stores’ consolidated financial statements includes a discussion of our credit card and automobile loan securitizations.

Calculation of the Liability for Lease Termination Costs

Circuit City Stores accounts for lease termination costs in accordance with Emerging Issues Task Force No. 88-10, “Costs Associated with Lease Modification or Termination.” Circuit City Stores records a liability for remaining costs related to leased properties that are no longer used for operating purposes, reduced by any estimated sublease income. Inherent in the calculation are certain significant management estimates including, among others, vacancy periods and future sublease revenues. Fluctuations in the economy and in marketplace demand for commercial properties can result in material changes in the liability for lease termination costs. Note 2(H) to Circuit City Stores’ consolidated financial statements includes a discussion of our accounting policies related to leased properties that are no longer used for operating purposes.

Results of Operations

Net Sales and Operating Revenues

Total sales for Circuit City Stores decreased 1% in fiscal 2002 to $12.79 billion. In fiscal 2001, total sales increased 3% to $12.96 billion from $12.61 billion in fiscal 2000.

Percent Sales Change From Prior Year

	Circuit City Stores, Inc.	Circuit City Group		CarMax Group
Fiscal	Total	Total	Comparable (1)	Total	Comparable(1)
2002	(1)%	(8)%	(10)%	28%	28%
2001	3%	(1)%	(4)%	24%	17%
2000	17%	13%	8%	37%	2%
1999	22%	17%	8%	68%	(2)%
1998	16%	12%	(1)%	71%	6%

(1) Circuit City and CarMax stores are included in comparable store sales after the store has been open for a full year.

The Circuit City Group.     Total sales for the Circuit City group decreased 8% in fiscal 2002 to $9.59 billion. In fiscal 2001, total sales decreased 1% to $10.46 billion from $10.60 billion in fiscal 2000. The fiscal 2002 total sales decline primarily reflects a 10% decline in comparable store sales, partly offset by the net addition of 10 Circuit City Superstores. In fiscal 2002, we opened 11 Superstores in existing markets, closed one Superstore and relocated eight Superstores. We also closed 15 mall-based Express stores. Excluding the major appliance category, from which we completed our exit in November 2000, comparable store sales declined 4% in fiscal 2002.

Fiscal 2002 was marked by significant variation in sales performance between the first half and the second half of the year. As expected, the sales slowdown experienced in the latter part of fiscal 2001 continued in the first half of fiscal 2002, with comparable store sales declining 23%. The slowing economy, continued industry-wide weakness in personal desktop computer sales, declining average retail prices for many products and the absence of the major appliance business all contributed to lower first half sales. The sales declines moderated in

121

the third quarter, and in the fourth quarter comparable store sales grew 6% in part because of the lessening impact of the exit from the appliance business and the seasonal upturn in categories, such as video game hardware, software and accessories; DVD software; PC software; and digital cameras, all of which were added or expanded following our exit from the appliance category. Throughout fiscal 2002, new technologies, better- featured consumer electronics and the new and expanded product selections produced solid comparable store sales growth. We believe our second half sales also benefited from new marketing, merchandising and customer service initiatives implemented earlier in the year. Inventory shortages and limited selections in some product categories following the strong holiday period limited sales growth in the last two months of the fiscal year.

The fiscal 2001 total sales decline reflects a 4% decline in comparable store sales, partly offset by the net addition of 23 Superstores. In July 2000, spurred by a declining sales pace, expected increases in competition and the results of a product profitability analysis that indicated major appliances produced below-average profits, we announced plans to exit the major appliance business. We completed the exit and associated remerchandising of the appliance selling space in November 2000. Throughout fiscal 2001, we experienced significant variability in the comparable store sales pace, and sales softened substantially in the last two months of the fiscal year. We believe the variability reflected the slower consumer spending experienced by most retailers during the second half of the year, some disruption caused by the partial remodeling to remerchandise the appliance space, significant declines in average retail prices and industry-wide declines in desktop personal computer sales by year-end. Excluding the appliance category from fiscal 2001 and fiscal 2000 sales, comparable store sales rose 3% in fiscal 2001.

In fiscal 2000 and fiscal 1999, Circuit City benefited from a period of renewed industry growth and product introductions. Industry growth was augmented by geographic expansion, with the net addition of 34 Superstores in fiscal 2000 and 37 Superstores in fiscal 1999. In fiscal 1998, a lack of significant consumer electronics product introductions resulted in weak industry sales, and so, geographic expansion was the primary contributor to our sales growth, with the net addition of 57 Superstores.

Circuit City Percent of Merchandise Sales by Category

Fiscal	2002		2001		2000		1999		1998
Video	39	%	35	%	32	%	31	%	31	%
Audio	15		16		16		17		18
Information Technology	34		35		33		32		30
Entertainment	12		7		5		5		6
Appliances	–		7		14		15		15
Total	100	%	100	%	100	%	100	%	100	%

In most states, Circuit City sells extended warranty programs on behalf of unrelated third parties who are the primary obligors. Under these third-party warranty programs, we have no contractual liability to the customer. In the three states where third-party warranty sales are not permitted, Circuit City sells an extended warranty for which we are the primary obligor. Gross dollar sales from all extended warranty programs were 5.1% of total sales of the Circuit City business in fiscal 2002 and fiscal 2001 and 5.4% in fiscal 2000. Total extended warranty revenue, which is reported in total sales, was 3.9% of sales in fiscal 2002, 4.0% in fiscal 2001 and 4.4% in fiscal 2000. The gross profit margins on products sold with extended warranties are higher than the gross profit margins on products sold without extended warranties. The decline in extended warranty sales as a percent of total sales since fiscal 2000 reflects the increased selection of products, such as entertainment software, for which extended warranties are not available. Third-party extended warranty revenue was 4.0% of total sales in fiscal 2002, 3.9% in fiscal 2001 and 4.1% in fiscal 2000.

122

Circuit City Superstore Sales Per Total Square Foot

Fiscal
2002	$	478
2001	$	528
2000	$	555
1999	$	514
1998	$	478

At the end of fiscal 2002, total space for all Circuit City Superstores equaled 20,046,725 square feet and selling space equaled 11,755,124 square feet. At the end of fiscal 2001, total space equaled 19,706,588 square feet and selling space equaled 11,469,092 square feet. The decreases in sales per total square foot in fiscal 2002 and fiscal 2001 reflect the declines in comparable store sales in those years. The improvements in fiscal 1999 and fiscal 2000 were driven by comparable store sales growth in those years.

Circuit City Store Mix

	Retail Units at Year-End
Fiscal	2002	2001	2000	1999	1998
Superstores	604	594	571	537	500
Circuit City Express	20	35	45	48	52
Electronics-only	–	–	–	2	4
Total	624	629	616	587	556

The CarMax Group.    Total sales for the CarMax group increased 28% in fiscal 2002 to $3.20 billion. In fiscal 2001, total sales increased 24% to $2.50 billion from $2.01 billion in fiscal 2000.

CarMax Comparable Store Sales Change

Fiscal	2002	2001	2000
Vehicle dollars:
Used vehicles	30%	19%	(4)%
New vehicles	24%	9%	50 %
Total	28%	17%	2 %
Vehicle units:
Used vehicles	24%	13%	(8)%
New vehicles	21%	9%	49 %
Total	23%	12%	(4)%

CarMax Average Retail Selling Prices

Fiscal	2002		2001		2000
Used vehicles	$	15,100	$	14,400	$	13,700
New vehicles	$	23,100	$	22,600	$	22,500
Blended average	$	16,200	$	15,500	$	14,900

123

CarMax Vehicle Sales Mix

Fiscal	2002	2001	2000
Vehicle dollars:
Used vehicles	82%	81%	79%
New vehicles	18%	19%	21%
Total	100%	100%	100%
Vehicle units:
Used vehicles	87%	87%	86%
New vehicles	13%	13%	14%
Total	100%	100%	100%

The fiscal 2002 total sales growth primarily resulted from a 28% increase in the comparable store vehicle dollar sales of the CarMax business. We opened two CarMax used-car superstores in fiscal 2002 during the last month of the fiscal year, and so they were not significant contributors to total sales growth in fiscal 2002. The growth in comparable store vehicle dollar sales reflects increased store traffic that, combined with better in-store execution, resulted in comparable store unit sales growth for both used and new cars. We believe that the higher traffic levels were driven by the effectiveness of our marketing programs, CarMax.com and word-of-mouth customer referrals. In addition, traffic was bolstered in October, November and December by cross-shopping from zero-percent financing incentive programs introduced by new-car manufacturers to counteract an industry-wide slowdown in new-car sales. New-car manufacturers returned to more conventional sales and financing incentives in January 2002. Increased average retail prices resulting from a higher mix of later-model used cars, luxury vehicles and sport utility vehicles and higher new-car average retail prices also contributed to the sales growth.

In late February 2002, CarMax opened one standard-sized used-car superstore and one satellite used-car superstore. During fiscal 2002, CarMax also relinquished the franchise rights for one stand-alone new-car franchise and one new-car franchise that had been integrated with a used-car superstore and sold one new-car stand-alone franchise and one new-car franchise that had been integrated with a used-car superstore. Although new-car stores that are integrated or co-located with used-car superstores have performed at or above our expectations, the three remaining stand-alone new-car stores are still performing below our expectations. We intend to integrate or co-locate these stores with used-car superstores. We expect this integration or co-location to occur within the next fiscal year for the store located in Orlando, Florida, and we expect to co-locate the two remaining new-car stores, which are in Los Angeles, California, with one used-car superstore within the next two fiscal years.

The fiscal 2001 total sales increase reflects a 17% increase in the comparable store vehicle dollar sales of the CarMax business, driven by higher-than-anticipated used-car sales, and the net addition of two used-car superstores, two prototype satellite stores and six new-car franchises since the end of fiscal 1999. The new stores and four of the franchises moved into the comparable store sales base throughout fiscal 2001. In fiscal 2001, CarMax also added two new-car franchises, integrating them with existing used-car superstores. We believe CarMax’s fiscal 2001 sales performance primarily reflects the improved execution of the CarMax offer at individual stores, increased consumer awareness and use of CarMax.com and the exit of CarMax’s primary used-car superstore competitor late in fiscal 2000. We believe this competitor’s exit from five multi-store markets helped eliminate consumer confusion over the two offers. CarMax’s used-car comparable store vehicle dollar and unit sales growth has remained strong in all these CarMax markets since this competitor’s exit from the used-car superstore business.

Geographic expansion of CarMax used-car superstores and the addition of new-car franchises generated the total sales growth in the first half of fiscal 2000 and, along with comparable store sales growth for the last two

124

quarters and for the fiscal year, contributed to total sales growth for the full year. During fiscal 2000, we opened two CarMax used-car superstores, two prototype satellite used-car superstores, five stand-alone new-car stores and one new-car franchise that was integrated with a used-car superstore. CarMax also converted one existing store into a satellite operation and relocated one new-car franchise next to a used-car superstore. In the second half of fiscal 2000, CarMax limited its geographic expansion to focus on building sales and profitability in existing markets.

CarMax Retail Units

	Retail Units at Year-End
Fiscal	2002	2001	2000
Mega superstores(1)	13	13	13
Standard superstores(2)	17	16	16
Prototype satellite superstores	5	4	4
Co-located new-car stores(3)	2	2	2
Stand-alone new-car stores	3	5	5
Total	40	40	40

(1) Formerly “C” and “B” stores; 70,000 to 100,000 square feet.

(2) Formerly “A” stores; 40,000 to 60,000 square feet.

(3) Formerly included as “A” and “C” stores.

CarMax New-Car Franchises

	New-Car Franchises at Year-End
Fiscal	2002	2001	2000
Integrated/co-located new-car franchises	15	17	15
Stand-alone new-car franchises	3	5	5
Total	18	22	20

CarMax sells extended warranties on behalf of unrelated third parties who are the primary obligors. Under these third-party warranty programs, we have no contractual liability to the customer. Extended warranty revenue, which is reported in total sales, was 1.7% of total sales in fiscal 2002, 1.8% in fiscal 2001 and 1.6% in fiscal 2000. Used cars achieve a higher warranty penetration rate than new cars.

Impact Of Inflation.     Inflation has not been a significant contributor to Circuit City Stores’ results. For the Circuit City business, average retail prices have declined in many of Circuit City’s product categories during the past three years. Although product introductions could help reverse this trend in selected areas, we expect no significant short-term change overall. Because we purchase substantially all products sold in Circuit City stores in U.S. dollars, prices are not directly impacted by the value of the dollar in relation to foreign currencies.

For the CarMax business, profitability is based on achieving specific gross profit dollars per vehicle rather than on average retail prices. Because the wholesale market generally adjusts to reflect retail price trends, we believe that if the stores meet inventory turn objectives, then changes in average retail prices will have only a short-term impact on the gross margin and thus profitability.

Cost of Sales, Buying and Warehousing

For Circuit City Stores, the gross profit margin was 21.4% in fiscal 2002, compared with 21.6% in fiscal 2001 and 22.7% in fiscal 2000. The fiscal 2002 gross profit margin includes higher gross profit margins for the

125

Circuit City business and lower gross profit margins for the CarMax business, compared with fiscal 2001. The lower gross profit margin of the CarMax business relative to the Circuit City business and the increased sales contribution from CarMax reduced Circuit City Stores’ overall gross profit margin. Excluding the appliance exit costs and the appliance merchandise markdowns incurred by the Circuit City business in fiscal 2002 and fiscal 2001, Circuit City Stores’ gross profit margin would have been 21.4% in fiscal 2002 and 22.0% in fiscal 2001.

The Circuit City Group.    For the Circuit City business, the gross profit margin was 24.3% in fiscal 2002, 23.6% in fiscal 2001 and 24.7% in fiscal 2000. The fiscal 2001 gross profit margin was reduced by costs of $28.3 million and merchandise markdowns of $28.0 million associated with the exit from the appliance business. The appliance exit costs included lease terminations, employee severance, fixed-asset impairment and other related costs. The fiscal 2002 gross profit margin was reduced by additional lease termination costs of $10.0 million related to the exit from the appliance business. In the fourth quarter of fiscal year 2002, we increased our liability for lease termination costs related to the appliance exit because of the weakening in the economy and in marketplace demand for commercial properties during the year. Excluding the appliance exit costs and the appliance merchandise markdowns, the gross profit margin would have been 24.4% in fiscal 2002 and 24.1% in fiscal 2001.

The improvement in the gross profit margin in fiscal 2002 reflected solid sales growth in new and better-featured products, which generally carry higher-than-average gross profit margins, and the reduction in personal computer sales, which carry lower-than-average gross profit margins. In fiscal 2001, the decline in the gross profit margin reflected significantly lower appliance gross profit margins prior to the announced plans to exit that business and a merchandise mix that included a high percentage of traditional products that carry lower gross profit margins. The decline was partly offset by lower personal computer sales and continued double-digit sales growth in new technologies and in higher margin categories where selection was expanded as part of the exit from the appliance business.

The Carmax Group.    For the CarMax business, the gross profit margin was 12.6% in fiscal 2002, 13.2% in fiscal 2001 and 11.9% in fiscal 2000. Although we achieved our specific gross profit dollar targets per vehicle, increased average retail prices resulting from a higher mix of later-model used cars, luxury vehicles and sport utility vehicles generated the decline in gross profit as a percentage of sales in fiscal 2002. Used-car gross profit dollars are similar across makes and models. Consequently, the gross profit on a higher-priced used car is a lower percentage of the retail selling price than on a more modestly priced car. In fiscal 2001, the increase in used-car sales as a percentage of CarMax’s total sales mix and strong inventory management throughout the year, especially during the second half when the model-year transition occurs in the new-car industry, contributed to a higher gross margin.

Selling, General and Administrative Expenses

For Circuit City Stores, selling, general and administrative expenses were 18.6% of sales in fiscal 2002, compared with 19.4% in fiscal 2001 and 18.3% in fiscal 2000. Profits generated by Circuit City Stores’ finance operations, fees received for arranging customer automobile financing through third parties and interest income are recorded as reductions to selling, general and administrative expenses. See below for additional finance operations disclosure.

The Circuit City Group. For the Circuit City business, selling, general and administrative expenses were 22.1% of sales in fiscal 2002, compared with 21.7% in fiscal 2001 and 19.6% in fiscal 2000.

The fiscal 2002 expenses included $19.3 million for store remodeling and relocation. In fiscal 2002, we continued to conduct a number of remodeling and remerchandising tests to determine how we can efficiently and effectively upgrade the Circuit City Superstore base. During the year, we fully remodeled 24 Circuit City Superstores, including 10 stores in the Chicago, Illinois, market and two stores in Virginia, and completed a less costly remodel in 12 stores in the Washington, D.C., and Baltimore, Maryland, markets. We also relocated eight

126

Superstores during fiscal 2002. In addition, we tested individual department remodels and display changes in a smaller set of stores. The fiscal 2001 expenses included $41.9 million in remodeling costs, $30.0 million in partial remodeling costs associated with the exit from the appliance business and $5.0 million in severance costs related to a workforce reduction. Excluding these costs and the estimated fiscal 2001 sales disruption during the seven to 10 days of partial remodeling for each store, the expense ratio would have been 21.9% in fiscal 2002 and 20.9% in fiscal 2001.

The fiscal 2002 rise in the expense ratio reflects the 8% decline in total sales. However, selling, general and administrative expenses declined by $92.5 million during this period, exclusive of the remodeling, relocation and severance costs, reflecting cost control and productivity initiatives, including more efficient advertising expenditures. Advertising expense was 3.8% of sales in fiscal 2002, 4.0% in fiscal 2001 and 3.7% in fiscal 2000. An increased contribution from the finance operation also reduced net selling, general and administrative expenses in fiscal 2002.

Increased expenses and the decline in sales produced the expense ratio rise in fiscal 2001. In addition to the remodeling and severance costs previously noted, fiscal 2001 selling, general and administrative costs included a higher level of advertising costs than in the prior fiscal year.

The CarMax Group.    For the CarMax business, selling, general and administrative expenses were 7.9% of sales in fiscal 2002, 9.8% in fiscal 2001 and 11.3% in fiscal 2000.

The improvement in the fiscal 2002 expense ratio reflects significant expense leverage generated by strong comparable store sales growth and continued expense management, particularly of non-store expenses, the benefit of which more than offset higher second half expenses related to renewed geographic expansion. In addition, a lower cost of funds increased yield spreads and contributed to higher profits from the finance operation in fiscal 2002. The decline in the fiscal 2001 expense ratio reflects leverage from strong comparable store sales growth, more efficient advertising expenditures and overall improvements in store productivity, including those achieved through the hub-and-satellite operating strategy that we adopted in multi-store markets. Advertising expense was 1.5% of sales in fiscal 2002, 1.8% in fiscal 2001 and 2.4% in fiscal 2000.

In fiscal 2001, the improvement in the expense ratio was partly offset by an $8.7 million write-off of goodwill associated with two underperforming stand-alone new-car franchises. Excluding these costs, the fiscal 2001 expense ratio would have been 9.4%. The fiscal 2000 expense ratio reflects $4.8 million in charges related to lease termination costs on undeveloped property and a write-down of assets associated with excess property for sale. Excluding these costs, the fiscal 2000 expense ratio would have been 11.1%.

Finance Operations.    For the past three years, the profits of the finance operations and fees that CarMax receives for arranging customer automobile financing through third parties, which are recorded as reductions to selling, general and administrative expenses, were as follows:

	Years Ended February 28 or 29
(in millions)	2002		2001		2000
Circuit City Group
Finance operation income	$	106.2	$	76.8	$	101.4
CarMax Group
Finance operation income		66.5		42.8		30.0
Third-party financing fees		15.7		11.5		9.8
Circuit City Stores, Inc.
Consolidated finance operations income	$	188.4	$	131.1	$	141.2

127

For the Circuit City group, the finance operation income does not include any allocation of indirect costs or any inter-company income. The finance operation income in fiscal 2001 was reduced in part by a $4 million increase in expenses associated with new securitization agreements and by a $13 million decrease in the fair value of retained interests to reflect a revised estimate of discounted future cash flows. In fiscal 2002, a favorable interest rate environment substantially reduced the cost of providing promotional financing and contributed to finance operation income similar to that produced in fiscal 2000.

For the CarMax group, the finance operation income does not include any allocation of indirect costs or any inter-company income. A lower cost of funds increased yield spreads and contributed to higher profits from the finance operation in fiscal 2002. In both fiscal 2002 and fiscal 2001, the increases in profits from the CarMax finance operation and in third-party fees reflect a greater number of automobile loans, resulting from CarMax’s strong vehicle sales growth.

Interest Expense

Interest expense was less than 0.1% of sales in fiscal 2002 and was 0.2% in both fiscal 2001 and fiscal 2000. The fiscal 2002 decline in the interest expense ratio reflects a decline in total debt of Circuit City Stores and lower interest rates. Refer to the “Financing Activities” section below for further information on changes in debt.

Income Taxes

The effective income tax rate was 38.0% in fiscal 2002, fiscal 2001 and fiscal 2000.

Earnings from Continuing Operations

Earnings from continuing operations for Circuit City Stores were $218.8 million in fiscal 2002, compared with $160.8 million in fiscal 2001 and $327.8 million in fiscal 2000. Increased earnings posted by both the Circuit City and CarMax businesses drove the fiscal 2002 improvement. The decline in fiscal 2001 reflects the lower earnings for the Circuit City business, partly offset by the increased earnings achieved by the CarMax business.

In a public offering completed during the second quarter of fiscal 2002, Circuit City Stores sold 9,516,800 shares of CarMax Group Common Stock that previously had been reserved for the Circuit City group or for issuance to holders of Circuit City Group Common Stock. With the impact of the offering, 69.2% of the CarMax group’s earnings were attributed to the Circuit City group’s reserved CarMax group shares in fiscal 2002. In fiscal 2001, 74.6% of the CarMax group’s earnings were attributed to the Circuit City group’s reserved CarMax group shares, and in fiscal 2000, 77.1% of the CarMax group’s earnings were attributed to the Circuit City group’s reserved CarMax group shares.

The Circuit City Group.    For the Circuit City business, earnings from continuing operations before the income attributed to the reserved CarMax group shares were $128.0 million, or 62 cents per Circuit City group share, in fiscal 2002, compared with $115.2 million, or 56 cents per Circuit City group share, in fiscal 2001 and $326.7 million, or $1.60 per Circuit City group share, in fiscal 2000. Excluding in fiscal 2002 the remodel and relocation expenses and lease termination costs related to the appliance exit, and in fiscal 2001 the estimated sales disruption during the seven to 10 days of partial remodeling, appliance exit costs, appliance merchandise markdowns, remodel and relocation expenses and severance costs related to the workforce reduction, earnings from continuing operations before the income attributed to the reserved CarMax group shares would have been $146.2 million, or 71 cents per Circuit City group share, in fiscal 2002 and $205.1 million, or $1.00 per Circuit City group share, in fiscal 2001.

The net earnings attributed to the Circuit City group’s reserved CarMax group shares were $62.8 million, or 30 cents per Circuit City group share, in fiscal 2002, compared with $34.0 million, or 17 cents per Circuit City group share, in fiscal 2001 and $862,000 in fiscal 2000.

128

Earnings from continuing operations attributed to the Circuit City group, including income attributed to the reserved CarMax group shares, were $190.8 million, or 92 cents per Circuit City group share, in fiscal 2002; $149.2 million, or 73 cents per Circuit City group share, in fiscal 2001; and $327.6 million, or $1.60 per Circuit City group share, in fiscal 2000.

	Circuit City Group Diluted Earnings per Share from Continuing Operations
Fiscal	2002			2001			2000
Circuit City Business	$	0.71		$	1.00		$	1.60
Impact of Appliance Exit Costs		(0.03	)		(0.09	)		–
Impact of Appliance Merchandise Markdowns (1)		–			(0.08	)		–
Impact of Partial Remodel Costs (2)		–			(0.09	)		–
Impact of Estimated Sales Disruption		–			(0.03	)		–
Impact of Remodel and Relocation Costs (2)		(0.06	)		(0.13	)		–
Impact of Workforce Reduction Costs (2)		–			(0.02	)		–
Reserved CarMax Group Shares		0.30			0.17			–
Circuit City Group	$	0.92		$	0.73		$	1.60

(1) Reflected as a reduction in gross profit margins.

(2) Reflected as an increase in selling, general and administrative expenses.

The CarMax Group.    For the CarMax business, net earnings were $90.8 million in fiscal 2002, $45.6 million in fiscal 2001 and $1.1 million in fiscal 2000. Excluding the write-off of goodwill, net earnings would have been $51.0 million in fiscal 2001. Excluding lease termination costs and the write-down of assets, net earnings would have been $4.1 million in fiscal 2000. Net earnings attributed to the outstanding CarMax Group Common Stock were $28.0 million, or 82 cents per share, in fiscal 2002; $11.6 million, or 43 cents per share, in fiscal 2001; and $256,000, or 1 cent per share, in fiscal 2000. The net earnings attributed to the outstanding CarMax Group Common Stock grew faster than total net earnings and net earnings per outstanding CarMax group share because of the impact of the public offering of CarMax group shares during the second quarter of fiscal 2002.

Loss from Discontinued Operations

On June 16, 1999, Digital Video Express announced that it would cease marketing of the Divx home video system and discontinue operations, but existing, registered customers would be able to view discs during a two-year phase-out period. The operating results of Divx and the loss on disposal of the Divx business have been segregated from continuing operations and reported as separate line items, after tax, on Circuit City Stores’ consolidated statement of earnings for fiscal 2000.

In fiscal 2000, the loss from the discontinued Divx operations totaled $16.2 million after an income tax benefit of $9.9 million. The loss on the disposal of the Divx business totaled $114.0 million after an income tax benefit of $69.9 million. The loss on the disposal included a provision for operating losses to be incurred during the phase-out period. It also included provisions for commitments under licensing agreements with motion picture distributors, the write-down of assets to net realizable value, lease termination costs, employee severance and benefit costs and other contractual commitments.

As of February 28, 2002, entities comprising the discontinued Divx operations have been dissolved. The remaining liabilities, totaling $18.5 million, have been assumed by Circuit City Stores and are included in the consolidated balance sheet.

129

Net Earnings

Net earnings for Circuit City Stores were $218.8 million in fiscal 2002, $160.8 million in fiscal 2001 and $197.6 million in fiscal 2000.

Operations Outlook

The Circuit City Group.    We believe that increased consumer interest in products and services such as big-screen televisions, including digital televisions, plasma televisions and liquid-crystal display panels; multi-channel video programming devices; digital imaging; wireless communications; and Broadband Internet access will drive profitability in the consumer electronics business during this decade. For that reason, we are focusing significant resources on store remodeling, sales counselor training, customer service enhancements, marketing programs and supply chain initiatives to take advantage of the growth opportunities these products provide and thus improve the sales and profitability of the Circuit City business.

Over the past two years, we have experimented with several remodel designs and product category tests to expand the benefits of the new Circuit City store design to the existing store base. In fiscal 2003, we plan to draw on these remodel and product category tests to roll out a remodeled video department and lighting upgrade to approximately 300 Circuit City Superstores, spending an average of $325,000 to $350,000 per store. We believe that rolling out this remodeled department will enable us to increase Circuit City’s market share in the growing and highly profitable big-screen television category and further solidify our position in the overall video category. The Consumer Electronics Association projects that big-screen television sales will grow at a double-digit rate in calendar 2002. The fiscal 2003 remodeling plan will allow us to affect a large number of Circuit City Superstores in a manner that has significant potential for incremental benefit, while minimizing the disruptive impact of the remodeling process. We expect the remodeling activities will take approximately two weeks to complete in each store. We will continue testing design ideas for other departments in the Circuit City Superstores. We also plan to relocate approximately 10 Circuit City Superstores in fiscal 2003. In fiscal 2003, we expect Circuit City expenditures for remodeling and relocations to total approximately $130 million, of which we expect to capitalize approximately $70 million and expense approximately $60 million, or 18 cents per Circuit City group share. We plan to continue improving the Circuit City store base in fiscal 2004 and fiscal 2005 by completing the remodel of these 300 stores and by relocating additional stores to provide a shopping experience that we believe is more consistent with the preferences of today’s consumer.

With existing Circuit City initiatives, additional efforts to enhance the business and a relatively stable economy, we believe Circuit City can achieve comparable store sales growth in the mid-single digits for fiscal 2003. We expect that categories where we expanded selections following the exit from the appliance business and categories, such as big-screen televisions, that are benefiting from digital product innovation, will contribute to this growth. We plan to open approximately 10 Superstores in fiscal 2003. Given our presence in virtually all of the nation’s top metropolitan markets, new Superstores are being added in one- or two-store markets or to increase our presence in existing major markets. Because of the limited planned geographic expansion, we expect total Circuit City sales growth to only slightly exceed comparable store sales growth. We expect relatively stable Circuit City gross profit margins in fiscal 2003. We also expect a modest increase in the Circuit City expense ratio in fiscal 2003, despite the anticipated increase in comparable store sales. Planned increases in remodeling and relocation expenses, advertising and systems enhancements are among the anticipated contributors to the higher expense ratio. For the full year, we expect the fiscal 2003 profit contribution from Circuit City’s finance operation to be similar to the contribution in fiscal 2002.

We currently expect the Circuit City business will contribute 75 cents per share to 85 cents per share to the earnings of the Circuit City group in fiscal 2003, before remodeling and relocation expenses. Including these expenses, we expect the Circuit City business will contribute 57 cents per share to 67 cents per share to the earnings of the Circuit City group.

130

The CarMax Group.    Over the past two years, CarMax has demonstrated that its consumer offer and business model can produce strong sales and earnings growth. Given its solid financial performance, we believe CarMax is able to support its growth independently.

In fiscal 2003, CarMax’s geographic expansion will continue to focus on entries into mid-sized markets and satellite store opportunities in existing markets. We have identified more than 30 additional markets that could support a standard superstore, the principal CarMax store size going forward. We also believe that we can add approximately 10 satellite stores in CarMax’s existing markets. In fiscal 2003, CarMax plans to open four to six stores, approximately one half of which are expected to be satellite stores.

We believe comparable store used-car unit sales growth, which drives our profitability, will be in the low-to mid-teens in the first half of fiscal 2003, moderating to high-single to low-double digits in the second half. Fiscal 2003 will be a year of transition for CarMax as it ramps up its growth pace. Additional growth-related costs such as training, recruiting and employee relocation for our new stores will moderate earnings growth. In addition, we anticipate a reduction in yield spreads from the CarMax finance operation as interest rates rise above the low levels experienced in fiscal 2002. Our earnings expectations for CarMax also include preliminary estimates of expenses expected to be incurred in the second half of fiscal 2003 if the planned separation is approved. We expect the expense leverage improvement achieved from total and comparable store sales growth to be substantially offset by these three factors. As a result, we anticipate earnings per CarMax group share of 95 cents to $1.00 for fiscal 2003, excluding the non-recurring costs of separation, which are not tax-deductible and are estimated to be approximately $8 million, or 8 cents per CarMax group share.

We plan to open six to eight CarMax stores per year in fiscal 2004 through fiscal 2006, including openings in mid-sized markets and satellite stores in existing markets.

Recent Accounting Pronouncements

In July 2000, the Financial Accounting Standards Board issued EITF No. 00-14, “Accounting for Certain Sales Incentives,” which is effective for fiscal quarters beginning after December 15, 2001. EITF No. 00-14 provides that sales incentives, such as mail-in rebates, offered to customers should be classified as a reduction of revenue. Circuit City Stores offers certain mail-in rebates that are currently recorded in cost of sales, buying and warehousing. However, in the first quarter of fiscal 2003, Circuit City Stores expects to reclassify these rebate expenses from cost of sales, buying and warehousing to net sales and operating revenues to be in compliance with EITF No. 00-14. On a pro forma basis, this reclassification would have increased the fiscal 2002 Circuit City Stores gross profit margin by 12 basis points and the expense ratio by 10 basis points. For fiscal 2001, this reclassification would have increased the gross profit margin and the expense ratio by 20 basis points. For the Circuit City group, this reclassification would have increased the gross profit margin by 18 basis points and the expense ratio by 17 basis points in fiscal 2002, and the gross profit margin by 29 basis points and the expense ratio by 27 basis points in fiscal 2001. Circuit City Stores does not expect the adoption of EITF No. 00-14 to have a material impact on its financial position, results of operations or cash flows.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations,” effective for business combinations initiated after June 30, 2001, and SFAS No. 142, “Goodwill and Other Intangible Assets,” effective for fiscal years beginning after December 15, 2001. Under SFAS No. 141, the pooling of interests method of accounting for business combinations is eliminated, requiring that all business combinations initiated after the effective date be accounted for using the purchase method. Also under SFAS No. 141, identified intangible assets acquired in a purchase business combination must be separately valued and recognized on the balance sheet if they meet certain requirements. Under the provisions of SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the pronouncement. Other intangible assets that are identified to have finite useful lives will continue to be amortized in a manner that reflects the estimated decline in the economic value of the intangible asset and will be subject to review when events or circumstances arise

131

which indicate impairment. For the CarMax group, goodwill totaled $20.1 million and covenants not to compete totaled $1.5 million as of February 28, 2002. In fiscal 2002, goodwill amortization totaled $1.8 million, and amortization of covenants not to compete totaled $931,000. Covenants not to compete will continue to be amortized on a straight-line basis over the life of the covenant, not to exceed five years. Application of the nonamortization provisions of SFAS No. 142 in fiscal 2003 is not expected to have a material impact on the financial position, results of operations or cash flows of Circuit City Stores. During fiscal 2003, Circuit City Stores will perform the first of the required impairment tests of goodwill, as outlined in the new pronouncement. Based on preliminary estimates, as well as ongoing periodic assessments of goodwill, Circuit City Stores does not expect to recognize any material impairment losses from these tests.

In August 2001, the FASB issued SFAS No. 143, “Accounting For Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Circuit City Stores has not yet determined the impact, if any, of adopting this standard.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes both SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” related to the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. Circuit City Stores is required to adopt SFAS No. 144 no later than the fiscal year beginning after December 15, 2001, and plans to adopt the provisions in the first quarter of fiscal 2003. Circuit City Stores does not expect the adoption of SFAS No. 144 to have a material impact on its financial position, results of operations or cash flows.

Financial Condition

Liquidity and Capital Resources

Cash Flow Highlights

	Years Ended February 28 or 29
(Amounts in millions)	2002			2001			2000
Net earnings from continuing operations	$	218.8		$	160.8		$	327.8
Depreciation and amortization	$	150.7		$	153.1		$	148.2
Provision for deferred income taxes	$	31.2		$	19.8		$	43.1
Cash provided by (used for) working capital, net	$	336.7		$	(165.7	)	$	122.4
Cash provided by operating activities	$	837.2		$	167.1		$	638.3
Purchases of property and equipment	$	(214.0	)	$	(285.6	)	$	(222.3	)
Proceeds from sales of property and equipment, net	$	187.4		$	115.7		$	100.2
Net decrease in short-term and long-term debt	$	(123.4	)	$	(179.9	)	$	(7.7	)
Proceeds from CarMax stock offering, net	$	139.5			–			–

132

Cash Provided By Operations.    Circuit City Stores generated net cash from operating activities of $837.2 million in fiscal 2002, compared with $167.1 million in fiscal 2001 and $638.3 million in fiscal 2000. The fiscal 2002 improvement primarily resulted from working capital efficiencies and a $58.0 million increase in net earnings. Improved supply chain management in the Circuit City business contributed to a $192.0 million reduction in working capital used for inventories in fiscal 2002 compared with fiscal 2001. Increases in accounts payable, accrued expenses and other current liabilities, and accrued income taxes reduced working capital by an additional $401.0 million in fiscal 2002 compared with fiscal 2001. The increase in accounts payable primarily reflects extended payment terms achieved through supply chain management in the Circuit City business. The fiscal 2001 decline in cash provided by operating activities was largely a function of lower net earnings for the Circuit City business and an increase in working capital, partly offset by the increase in earnings for the CarMax business.

Investing Activities.    Net cash used in investing activities was $26.6 million in fiscal 2002, compared with $171.2 million in fiscal 2001 and $157.0 million in fiscal 2000. Capital expenditures were $214.0 million in fiscal 2002, $285.6 million in fiscal 2001 and $222.3 million in fiscal 2000. Fiscal 2002 capital expenditures included spending for the construction of 11 new and eight relocated Circuit City Superstores, $19.8 million of capitalized Circuit City remodeling expenditures and the construction of two standard-sized CarMax used-car superstores, one of which opened during the first quarter of fiscal 2003, and one satellite used-car superstore. Fiscal 2001 capital expenditures included spending for the construction of 23 new and two relocated Circuit City Superstores and $106.0 million of capitalized Circuit City remodeling expenditures associated with full remodels of 26 superstores primarily in south or central Florida, and partial remodels associated with the exit from the appliance business. Fiscal 2000 capital expenditures included spending for the construction of 34 new and four relocated Circuit City Superstores and four CarMax used-car superstores.

Capital expenditures have been funded primarily through internally generated funds, sale-leaseback transactions, landlord reimbursements and short- and long-term debt. Net proceeds from sales of property and equipment, including sale-leasebacks, totaled $187.4 million in fiscal 2002, $115.7 million in fiscal 2001 and $100.2 million in fiscal 2000. In August 2001, Circuit City completed a sale-leaseback transaction for its Orlando, Fla., distribution center, from which total proceeds of $19.5 million were received. In November 2001, we completed a sale-leaseback transaction for Circuit City’s Marion, Ill., distribution center, from which total proceeds of $29.0 million were received. In August 2001, CarMax entered into a sale-leaseback transaction covering nine superstore properties for an aggregate sale price of $102.4 million. This transaction, which represented the first sale-leaseback entered into by CarMax without a Circuit City Stores guarantee, was structured at competitive rates with an initial lease term of 15 years and two 10-year renewal options.

In fiscal 2003, we anticipate capital expenditures for the Circuit City business of approximately $150 million. In fiscal 2003, the Circuit City business plans to open approximately 10 Superstores, remodel the video department and install lighting upgrades in approximately 300 Superstores and relocate approximately 10 Superstores. We expect Circuit City will continue incurring remodeling and relocation costs in fiscal years 2004 and 2005.

In fiscal 2003, we anticipate capital expenditures for the CarMax business of approximately $175 million. CarMax planned expenditures primarily relate to new store construction, including furniture, fixtures and equipment and land purchases, and leasehold improvements to existing properties. CarMax expects to open four to six stores during fiscal 2003, approximately one half of which will be satellite stores, and, assuming the business continues to meet our expectations, 22 to 30 stores over the following four years. We expect the initial cash investment per store to be in the range of $20 million to $27 million for a standard superstore and $10 million to $15 million for a satellite store. If CarMax takes full advantage of building and land sale-leasebacks, then we expect the net cash used to fund a new store will be $8 million to $12 million for a standard superstore and $5 million to $7 million for a satellite superstore. As a new store matures, sales financed through CarMax’s finance operation will require additional use of capital in the form of a seller’s interest in the receivables or reserves. For a standard used-car superstore, we would expect the cash investment for the seller’s interest to

133

range from $0.8 million to $1.5 million at the end of the first year of operation, growing to $2.2 million to $3.4 million after five years of operation.

For Circuit City Stores, we expect that available cash resources, CarMax’s anticipated credit agreement secured by vehicle inventory, sale-leaseback transactions, landlord reimbursements and cash generated by operations will be sufficient to fund capital expenditures for the foreseeable future.

Financing Activities.    In December 2001, CarMax entered into an $8.5 million secured promissory note in conjunction with the purchase of land for new store construction. This note, which is payable in August 2002, was included in short-term debt as of February 28, 2002.

As scheduled, Circuit City Stores used existing working capital to repay a $130 million term loan in fiscal 2002 and a $175 million term loan in fiscal 2001. At February 28, 2002, a $100 million outstanding term loan due in July 2002 was classified as a current liability. Although Circuit City Stores has the ability to refinance this debt, we intend to repay it using existing working capital.

At February 28, 2002, Circuit City Stores had cash and cash equivalents of $1.25 billion and total outstanding debt of $126.4 million. Circuit City Stores maintains a $150 million unsecured revolving credit facility that expires on August 31, 2002. Circuit City Stores does not anticipate renewing this facility. Circuit City Stores also maintains $195 million in committed seasonal lines of credit that are renewed annually with various banks. At February 28, 2002, total balances of $1.8 million were outstanding under these facilities.

We anticipate that during the first quarter of fiscal 2003, CarMax will enter into a multi-year, $200 million credit agreement secured by vehicle inventory. We anticipate that some of the proceeds from the agreement will be used for the repayment of allocated debt; the payment on the separation date of a one-time special dividend to Circuit City Stores, currently estimated to be between $25 million and $35 million; the payment of transaction expenses incurred in connection with the separation; and general corporate purposes. Refer to “Contractual Obligations” for further discussion of the special dividend payment. See “Contingent Lease Obligations Retained by Circuit City Stores” on page 30.

Receivables generated by the Circuit City and CarMax finance operations are funded through securitization transactions in which the finance operations sell their receivables while retaining servicing rights. These securitization transactions provide an efficient and economical means of funding credit card and automobile loan receivables. For transfers of receivables that qualify as sales under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” we recognize gains and losses as a component of the profits of Circuit City’s or CarMax’s finance operation.

On a daily basis, Circuit City’s finance operation sells its private-label credit card and MasterCard and VISA credit card, referred to as bank card, receivables to special purpose subsidiaries, which, in turn, transfer the receivables to two separate securitization master trusts. The master trusts periodically issue asset-backed securities in public offerings and private transactions, and the proceeds are distributed through the special purpose subsidiaries to Circuit City’s finance operation. The special purpose subsidiaries retain an undivided interest in the transferred receivables and hold various subordinated asset-backed securities that serve as credit enhancement for the asset-backed securities held by outside investors. Circuit City’s finance operation continues to service the transferred receivables for a fee.

The private-label and bankcard master trusts each have issued multiple series of asset-backed securities, referred to as term securities, having fixed initial principal amounts. Investors in the term securities are entitled to receive monthly interest payments and a single principal payment on a stated maturity date. In addition, each master trust has issued a series of asset-backed securities, referred to as variable funding securities, having a variable principal amount. Investors in the variable funding securities are generally entitled to receive monthly interest payments and have committed to acquire additional undivided interests in the transferred receivables up

134

to a stated amount through a stated commitment termination date. The commitment under the private-label variable funding series is currently scheduled to expire on December 13, 2002, and the commitment under the bankcard variable funding series is currently scheduled to expire on October 24, 2002. We expect that the commitment termination dates of both variable funding series will be extended. If certain events were to occur, principal payment dates for the term series would be accelerated, the variable funding commitments would terminate and the variable funding investors would begin to receive monthly principal payments until paid in full.

At February 28, 2002, the aggregate principal amount of securitized credit card receivables totaled $1.31 billion under the private-label program and $1.49 billion under the bankcard program. At February 28, 2002, the unused capacity of the private-label variable funding program was $22.9 million and the unused capacity of the bankcard variable funding program was $496.5 million. At February 28, 2002, there were no provisions providing recourse to Circuit City Stores for credit losses on the receivables securitized through the private-label or bankcard master trusts.

We have conducted tests of a co-branded Circuit City bankcard, which offers more utility to the customer than the private-label card. We are considering transitioning our private-label program to this card.

On a monthly basis, CarMax’s finance operation sells its automobile loan receivables to a special purpose subsidiary, which, in turn, transfers the receivables to a group of third-party investors. The investors sell commercial paper backed by the transferred receivables, and the proceeds are distributed through the special purpose subsidiary to CarMax’s finance operation. The special purpose subsidiary retains a subordinated interest in the transferred receivables. CarMax’s finance operation continues to service the transferred receivables for a fee. The investors are generally entitled to receive monthly interest payments and have committed to acquire additional undivided interests in the transferred receivables up to a stated amount through June 27, 2002. We expect that the commitment termination date will be extended. If certain events were to occur, the commitment to acquire additional undivided interests would terminate and the investors would begin to receive monthly principal payments until paid in full. At February 28, 2002, the unused capacity of this program was $211.0 million.

CarMax’s finance operation periodically refinances its automobile loan receivables through the public issuance of asset-backed securities. The finance operation sells the receivables to be refinanced to a special purpose subsidiary, which, in turn, transfers the purchased receivables to a securitization trust. The securitization trust then issues asset-backed securities secured by the transferred receivables in public offerings, and the proceeds are distributed through the special purpose subsidiary to CarMax’s finance operation. CarMax continues to service the transferred receivables for a fee. Asset-backed securities were issued totaling $644.0 million in October 1999, $655.4 million in January 2001 and $641.7 million in November 2001.

At February 28, 2002, the aggregate principal amount of securitized automobile loan receivables totaled $1.54 billion. At February 28, 2002, there were no provisions providing recourse to Circuit City Stores for credit losses on the securitized automobile loan receivables.

We anticipate that we will be able to expand or enter into new securitization arrangements to meet future needs of both the Circuit City and CarMax finance operations.

During the second quarter of fiscal 2002, Circuit City Stores completed the public offering of 9,516,800 shares of CarMax Group Common Stock. The shares sold in the offering were shares of CarMax Group Common Stock that previously had been reserved for the Circuit City group or for issuance to holders of Circuit City Group Common Stock. The net proceeds of $139.5 million from the offering were allocated to the Circuit City group to be used for general purposes of the Circuit City business, including remodeling of Circuit City Superstores.

135

Contractual Obligations (1)

					2 to 3		4 to 5		After 5
(Amounts in millions)	Total		1 Year		Years		Years		Years
Contractual obligations:
Long-term debt	$	104.5	$	101.5	$	2.6	$	0.4	$	–
Promissory note		8.5		8.5		–		–		–
Capital lease obligations		11.6		0.6		1.3		1.7		8.0
Operating leases		4,801.8		339.2		672.3		659.1		3,131.2
Lines of credit		1.8		1.8		–		–		–
Other contractual obligations		18.5		18.5		–		–		–
Total	$	4,946.7	$	470.1	$	676.2	$	661.2	$	3,139.2

(1) Amounts are based on the capital structure of Circuit City Stores as of February 28, 2002. Future obligations depend upon the final outcome of the proposed separation of CarMax.

CarMax currently operates 23 of its sales locations pursuant to various leases under which Circuit City Stores was the original tenant and primary obligor. Circuit City Stores, and not CarMax, had originally entered into these leases so that CarMax could take advantage of the favorable economic terms available to us as a large retailer. We have assigned each of these leases to CarMax. Despite the assignment and pursuant to the terms of the leases, we remain contingently liable under the leases. For example, if CarMax were to fail to make lease payments under one or more of the leases, we may be required to make those payments on CarMax’s behalf. In recognition of this ongoing contingent liability, CarMax has agreed to make a one-time special dividend payment to Circuit City Stores on the separation date, assuming the separation is completed. We currently expect this special dividend to be between $25 million and $35 million.

Capital Structure

Total assets at February 28, 2002, were $4.54 billion, up $668.1 million, or 17%, since February 28, 2001. An $805.4 million increase in cash, partly offset by a $124.3 million decrease in inventory, was the primary contributor to the increase in total assets.

During fiscal 2002, stockholders’ equity increased 16% to $2.73 billion. Capitalization for the past five years is illustrated in the “Capitalization” table that follows. The return on equity was 8.6% in fiscal 2002, compared with 7.1% in fiscal 2001.

Historically, the groups have relied on the cash or external debt of Circuit City Stores to provide working capital needed to fund net assets not otherwise financed through sale-leasebacks or the securitization of receivables. Most of the financial activities of each group are managed by Circuit City Stores on a centralized basis and are dependent on the financial condition of Circuit City Stores or, in some cases, its separate businesses. These financial activities have included the investment of surplus cash, issuance and repayment of debt, securitization of receivables, sale-leasebacks of real estate and inter-group loans.

In February 2002, Circuit City Stores announced plans to separate the CarMax business from the Circuit City business in a tax-free transaction in which CarMax, Inc., presently a wholly owned subsidiary of Circuit City Stores, would become an independent, separately traded public company. The separation plan calls for Circuit City Stores to redeem all outstanding shares of CarMax Group Common Stock in exchange for shares of common stock of CarMax, Inc. Simultaneously, shares of CarMax, Inc. common stock, representing the shares of CarMax Group Common Stock reserved for the holders of Circuit City Group Common Stock, would be distributed as a tax-free dividend to the holders of Circuit City Group Common Stock.

136

Capitalization

Fiscal	2002				2001				2000				1999				1998
(Dollar amounts in millions)	$		%		$		%		$		%		$		%		$		%
Long-term debt, excluding current installments	$	14.1	1	%	$	116.1	5	%	$	249.2	10	%	$	426.6	17	%	$	424.3	18	%
Other long-term liabilities		149.6	5			107.1	4			157.8	6			149.7	6			171.5	7
Total stockholders’ equity		2,734.4	94			2,356.5	91			2,142.2	84			1,905.1	77			1,730.0	75
Total capitalization	$	2,898.1	100	%	$	2,579.7	100	%	$	2,549.2	100	%	$	2,481.4	100	%	$	2,325.8	100	%

Market Risk

Receivables Risk

Circuit City Stores manages the market risk associated with the private-label credit card and bankcard revolving loan portfolios of Circuit City’s finance operation and the automobile installment loan portfolio of CarMax’s finance operation. Portions of these portfolios have been securitized in transactions accounted for as sales in accordance with SFAS No. 140 and, therefore, are not presented on Circuit City Stores’ consolidated balance sheets.

Consumer Revolving Credit Receivables.    The majority of accounts in the private-label credit card and bankcard portfolios are charged interest at rates indexed to the prime rate, adjustable on a monthly basis subject to certain limitations. The balance of the accounts are charged interest at a fixed annual percentage rate. As of February 28, 2002, and February 28, 2001, the total outstanding principal amount of private-label credit card and bankcard receivables had the following interest rate structure:

(Amounts in millions)	2002		2001
Indexed to prime rate	$	2,645	$	2,596
Fixed-rate		202		203
Total	$	2,847	$	2,799

Financing for the private-label credit card and bankcard receivables is achieved through asset securitization programs that, in turn, issue both private and public market debt, principally at floating rates based on LIBOR and commercial paper rates. Receivables held for sale are financed with working capital. The total principal amount of receivables securitized or held for sale at February 28, 2002, and February 28, 2001, was as follows:

(Amounts in millions)	2002		2001
Floating-rate securitizations	$	2,798	$	2,754
Held by Circuit City Stores for sale		49		45
Total	$	2,847	$	2,799

Automobile Installment Loan Receivables.    At February 28, 2002, and February 28, 2001, all loans in the portfolio of automobile loan receivables were fixed-rate installment loans. Financing for these automobile loan receivables is achieved through asset securitization programs that, in turn, issue both fixed- and floating-rate securities. Receivables held for investment or sale are financed with working capital. The total principal amount

137

of receivables securitized or held for investment or sale as of February 28, 2002, and February 28, 2001, was as follows:

(Amounts in millions)	2002		2001
Fixed-rate securitizations	$	1,122	$	984
Floating-rate securitizations synthetically altered to fixed		413		299
Floating-rate securitizations		1		1
Held for investment(1)		12		9
Held for sale		2		3
Total	$	1,550	$	1,296

(1) Held by a bankruptcy-remote special purpose subsidiary.

Interest Rate Exposure.    Circuit City Stores is exposed to interest rate risk on Circuit City’s securitized credit card portfolio, especially when interest rates move dramatically over a relatively short period of time. We have attempted to mitigate this risk through matched funding. In addition, our ability to increase the finance charge yield of Circuit City’s variable rate credit cards may be contractually limited or limited at some point by competitive conditions. Interest rate exposure relating to CarMax’s securitized automobile loan receivables represents a market risk exposure that we manage with matched funding and interest rate swaps matched to projected payoffs. Generally, changes only in interest rates do not have a material impact on Circuit City Stores’ results of operations.

The market and credit risks associated with financial derivatives are similar to those relating to other types of financial instruments. Refer to Note 12 to Circuit City Stores’ consolidated financial statements for a description of these items. Market risk is the exposure created by potential fluctuations in interest rates. On behalf of the Circuit City business, Circuit City Stores enters into interest rate cap agreements to meet the requirements of the credit card receivables securitization transactions. Circuit City Stores has entered into offsetting interest rate cap positions and, therefore, does not anticipate significant market risk arising from interest rate caps. Circuit City Stores does not anticipate significant market risk from swaps because they are used on a monthly basis to match funding costs to the use of the funding. Credit risk is the exposure to nonperformance of another party to an agreement. Circuit City Stores mitigates credit risk by dealing with highly rated bank counterparties.

138

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus includes and incorporates by reference “forward-looking statements” within the meaning of the securities laws. All statements that are not historical facts are “forward-looking statements.” The words “estimate,” “project,” “intend,” “expect,” “believe,” “anticipate” and similar expressions, and statements concerning strategy, identify forward-looking statements. These forward-looking statements include statements regarding the expected financial position, business, financing plans, business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, in each case relating to Circuit City Stores and its Circuit City and CarMax businesses.

Forward-looking statements are estimates and projections reflecting Circuit City Stores’ judgment and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Although Circuit City Stores believes that the estimates and projections reflected in the forward-looking statements are reasonable, these expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include:

· changes in the amount and degree of promotional intensity exerted by current competitors and potential new competition from both retail stores and alternative methods or channels of distribution such as online and telephone shopping services and mail order;

· 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;

· the presence or absence of, or consumer acceptance of, new products or product features in the merchandise categories the Circuit City and CarMax businesses sell and changes in their actual merchandise sales mix;

· significant changes in retail prices for products sold by any of the Circuit City or CarMax businesses;

· lack of availability or access to sources of inventory;

· inability on the part of the Circuit City or CarMax businesses to liquidate excess inventory should excess inventory develop;

· unanticipated adverse results from the remodeling or relocations of Circuit City Superstores;

· the ability to attract and retain 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 service-driven operating strategies of the Circuit City and CarMax businesses;

· changes in availability or cost of capital expenditure and working capital financing, including the availability of long-term financing to support development of the Circuit City or CarMax businesses and the availability of securitization financing;

· changes in production or distribution costs or cost of materials for advertising;

· availability of appropriate real estate locations for expansion;

· the imposition of new restrictions or regulations regarding the sale of products and/or services the Circuit City and CarMax businesses sell, changes in tax rules and regulations applicable to the Circuit City or CarMax businesses or their competitors, or any failure to comply with such laws or any adverse change in such laws;

· adverse results in significant litigation matters; and

· those factors listed in this proxy statement/prospectus under “Risk Factors.”

Circuit City Stores believes these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations.

139

LEGAL MATTERS

The validity of the CarMax, Inc. common stock to be issued in the separation will be passed upon for CarMax by McGuireWoods LLP, Richmond, Virginia.

EXPERTS

KPMG LLP, Circuit City Stores' independent auditors, have audited the Circuit City Stores, Inc. consolidated financial statements and schedule, the financial statements and schedule of the Circuit City group and the financial statements and schedule of the CarMax group as of February 28, 2002 and 2001, and for each of the fiscal years in the three-year period ended February 28, 2002, incorporated by reference in the Circuit City Stores, Inc. Annual Report on Form 10-K for the year ended February 28, 2002, as set forth in their reports which are incorporated by reference in this proxy statement/prospectus. KPMG LLP have also audited the Circuit City Stores, Inc. consolidated financial statements and schedule as of February 28, 2002 and 2001 and for each of the fiscal years in the three-year period ended February 28, 2002, as set forth in their reports, which are included in this proxy statement/prospectus. These financial statements and schedules are included in and incorporated by reference in this proxy statement/prospectus in reliance on their reports, given on the authority of that firm as experts in accounting and auditing. The reports of KPMG LLP dated April 2, 2002 covering the Circuit City group financial statements as of February 28, 2002 and 2001 and for each of the fiscal years in the three-year period ended February 28, 2002, and the related financial statement schedule, include a qualification related to the effects of not consolidating the CarMax group with the Circuit City group as required by accounting principles generally accepted in the United States of America.

KPMG LLP, CarMax's independent auditors, have audited the CarMax, Inc. consolidated financial statements and schedule as of February 28, 2002 and 2001 and for each of the fiscal years in the three-year period ended February 28, 2002, as set forth in their reports, which are included in this proxy statement/prospectus. These financial statements and schedule are included in this proxy statement/prospectus in reliance on their reports, given on the authority of that firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

Circuit City Stores files annual, quarterly and current reports, proxy statements and other information with the SEC. Those filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document Circuit City Stores files with the SEC at its public reference facilities. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. You can also obtain copies of those documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Circuit City Stores’ filings are also available at the office of the New York Stock Exchange. For further information on obtaining copies of our public filings at the New York Stock Exchange, you should call (212) 656-5060.

The reports, proxy statements and other information the Circuit City Stores files with the SEC may contain important information about CarMax. Since CarMax Group Common Stock has been outstanding, Circuit City Stores has included in its SEC filings the consolidated financial statements of Circuit City Stores and the financial statements of the CarMax group. After the separation, CarMax, as an independent, separately traded public company, will become subject to the informational reporting requirements of the Securities Exchange Act of 1934. Accordingly, CarMax will file annual, quarterly and other reports and other information with the SEC.

The SEC allows us to ‘‘incorporate by reference’’ the information that we filed with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this proxy statement/prospectus. In addition, any information that we file with the SEC subsequent to the date of this proxy statement/prospectus will automatically update this proxy

140

statement/prospectus. We incorporate by reference the document listed below, which we have already filed with the SEC, and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until the separation of CarMax contemplated by this prospectus is completed:

· Annual Report on Form 10-K for the year ended February 28, 2002.

You may request a copy of this filing and other filings made after the date of this proxy statement/prospectus, other than an exhibit to a filing unless that exhibit is specifically incorporated by reference into that filing, at no cost, by writing or calling Circuit City Stores at the following address:

Circuit City Stores, Inc.

9950 Mayland Drive

Richmond, Virginia 23233

Attention: Corporate Secretary

Telephone: (804) 527-4022

CarMax has filed with the SEC a registration statement on Form S-4 under the Securities Act of 1933 with respect to the shares of CarMax, Inc. common stock being issued in the separation. This proxy statement/prospectus, which forms a part of the registration statement, does not contain all the information included in the registration statement and the exhibits to the registration statement, to which reference is hereby made. You should refer to the registration statement, including its exhibits and schedules, for further information about CarMax and the CarMax, Inc. common stock. You may obtain from the SEC a copy of the registration statement and exhibits that CarMax filed with the SEC when CarMax registered the CarMax, Inc. common stock.

You should rely only on the information contained in this document. Neither we nor CarMax has authorized anyone to provide you with information different from that contained in this document. The information contained in this document is accurate only as of the date of this document, regardless of the time of delivery of this document or any distribution of the CarMax, Inc. common stock described in this document. Please note that information included in our Website and in CarMax’s Website does not form a part of this document.

141

PROPOSALS BY SHAREHOLDERS FOR PRESENTATION AT THE

CIRCUIT CITY STORES, INC. 2003 ANNUAL MEETING

Section 1.3 of the Circuit City Stores bylaws provides that, in addition to other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must give timely written notice to the secretary or an assistant secretary at Circuit City Stores’ principal office. In order to be timely, that notice must be received:

· on or after February 1st and before March 1st of the year in which the annual meeting will be held, if the next clause is not applicable, or

· not less than 90 days before the date of the annual meeting if the date for the meeting prescribed in the bylaws has been changed by more than 30 days.

The shareholder’s notice must set forth:

· the name and address, as they appear on Circuit City Stores’ stock transfer books, of the shareholder,

· the class and number of shares of stock of Circuit City Stores beneficially owned by the shareholder,

· a representation that the shareholder is a shareholder of record at the time of the giving of the notice and intends to appear in person or by proxy at the meeting to present the business specified in the notice,

· a brief description of the business desired to be brought before the meeting, including the complete text of any resolutions to be presented and the reasons for wanting to conduct such business, and

· any interest that the shareholder may have in such business.

The proxies will have discretionary authority to vote on any matter that properly comes before the meeting if the shareholder has not provided timely written notice as required by the bylaws.

Proposals that any shareholder desires to have included in the proxy statement for the 2003 annual meeting of shareholders must be received by Circuit City Stores no later than January 10, 2003.

By Order of the Board of Directors

Michael T. Chalifoux, Secretary

June 7, 2002

142

ANNEX A

AMENDMENT TO AMENDED AND RESTATED ARTICLES

OF INCORPORATION TO EFFECT THE CARMAX SEPARATION PROPOSAL

(Referenced as the CarMax Separation Amendment in this Proxy Statement/Prospectus)

Article V of the Amended and Restated Articles of Incorporation is hereby amended as follows:

FIRST, by adding at the end of paragraph B(5)(b)(i) the following:

At any time when the Separation Agreement dated as of May 21, 2002 (the “Separation Agreement”) between the Corporation and CarMax, Inc., a Virginia corporation (“CarMax, Inc.”), shall be in full force and effect and shall not have been amended or modified (other than by supplementation as provided therein), for all purposes of the preceding sentence, CarMax, Inc. shall be deemed to be a CarMax Group Subsidiary and shall be deemed to hold directly or indirectly all of the assets and liabilities attributed to the CarMax Group (and no other assets or liabilities of the Corporation or any subsidiary thereof).

SECOND, by adding at the end of the last sentence of paragraph B(5)(d)(vi), immediately before the period, the following:

; provided that at any time when the Separation Agreement shall be in full force and effect and shall not have been amended or modified (other than by supplementation as provided therein), such notice may be given not less than 10 Trading Days prior to the Redemption Date

A-1

ANNEX B

AMENDMENT TO AMENDED AND RESTATED ARTICLES OF

INCORPORATION TO EFFECT THE CLEAN-UP AMENDMENT PROPOSAL

(Referenced as the Clean-Up Amendment in this Proxy Statement/Prospectus)

Article V of the Amended and Restated Articles of Incorporation is hereby amended to read, in its entirety, as follows:

ARTICLE V

COMMON STOCK

A.  General.    Certain relative rights of the Common Stock and the holders of the outstanding shares thereof are set forth below.

(1) Dividends.    Subject to the provisions hereinabove set forth with respect to the Preferred Stock and to the provisions contained in the Articles of Serial Designation for any series of the Preferred Stock, the holders of outstanding shares of the Common Stock shall be entitled to receive dividends if, when and as declared by the Board of Directors out of funds legally available therefor.

(2) Voting Rights.    The holders of outstanding shares of the Common Stock shall, to the exclusion of the holders of any other class of stock of the Corporation, have the sole and full power to vote for the election of directors and for all other purposes without limitation, except (i) as otherwise provided herein or in the Articles of Serial Designation as applicable to any series of the Preferred Stock, and (ii) as may be required by law. The holders of outstanding shares of the Common Stock shall be entitled to one vote on each matter to be voted upon by the shareholders for each share of the Common Stock which they hold.

B.  Redesignation of Existing Common Stock.    As of the effective date of the Articles of Amendment pursuant to which this Section B is added to those Amended and Restated Articles of Incorporation, and without any further action on the part of the Corporation or its shareholders, each share of the Common Stock immediately theretofore designated Circuit City Stock shall automatically be redesignated, changed and converted into one share of Common Stock.

B-1

ANNEX C

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

FOR CARMAX, INC.

The following unaudited pro forma consolidated balance sheet as of February 28, 2002 gives effect to:

· the special dividend of $28,400,000 to be paid on the separation date to Circuit City Stores by CarMax in recognition of Circuit City Stores’ continuing contingent liability on 23 leases assigned by Circuit City Stores to a subsidiary of CarMax, see page 30 for additional information regarding the special dividend,

· new financing arrangements for CarMax (for additional information on new financing arrangements, see “Treatment of Indebtedness and Post-Separation Financing Arrangements” on page 30), and

· the payment of certain costs and expenses incurred by CarMax in connection with the CarMax Separation.

The unaudited pro forma consolidated balance sheet assumes that such transactions had been consummated as of February 28, 2002.

The following unaudited pro forma consolidated statement of earnings for the year ended February 28, 2002, gives effect to:

· changes in interest expense as a result of new financing arrangements for CarMax, and

· an expected 10% mark-up for general and administrative costs and shared services that are currently allocated at cost to CarMax, Inc. from Circuit City Stores, which may not be the same services to be provided by Circuit City Stores to CarMax after the separation. See the summary of the transition services agreement on page 88 for continued services to be provided to CarMax, Inc. by Circuit City Stores.

The unaudited pro forma consolidated statement of earnings assumes that such transactions had been consummated at the beginning of the period presented. No pro forma adjustments were made for changes in the future level of general and administrative expenses to be incurred by CarMax, Inc.

No pro forma adjustments have been made in the unaudited pro forma consolidated statement of earnings for nonrecurring charges associated with the CarMax Separation, except for the 10% mark-up for general and administrative costs and shared services referred to above. Adjustments for the special dividend and certain costs and expenses incurred in connection with the CarMax Separation are reflected in the unaudited pro forma consolidated balance sheet.

Following the CarMax Separation, CarMax Inc. will account for its assets and liabilities based on historical values at which they are carried by Circuit City Stores immediately before the CarMax Separation.

The pro forma adjustments in the following unaudited pro forma consolidated financial statements are based on available information and certain assumptions that management believes are reasonable and are described in the accompanying notes. The unaudited pro forma consolidated financial statements do not necessarily represent CarMax, Inc.’s financial position or results of operations had the transactions occurred at such dates or project CarMax, Inc.’s financial position or results of operations for any future date or period. A number of factors may affect CarMax, Inc.’s results. See “Special Note Regarding Forward-Looking Statements” on page 127 of the proxy statement/prospectus. In the opinion of management, all adjustments necessary to present fairly the unaudited pro forma consolidated financial statements have been made. The unaudited pro forma consolidated financial statements should be read in conjunction with the historical consolidated financial statements of CarMax, Inc., including the notes thereto, included in Annex D.

C-1

CARMAX, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

As of February 28, 2002

(Amounts in thousands)	CarMax, Inc. Historical		Separation Adjustments			CarMax, Inc. Pro Forma
ASSETS
Current assets:
Cash	$	3,286	$	8,602	(A)	$	11,888
Net accounts receivable		64,280		—			64,280
Retained interests in securitized receivables		108,988		—			108,988
Inventory		399,084		—			399,084
Prepaid expenses and other current assets		2,065		—			2,065
Total current assets		577,703		8,602			586,305
Property and equipment, net		120,976		—			120,976
Other assets		21,543		—			21,543
TOTAL ASSETS	$	720,222	$	8,602		$	728,824
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Current installments of long-term debt	$	78,608	$	(78,608	)(A)	$	—
Accounts payable		87,160		—			87,160
Short-term debt		9,840		(1,390	)(A)		8,450
Accrued expenses and other current liabilities		25,775		—			25,775
Deferred income taxes		22,009		—			22,009
Total current liabilities		223,392		(79,998	)		143,394
Long-term debt, excluding current installments		—		125,000	(A)		125,000
Deferred revenue and other liabilities		8,416		—			8,416
Deferred income taxes		2,935		—			2,935
TOTAL LIABILITIES		234,743		45,002			279,745
STOCKHOLDER’S EQUITY:
Equity of parent		485,479		(485,479	)		—
CarMax, Inc. common stock, $0.50 par value; 350,000,000 shares authorized; 102,774,000 shares issued and outstanding		—		51,387	(C)		51,387
Capital in excess of par value		—		397,692	(C)		397,692
TOTAL STOCKHOLDER’S EQUITY		485,479		(36,400	)(B)		449,079
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	720,222	$	8,602		$	728,824

See accompanying notes to unaudited pro forma consolidated balance sheet.

C-2

CARMAX, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

(A) Reflects the effect of the new two-year, $200,000,000 credit agreement secured by vehicle inventory. The facility includes a term loan of $100,000,000 and a revolving credit line of $100,000,000. Principal will be due in full at maturity with interest payable periodically at LIBOR plus 1.50%. No commitment fees are associated with the facility. Although this credit agreement will allow CarMax, Inc. to borrow up to $200,000,000, CarMax would have borrowed approximately $125,000,000 at February 28, 2002. With this $125,000,000, CarMax would have paid:

· $79,998,000 to Circuit City Stores for the repayment of debt that was previously allocated to CarMax from Circuit City Stores. This amount is made up of $78,608,000 of current installments of long-term debt and $1,390,000 of short-term debt.

· the special dividend of $28,400,000 to be paid on the separation date to Circuit City Stores by CarMax in recognition of Circuit City Stores’ continuing contingent liability on 23 leases assigned by Circuit City Stores to a subsidiary of CarMax. See page 30 for additional information regarding the special dividend, and

· approximately $8,000,000 in separation costs for services of attorneys and financial advisors and expenses, including filing fees.

The remaining debt proceeds of $8,602,000 will remain in cash to fund operations.

The $8,602,000 net increase in cash is made up of the following:

Cash received from new credit agreement	$	125,000,000
Repayment of Circuit City Stores allocated debt		(79,998,000	)
Payment of special dividend		(28,400,000	)
Payment of separation costs		(8,000,000	)
Net increase in cash	$	8,602,000

The $125,000,000 increase in long-term debt, excluding current installments, reflects the new credit agreement.

(B) Reflects the $28,400,000 special dividend above and estimated expenses of $8,000,000 to be incurred in connection with the separation.

(C) Reflects the following:

(Shares in thousands)
Outstanding shares of CarMax Group Common Stock as of February 28, 2002 exchanged for CarMax, Inc. common stock	36,851
CarMax Group Common Stock reserved for Circuit City Group shareholders distributed as CarMax, Inc. common stock	65,923
Total shares outstanding as of the CarMax Separation	102,774

The $51,387,000 of common stock is calculated by multiplying the shares outstanding of 102,774,000 by the par value of $0.50 per share.

C-3

CARMAX, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

Year Ended February 28, 2002

(Amounts in thousands except per share data)	CarMax, Inc. Historical		Separation Adjustments			CarMax, Inc. Pro Forma
Net sales and operating revenues	$	3,201,665	$	—		$	3,201,665
Cost of sales		2,797,962		—			2,797,962
Gross profit		403,703		—			403,703
Selling, general and administrative expenses		252,289		320	(A)		252,609
Interest expense		4,958		2,774	(B)		7,732
Total expenses		257,247		3,094			260,341
Earnings before income taxes		146,456		(3,094	)		143,362
Provision for income taxes		55,654		(1,176	)(C)		54,478
Net earnings	$	90,802	$	(1,918	)	$	88,884
Weighted average common shares:
Basic							102,039	(D)
Diluted							104,021	(D)
Net earnings per share:
Basic						$	0.87	(D)
Diluted						$	0.85	(D)

See accompanying notes to unaudited pro forma consolidated statement of earnings.

C-4

CARMAX, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

(A) Reflects an expected 10% mark-up for general and administrative costs and shared services that are currently allocated at cost to CarMax, Inc. from Circuit City Stores, which may not be the same services to be provided by Circuit City Stores to CarMax after the separation. Costs historically allocated at cost to CarMax, Inc. were approximately $3,197,000 for the year ended February 28, 2002. See the summary of the transition services agreement on page 88 for continued services to be provided to CarMax, Inc. by Circuit City Stores.

(B) Pro forma interest costs have been calculated by multiplying pro forma average levels of debt for the year ended February 28, 2002 by the pro forma average interest rate for the same period. The $163,269,000 pro forma average level of debt for the year ended February 28, 2002, was the average debt by quarter adjusted for the new credit agreement plus any additional borrowing needed to pay the special dividend and separation costs. The pro forma average interest rate was approximately 4.7% for the year ended February 28, 2002. This rate is the average LIBOR rate for the period plus 150 basis points, the interest rate of the new credit agreement. A  ¹/8 percentage point change in the assumed financing rate would have changed interest expenses in fiscal 2002 by approximately $205,000.

The proceeds from the new credit agreement are expected to be used to re-pay Circuit City Stores for debt that was previously allocated to CarMax, to pay the special dividend of $28,400,000 to Circuit City Stores and separation costs for services of attorneys and financial advisors and expenses, including filing fees.

(C) Reflects the income tax effects of adjustments (A) and (B).

(D) The weighted average common shares were calculated as follows:

(Shares in thousands)	Year Ended February 28, 2002
Weighted average CarMax Group Common Stock	32,140
Weighted average CarMax Group Common Stock reserved for Circuit City Group	69,899
Pro forma weighted average common shares	102,039

Reconciliation of the numerator and denominator of basic and diluted earnings per share are presented below:

(Amounts in thousands except per share data)	Year Ended February 28, 2002
Weighted average common shares		102,039
Dilutive potential common shares:
Options		1,949
Restricted stock		33
Weighted average common shares and dilutive potential common shares		104,021
Net earnings available to common shareholders	$	88,884
Basic net earnings per share	$	0.87
Diluted net earnings per share	$	0.85

No options were excluded from the computation of diluted net earnings per share because the option’s exercise price was greater than the average market price of the common shares.

C-5

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS  FOR CIRCUIT CITY STORES, INC.

The following unaudited pro forma consolidated balance sheet as of February 28, 2002 gives effect to the separation of CarMax, which we will account for as a discontinued operation, the special dividend of $28,400,000 to be paid on the separation date to Circuit City Stores by CarMax, Inc. in recognition of Circuit City Stores’ continuing contingent liability on 23 leases assigned by Circuit City Stores to a subsidiary of CarMax and the distribution of CarMax, Inc. common stock to the holders of Circuit City Group Common Stock and CarMax Group Common Stock. See page 30 for further information. The unaudited pro forma consolidated balance sheet assumes that such transactions had been consummated as of February 28, 2002.

The following unaudited pro forma consolidated statement of earnings for the year ended February 28, 2002 gives effect to:

· the separation of CarMax, which we will account for as a discontinued operation, and

· an expected 10% mark-up for general and administrative costs and shared services that are currently allocated at cost to CarMax, Inc. from Circuit City Stores, which may not be the same services to be provided by Circuit City Stores to CarMax after the separation. See the summary of the transition services agreement on page 88 for continued services to be provided to CarMax, Inc. by Circuit City Stores.

The unaudited pro forma consolidated statement of earnings assumes that such transactions had been consummated at the beginning of the period presented. No pro forma adjustments were made for changes in the future level of general and administrative expenses to be incurred by Circuit City Stores for services provided to CarMax.

Pro forma weighted average shares and net earnings per share amounts do not give effect to the change in the outstanding Circuit City Stores restricted stock and stock options as a result of the separation. The modifications to exercise prices and shares for restricted stock and stock options will not be determined until the distribution date. See page 36 for a description of how the Circuit City Stores stock options and restricted stock will be modified at the distribution date.

No pro forma adjustments have been made for changes in the future level of general and administrative expenses to be incurred by Circuit City Stores, except for the 10% mark-up for general and administrative costs and shared services referred to above. See the summary of the transition services agreement on page 88 for continued services to be provided to CarMax, Inc. from Circuit City Stores. Future general and administrative expenses are expected to continue at approximately the same level as previously.

No pro forma adjustments have been made in the unaudited pro forma consolidated statement of earnings for nonrecurring charges associated with the separation. An adjustment for the special dividend is reflected in the unaudited pro forma consolidated balance sheet.

The pro forma adjustments included in the following unaudited pro forma consolidated financial statements are based on available information and certain assumptions that management believes are reasonable and are described in the accompanying notes. The unaudited pro forma consolidated financial statements do not necessarily represent Circuit City Stores’ financial position or results of operations had the transactions occurred at such dates or project Circuit City Stores’ financial position or results of operations for any future date or period. A number of factors may affect Circuit City Stores’ results. See “Special Note Regarding Forward-Looking Statements” on page 127 of the proxy statement/prospectus. In the opinion of management, all adjustments necessary to present fairly the unaudited pro forma consolidated financial statements have been made. The unaudited pro forma consolidated financial statements should be read in conjunction with the historical consolidated financial statements of Circuit City Stores, including the notes thereto, included in Annex E.

C-6

CIRCUIT CITY STORES, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

As of February 28, 2002

	Circuit City Stores Historical		Discontinued Operations Adjustments			Circuit City Stores Pro Forma Before Separation Adjustments		Separation Adjustments			Circuit City Stores Pro Forma
(Amount in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	1,251,532	$	(3,286	)(A)	$	1,248,246	$	28,400	(B)	$	1,276,646
Net accounts receivable		223,098		(64,280	)(A)		158,818		—			158,818
Retained interests in securitized receivables		503,443		(108,988	)		394,455		—			394,455
Inventory		1,633,327		(399,084	)(A)		1,234,243		—			1,234,243
Prepaid expenses and other current assets		41,311		(2,065	)(A)		39,246		—			39,246
Total current assets		3,652,711		(577,703	)		3,075,008		28,400			3,103,408
Net investment in discontinued operations		—		565,477	(A)		565,477		(565,477	)(D)		—
Property and equipment, net		853,778		(120,976	)(A)		732,802		—			732,802
Other assets		32,897		(18,896	)(A)		14,001		—			14,001
TOTAL ASSETS	$	4,539,386	$	(152,098	)	$	4,387,288	$	(537,077	)	$	3,850,211
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt	$	102,073	$	—		$	102,073	$	(78,608	)(C)	$	23,465
Accounts payable		1,106,679		(87,160	)(A)		1,019,519		—			1,019,519
Short-term debt		10,237		(8,450	)(A)		1,787		(1,390	)(C)		397
Accrued expenses and other current liabilities		183,336		(25,775	)(A)		157,561		—			157,561
Accrued income taxes		100,696		—			100,696		—			100,696
Deferred income taxes		138,306		(22,009	)(A)		116,297		—			116,297
Total current liabilities		1,641,327		(143,394	)		1,497,933		(79,998	)		1,417,935
Long-term debt, excluding current installments		14,064		—			14,064		—			14,064
Deferred revenue and other liabilities		149,269		(8,416	)(A)		140,853		—			140,853
Deferred income taxes		288		(288	)(A)		—		—			—
TOTAL LIABILITIES		1,804,948		(152,098	)		1,652,850		(79,998	)		1,572,852
STOCKHOLDERS’ EQUITY:
Circuit City Group Common Stock, $0.50 par value; 350,000,000 shares authorized; 208,823,000 shares issued and outstanding		104,411		—			104,411		(104,411	)(F)		—
CarMax Group Common Stock, $0.50 par value; 175,00,000 shares authorized; 36,861,000 shares issued and outstanding		18,426		—			18,426		(18,426	)(E)		—
Circuit City common stock, $0.50 par value; 350,000,000 shares authorized; 208,823,000 shares issued and outstanding		—		—			—		104,411	(F)		104,411
Capital in excess of par value		810,047		—			810,047		—			810,047
Retained earnings		1,801,554		—			1,801,554		(438,653	)(E)		1,362,901
TOTAL STOCKHOLDERS’ EQUITY		2,734,438		—			2,734,438		(457,079	)		2,277,359
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,539,386	$	(152,098	)	$	4,387,288	$	(537,077	)	$	3,850,211

See accompanying notes to unaudited pro forma consolidated balance sheet.

C-7

CIRCUIT CITY STORES, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

(A) Reflects the reclassification of all assets and liabilities of the businesses of CarMax, Inc. to discontinued operations. The measurement date for discontinued operations purposes will be on or about the time of the separation.

(B) Reflects the effects of the special dividend of $28,400,000 to be paid on the separation date to Circuit City Stores by CarMax, Inc. in recognition of Circuit City Stores’ continuing contingent liability on 23 leases assigned by Circuit City Stores to a subsidiary of CarMax. See page 30 for additional information regarding the special dividend.

(C) Reflects debt that was previously allocated to CarMax, Inc. CarMax, Inc. has entered into its own two-year, $200,000,000 credit agreement secured by vehicle inventory. With some of the proceeds of this facility, CarMax will repay Circuit City Stores for debt that was previously allocated to CarMax. Circuit City Stores will in turn pay down its outstanding debt for the same amount. This amount is made up of $78,608,000 of current installments of long-term debt and $1,390,000 of short-term debt.

(D) Reflects the removal of the net investment in discontinued operations as a result of the separation.

(E) Reflects the distribution of CarMax, Inc. common stock to the shareholders offset by the $28,400,000 special dividend paid to Circuit City from CarMax.

(F) Reflects the redesignation of Circuit City Group Common Stock to Circuit City common stock.

C-8

CIRCUIT CITY STORES, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

Year Ended February 28, 2002

	Circuit City Stores Historical		Discontinued Operations Adjustments			Circuit City Stores Pro Forma Before Separation Adjustments		Separation Adjustments			Circuit City Stores Pro Forma
(Amounts in thousands except per share data)
Net sales and operating revenues	$	12,791,468	$	(3,201,665	)(A)	$	9,589,803	$	—		$	9,589,803
Cost of sales, buying and warehousing		10,049,793		(2,797,962	)(A)		7,251,831		—			7,251,831
Appliance exit costs		10,000		—			10,000		—			10,000
Gross profit		2,731,675		(403,703	)		2,327,972		—			2,327,972
Selling, general and administrative expenses		2,372,941		(252,289	)(A)		2,120,652		(320	)(B)		2,120,332
Interest expense		5,839		(4,958	)(A)		881		—			881
Total expenses		2,378,780		(257,247	)		2,121,533		(320	)		2,121,213
Earnings before income taxes		352,895		(146,456	)		206,439		320			206,759
Provision for income taxes		134,100		(55,654	)(A)		78,446		122	(C)		78,568
Net earnings	$	218,795	$	(90,802	)	$	127,993	$	198		$	128,191
Net earnings attributed to:
Circuit City Group Common Stock	$	190,799
CarMax Group Common Stock	$	27,996
Circuit City common stock											$	128,191
Weighted average common shares:
Circuit City Group:
Basic		205,501
Diluted		207,095
CarMax Group:
Basic		32,140
Diluted		34,122
Circuit City:
Basic												205,501	(D)
Diluted												207,095	(D)
Net earnings per share attributed to:
Circuit City Group Common Stock:
Basic	$	0.93
Diluted	$	0.92
CarMax Group Common Stock:
Basic	$	0.87
Diluted	$	0.82
Circuit City common stock:
Basic											$	0.62	(D)
Diluted											$	0.62	(D)

See accompanying notes to unaudited pro forma consolidated statement of earnings.

C-9

CIRCUIT CITY STORES, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

(A) Reflects the reclassification of all revenues and expenses of the businesses of CarMax, Inc. to discontinued operations. The measurement date for discontinued operations purposes will be on or about the time of the separation.

Historically, Circuit City Stores has allocated debt and interest expense to the Circuit City group and CarMax group based on their borrowing needs and the average interest rate for external debt during that period. Since CarMax is planning to re-pay its allocated debt at the date of separation and Circuit City Stores will then in turn pay down its external debt, the only debt and interest expense left would be the portion previously allocated to the Circuit City group.

(B) Reflects an expected 10% mark-up for general and administrative costs and shared services that are currently allocated at cost to CarMax, Inc. from Circuit City Stores, which may not be the same services to be provided by Circuit City Stores to CarMax after the separation. Costs historically allocated to CarMax, Inc. were approximately $3,197,000 for the year ended February 28, 2002. See the summary of the transition services agreement on page 88 for continued services to be provided to CarMax, Inc. by Circuit City Stores.

(C) Reflects the income tax effects of adjustment (B).

(D) Reconciliation of the numerator and denominator of basic and diluted earnings per share are presented below:

(Amounts in thousands except per share data)	Year ended February 28, 2002
Weighted average common shares		205,501
Dilutive potential common shares:
Options		773
Restricted Stock		821
Weighted average common shares and dilutive potential common shares		207,095
Net earnings available to common shareholders	$	128,191
Basic net earnings per share	$	0.62
Diluted net earnings per share	$	0.62

Options to purchase 5,253,600 shares of Circuit City Group Common Stock with exercise prices ranging from $26.15 to $43.03 were outstanding and not included in the computation of diluted net earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

        Pro forma weighted average shares and net earnings per share amounts do not give effect to the change in the outstanding Circuit City Stores restricted stock and and stock options as a result of the separation. The modification to exercise prices and shares for restricted stock and stock options will not be determined until the distribution date. See page 36 for a description of how the Circuit City Stores stock options and restricted stock will be modified at the distribution date.

C-10

ANNEX D

CARMAX, INC. HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS

INDEX FOR ANNEX D

CarMax, Inc. Historical Consolidated Financial Statements
Consolidated Statements of Earnings	D-2
Consolidated Balance Sheets	D-3
Consolidated Statements of Cash Flows	D-4
Consolidated Statements of Equity	D-5
Notes to Consolidated Financial Statements	D-6
Independent Auditors’ Report	D-22
Schedule II—Valuation and Qualifying Accounts and Reserves	D-23
Independent Auditors’ Report on Financial Statement Schedule	D-24

D-1

CARMAX, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

	Years Ended February 28 or 29
(Amounts in thousands)	2002		2001		2000
Net sales and operating revenues	$	3,201,665	$	2,500,991	$	2,014,984
Cost of sales		2,797,962		2,171,232		1,774,619
Gross profit		403,703		329,759		240,365
Selling, general and administrative expenses [Notes 1 and 9]		252,289		244,167		228,200
Interest expense [Notes 1 and 4]		4,958		12,110		10,362
Total expenses		257,247		256,277		238,562
Earnings before income taxes		146,456		73,482		1,803
Provision for income taxes [Notes 1 and 5]		55,654		27,918		685
Net earnings	$	90,802	$	45,564	$	1,118

See accompanying notes to consolidated financial statements.

D-2

CARMAX, INC.

CONSOLIDATED BALANCE SHEETS

	At February 28
(Amounts in thousands)	2002		2001
ASSETS
Current assets:
Cash [Note 2]	$	3,286	$	8,802
Net accounts receivable		64,280		60,526
Retained interests in securitized receivables [Note 10]		108,988		74,136
Inventory		399,084		347,137
Prepaid expenses and other current assets		2,065		2,306
Total current assets		577,703		492,907
Property and equipment, net [Notes 3 and 4]		120,976		192,158
Other assets		21,543		25,888
TOTAL ASSETS	$	720,222	$	710,953
LIABILITIES AND EQUITY
Current liabilities:
Current installments of long-term debt [Notes 1 and 4]	$	78,608	$	108,151
Accounts payable		87,160		82,483
Short-term debt [Notes 1 and 4]		9,840		987
Accrued expenses and other current liabilities		25,775		16,154
Deferred income taxes [Notes 1 and 5]		22,009		18,162
Total current liabilities		223,392		225,937
Long-term debt, excluding current installments [Notes 1 and 4]		—		83,057
Deferred revenue and other liabilities		8,416		6,836
Deferred income taxes [Notes 1 and 5]		2,935		3,620
TOTAL LIABILITIES		234,743		319,450
Equity		485,479		391,503
Commitments and contingent liabilities [Notes 1, 7, 8, and 12]
TOTAL LIABILITIES AND EQUITY	$	720,222	$	710,953

See accompanying notes to consolidated financial statements.

D-3

CARMAX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended February 28 or 29
(Amounts in thousands)	2002			2001			2000
OPERATING ACTIVITIES:
Net earnings	$	90,802		$	45,564		$	1,118
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		16,340			18,116			15,241
Unearned compensation amortization of restricted stock		100			154			447
Write-down of assets and lease termination costs [Note 9]		—			8,677			4,755
Loss (gain) on disposition of property and equipment		—			415			(820	)
Provision for deferred income taxes		3,162			8,758			1,225
Changes in operating assets and liabilities, net of effects from business acquisitions:
Increase in net accounts receivable and retained interests in securitized receivables		(38,606	)		(5,409	)		(31,889	)
Increase in inventory		(51,947	)		(62,745	)		(39,909	)
Decrease (increase) in prepaid expenses and other current assets		241			538			(2,224	)
Decrease in other assets		1,639			424			1,255
Increase in accounts payable, accrued expenses and other current liabilities		19,330			3,881			25,016
Increase (decrease) in deferred revenue and other liabilities		1,580			(413	)		2,234
Net cash provided by (used in) operating activities		42,641			17,960			(23,551	)
INVESTING ACTIVITIES:
Cash used in business acquisitions		—			(1,325	)		(34,849	)
Purchases of property and equipment		(41,417	)		(10,834	)		(45,395	)
Proceeds from sales of property and equipment, net		98,965			15,506			25,340
Net cash provided by (used in) investing activities		57,548			3,347			(54,904	)
FINANCING ACTIVITIES:
Increase (decrease) in short-term debt, net		8,853			(565	)		(3,053	)
(Decrease) increase in long-term debt, net		(112,600	)		(21,658	)		71,896
Equity transactions with parent, net		(1,958	)		(263	)		1,914
Net cash (used in) provided by financing activities		(105,705	)		(22,486	)		70,757
Decrease in cash and cash equivalents		(5,516	)		(1,179	)		(7,698	)
Cash and cash equivalents at beginning of year		8,802			9,981			17,679
Cash and cash equivalents at end of year	$	3,286		$	8,802		$	9,981

See accompanying notes to consolidated financial statements.

D-4

CARMAX, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(Amounts in thousands)

Balance at March 1, 1999	$	340,415
Net earnings		1,118
Equity transactions with parent, net		3,456
Balance at February 29, 2000		344,989
Net earnings		45,564
Equity transactions with parent, net		950
Balance at February 28, 2001		391,503
Net earnings		90,802
Equity transactions with parent, net		3,174
Balance at February 28, 2002	$	485,479

See accompanying notes to consolidated financial statements.

D-5

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

On February 22, 2002, Circuit City Stores announced that its board of directors had authorized management to initiate a process that would separate the CarMax auto superstore business from the rest of Circuit City Stores. As a result of the separation, all of the businesses, assets and liabilities of the CarMax group would be held in CarMax, Inc. (presently a wholly owned subsidiary of Circuit City Stores), which, following the separation, would be an independent separately traded public company. These consolidated financial statements are presented as if CarMax, Inc. existed as an entity separate from the remaining businesses of Circuit City Stores during the periods presented.

Circuit City Stores has contributed to CarMax, Inc. all of the subsidiaries, assets and liabilities that constituted the CarMax group. CarMax, Inc. includes the same businesses, assets and liabilities the financial performance of which was intended to be reflected by the CarMax Group Common Stock. The assets of CarMax, Inc. will be accounted for at the historical values carried by Circuit City Stores prior to the separation.

The accompanying consolidated financial statements include the historical operations of certain subsidiaries of Circuit City Stores. Accordingly, Circuit City Stores’ net investment in CarMax is shown as equity on the accompanying consolidated financial statements. Equity transactions with parent reflect amounts allocated to CarMax based on equity transactions of the CarMax Group Common Stock.

In conjunction with the separation, all outstanding CarMax group stock options and restricted stock will be replaced with CarMax, Inc. stock options and restricted stock with the same terms and conditions, exercise price and restrictions as the CarMax group stock options and restricted stock they replace.

CarMax’s financial statements reflect the application of the management and allocation policies adopted by Circuit City Stores’ board of directors. These policies may be modified or rescinded, or new policies may be adopted, at the sole discretion of the board of directors, although the board of directors has no present plans to do so. These management and allocation policies include the following:

(A)  Financial Activities:

Most financial activities are managed by Circuit City Stores on a centralized basis. Such financial activities include the investment of surplus cash and the issuance and repayment of short-term and long-term debt. Allocated invested surplus cash of CarMax consists of (i) Circuit City Stores cash equivalents, if any, that have been allocated in their entirety to CarMax and (ii) a portion of Circuit City Stores’ cash equivalents, if any, that are allocated to CarMax. Circuit City Stores allocates debt to CarMax based on usage of funds. Debt that is specific only to the CarMax business or the Circuit City business is allocated in its entirety to that business. For shared funds obtained from bank debt (pooled debt), CarMax's portion is determined by applying to CarMax's intercompany debt due to Circuit City Stores the percentages that short-term bank debt, long-term bank debt and the current portion of long-term bank debt are of the total pooled debt. The remainder of any debt is then applied to the Circuit City business. 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.

(B)  Corporate General and Administrative Costs:

Corporate general and administrative costs and other shared services generally have been allocated to CarMax based upon utilization of such services. Where determinations based on utilization alone have been impractical, other methods and criteria are used that management believes are equitable and provide a reasonable estimate of the costs attributable to CarMax. Costs allocated to CarMax totaled approximately $3.2 million for fiscal 2002, $4.0 million for fiscal 2001 and $5.6 million for fiscal 2000.

In connection with the separation, Circuit City Stores and CarMax, Inc. will enter into a transition services agreement. Under this agreement, Circuit City Stores will provide to CarMax services for payroll, human resources, benefits administration, relocation and purchasing of television advertising, car stereo installation and

D-6

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

displays, security, cafeteria services, telecommunications, computer center support, special technical services and administrative services. These services are divided into three different categories, each category with an initial term of six months to 2 years with two renewal options. CarMax will pay Circuit City Stores the allocable portion of all direct and indirect costs for providing these services plus an expected 10% mark-up.

(C)  Income Taxes:

CarMax is included in the consolidated federal income tax return and in certain state tax returns filed by Circuit City Stores. Accordingly, the financial statement provision and the related tax payments or refunds are reflected in the financial statements in accordance with the Circuit City Stores’ tax allocation policy. In general, this policy provides that the consolidated tax provision and related tax payments or refunds are allocated to CarMax based principally upon the financial income, taxable income, credits and other amounts directly related to these items. Tax benefits that cannot be used by CarMax, but can be utilized by Circuit City Stores on a consolidated basis, are allocated to the business that generated such benefits. As a result, the allocated amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if CarMax had filed separate tax returns.

In connection with the separation, Circuit City Stores and CarMax, Inc. will enter into a tax allocation agreement that will govern Circuit City Stores’ and CarMax’s respective rights, responsibilities, and obligations after the separation with respect to taxes for the periods ending on or before the separation, which will remain in effect following the separation. Generally, the tax allocation agreement provides that pre-separation taxes that are attributable to the business of one party will be borne solely by that party.

2.    Summary of Significant Accounting Policies

(A)  Securitizations:

CarMax enters into securitization transactions, which allow for the sale of automobile loan receivables to qualified special purpose entities, which, in turn, issue asset-backed securities to third-party investors. On April 1, 2001, CarMax adopted Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which replaced SFAS No. 125 and applies prospectively to all securitization transactions occurring after March 31, 2001. Adoption of SFAS No. 140 did not have a material impact on the financial position, results of operations or cash flows of CarMax. Transfers of financial assets that qualify as sales under SFAS No. 140 are accounted for as off-balance sheet securitizations. CarMax may retain interest-only strips, one or more subordinated tranches, residual interests in a securitization trust, servicing rights and a cash reserve account, all of which are retained interests in the securitized receivables. These retained interests are carried at fair value as determined by the present value of expected future cash flows using management’s projections of key factors, such as finance charge income, default rates, payment rates and discount rates appropriate for the type of asset and risk. The changes in fair value of retained interests are included in earnings.

(B)  Fair Value of Financial Instruments:

The carrying value of CarMax’s cash, automobile loan and other receivables, accounts payable, short-term borrowings and long-term debt approximates fair value. CarMax’s retained interests in securitized receivables and derivative financial instruments are recorded on the CarMax balance sheets at fair value.

D-7

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(C)  Inventory:

Inventory is comprised primarily of vehicles held for sale or for reconditioning and 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 and reconditioning vehicles, are included in inventory. Certain manufacturer incentives and rebates for new-car inventory, including holdbacks, are recognized as a reduction to new-car inventory when CarMax purchases the vehicles.

(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.

(E)  Computer Software Costs:

External direct costs of materials and services used in the development of internal-use software and payroll and payroll-related costs for employees directly involved in the development of internal-use software are capitalized. Amounts capitalized are amortized on a straight-line basis over a period of three to five years.

(F)  Impairment of Long-Lived Assets:

CarMax reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. Impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value.

(G)  Store Opening Expenses:

Costs relating to store openings, including organization and pre-opening costs, are expensed as incurred.

(H)  Income Taxes:

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes, measured by applying currently enacted tax laws. A deferred tax asset is recognized if it is more likely than not that a benefit will be realized.

(I)  Revenue Recognition:

CarMax recognizes revenue when the earnings process is complete, generally at either the time of sale to a customer or upon delivery to a customer. CarMax sells extended warranties on behalf of unrelated third parties. These warranties usually have terms of coverage from 12 to 72 months. Because third parties are the primary obligors under these warranties, commission revenue is recognized at the time of sale, net of a provision for estimated customer returns of the warranties.

(J)  Selling, General and Administrative Expenses:

Profits generated by the finance operation, fees received for arranging customer automobile financing through third parties and interest income are recorded as reductions to selling, general and administrative expenses.

D-8

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(K)  Advertising Expenses:

All advertising costs are expensed by CarMax as incurred.

(L)  Stock-Based Compensation:

CarMax accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting For Stock Issued to Employees,” and provides the pro forma disclosures required by SFAS No. 123, “Accounting for Stock-Based Compensation.”

(M)  Derivative Financial Instruments:

On behalf of CarMax and in connection with securitization activities, Circuit City Stores enters into interest rate swap agreements to manage exposure to interest rates and to more closely match funding costs to the use of funding. CarMax adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, on March 1, 2001. SFAS No. 133 requires CarMax to recognize all derivative instruments as either assets or liabilities on the balance sheets at fair value. The adoption of SFAS No. 133 did not have a material impact on the financial position, results of operations or cash flows of CarMax. The changes in fair value of derivative instruments are included in earnings.

(N)  Risks and Uncertainties:

CarMax is a used- and new-car retail business. The diversity of CarMax’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. However, because of CarMax’s limited overall size, management cannot assure that unanticipated events will not have a negative impact on CarMax.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

(O)  Reclassifications:

Certain prior year amounts have been reclassified to conform to classifications adopted in fiscal 2002.

3.    Property and Equipment

Property and equipment, at cost, at February 28 is summarized as follows:

(Amounts in thousands)	2002		2001
Land and buildings (20 to 25 years)	$	3,442	$	101,382
Land held for sale		8,762		27,971
Land held for development		8,021		4,285
Construction in progress		64,122		14,324
Furniture, fixtures and equipment (3 to 8 years)		69,435		64,866
Leasehold improvements (10 to 15 years)		17,281		21,196
		171,063		234,024
Less accumulated depreciation and amortization		50,087		41,866
Property and equipment, net	$	120,976	$	192,158

D-9

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Land held for development is land owned for future sites that are scheduled to open more than one year beyond the fiscal year reported.

4.    Debt

As discussed in Note 1, CarMax is allocated debt from Circuit City Stores. At February 28, 2002, CarMax was allocated $9.8 million of short-term debt and $78.6 million of long-term debt. At February 28, 2001, CarMax was allocated $1.0 million of short-term debt and $191.2 million of long-term debt . Long-term debt of Circuit City Stores at February 28 is summarized as follows:

(Amounts in thousands)	2002		2001
Term loans	$	100,000	$	230,000
Industrial Development Revenue Bonds due through 2006 at various prime-based rates of interest ranging from 3.1% to 6.7%		3,717		4,400
Obligations under capital leases		11,594		12,049
Note payable		826		2,076
Total long-term debt		116,137		248,525
Less current installments		102,073		132,388
Long-term debt, excluding current installments	$	14,064	$	116,137
Portion of long-term debt, excluding current installments, allocated to CarMax		—	$	83,057
Portion of current installments of long-term debt allocated to CarMax	$	78,608	$	108,151

In July 1994, Circuit City Stores entered into a seven-year, $100,000,000 unsecured bank term loan. The loan was restructured in August 1996 as a six-year, $100,000,000 unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.40%. At February 28, 2002, the interest rate on the term loan was 2.25 percent. This term loan is due in July 2002 and was classified as a current liability at February 28, 2002. Although Circuit City Stores has the ability to refinance this loan, it intends to repay the debt using existing working capital.

In June 1996, Circuit City Stores entered into a five-year, $130,000,000 unsecured bank term loan. Principal was due in full at maturity with interest payable periodically at LIBOR plus 0.35%. As scheduled, Circuit City Stores used existing working capital to repay this term loan in June 2001.

Circuit City Stores maintains a multi-year, $150,000,000 unsecured revolving credit agreement with four banks. The agreement calls for interest based on both committed rates and money market rates and a commitment fee of 0.18% per annum. The agreement was entered into as of August 31, 1996, and expires on August 31, 2002. No amounts were outstanding under the revolving credit agreement at February 28, 2002 or 2001, and Circuit City Stores does not plan to renew this agreement.

In November 1998, CarMax entered into a four-year, $5,000,000 unsecured promissory note. A portion of the principal amount is due annually with interest payable periodically at 8.25% . The outstanding balance at February 28, 2002, was $826,000 and was included in current installments of long-term debt.

In December 2001, CarMax entered into an $8,450,000 secured promissory note in conjunction with the purchase of land for new store construction. This note is due in August 2002 and was classified as short-term debt at February 28, 2002.

D-10

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The scheduled aggregate annual principal payments on Circuit City Stores’ long-term obligations for the next five fiscal years are as follows: 2003—$102,073,000; 2004—$1,410,000; 2005—$2,521,000; 2006—$1,083,000; 2007—$1,010,000.

Under certain of the debt agreements, Circuit City Stores must meet financial covenants relating to minimum tangible net worth, current ratios and debt-to-capital ratios. Circuit City Stores was in compliance with all such covenants at February 28, 2002 and 2001.

Short-term debt of Circuit City Stores is funded through committed lines of credit and informal credit arrangements, as well as the revolving credit agreement. Other information regarding short-term financing and committed lines of credit is as follows:

	Years Ended February 28
(Amounts in thousands)	2002		2001
Average short-term financing outstanding	$	2,256	$	56,065
Maximum short-term financing outstanding	$	6,594	$	363,199
Aggregate committed lines of credit	$	195,000	$	360,000

The weighted average interest rate on the outstanding short-term debt was 4.4% during fiscal 2002, 6.8% during fiscal 2001 and 5.6% during fiscal 2000.

Interest expense allocated by Circuit City Stores to CarMax, excluding interest capitalized, was $4,958,000 in fiscal 2002, $12,110,000 in fiscal 2001 and $10,362,000 in fiscal 2000. CarMax capitalizes interest in connection with the construction of certain facilities. Capitalized interest totaled $530,000 in fiscal 2002. No interest was capitalized in fiscal 2001. Capitalized interest totaled $1,254,000 in fiscal 2000.

5.    Income Taxes

The components of the provision for income taxes on net earnings are as follows:

	Years Ended February 28 or 29
(Amounts in thousands)	2002		2001		2000
Current:
Federal	$	47,389	$	16,986	$	(1,395	)
State		5,103		2,174		855
		52,492		19,160		(540	)
Deferred:
Federal		3,067		8,494		1,190
State		95		264		35
		3,162		8,758		1,225
Provision for income taxes	$	55,654	$	27,918	$	685

D-11

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The effective income tax rate differed from the federal statutory income tax rate as follows:

	Years Ended February 28 or 29
	2002		2001		2000
Federal statutory income tax rate	35	%	35	%	35	%
State and local income taxes, net of federal benefit	3	%	3	%	3	%
Effective income tax rate	38	%	38	%	38	%

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 are as follows:

(Amount in thousands)	2002		2001
Deferred tax assets:
Accrued expenses	$	6,719	$	5,173
Other		187		235
Total gross deferred tax assets		6,906		5,408
Deferred tax liabilities:
Depreciation and amortization		3,615		3,850
Securitized receivables		22,593		15,262
Inventory		4,257		6,449
Prepaid expenses		1,385		1,629
Total gross deferred tax liabilities		31,850		27,190
Net deferred tax liability	$	24,944	$	21,782

Based on CarMax’s historical and current pretax earnings, management believes the amount of gross deferred tax assets will more likely than not be realized through future taxable income; therefore, no valuation allowance is necessary.

6.    Common Stock and Stock-Based Incentive Plans

(A)  Voting Rights:

The holders of both series of common stock of Circuit City Stores and any series of preferred stock outstanding and entitled to vote together with the holders of common stock will vote together as a single voting group on all matters on which common shareholders generally are entitled to vote other than a matter on which the common stock or either series thereof or any series of preferred stock would be entitled to vote as a separate voting group. On all matters on which both series of common stock would vote together as a single voting group, (i) each outstanding share of Circuit City Group Common Stock shall have one vote and (ii) each outstanding share of CarMax Group Common Stock shall have a number of votes based on the weighted average ratio of the market value of a share of CarMax Group Common Stock to a share of Circuit City Group Common Stock. If shares of only one series of common stock are outstanding, each share of that series shall be entitled to one vote. If either series of common stock is entitled to vote as a separate voting group with respect to any matter, each share of that series shall, for purposes of such vote, be entitled to one vote on such matter.

D-12

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(B)  Shareholder Rights Plan:

In conjunction with Circuit City Stores’ Shareholder Rights Plan as amended and restated, preferred stock purchase rights were distributed as a dividend at the rate of one right for each share of CarMax Group Common Stock. The rights are exercisable only upon the attainment of, or the commencement of a tender offer to attain, a specified ownership interest in Circuit City Stores by a person or group. When exercisable, each CarMax group right would entitle the holder to buy one four-hundredth of a share of Cumulative Participating Preferred Stock, Series F, $20 par value, at an exercise price of $100 per share, subject to adjustment. A total of 500,000 shares of such preferred stock, which have preferential dividend and liquidation rights, have been designated. No such shares are outstanding. In the event that an acquiring person or group acquires the specified ownership percentage of Circuit City Stores’ common stock (except pursuant to a cash tender offer for all outstanding shares determined to be fair by the board of directors) or engages in certain transactions with Circuit City Stores 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 CarMax Group Common Stock valued at two times the exercise price.

(C)  Restricted Stock:

Circuit City Stores has issued restricted stock under the provisions of the 1994 Stock Incentive Plan whereby management and key employees of CarMax are granted restricted shares of CarMax Group Common Stock. Shares are awarded in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions or forfeitures. Restrictions on the awards generally expire three to four years from the date of grant. Total restricted stock awards of 2,100 shares of CarMax Group Common Stock were granted to eligible CarMax employees in fiscal 2002. The market value at the date of grant of all shares granted has been recorded as unearned compensation and is a component of equity. Unearned compensation is expensed over the restriction periods. In fiscal 2002, a total of $99,700 was charged to operations ($153,500 in fiscal 2001 and $447,200 in fiscal 2000). As of February 28, 2002, 27,100 restricted shares of CarMax Group Common Stock were outstanding.

(D)  Stock Incentive Plans:

Under Circuit City Stores stock incentive plans, nonqualified stock options may be granted to management and key employees of CarMax and outside directors of Circuit City Stores to purchase shares of CarMax Group Common Stock. The exercise price for nonqualified options is equal to, or greater than, the market value at the date of grant. Options generally are exercisable over a period from one to ten years from the date of grant. Circuit City Stores has authorized 9,750,000 shares of CarMax Group Common Stock to be issued as either options or restricted stock grants. Shares of CarMax Group Common Stock available for issuance of options or restricted stock grants totaled 1,150,779 at February 28, 2002, and 2,615,227 at February 28, 2001.

(E)  Employee Stock Purchase Plan:

Circuit City Stores has an employee stock purchase plan for all CarMax employees meeting certain eligibility criteria. Under the CarMax plan, eligible employees may, subject to certain limitations, purchase shares of CarMax Group Common Stock. For each $1.00 contributed by employees under the plan, CarMax matches $0.15. Purchases are limited to 10% of an employee’s eligible compensation, up to a maximum of $7,500 per year. Circuit City Stores has authorized 2,000,000 shares of CarMax Group Common Stock for purchase under the CarMax plan. At February 28, 2002, a total of 397,717 shares remained available under the CarMax plan. During fiscal 2002, 183,902 shares were issued to or purchased on the open market on behalf of employees (477,094 in fiscal 2001 and 580,000 in fiscal 2000). The average price per share purchased under the plan was $17.13 in fiscal 2002, $4.18 in fiscal 2001 and $3.68 in fiscal 2000. The CarMax match totaled $384,800 in fiscal 2002, $247,000 in fiscal 2001 and $221,500 in fiscal 2000.

D-13

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(F)  401(k) Plan:

Effective August 1, 1999, Circuit City Stores began sponsoring a 401(k) Plan for all employees meeting certain eligibility criteria. Under the Plan, eligible CarMax employees can contribute up to 15% of their salaries, and CarMax matches a portion of those associate contributions. The expense allocated to CarMax for this plan for CarMax associates was $885,000 in fiscal 2002, $686,000 in fiscal 2001 and $317,000 in fiscal 2000.

TABLE 1

	2002				2001				2000
(Shares in thousands)	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year	4,107		$	3.16	3,324		$	3.87	4,380		$	1.77
Granted	1,659			4.94	1,281			1.70	1,132			5.89
Exercised	(1,941	)		1.32	(56	)		0.22	(2,027	)		0.22
Cancelled	(194	)		5.95	(442	)		4.67	(161	)		6.94
Outstanding at end of year	3,631		$	4.81	4,107		$	3.16	3,324		$	3.87
Options exercisable at end of year	821		$	6.85	1,943		$	2.94	1,203		$	2.54

TABLE 2

	Options Outstanding				Options Exercisable
(Shares in thousands) Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$1.63	962	5.0	$	1.63	193	$	1.63
3.22 to 4.89	1,648	5.9		4.82	25		3.66
6.06 to 9.06	794	4.2		6.37	387		6.51
9.19 to 14.00	141	2.9		11.09	136		11.02
15.00 to 22.47	86	2.5		15.42	80		15.08
Total	3,631	5.1	$	4.81	821	$	6.85

The CarMax Group’s stock option activity is summarized in Table 1 above. Table 2 above summarizes information about stock options outstanding as of February 28, 2002.

CarMax 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, net earnings would have changed to the pro forma amounts indicated in the following table. In accordance with the transition provisions of SFAS No. 123, the pro forma amounts reflect options with grant dates subsequent to March 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented 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 2002 may not be representative of the pro forma effects on net earnings for future years.

D-14

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Years Ended February 28 or 29
(Amounts in thousands)	2002		2001		2000
Net earnings:
As reported	$	90,802	$	45,564	$	1,118
Pro forma		90,328		45,354		937

For the purpose of computing the pro forma amounts indicated above, the fair value of each option on the date of grant was estimated using the Black-Scholes option-pricing model. The weighted average assumptions used in the model are as follows:

	2002		2001		2000
Expected dividend yield	—		—		—
Expected stock volatility	79	%	71	%	62	%
Risk-free interest rates	5	%	7	%	6	%
Expected lives (in years)	4		4		4

Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted for CarMax was $3 per share in fiscal 2002, $1 per share in fiscal 2001 and $3 per share in fiscal 2000.

7.    Pension Plans

Circuit City Stores has a noncontributory defined benefit pension plan covering the majority of full-time employees who are at least age 21 and have completed one year of service. The cost of the program is being funded currently. Plan benefits generally are based on years of service and average compensation. Plan assets consist primarily of equity securities and included 160,000 shares of Circuit City Group Common Stock at February 28, 2002, and February 28, 2001. Eligible employees of CarMax participate in Circuit City Stores’ plan. Pension costs for these employees have been allocated to CarMax based on its proportionate share of the projected benefit obligation. Circuit City Stores contributions allocated to CarMax were $1,304,000 in fiscal 2002, $1,630,000 in fiscal 2001 and $625,000 in fiscal 2000.

D-15

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables set forth CarMax’s share of the pension plan’s financial status and amounts recognized in the balance sheets as of February 28:

(Amounts in thousands)	2002		2001
Change in benefit obligation:
Benefit obligation at beginning of year	$	7,837	$	4,443
Service cost		2,549		1,525
Interest cost		588		355
Actuarial loss		4,002		1,514
Benefits paid		(108)		—
Benefit obligation at end of year	$	14,868	$	7,837
Change in plan assets:
Fair value of plan assets at beginning of year	$	4,074	$	2,715
Actual return on plan assets		(262)		(271)
Employer contributions		1,304		1,630
Benefits paid		(108)		—
Fair value of plan assets at end of year		5,008	$	4,074
Reconciliation of funded status:
Funded status	$	(9,860)	$	(3,763)
Unrecognized actuarial loss		7,524		3,039
Unrecognized transitional asset		—		(3)
Unrecognized prior service benefit		(2)		(4)
Net amount recognized	$	(2,338)	$	(731)

The components of net pension expense were as follows:

	Years Ended February 28 or 29
(Amounts in thousands)	2002			2001			2000
Service cost	$	2,549		$	1,525		$	1,250
Interest cost		588			355			173
Expected return on plan assets		(424	)		(283	)		(159	)
Amortization of prior service cost		(2	)		(2	)		(2	)
Amortization of transitional asset		(3	)		(3	)		(3	)
Recognized actuarial loss		203			91			77
Net pension expense	$	2,911		$	1,683		$	1,336

Assumptions used in the accounting for the pension plan were:

	Years Ended February 28 or 29
	2002		2001		2000
Weighted average discount rate	7.25	%	7.50	%	8.00	%
Rate of increase in compensation levels	7.00	%	6.00	%	6.00	%
Expected rate of return on plan assets	9.00	%	9.00	%	9.00	%

D-16

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Circuit City Stores also has an unfunded nonqualified plan that restores retirement benefits for certain CarMax senior executives who are affected by Internal Revenue Code limitations on benefits provided under the pension plan. The projected benefit obligation under this plan and allocated to CarMax was $1,600,000 at February 28, 2002 and $600,000 at February 28, 2001.

8.    Lease Commitments

CarMax conducts a substantial portion of its business in leased premises. CarMax’s lease obligations are based upon contractual minimum rates. Twenty-three of CarMax’s sales locations are currently operated under leases originally entered into by Circuit City Stores. Although each of these leases has been assigned to a subsidiary of CarMax, Circuit City Stores remains contingently liability under the leases.

Rental expense for all operating leases was $41,362,000 in fiscal 2002, $36,057,000 in fiscal 2001 and $34,706,000 in fiscal 2000. Most leases provide that CarMax pay taxes, maintenance, insurance and operating expenses applicable to the premises. The initial term of most real property leases will expire within the next 20 years; however, most of the leases have options providing for renewal periods of 10 to 20 years at terms similar to the initial terms.

Future minimum fixed lease obligations, excluding taxes, insurance and other costs payable directly by CarMax, as of February 28, 2002, were:

(Amounts in thousands) Fiscal	Operating Lease Commitments
2003	$	43,077
2004		43,364
2005		43,332
2006		42,737
2007		41,991
After 2007		508,516
Total minimum lease payments	$	723,017

In August 2001, CarMax entered into a sale-leaseback transaction with unrelated parties covering nine superstore properties. This transaction, which represented the first sale-leaseback entered into by CarMax without a Circuit City Stores guarantee, was structured at competitive rates with an initial lease term of 15 years and two 10-year renewal options. In conjunction with this sale-leaseback transaction, CarMax must meet financial covenants relating to minimum tangible net worth and minimum coverage of rent expense. CarMax was in compliance with all such covenants at February 28, 2002. The aggregate selling price of sale-leaseback transactions was $102,388,000 in fiscal 2002 and $12,500,000 in fiscal 2000. In fiscal 2001, Circuit City Stores did not enter into any sale-leaseback transactions on behalf of CarMax. Gains or losses on sale-leaseback transactions are deferred and amortized over the term of the leases. Neither Circuit City Stores nor CarMax has continuing involvement under sale-leaseback transactions.

9.    Supplementary Financial Statement Information

(A)  Advertising Expense:

Advertising expense, which is included in selling, general and administrative expenses in the accompanying statements of earnings, amounted to $47,255,000 (1.5% of net sales and operating revenues) in fiscal 2002,

D-17

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$44,912,000 (1.8% of net sales and operating revenues) in fiscal 2001 and $48,637,000 (2.4% of net sales and operating revenues) in fiscal 2000.

(B)  Write-Down of Assets and Lease Termination Costs:

In the fourth quarter of fiscal 2001, CarMax recorded $8.7 million for the write-off of goodwill associated with two underperforming stand-alone new-car franchises. In the fourth quarter of fiscal 2000, CarMax recorded $4.8 million in charges related to lease termination costs on undeveloped property and a write-down of assets associated with excess property for sale. The loss related to operating leases was calculated based on expected lease termination costs and costs associated with subleasing the property.

10.    Securitizations

CarMax has asset securitization programs to finance the automobile loan receivables generated by its finance operation. CarMax’s finance operation sells its automobile loan receivables to a special purpose subsidiary, which, in turn, transfers those receivables to a group of third-party investors. For transfers of receivables that qualify as sales, CarMax recognizes gains or losses as a component of the finance operation’s profits, which are recorded as reductions to selling, general and administrative expenses. A special purpose subsidiary retains a subordinated interest in the transferred receivables. CarMax’s finance operation continues to service securitized receivables for a fee. CarMax’s finance operation refinanced $641.7 million of automobile loan receivables through the public issuance of asset-backed securities in fiscal 2002 and $655.4 million in fiscal 2001. The automobile loan securitization agreements do not provide for recourse to Circuit City Stores for credit losses on the securitized receivables. Under certain of these securitization programs, CarMax must meet financial covenants relating to minimum tangible net worth, minimum delinquency rates and minimum coverage of rent and interest expense. CarMax was in compliance with these covenants at February 28, 2002 and 2001.

At February 28, 2002, the total principal amount of automobile loan receivables managed was $1.55 billion. Of that total, the principal amount of automobile loan receivables securitized was $1.54 billion and the principal amount of automobile loan receivables held for sale or investment was $13.9 million. At February 28, 2002, the unused capacity of the automobile loan variable funding program was $211.0 million. The aggregate principal amount of automobile loans that were 31 days or more delinquent was $22.3 million at February 28, 2002. The principal amount of losses net of recoveries totaled $13.2 million for the year ended February 28, 2002, and $7.2 million for the year ended February 28, 2001.

CarMax receives annual servicing fees approximating 1% of the outstanding principal balance of the securitized automobile loan receivables and retains the rights to future cash flows available after the investors in the asset-backed securities have received the return for which they contracted. The servicing fees specified in the automobile loan securitization agreements adequately compensate the finance operation for servicing the securitized receivables. Accordingly, no servicing asset or liability has been recorded.

D-18

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued)

The table below summarizes certain cash flows received from and paid to securitization trusts:

	Years Ended February 28,
(Amounts in thousands)	2002		2001
Proceeds from new securitizations	$	752,516	$	619,525
Proceeds from collections reinvested in previous automobile loan securitizations	$	452,329	$	313,827
Servicing fees received	$	13,787	$	10,474
Other cash flows received on retained interests*	$	68,153	$	39,265

* This amount represents total cash flows received from retained interests by the transferor other than servicing fees, including cash flows from interest-only strips and cash above the minimum required level in cash collateral accounts.

When determining the fair value of retained interests, CarMax estimates future cash flows using management’s projections of key factors, such as finance charge income, default rates, payment rates and discount rates appropriate for the type of asset and risk. CarMax employs a risk-based pricing strategy that increases the stated annual percentage rate for accounts that have a higher predicted risk of default. Accounts with a lower risk profile may qualify for promotional financing.

Future finance income from securitized automobile loan receivables that exceeds the contractually specified investor returns and servicing fees (interest-only strips) is carried at fair value; amounted to $74.3 million at February 28, 2002, and $42.0 million at February 28, 2001. Gains of $56.4 million on sales of automobile loan receivables were recorded in fiscal 2002; gains of $35.4 million on sales of automobile loan receivables were recorded in fiscal 2001.

The fair value of retained interests at February 28, 2002, was $109.0 million, with a weighted-average life of 1.6 years. The fair value of retained interests at February 28, 2001, was $74.1 million with a weighted average life ranging from 1.5 years to 1.8 years. The following table shows the key economic assumptions used in measuring the fair value of retained interests at February 28, 2002, and a sensitivity analysis showing the hypothetical effect on the fair value of those interests when there are unfavorable variations from the assumptions used. Key economic assumptions at February 28, 2002, are not materially different from assumptions used to measure the fair value of retained interests at the time of securitization. These sensitivities are hypothetical and should be used with caution. In this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in actual circumstances, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

(Dollar amounts in thousands)	Assumptions Used (Annual)		Impact on Fair Value of 10% Adverse Change		Impact on Fair Value of 20% Adverse Change
Prepayment speed	1.5-1.6	%	$	3,646	$	7,354
Default rate	1.0-1.2	%	$	2,074	$	4,148
Discount rate	12.0	%	$	1,464	$	2,896

11.    Financial Derivatives

On behalf of CarMax, Circuit City Stores enters into amortizing swaps relating to automobile loan receivable securitizations to convert variable-rate financing costs to fixed-rate obligations to better match funding

D-19

CARMAX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

costs to the receivables being securitized. Circuit City Stores entered into twelve 40-month amortizing interest rate swaps with notional amounts totaling approximately $854.0 million in fiscal 2002, nine 40-month amortizing swaps with notional amounts totaling approximately $735.0 million in fiscal 2001 and four 40-month amortizing swaps with notional amounts totaling approximately $344.0 million in fiscal 2000. The remaining total notional amount of all swaps related to the automobile loan receivable securitizations was approximately $413.3 million at February 28, 2002, and $299.3 million at February 28, 2001. At February 28, 2002, the fair value of these swaps totaled a net liability of $841,000 and were included in accounts payable.

The market and credit risks associated with 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. Circuit City Stores does not anticipate significant market risk from swaps because they are used on a monthly basis to match funding costs to the use of the funding. Credit risk is the exposure to nonperformance of another party to an agreement. Circuit City Stores mitigates credit risk by dealing with highly rated bank counterparties.

12.    Contingent Liabilities

In the normal course of business, CarMax is involved in various legal proceedings. Based upon CarMax’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 CarMax’s financial position, liquidity or results of operations.

13.    Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations,” effective for business combinations initiated after June 30, 2001, and SFAS No. 142, “Goodwill and Other Intangible Assets,” effective for fiscal years beginning after December 15, 2001. Under SFAS No. 141, the pooling of interests method of accounting for business combinations is eliminated, requiring that all business combinations initiated after the effective date be accounted for using the purchase method. Also under SFAS No. 141, identified intangible assets acquired in a purchase business combination must be separately valued and recognized on the balance sheet if they meet certain requirements. Under the provisions of SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the pronouncement. Other intangible assets that are identified to have finite useful lives will continue to be amortized in a manner that reflects the estimated decline in the economic value of the intangible asset and will be subject to review when events or circumstances arise which indicate impairment. For CarMax, goodwill totaled $20.1 million and covenants not to compete totaled $1.5 million as of February 28, 2002. In fiscal 2002, goodwill amortization was $1.8 million and amortization of covenants not to compete was $931,000. Covenants not to compete will continue to be amortized on a straight-line basis over the life of the covenant, not to exceed five years. Application of the nonamortization provisions of SFAS No. 142 in fiscal 2003 is not expected to have a material impact on the financial position, results of operations or cash flows of CarMax. During fiscal 2003, CarMax will perform the first of the required impairment tests of goodwill, as outlined in the new pronouncement. Based on preliminary estimates, as well as ongoing periodic assessments of goodwill, CarMax does not expect to recognize any material impairment losses from these tests.

In August 2001, the FASB issued SFAS No. 143, “Accounting For Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record

D-20

the fair value of a liability for an asset retirement obligation in the period incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. CarMax has not yet determined the impact, if any, of adopting this standard.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes both SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” related to the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. CarMax is required to adopt SFAS No. 144 no later than the fiscal year beginning after December 15, 2001, and plans to adopt the provisions in the first quarter of fiscal 2003. CarMax does not expect the adoption of SFAS No. 144 to have a material impact on its financial position, results of operations or cash flows.

14.    Quarterly Financial Data (Unaudited)

	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Year
(Amounts in thousands)	2002		2001		2002		2001		2002		2001		2002		2001		2002		2001
Net sales and operating revenues	$	796,820	$	625,741	$	851,363	$	673,561	$	774,324	$	561,693	$	779,158	$	639,996	$	3,201,665	$	2,500,991
Gross profit	$	103,960	$	85,462	$	108,526	$	90,549	$	91,026	$	71,679	$	100,191	$	82,069	$	403,703	$	329,759
Net earnings	$	26,572	$	13,944	$	27,391	$	16,271	$	18,443	$	7,568	$	18,396	$	7,781	$	90,802	$	45,564

D-21

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders of Circuit City Stores, Inc.:

We have audited the accompanying consolidated balance sheets of CarMax, Inc. and subsidiaries (as defined in Note 1) as of February 28, 2002 and 2001, and the related consolidated statements of earnings, equity and cash flows for each of the fiscal years in the three-year period ended February 28, 2002. These financial statements are the responsibility of Circuit City Stores, Inc.’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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in 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 CarMax, Inc. and subsidiaries as of February 28, 2002 and 2001, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 28, 2002, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Richmond, Virginia

April 2, 2002

D-22

CARMAX, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(Amounts in thousands) Description	Balance at Beginning of Year		Charged to Income		Charge-offs less Recoveries			Balance at End of Year
Year ended February 29, 2000:
Allowance for doubtful accounts	$	5,213	$	3,434	$	(2,829	)	$	5,818
Year ended February 28, 2001:
Allowance for doubtful accounts	$	5,818	$	3,707	$	(2,621	)	$	6,904
Year ended February 28, 2002:
Allowance for doubtful accounts	$	6,904	$	2,067	$	(4,884	)	$	4,087

Certain prior year amounts have been changed to conform to current year presentation.

D-23

INDEPENDENT AUDITORS’ REPORT ON FINANCIAL STATEMENT SCHEDULE

The Board of Directors and Stockholders of Circuit City Stores, Inc.:

Under the date of April 2, 2002, we reported on the consolidated balance sheets of CarMax, Inc. and subsidiaries (the Company) as of February 28, 2002 and 2001, and the related consolidated statements of earnings, equity and cash flows for each of the fiscal years in the three-year period ended February 28, 2002, which are included in this proxy statement/prospectus. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related CarMax, Inc. financial statement schedule included in this proxy statement/prospectus. 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 audit.

In our opinion, such financial statement 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 LLP

Richmond, Virginia

April 2, 2002

D-24

ANNEX E

CIRCUIT CITY STORES, INC. HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO ANNEX E

Circuit City Stores, Inc. Historical Consolidated Financial Statements
Consolidated Statements of Earnings	E-2
Consolidated Balance Sheets	E-3
Consolidated Statements of Cash Flows	E-4
Consolidated Statements of Stockholders’ Equity	E-5
Notes to Consolidated Financial Statements	E-6
Independent Auditors’ Report	E-31
Schedule II—Valuation and Qualifying Accounts and Reserves	E-32
Independent Auditors’ Report on Financial Statement Schedule	E-33

E-1

CIRCUIT CITY STORES INC.

CONSOLIDATED STATEMENTS OF EARNINGS

	Years Ended February 28 or 29
(Amounts in thousands except per share data)	2002		2001		2000
Net sales and operating revenues	$	12,791,468	$	12,959,028	$	12,614,390
Cost of sales, buying and warehousing		10,049,793		10,135,380		9,751,833
Appliance exit costs [Note 14]		10,000		28,326		—
Gross profit		2,731,675		2,795,322		2,862,557
Selling, general and administrative expenses [Note 10]		2,372,941		2,514,912		2,309,593
Appliance exit costs [Note 14]		—		1,670		—
Interest expense [Note 4]		5,839		19,383		24,206
Total expenses		2,378,780		2,535,965		2,333,799
Earnings from continuing operations before income taxes		352,895		259,357		528,758
Provision for income taxes [Note 5]		134,100		98,555		200,928
Earnings from continuing operations		218,795		160,802		327,830
Discontinued operations [Note 15]:
Loss from discontinued operations of Divx, less income tax benefit		—		—		(16,215	)
Loss on disposal of Divx, less income tax benefit		—		—		(114,025	)
Loss from discontinued operations		—		—		(130,240	)
Net earnings	$	218,795	$	160,802	$	197,590
Net earnings (loss) attributed to [Notes 1 and 2]:
Circuit City Group Common Stock:
Continuing operations	$	190,799	$	149,247	$	327,574
Discontinued operations		—		—		(130,240	)
CarMax Group Common Stock		27,996		11,555		256
	$	218,795	$	160,802	$	197,590
Weighted average common shares [Notes 2 and 7]:
Circuit City Group basic		205,501		203,774		201,345
Circuit City Group diluted		207,095		205,830		204,321
CarMax Group basic		32,140		25,554		23,778
CarMax Group diluted		34,122		26,980		25,788
Net earnings (loss) per share attributed to [Notes 1, 2 and 7]:
Circuit City Group basic:
Continuing operations	$	0.93	$	0.73	$	1.63
Discontinued operations		—		—		(0.65	)
Net earnings	$	0.93	$	0.73	$	0.98
Circuit City Group diluted:
Continuing operations	$	0.92	$	0.73	$	1.60
Discontinued operations		—		—		(0.64	)
Net earnings	$	0.92	$	0.73	$	0.96
CarMax Group basic	$	0.87	$	0.45	$	0.01
CarMax Group diluted	$	0.82	$	0.43	$	0.01

See accompanying notes to consolidated financial statements.

E-2

CIRCUIT CITY STORES, INC.

CONSOLIDATED BALANCE SHEETS

	At February 28
(Amounts in thousands except share data)	2002		2001
ASSETS
Current assets:
Cash and cash equivalents [Note 2]	$	1,251,532	$	446,131
Net accounts receivable		223,098		265,515
Retained interests in securitized receivables [Note 11]		503,443		320,246
Inventory		1,633,327		1,757,664
Prepaid expenses and other current assets		41,311		57,623
Total current assets		3,652,711		2,847,179
Property and equipment, net [Notes 3 and 4]		853,778		988,947
Other assets		32,897		35,207
TOTAL ASSETS	$	4,539,386	$	3,871,333
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt [Notes 4 and 9]	$	102,073	$	132,388
Accounts payable		1,106,679		902,560
Short-term debt [Note 4]		10,237		1,200
Accrued expenses and other current liabilities		183,336		162,972
Accrued income taxes		100,696		—
Deferred income taxes [Note 5]		138,306		92,479
Total current liabilities		1,641,327		1,291,599
Long-term debt, excluding current installments [Notes 4 and 9]		14,064		116,137
Deferred revenue and other liabilities		149,269		92,165
Deferred income taxes [Note 5]		288		14,949
TOTAL LIABILITIES		1,804,948		1,514,850
STOCKHOLDERS’ EQUITY [Notes 1 and 6]:
Circuit City Group Common Stock, $0.50 par value; 350,000,000 shares authorized; 208,823,000 shares issued and outstanding (207,020,000 in 2001)		104,411		103,510
CarMax Group Common Stock, $0.50 par value; 175,000,000 shares authorized; 36,851,000 shares issued and outstanding (25,639,000 in 2001)		18,426		12,820
Capital in excess of par value		810,047		642,838
Retained earnings		1,801,554		1,597,315
TOTAL STOCKHOLDERS’ EQUITY		2,734,438		2,356,483
Commitments and contingent liabilities [Notes 1, 8, 9, 13, 14 and 15]
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,539,386	$	3,871,333

See accompanying notes to consolidated financial statements.

E-3

CIRCUIT CITY STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended February 28 or 29
(Amounts in thousands)	2002			2001			2000
OPERATING ACTIVITIES:
Net earnings	$	218,795		$	160,802		$	197,590
Adjustments to reconcile net earnings to net cash provided by operating activities of continuing operations:
Loss from discontinued operations [Note 15]		—			—			16,215
Loss on disposal of discontinued operations [Note 15]		—			—			114,025
Depreciation and amortization		150,711			153,090			148,164
Unearned compensation amortization of restricted stock		15,678			11,365			12,096
Loss on disposition of property and equipment		13,735			4,674			17
Provision for deferred income taxes		31,166			19,765			43,053
Changes in operating assets and liabilities, net of effects from business acquisitions:
(Increase) decrease in net accounts receivable and retained interests in securitized receivables		(140,766	)		7,541			(18,922	)
Decrease (increase) in inventory		124,337			(67,655	)		(184,507	)
Decrease (increase) in prepaid expenses and other current assets		16,312			(41,426	)		81,316
(Increase) decrease in other assets		(720	)		1,012			240
Increase (decrease) in accounts payable, accrued expenses and other current liabilities and accrued income taxes		336,774			(64,193	)		244,559
Increase (decrease) in deferred revenue and other liabilities		71,186			(17,855	)		(15,565	)
Net cash provided by operating activities of continuing operations		837,208			167,120			638,281
INVESTING ACTIVITIES:
Cash used in business acquisitions		—			(1,325	)		(34,849	)
Purchases of property and equipment		(213,997	)		(285,556	)		(222,268	)
Proceeds from sales of property and equipment, net		187,426			115,695			100,151
Net cash used in investing activities of continuing operations		(26,571	)		(171,186	)		(156,966	)
FINANCING ACTIVITIES:
Proceeds from (payments on) short-term debt, net		9,037			(1,805	)		(5,011	)
Principal payments on long-term debt [Note 4]		(132,388	)		(178,060	)		(2,707	)
Issuances of Circuit City Group Common Stock, net		17,920			26,912			6,942
Issuances of CarMax Group Common Stock, net		(1,958	)		(263	)		1,914
Proceeds from CarMax Group Common Stock offering, net [Note 1]		139,546			—			—
Dividends paid on Circuit City Group Common Stock		(14,556	)		(14,346	)		(14,207	)
Net cash provided by (used in) financing activities of continuing operations		17,601			(167,562	)		(13,069	)
Cash used in discontinued operations [Note 15]		(22,837	)		(26,174	)		(90,193	)
Increase (decrease) in cash and cash equivalents		805,401			(197,802	)		378,053
Cash and cash equivalents at beginning of year		446,131			643,933			265,880
Cash and cash equivalents at end of year	$	1,251,532		$	446,131		$	643,933
Supplemental disclosures of cash flow information
Cash paid (received) during the year for:
Interest	$	8,929		$	25,336		$	34,389
Income taxes	$	(42,575	)	$	117,366		$	14,908

See accompanying notes to consolidated financial statements.

E-4

CIRCUIT CITY STORES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Shares Outstanding				Common Stock						Capital in Excess of Par Value			Retained Earnings			Total
(Amounts in thousands except per share data)	Circuit City Group		CarMax Group		Circuit City Group			CarMax Group
Balance at March 1, 1999	100,820		23,116		$	50,410		$	11,558		$	575,686		$	1,267,476		$	1,905,130
Effect of two-for-one stock split	100,820		—			50,410			—			(50,410	)		—			—
Net earnings	—		—			—			—			—			197,590			197,590
Exercise of common stock options [Note 6]	2,864		2,027			1,432			1,014			34,232			—			36,678
Shares issued under employee stock purchase plans [Note 6]	502		506			251			253			21,547			—			22,051
Shares issued under the stock incentive plans [Note 6]	346		30			173			15			13,996			—			14,184
Tax benefit from stock issued	—		—			—			—			32,459			—			32,459
Shares cancelled upon reacquisition by Company	(1,484	)	(65	)		(742	)		(33	)		(52,173	)		—			(52,948	)
Unearned compensation-restricted stock	—		—			—			—			1,237			—			1,237
Cash dividends-Circuit City Group Common Stock ($0.07 per share)	—		—			—			—			—			(14,207	)		(14,207	)
Balance at February 29, 2000	203,868		25,614			101,934			12,807			576,574			1,450,859			2,142,174
Net earnings	—		—			—			—			—			160,802			160,802
Exercise of common stock options [Note 6]	1,526		56			763			28			35,391			—			36,182
Shares issued under employee stock purchase plans [Note 6]	862		—			431			—			16,119			—			16,550
Shares issued under the stock incentive plans [Note 6]	1,486		—			743			—			31,912			—			32,655
Tax benefit from stock issued	—		—			—			—			29,839			—			29,839
Shares cancelled upon reacquisition by Company	(722	)	(31	)		(361	)		(15	)		(32,774	)		—			(33,150	)
Unearned compensation-restricted stock	—		—			—			—			(14,223	)		—			(14,223	)
Cash dividends-Circuit City Group Common Stock ($0.07 per share)	—		—			—			—			—			(14,346	)		(14,346	)
Balance at February 28, 2001	207,020		25,639			103,510			12,820			642,838			1,597,315			2,356,483
Net earnings	—		—			—			—			—			218,795			218,795
Sale of CarMax Group Common Stock [Note 1]	—		9,517			—			4,758			134,788			—			139,546
Exercise of common stock options [Note 6]	541		1,941			270			971			9,669			—			10,910
Shares issued under employee stock purchase plans [Note 6]	867		—			434			—			11,627			—			12,061
Shares issued under the stock incentive plans [Note 6]	1,068		2			534			1			13,605			—			14,140
Tax benefit from stock issued	—		—			—			—			2,530			—			2,530
Shares cancelled upon reacquisition by Company	(673	)	(248	)		(337	)		(124	)		(17,995	)		—			(18,456	)
Unearned compensation-restricted stock	—		—			—			—			12,985			—			12,985
Cash dividends-Circuit City Group Common Stock ($0.07 per share)	—		—			—			—			—			(14,556	)		(14,556	)
Balance at February 28, 2002	208,823		36,851		$	104,411		$	18,426		$	810,047		$	1,801,554		$	2,734,438

See accompanying notes to consolidated financial statements.

E-5

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

The common stock of Circuit City Stores, Inc. consists of two common stock series that are intended to reflect the performance of the Company’s two businesses. The Circuit City Group Common Stock is intended to reflect the performance of the Circuit City stores and related operations and the shares of CarMax Group Common Stock reserved for the Circuit City Group or for issuance to holders of Circuit City Group Common Stock. The CarMax Group Common Stock is intended to reflect the performance of the CarMax stores and related operations. The reserved CarMax Group shares are not outstanding CarMax Group Common Stock. Therefore, net earnings attributed to the reserved CarMax Group shares are included in the net earnings and earnings per share attributed to the Circuit City Group Common Stock and not in the earnings per share attributed to the CarMax Group Common Stock.

During the second quarter of fiscal 2002, Circuit City Stores completed the public offering of 9,516,800 shares of CarMax Group Common Stock. The shares sold in the offering were shares of CarMax Group Common Stock that previously had been reserved for the Circuit City Group or for issuance to holders of Circuit City Group Common Stock. The net proceeds of $139.5 million from the offering were allocated to the Circuit City Group to be used for general purposes of the Circuit City business, including remodeling of Circuit City Superstores. As of February 28, 2002, 65,923,200 shares of CarMax Group Common Stock were reserved for the Circuit City Group or for issuance to holders of Circuit City Group Common Stock.

Excluding shares reserved for CarMax employee stock incentive plans, the reserved CarMax Group shares represented 64.1% of the total outstanding and reserved shares of CarMax Group Common Stock at February 28, 2002; 74.6% at February 28, 2001; and 74.7% at February 29, 2000. The terms of each series of common stock are discussed in detail in the Company’s Form 8-A registration statement on file with the Securities and Exchange Commission.

On February 22, 2002, Circuit City Stores, Inc. announced that its board of directors had authorized management to initiate a process that would separate the CarMax auto superstore business from the Circuit City consumer electronics business through a tax-free transaction in which CarMax, Inc., presently a wholly owned subsidiary of Circuit City Stores, Inc., would become an independent, separately traded public company. CarMax, Inc. holds substantially all of the businesses, assets and liabilities of the CarMax Group. The separation plan calls for Circuit City Stores, Inc. to redeem the outstanding shares of CarMax Group Common Stock in exchange for shares of common stock of CarMax, Inc. Simultaneously, shares of CarMax, Inc. common stock, representing the shares of CarMax Group Common Stock reserved for the holders of Circuit City Group Common Stock, would be distributed as a tax-free dividend to the holders of Circuit City Group Common Stock.

In the proposed separation, the holders of CarMax Group Common Stock would receive one share of CarMax, Inc. common stock for each share of CarMax Group Common Stock redeemed by the Company. Management anticipates that the holders of Circuit City Group Common Stock would receive a fraction of a share of CarMax, Inc. common stock for each share of Circuit City Group Common Stock they hold. The exact fraction would be determined on the record date for the distribution. The separation is expected to be completed by late summer, subject to shareholder approval and final approval from the board of directors.

Notwithstanding the attribution of the Company’s assets and liabilities, including contingent liabilities, and stockholders’ equity between the Circuit City Group and the CarMax Group for the purposes of preparing the financial statements, holders of Circuit City Group Common Stock and holders of CarMax Group Common Stock are shareholders of the Company and as such are 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 equity structure of the

E-6

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Company do not affect title to the assets or responsibility for the liabilities of the Company or any of its subsidiaries. Neither shares of Circuit City Group Common Stock nor shares of CarMax Group Common Stock represent a direct equity or legal interest solely in the assets and liabilities allocated to a particular Group. Instead, those shares represent direct equity and legal interests in the assets and liabilities of the Company. The results of operations or financial condition of one Group could affect the results of operations or financial condition of the other Group. Net losses of either Group and dividends or distributions on, or repurchases of, Circuit City Group Common Stock or CarMax Group Common Stock will reduce funds legally available for dividends on, or repurchases of, both stocks. Accordingly, the Company’s consolidated financial statements included herein should be read in conjunction with the financial statements of each Group and the Company’s SEC filings.

The financial statements of the Company reflect each Group’s business as well as the allocation of the Company’s assets, liabilities, expenses and cash flows between the Groups in accordance with the policies adopted by the board of directors. These policies may be modified or rescinded, or new policies may be adopted, at the sole discretion of the board of directors, although the board of directors has no present plans to do so. These management and allocation policies include the following:

(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. Debt of the Company is either allocated between the Groups (pooled debt) or is allocated in its entirety to one Group. 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.

(B)  Corporate General and Administrative Costs:

Corporate general and administrative costs and other shared services generally have been allocated to the Groups based upon utilization of such services by each Group. Where determinations based on utilization alone have been impractical, other methods and criteria are used that management believes are equitable and provide a reasonable estimate of the costs attributable to each Group.

(C)  Income Taxes:

The Groups are included in the consolidated federal income tax return and in certain state tax returns filed by the Company. Accordingly, 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 the Groups. In general, this policy provides that the consolidated tax provision and related tax payments or refunds are allocated between the Groups based principally upon the financial income, taxable income, credits and other amounts directly related to each Group. Tax benefits that cannot be used by the Group generating such attributes, but can be utilized on a consolidated basis, are allocated to the Group that generated such benefits.

2.    Summary of Significant Accounting Policies

(A)  Principles Of Consolidation:

The consolidated financial statements include the accounts of the Circuit City Group and the CarMax Group, which combined comprise all accounts of the Company. All significant intercompany balances and transactions have been eliminated in consolidation.

E-7

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(B)  Cash and Cash Equivalents:

Cash equivalents of $1.22 billion at February 28, 2002, and $408.8 million at February 28, 2001, consist of highly liquid debt securities with original maturities of three months or less.

(C)  Securitizations:

The Company enters into securitization transactions, which allow for the sale of credit card and automobile loan receivables to qualified special purpose entities which, in turn, issue asset-backed securities to third-party investors. On April 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which replaced SFAS No. 125 and applies prospectively to all securitization transactions occurring after March 31, 2001. Adoption of SFAS No. 140 did not have a material impact on the financial position, results of operations or cash flows of the Company. Transfers of financial assets that qualify as sales under SFAS No. 140 are accounted for as off-balance sheet securitizations. The Company may retain interest-only strips, one or more subordinated tranches, residual interests in a securitization trust, servicing rights and a cash reserve account, all of which are retained interests in the securitized receivables. These retained interests are carried at fair value as determined by the present value of expected future cash flows using management’s projections of key factors, such as finance charge income, default rates, payment rates, forward interest rate curves and discount rates appropriate for the type of asset and risk. The changes in fair value of retained interests are included in earnings.

(D)  Fair Value of Financial Instruments:

The carrying value of the Company’s cash and cash equivalents, credit card, automobile loan and other receivables, accounts payable, short-term borrowings and long-term debt approximates fair value. The Company’s retained interests in securitized receivables and derivative financial instruments are recorded on the consolidated balance sheets at fair value.

(E)  Inventory:

Circuit City inventory is comprised of finished goods held for sale and is stated at the lower of cost or market. CarMax inventory is comprised primarily of vehicles held for sale or for reconditioning and is stated at the lower of cost or market. Cost is determined by the average cost method for Circuit City’s inventory and by specific identification for CarMax’s vehicle inventory. Parts and labor used to recondition vehicles, as well as transportation and other incremental expenses associated with acquiring and reconditioning vehicles, are included in CarMax’s inventory.

(F)  Property and Equipment:

Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the assets’ estimated useful lives. Property held under capital lease is stated at the lower of the present value of the minimum lease payments at the inception of the lease or market value and is amortized on a straight-line basis over the lease term or the estimated useful life of the asset, whichever is shorter.

E-8

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(G)  Computer Software Costs:

External direct costs of materials and services used in the development of internal-use software and payroll and payroll-related costs for employees directly involved in the development of internal-use software are capitalized. Amounts capitalized are amortized on a straight-line basis over a period of three to five years.

(H)  Impairment of Long-Lived Assets:

The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. Impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. When the Company closes a location, the estimated unrecoverable costs are charged to selling, general and administrative expenses. Such costs include the estimated loss on the sale of land and buildings, the book value of abandoned fixtures, equipment and leasehold improvements and a provision for the present value of future lease obligations, less estimated sublease income.

(I)  Store Opening Expenses:

Costs relating to store openings, including organization and pre-opening costs, are expensed as incurred.

(J)  Income Taxes:

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes, measured by applying currently enacted tax laws. The Company recognizes deferred tax assets if it is more likely than not that a benefit will be realized.

(K)  Revenue Recognition:

The Company recognizes revenue when the earnings process is complete, generally at either the time of sale to a customer or upon delivery to a customer. Circuit City sells 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) from 12 to 60 months. Because third parties are the primary obligors under these contracts, commission revenue for the unrelated third-party extended warranty plans is recognized at the time of sale.

CarMax also sells extended warranties on behalf of unrelated third parties. These warranties usually have terms of coverage from 12 to 72 months. Because third parties are the primary obligors under these warranties, commission revenue is recognized at the time of sale, net of a provision for estimated customer returns of the warranties.

(L)  Deferred Revenue:

Circuit City sells its own extended warranty contracts that extend beyond the normal manufacturer’s warranty period, usually with terms (including the manufacturer’s warranty period) from 12 to 60 months. As Circuit City is the primary obligor on its own contracts, all revenue from the sale of these 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.

E-9

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(M)  Selling, General and Administrative Expenses:

Profits generated by the Company’s finance operations, fees received for arranging customer automobile financing through third parties and interest income are recorded as reductions to selling, general and administrative expenses.

(N)  Advertising Expenses:

All advertising costs are expensed as incurred.

(O)  Net Earnings (Loss) Per Share:

Basic net earnings (loss) per share attributed to Circuit City Group Common Stock is computed by dividing net earnings (loss) attributed to Circuit City Group Common Stock, including earnings attributed to the reserved CarMax Group shares, by the weighted average number of shares of Circuit City Group Common Stock outstanding. Diluted net earnings (loss) per share attributed to Circuit City Group Common Stock is computed by dividing net earnings (loss) attributed to Circuit City Group Common Stock, including earnings attributed to the reserved CarMax Group shares, by the sum of the weighted average number of shares of Circuit City Group Common Stock outstanding and dilutive potential Circuit City Group Common Stock.

Basic net earnings per share attributed to CarMax Group Common Stock is computed by dividing net earnings attributed to the outstanding CarMax Group Common Stock by the weighted average number of shares of CarMax Group Common Stock outstanding. Diluted net earnings per share attributed to CarMax Group Common Stock is computed by dividing net earnings attributed to the outstanding CarMax Group Common Stock by the sum of the weighted average number of shares of CarMax Group Common Stock outstanding and dilutive potential CarMax Group Common Stock.

(P)  Stock-Based Compensation:

The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting For Stock Issued to Employees,” and provides the pro forma disclosures required by SFAS No. 123, “Accounting for Stock-Based Compensation.”

(Q)  Derivative Financial Instruments:

In connection with securitization activities, the Company enters into interest rate swap agreements to manage exposure to interest rates and to more closely match funding costs to the use of funding. The Company also enters into interest rate cap agreements to meet the requirements of the credit card receivable securitization transactions. The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, on March 1, 2001. SFAS No. 133 requires the Company to recognize all derivative instruments as either assets or liabilities on the balance sheets at fair value. The adoption of SFAS No. 133 did not have a material impact on the financial position, results of operations or cash flows of the Company. The changes in fair value of derivative instruments are included in earnings.

(R)  Risks and Uncertainties:

Circuit City is a leading national retailer of brand-name consumer electronics, personal computers and entertainment software. The diversity of Circuit City’s products, customers, suppliers and geographic operations

E-10

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

CarMax is a used- and new-car retail business. The diversity of CarMax’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. However, because of CarMax’s limited overall size, management cannot assure that unanticipated events will not have a negative impact on the Company.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

(S)  Reclassifications:

Certain prior year amounts have been reclassified to conform to classifications adopted in fiscal 2002.

3.    Property and Equipment

Property and equipment, at cost, at February 28 is summarized as follows:

(Amounts in thousands)	2002		2001
Land and buildings (20 to 25 years)	$	70,283	$	178,042
Land held for sale		11,521		30,730
Land held for development		8,021		4,285
Construction in progress		79,851		58,659
Furniture, fixtures and equipment (3 to 8 years)		871,291		874,367
Leasehold improvements (10 to 15 years)		680,701		619,782
Capital leases, primarily buildings (20 years)		12,406		12,471
		1,734,074		1,778,336
Less accumulated depreciation and amortization		880,296		789,389
Property and equipment, net	$	853,778	$	988,947

Land held for development is land owned for future sites that are scheduled to open more than one year beyond the fiscal year reported.

E-11

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.    Debt

Long-term debt at February 28 is summarized as follows:

(Amounts in thousands)	2002		2001
Term loans	$	100,000	$	230,000
Industrial Development Revenue Bonds due through 2006 at various prime-based rates of interest ranging from 3.1% to 6.7%		3,717		4,400
Obligations under capital leases [Note 9]		11,594		12,049
Note payable		826		2,076
Total long-term debt		116,137		248,525
Less current installments		102,073		132,388
Long-term debt, excluding current installments	$	14,064	$	116,137

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 six-year, $100,000,000 unsecured bank term loan. Principal is due in full at maturity with interest payable periodically at LIBOR plus 0.40%. At February 28, 2002, the interest rate on the term loan was 2.25%. This term loan is due in July 2002 and was classified as a current liability at February 28, 2002. Although the Company has the ability to refinance this loan, it intends to repay the debt using existing working capital.

In June 1996, the Company entered into a five-year, $130,000,000 unsecured bank term loan. Principal was due in full at maturity with interest payable periodically at LIBOR plus 0.35%. As scheduled, the Company used existing working capital to repay this term loan in June 2001.

The Company maintains a multi-year, $150,000,000 unsecured revolving credit agreement with four banks. The agreement calls for interest based on both committed rates and money market rates and a commitment fee of 0.18% per annum. The agreement was entered into as of August 31, 1996, and expires on August 31, 2002. No amounts were outstanding under the revolving credit agreement at February 28, 2002 or 2001, and the Company does not plan to renew this agreement.

The Industrial Development Revenue Bonds are collateralized by land, buildings and equipment with an aggregate carrying value of approximately $5,144,000 at February 28, 2002, and $6,243,000 at February 28, 2001.

In November 1998, CarMax entered into a four-year, $5,000,000 unsecured promissory note. A portion of the principal amount is due annually with interest payable periodically at 8.25%. The outstanding balance at February 28, 2002, was $826,000 and was included in current installments of long-term debt.

In December 2001, CarMax entered into an $8,450,000 secured promissory note in conjunction with the purchase of land for new store construction. This note is due in August 2002 and was classified as short-term debt at February 28, 2002.

The scheduled aggregate annual principal payments on the Company’s long-term obligations for the next five fiscal years are as follows: 2003 – $102,073,000; 2004 – $1,410,000; 2005 – $2,521,000; 2006 – $1,083,000; 2007– $1,010,000.

E-12

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, 2002 and 2001.

Short-term debt of the Company is funded through committed lines of credit and informal credit arrangements, as well as the revolving credit agreement. Other information regarding short-term financing and committed lines of credit is as follows:

	Years Ended February 28
(Amounts in thousands)	2002		2001
Average short-term financing outstanding	$	2,256	$	56,065
Maximum short-term financing outstanding	$	6,594	$	363,199
Aggregate committed lines of credit	$	195,000	$	360,000

The weighted average interest rate on the outstanding short-term debt was 4.4% during fiscal 2002, 6.8% during fiscal 2001 and 5.6% during fiscal 2000.

The Company capitalizes interest in connection with the construction of certain facilities and software developed or obtained for internal use. Capitalized interest totaled $1,807,000 in fiscal 2002, $2,121,000 in fiscal 2001 and $3,420,000 in fiscal 2000.

5.    Income Taxes

The Company files a consolidated federal income tax return. The components of the provision for income taxes on earnings from continuing operations are as follows:

	Years Ended February 28 or 29
(Amounts in thousands)	2002		2001		2000
Current:
Federal	$	86,243	$	69,832	$	140,119
State		16,691		10,167		17,756
		102,934		79,999		157,875
Deferred:
Federal		30,231		17,999		41,762
State		935		557		1,291
		31,166		18,556		43,053
Provision for income taxes	$	134,100	$	98,555	$	200,928

The effective income tax rate differed from the federal statutory income tax rate as follows:

	Years Ended February 28 or 29
	2002		2001		2000
Federal statutory income tax rate	35	%	35	%	35	%
State and local income taxes, net of federal benefit	3		3		3
Effective income tax rate	38	%	38	%	38	%

E-13

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 are as follows:

	2002		2001
(Amounts in thousands)
Deferred tax assets:
Accrued expenses	$	68,018	$	48,126
Other		8,826		7,546
Total gross deferred tax assets		76,844		55,672
Deferred tax liabilities:
Deferred revenue		75,079		32,825
Depreciation and amortization		39,738		46,338
Securitized receivables		59,342		51,519
Inventory		26,595		16,376
Prepaid expenses		11,582		12,417
Other		3,102		3,625
Total gross deferred tax liabilities		215,438		163,100
Net deferred tax liability	$	138,594	$	107,428

Based on the Company’s historical and current pretax earnings, management believes the amount of gross deferred tax assets will more likely than not be realized through future taxable income; therefore, no valuation allowance is necessary.

6.    Common Stock and Stock-Based Incentive Plans

(A)  Voting Rights:

The holders of both series of common stock and any series of preferred stock outstanding and entitled to vote together with the holders of common stock will vote together as a single voting group on all matters on which common shareholders generally are entitled to vote other than a matter on which the common stock or either series thereof or any series of preferred stock would be entitled to vote as a separate voting group. On all matters on which both series of common stock would vote together as a single voting group, (i) each outstanding share of Circuit City Group Common Stock shall have one vote and (ii) each outstanding share of CarMax Group Common Stock shall have a number of votes based on the weighted average ratio of the market value of a share of CarMax Group Common Stock to a share of Circuit City Group Common 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.

(B)  Shareholder Rights Plan:

In conjunction with the Company’s Shareholder Rights Plan as amended and restated, preferred stock purchase rights were distributed as a dividend at the rate of one right for each share of Circuit City Group Common Stock and CarMax Group Common 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 the holder to buy one eight-hundredth of a share of Cumulative Participating Preferred Stock, Series E, $20 par value, at an exercise price of $125 per share, subject to adjustment. Each CarMax Group right, when exercisable, would entitle the holder to buy one four-

E-14

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

hundredth of a share of Cumulative Participating Preferred Stock, Series F, $20 par value, at an exercise price of $100 per share, subject to adjustment. A total of 1,000,000 shares of such preferred stock, which have preferential dividend and liquidation rights, have been designated. No such shares are outstanding. In the event that an acquiring person or group acquires the specified ownership percentage of the Company’s common stock (except pursuant to a cash tender offer for all outstanding shares determined to be fair by the board of directors) or engages in certain transactions with the Company after the rights become exercisable, each right will be converted into a right to purchase, for half the current market price at that time, shares of the related Group stock valued at two times the exercise price. The Company also has 1,000,000 shares of undesignated preferred stock authorized of which no shares are outstanding.

(C)  Restricted Stock:

The Company has issued restricted stock under the provisions of the 1994 Stock Incentive Plan whereby management and key employees are granted restricted shares of Circuit City Group Common Stock or CarMax Group Common Stock. Shares are awarded in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions or forfeitures. Restrictions on the awards generally expire three to seven years from the date of grant. Total restricted stock awards of 1,063,366 shares of Circuit City Group Common Stock and 2,100 shares of CarMax Group Common Stock were granted to eligible employees in fiscal 2002. In fiscal 2001, 1,483,358 restricted shares of Circuit City Group Common Stock were granted, including approximately 1,047,000 shares granted as a one-for-one replacement for cancelled options that were originally granted on June 13, 2000. Options held by senior management were excluded from this replacement grant. Approximately 782,000 shares of the replacement grant vest two-and-one-half years from the date of grant, and the remaining 265,000 shares vest four to five years from the grant date with accelerated vesting if certain performance factors are met. The market value at the date of grant of all shares granted has been recorded as unearned compensation and is a component of stockholders’ equity. Unearned compensation is expensed over the restriction periods. In fiscal 2002, a total of $15,678,100 was charged to operations ($11,364,700 in fiscal 2001 and $12,095,900 in fiscal 2000). As of February 28, 2002, 2,317,348 restricted shares of Circuit City Group Common Stock and 27,100 restricted shares of CarMax Group Common Stock were outstanding.

(D)  Stock Incentive Plans:

Under the Company’s stock incentive plans, nonqualified stock options may be granted to management, key employees and outside directors to purchase shares of Circuit City Group Common Stock or CarMax Group Common Stock. The exercise price for nonqualified options is equal to, or greater than, the market value at the date of grant. Options generally are exercisable over a period from one to 10 years from the date of grant. The Company has authorized 29,765,000 shares of Circuit City Group Common Stock and 9,750,000 shares of CarMax Group Common Stock to be issued as either options or restricted stock grants. At February 28, 2002, 7,736,657 shares of Circuit City Group Common Stock and 1,150,779 shares of CarMax Group Common Stock were available for issuance of options or restricted stock grants. The number of shares available for issuance at February 28, 2001, was 12,053,254 for the Circuit City Group and 2,615,227 for the CarMax Group.

(E)  Employee Stock Purchase Plans:

The Company has employee stock purchase plans for all employees meeting certain eligibility criteria. Under the Circuit City Group plan and the CarMax Group plan, eligible employees may, subject to certain limitations, purchase shares of Circuit City Group Common Stock or CarMax Group Common Stock. For each $1.00 contributed by employees under the plans, the Company matches $0.15. Purchases are limited to 10% of an employee’s eligible compensation, up to a maximum of $7,500 per year. The Company has authorized

E-15

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15,500,000 shares of Circuit City Group Common Stock and 2,000,000 shares of CarMax Group Common Stock for purchase under the plans. At February 28, 2002, a total of 1,635,207 shares remained available under the Circuit City Group plan and 397,717 shares remained available under the CarMax Group plan. During fiscal 2002, 866,524 shares of Circuit City Group Common Stock were issued to or purchased on the open market on behalf of employees (862,315 shares in fiscal 2001 and 501,984 shares in fiscal 2000), and 183,902 shares of CarMax Group Common Stock were issued to or purchased on the open market on behalf of employees (477,094 in fiscal 2001 and 580,000 in fiscal 2000). The average price per share of Circuit City Group Common Stock purchased under the plan was $17.59 in fiscal 2002, $29.93 in fiscal 2001 and $41.70 in fiscal 2000. The average price per share of CarMax Group Common Stock purchased under the plan was $17.13 in fiscal 2002, $4.18 in fiscal 2001 and $3.68 in fiscal 2000. The Company match totaled $2,251,500 in fiscal 2002, $2,766,500 in fiscal 2001 and $2,903,800 in fiscal 2000.

(F)  401(K) Plan:

Effective August 1, 1999, the Company began sponsoring a 401(k) Plan for all employees meeting certain eligibility criteria. Under the Plan, eligible employees can contribute up to 15% of their salaries, and the Company matches a portion of those employee contributions. The Company’s expense for this plan was $4,349,000 in fiscal 2002, $4,682,000 in fiscal 2001 and $2,475,000 in fiscal 2000.

TABLE 1

	2002				2001				2000
(Shares in thousands)	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Circuit City Group:
Outstanding at beginning of year	8,720		$	28.59	7,380		$	25.07	8,894		$	18.25
Granted	4,423			12.80	4,280			34.80	1,564			40.75
Exercised	(541	)		15.45	(1,526	)		23.64	(2,864	)		12.65
Cancelled	(611	)		23.96	(1,414	)		34.25	(214	)		22.06
Outstanding at end of year	11,991		$	23.60	8,720		$	28.60	7,380		$	25.07
Options exercisable at end of year	4,346		$	25.33	3,158		$	21.86	1,258		$	13.89
CarMax Group:
Outstanding at beginning of year	4,107		$	3.16	3,324		$	3.87	4,380		$	1.77
Granted	1,659			4.94	1,281			1.70	1,132			5.89
Exercised	(1,941	)		1.32	(56	)		0.22	(2,027	)		0.22
Cancelled	(194	)		5.95	(442	)		4.67	(161	)		6.94
Outstanding at end of year	3,631		$	4.81	4,107		$	3.16	3,324		$	3.87
Options exercisable at end of year	821		$	6.85	1,943		$	2.94	1,203		$	2.54

E-16

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

TABLE 2

	Options Outstanding				Options Exercisable
(Shares in thousands) Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
Circuit City Group:
$  9.94 to 12.45	3,896	6.9	$	12.41	96	$	11.32
13.25 to 17.93	1,634	3.8		15.13	1,067		15.43
18.00 to 27.95	1,243	3.0		20.18	1,037		19.86
29.50	1,000	0.1		29.50	1,000		29.50
30.48 to 43.03	4,218	5.7		36.82	1,146		37.03
Total	11,991	5.1	$	23.60	4,346	$	25.33
CarMax Group:
$  1.63	962	5.0	$	1.63	193	$	1.63
3.22 to   4.89	1,648	5.9		4.82	25		3.66
6.06 to   9.06	794	4.2		6.37	387		6.51
9.19 to 14.00	141	2.9		11.09	136		11.02
15.00 to 22.47	86	2.5		15.42	80		15.08
Total	3,631	5.1	$	4.81	821	$	6.85

The Company’s stock option activity is summarized in Table 1 above. Table 2 above summarizes information about stock options outstanding as of February 28, 2002.

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 net earnings and net earnings per share attributed to the Circuit City Group and the net earnings and net earnings per share attributed to the CarMax Group would have changed to the pro forma amounts indicated in the following table on the following page. In accordance with the transition provisions of SFAS No. 123, the pro forma amounts reflect options with grant dates subsequent to March 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented because compensation cost is reflected over the options’ vesting periods and compensation cost of options granted prior to March 1, 1995, is not considered. The pro forma effect on fiscal year 2002 may not be representative of the pro forma effects on net earnings for future years.

E-17

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Years Ended February 28 or 29
(Amounts in thousands except per share data)	2002		2001		2000
Circuit City Group:
Earnings from continuing operations:
As reported	$	190,799	$	149,247	$	327,574
Pro forma		174,654		136,957		319,337
Net earnings:
As reported	$	190,799	$	149,247	$	197,334
Pro forma		174,654		136,957		189,097
Earnings per share from continuing operations:
Basic—as reported	$	0.93	$	0.73	$	1.63
Basic—pro forma		0.85		0.67		1.59
Diluted—as reported		0.92		0.73		1.60
Diluted—pro forma		0.84		0.67		1.56
Net earnings per share:
Basic—as reported	$	0.93	$	0.73	$	0.98
Basic—pro forma		0.85		0.67		0.94
Diluted—as reported		0.92		0.73		0.96
Diluted—pro forma		0.84		0.67		0.93
CarMax Group:
Net earnings:
As reported	$	27,996	$	11,555	$	256
Pro forma		27,522		11,345		75
Net earnings per share:
Basic—as reported	$	0.87	$	0.45	$	0.01
Basic—pro forma		0.86		0.44		0.00
Diluted—as reported		0.82		0.43		0.01
Diluted—pro forma		0.81		0.42		0.00

For the purpose of computing the pro forma amounts indicated on the previous page, 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:

	2002		2001		2000
Circuit City Group:
Expected dividend yield	0.6	%	0.2	%	0.2	%
Expected stock volatility	62	%	49	%	38	%
Risk-free interest rates	5	%	6	%	6	%
Expected lives (in years)	5		5		5
CarMax Group:
Expected dividend yield	—		—		—
Expected stock volatility	79	%	71	%	62	%
Risk-free interest rates	5	%	7	%	6	%
Expected lives (in years)	4		4		4

Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted for the Circuit City Group was $7 per share in fiscal 2002, $17 per share in fiscal 2001 and $17 per share in fiscal 2000; and for the CarMax Group, $3 per share in fiscal 2002, $1 per share in fiscal 2001 and $3 per share in fiscal 2000.

E-18

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7.    Earnings Per Share

Reconciliations of the numerator and denominator of basic and diluted earnings per share are presented below.

	Years Ended February 28 or 29
(Amounts in thousands except per share data)	2002		2001		2000
Circuit City Group:
Weighted average common shares		205,501		203,774		201,345
Dilutive potential common shares:
Options		773		885		2,145
Restricted stock		821		1,171		831
Weighted average common shares and dilutive potential common shares		207,095		205,830		204,321
Earnings from continuing operations available to common shareholders	$	190,799	$	149,247	$	327,574
Basic earnings per share from continuing operations	$	0.93	$	0.73	$	1.63
Diluted earnings per share from continuing operations	$	0.92	$	0.73	$	1.60
CarMax Group:
Weighted average common shares		32,140		25,554		23,778
Dilutive potential common shares:
Options		1,949		1,332		1,814
Restricted stock		33		94		196
Weighted average common shares and dilutive potential common shares		34,122		26,980		25,788
Net earnings available to common shareholders	$	27,996	$	11,555	$	256
Basic net earnings per share	$	0.87	$	0.45	$	0.01
Diluted net earnings per share	$	0.82	$	0.43	$	0.01

Certain options were outstanding and not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase 5,253,600 shares of Circuit City Group Common Stock with exercise prices ranging from $26.15 to $43.03 per share were outstanding and not included in the calculation at the end of fiscal 2002; 8,469,700 shares with exercise prices ranging from $14.75 to $47.53 per share at the end of fiscal 2001; and 2,900 shares with exercise prices ranging from $43.03 to $47.53 per share at the end of fiscal 2000. All options to purchase shares of CarMax Group Common Stock were included in the calculation at the end of fiscal 2002; options to purchase 1,357,200 shares with exercise prices ranging from $6.06 to $16.31 per share were not included at the end of fiscal 2001; and 1,685,400 shares with exercise prices ranging from $3.90 to $16.31 per share were not included at the end of the fiscal 2000.

8.    Pension Plans

The Company has a noncontributory defined benefit pension plan covering the majority of full-time employees who are at least age 21 and have completed one year of service. The cost of the program is being funded currently. Plan benefits generally are based on years of service and average compensation. Plan assets

E-19

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

consist primarily of equity securities and included 160,000 shares of Circuit City Group Common Stock at February 28, 2002 and 2001. Company contributions were $8,883,000 in fiscal 2002, $15,733,000 in fiscal 2001 and $12,123,000 in fiscal 2000.

The following tables set forth the pension plan’s financial status and amounts recognized in the consolidated balance sheets as of February 28:

(Amounts in thousands)	2002		2001
Change in benefit obligation:
Benefit obligation at beginning of year	$	155,749	$	113,780
Service cost		16,673		14,142
Interest cost		11,621		9,045
Actuarial loss		5,606		21,776
Benefits paid		(5,651)		(2,994)
Benefit obligation at end of year	$	183,998	$	155,749
Change in plan assets:
Fair value of plan assets at beginning of year	$	134,425	$	132,353
Actual return on plan assets		(7,618)		(10,667)
Employer contributions		8,883		15,733
Benefits paid		(5,651)		(2,994)
Fair value of plan assets at end of year	$	130,039	$	134,425
Reconciliation of funded status:
Funded status	$	(53,958)	$	(21,324)
Unrecognized actuarial loss		42,933		16,961
Unrecognized transition asset		—		(202)
Unrecognized prior service benefit		(142)		(285)
Net amount recognized	$	(11,167)	$	(4,850)

The components of net pension expense are as follows:

	Years Ended February 28 or 29
(Amounts in thousands)	2002			2001			2000
Service cost	$	16,673		$	14,142		$	14,678
Interest cost		11,621			9,045			7,557
Expected return on plan assets		(12,951	)		(11,197	)		(9,078	)
Amortization of prior service cost		(143	)		(142	)		(134	)
Amortization of transitional asset		(202	)		(202	)		(202	)
Recognized actuarial loss (gain)		202			(183	)		87
Net pension expense	$	15,200		$	11,463		$	12,908

E-20

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assumptions used in the accounting for the pension plan were:

	Years Ended February 28 or 29
	2002		2001		2000
Weighted average discount rate	7.25	%	7.5	%	8.0	%
Rate of increase in compensation levels
Circuit City Group	6.00	%	6.00	%	6.00	%
CarMax Group	7.00	%	6.00	%	6.00	%
Expected rate of return on plan assets	9.00	%	9.0	%	9.0	%

The Company also has an unfunded nonqualified plan that restores retirement benefits for certain senior executives who are affected by Internal Revenue Code limitations on benefits provided under the Company’s pension plan. The projected benefit obligation under this plan was $18.0 million at February 28, 2002, and $12.8 million at February 28, 2001.

9.    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.

Rental expense and sublease income for all operating leases are summarized as follows:

	Years Ended February 28 or 29
(Amounts in thousands)	2002			2001			2000
Minimum rentals	$	370,239		$	352,315		$	334,240
Rentals based on sales volume		292			1,229			1,327
Sublease income		(17,914	)		(15,333	)		(16,425	)
Net rental expense	$	352,617		$	338,211		$	319,142

The Company computes rent based on a percentage of sales volumes in excess of defined amounts in certain store locations. Most of the Company’s other leases are fixed-dollar rental commitments, with many containing rent escalations based on the Consumer Price Index. Most of the leases provide that the Company pay taxes, maintenance, insurance and operating expenses applicable to the premises.

The initial term of most real property leases will expire within the next 20 years; however, most of the leases have options providing for renewal periods of five to 25 years at terms similar to the initial terms.

E-21

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Future minimum fixed lease obligations, excluding taxes, insurance and other costs payable directly by the Company, as of February 28, 2002, were:

(Amounts in thousands) Fiscal	Capital Leases			Operating Lease Commitments		Operating Sublease Income
2003	$	1,726		$	339,193	$	(17,868	)
2004		1,768			337,017		(15,656	)
2005		1,798			335,248		(13,601	)
2006		1,807			332,626		(11,925	)
2007		1,853			326,480		(9,439	)
After 2007		11,006			3,131,207		(33,374	)
Total minimum lease payments		19,958		$	4,801,771	$	(101,863	)
Less amounts representing interest		(8,364	)
Present value of net minimum capital lease payments [Note 4]	$	11,594

In fiscal 2002, the Company entered into sale-leaseback transactions with unrelated parties at an aggregate selling price of $150,888,000 ($61,526,000 in fiscal 2001 and $36,795,000 in fiscal 2000). Gains or losses on sale-leaseback transactions are deferred and amortized over the term of the leases. The Company does not have continuing involvement under sale-leaseback transactions.

Non-appliance-related lease termination costs were $25.8 million in fiscal 2002, of which $13.7 million was related to current year relocations; $1.1 million in fiscal 2001; and $9.2 million in fiscal 2000.

10.    Supplementary Financial Statement Information

Advertising expense from continuing operations, which is included in selling, general and administrative expenses in the accompanying consolidated statements of earnings, amounted to $409,281,000 (3.2% of net sales and operating revenues) in fiscal 2002, $467,786,000 (3.6% of net sales and operating revenues) in fiscal 2001 and $438,781,000 (3.5% of net sales and operating revenues) in fiscal 2000.

11.    Securitizations

(A)  Credit Card Securitizations:

Circuit City’s finance operation enters into securitization transactions to finance its consumer revolving credit card receivables. In accordance with the isolation provisions of SFAS No. 140, special purpose subsidiaries were created in December 2001 for the sole purpose of facilitating these securitization transactions. Credit card receivables are sold to special purpose subsidiaries, which, in turn, transfer these receivables to securitization master trusts. Private-label credit card receivables are securitized through one master trust and MasterCard and VISA credit card (referred to as bankcard) receivables are securitized through a separate master trust. Each master trust periodically issues securities backed by the receivables in that master trust. For transfers of receivables that qualify as sales, Circuit City recognizes gains or losses as a component of the finance operation’s profits, which are recorded as reductions to selling, general and administrative expenses. In these securitizations, Circuit City’s finance operation continues to service the securitized receivables for a fee and the special purpose subsidiaries retain an undivided interest in the transferred receivables and hold various subordinated asset-backed securities that serve as credit enhancements for the asset-backed securities held by

E-22

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

outside investors. Neither the private-label master trust agreement nor the bankcard master trust agreement provides for recourse to the Company for credit losses on the securitized receivables. Under certain of these securitization programs, Circuit City must meet financial covenants relating to minimum tangible net worth, minimum delinquency rates and minimum coverage of rent and interest expense. Circuit City was in compliance with these covenants at February 28, 2002 and 2001.

The total principal amount of credit card receivables managed was $2.85 billion at February 28, 2002, and $2.80 billion at February 28, 2001. Of these totals, the principal amount of receivables securitized was $2.80 billion at February 28, 2002, and $2.75 billion at February 28, 2001, and the principal amount of receivables held for sale was $49.2 million at the end of fiscal 2002 and $45.1 million at the end of fiscal 2001. At February 28, 2002, the unused capacity of the private label variable funding program was $22.9 million and the unused capacity of the bankcard variable funding program was $496.5 million. The aggregate amount of receivables that were 31 days or more delinquent was $198.4 million at February 28, 2002, and $192.3 million at February 28, 2001. The principal amount of losses net of recoveries totaled $262.8 million for the year ended February 28, 2002, and $229.9 million for the year ended February 28, 2001.

Circuit City receives annual servicing fees approximating 2% of the outstanding principal balance of the credit card receivables and retains the rights to future cash flows available after the investors in the asset-backed securities have received the return for which they contracted. The servicing fees specified in the credit card securitization agreements adequately compensate the finance operation for servicing the securitized receivables. Accordingly, no servicing asset or liability has been recorded.

The table below summarizes certain cash flows received from and paid to the securitization trusts:

	Years Ended February 28
(Amounts in thousands)	2002		2001
Proceeds from new securitizations	$	1,193,300	$	1,092,500
Proceeds from collections reinvested in previous credit card securitizations	$	1,591,085	$	1,730,511
Servicing fees received	$	51,777	$	52,044
Other cash flows received on retained interests*	$	195,375	$	173,775

* This amount represents cash flows received from retained interests by the transferor other than servicing fees, including cash flows from interest-only strips and cash above the minimum required level in cash collateral accounts.

When determining the fair value of retained interests, Circuit City estimates future cash flows using management’s projections of key factors, such as finance charge income, default rates, payment rates, forward interest rate curves and discount rates appropriate for the type of asset and risk. Circuit City employs a risk-based pricing strategy that increases the stated annual percentage rate for accounts that have a higher predicted risk of default. Accounts with a lower risk profile may qualify for promotional financing.

Future finance income from securitized credit card receivables that exceeds the contractually specified investor returns and servicing fees (interest-only strips) is carried at fair value; amounted to $131.9 million at February 28, 2002, and $131.0 million at February 28, 2001. Gains of $167.8 million on sales of credit card receivables were recorded in fiscal 2002; gains of $176.2 million on sales of credit card receivables were recorded in fiscal 2001.

The fair value of retained interests at February 28, 2002, was $394.5 million, with a weighted-average life ranging from 0.2 years to 1.8 years. The fair value of retained interests at February 28, 2001, was $246.1 million

E-23

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

with a weighted average life ranging from 0.4 years to 3 years. The following table shows the key economic assumptions used in measuring the fair value of retained interests at February 28, 2002, and a sensitivity analysis showing the hypothetical effect on the fair value of those interests when there are unfavorable variations from the assumptions used. Key economic assumptions at February 28, 2002, are not materially different from assumptions used to measure the fair value of retained interests at the time of securitization. These sensitivities are hypothetical and should be used with caution. In this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in actual circumstances, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

(Dollar amounts in thousands)	Assumptions Used (Annual)	Impact on Fair Value of 10% Adverse Change		Impact on Fair Value of 20% Adverse Change
Payment rate	6.8%-10.4%	$	8,426	$	15,629
Default rate	7.9%-17.1%	$	23,315	$	46,363
Discount rate	8.0%-15.0%	$	2,742	$	5,454

(B)  Automobile Loan Securitizations:

CarMax has asset securitization programs to finance the automobile loan receivables generated by its finance operation. CarMax’s finance operation sells its automobile loan receivables to a special purpose subsidiary, which, in turn, transfers those receivables to a group of third-party investors. For transfers of receivables that qualify as sales, CarMax recognizes gains or losses as a component of the finance operation’s profits, which are recorded as reductions to selling, general and administrative expenses. A special purpose subsidiary retains a subordinated interest in the transferred receivables. CarMax’s finance operation continues to service securitized receivables for a fee. CarMax’s finance operation refinanced $641.7 million of automobile loan receivables through the public issuance of asset-backed securities in fiscal 2002 and $655.4 million in fiscal 2001. The automobile loan securitization agreements do not provide for recourse to the Company for credit losses on the securitized receivables. Under certain of these securitization programs, CarMax must meet financial covenants relating to minimum tangible net worth, minimum delinquency rates and minimum coverage of rent and interest expense. CarMax was in compliance with these covenants at February 28, 2002 and 2001.

At February 28, 2002, the total principal amount of automobile loan receivables managed was $1.55 billion. Of that total, the principal amount of automobile loan receivables securitized was $1.54 billion and the principal amount of automobile loan receivables held for sale or investment was $13.9 million. At February 28, 2002, the unused capacity of the automobile loan variable funding program was $211.0 million. The aggregate principal amount of automobile loans that were 31 days or more delinquent was $22.3 million at February 28, 2002. The principal amount of losses net of recoveries totaled $13.2 million for the year ended February 28, 2002, and $7.2 million for the year ended February 28, 2001.

CarMax receives annual servicing fees approximating 1% of the outstanding principal balance of the securitized automobile loan receivables and retains the rights to future cash flows available after the investors in the asset-backed securities have received the return for which they contracted. The servicing fees specified in the automobile loan securitization agreements adequately compensate the finance operation for servicing the securitized receivables. Accordingly, no servicing asset or liability has been recorded.

E-24

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The table below summarizes certain cash flows received from and paid to the securitization trusts:

	Years Ended February 28
(Amounts in thousands)	2002		2001
Proceeds from new securitizations	$	752,516	$	619,525
Proceeds from collections reinvested in previous automobile loan securitizations	$	452,329	$	313,827
Servicing fees received	$	13,787	$	10,474
Other cash flows received on retained interests*	$	68,153	$	39,265

* This amount represents cash flows received from retained interests by the transferor other than servicing fees, including cash flows from interest-only strips and cash, above the minimum required level in cash collateral accounts.

When determining the fair value of retained interests, CarMax estimates future cash flows using management’s projections of key factors, such as finance charge income, default rates, payment rates and discount rates appropriate for the type of assets and risk. CarMax employs a risk-based pricing strategy that increases the stated annual percentage rate for accounts that have a higher predicted risk of default. Accounts with a lower risk profile may qualify for promotional financing.

Future finance income from securitized automobile loan receivables that exceeds the contractually specified investor returns and servicing fees (interest-only strips) is carried at fair value; amounted to $74.3 million at February 28, 2002; and $42.0 million at February 28, 2001. Gains of $56.4 million on sales of automobile loan receivables were recorded in fiscal 2002, gains of $35.4 million on sales of automobile loan receivables were recorded in fiscal 2001.

The fair value of retained interests at February 28, 2002, was $109.0 million, with a weighted-average life of 1.6 years. The fair value of retained interests at February 28, 2001, was $74.1 million with a weighted average life ranging from 1.5 years to 1.8 years. The following table shows the key economic assumptions used in measuring the fair value of retained interests at February 28, 2002, and a sensitivity analysis showing the hypothetical effect on the fair value of those interests when there are unfavorable variations from the assumptions used. Key economic assumptions at February 28, 2002, are not materially different from assumptions used to measure the fair value of retained interests at the time of securitization. These sensitivities are hypothetical and should be used with caution. In this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in actual circumstances, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

(Dollar amounts in thousands)	Assumptions Used (Annual)	Impact on Fair Value of 10% Adverse Change		Impact on Fair Value of 20% Adverse Change
Prepayment speed	1.5%-1.6%	$	3,646	$	7,354
Default rate	1.0%-1.2%	$	2,074	$	4,148
Discount rate	12.0%	$	1,464	$	2,896

12.    Financial Derivatives

On behalf of Circuit City, the Company enters into interest rate cap agreements to meet the requirements of the credit card receivable securitization transactions. The total notional amount of interest rate caps outstanding was $654.9 million at February 28, 2002, and $839.4 million at February 28, 2001. Purchased interest rate caps

E-25

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

were included in net accounts receivable and had a fair value of $2.4 million as of February 28, 2002, and $6.5 million as of February 28, 2001. Written interest rate caps were included in accounts payable and had a fair value of $2.4 million as of February 28, 2002, and $6.5 million as of February 28, 2001.

On behalf of CarMax, the Company enters into amortizing swaps relating to automobile loan receivable securitizations to convert variable-rate financing costs to fixed-rate obligations to better match funding costs to the receivables being securitized. The Company entered into twelve 40-month amortizing interest rate swaps with notional amounts totaling approximately $854.0 million in fiscal 2002, nine 40-month amortizing swaps with notional amounts totaling approximately $735.0 million in fiscal 2001 and four 40-month amortizing swaps with notional amounts totaling approximately $344.0 million in fiscal 2000. The remaining total notional amount of all swaps related to the automobile loan receivable securitizations was approximately $413.3 million at February 28, 2002, and $299.3 million at February 28, 2001. At February 28, 2002, the fair value of these swaps totaled a net liability of $841,000 and were included in accounts payable.

The market and credit risks associated with interest rate caps and 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 has entered into offsetting interest rate cap positions and, therefore, does not anticipate significant market risk arising from interest rate caps. The Company does not anticipate significant market risk from swaps because they are used on a monthly basis to 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 bank counterparties.

13.    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.

14.    Appliance Exit Costs

On July 25, 2000, the Company announced plans to exit the major appliance category and expand its selection of key consumer electronics and home office products in all Circuit City Superstores. A product profitability analysis had indicated that the appliance category produced below-average profits. This analysis, combined with declining appliance sales, expected increases in appliance competition and the Company’s profit expectations for the consumer electronics and home office categories led to the decision to exit the major appliance category. The Company maintains control over Circuit City’s in-home major appliance repair business, although repairs are subcontracted to an unrelated third party.

To exit the appliance business, the Company closed eight distribution centers and eight service centers. The majority of these closed properties are leased. While the Company has entered into contracts to sublease some of these properties, it continues the process of marketing the remaining properties to be subleased.

Approximately 910 employees were terminated as a result of the exit from the appliance business. These reductions mainly were in the service, distribution and merchandising functions. Because severance was paid to employees on a biweekly schedule based on years of service, cash payments lagged job eliminations. Certain fixed assets were written down in connection with the exit from the appliance business, including appliance build-to-order kiosks in stores and non-salvageable fixed assets and leasehold improvements at the closed locations.

E-26

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In the second quarter of fiscal 2001, the Company recorded appliance exit costs of $30.0 million. In the fourth quarter of fiscal 2002, the Company recorded additional lease termination costs of $10.0 million to reflect the current rental market for these leased properties. These expenses are reported separately on the fiscal 2002 and 2001 statements of earnings. The appliance exit cost liability is included in the accrued expenses and other current liabilities line item on the consolidated balance sheet. The appliance exit cost accrual activity is presented in Table 3.

TABLE 3

(Amounts in millions)	Total Original Exit Cost Accrual		Fiscal 2001 Payments or Write-Downs		Liability at February 28, 2001		Fiscal 2002 Adjustments to Exit Cost Accrual		Fiscal 2002 Payments or Write-Downs		Liability at February 28, 2002
Lease termination costs	$	17.8	$	1.8	$	16.0	$	10.0	$	6.3	$	19.7
Fixed asset write-downs, net		5.0		5.0		—		—		—		—
Employee termination benefits		4.4		2.2		2.2		—		2.2		—
Other		2.8		2.8		—		—		—		—
Appliance exit costs	$	30.0	$	11.8	$	18.2	$	10.0	$	8.5	$	19.7

15.    Discontinued Operations

On June 16, 1999, Digital Video Express announced that it would cease marketing the Divx home video system and discontinue operations. Discontinued operations have been segregated on the consolidated statements of cash flows; however, Divx is not segregated on the consolidated balance sheets.

For fiscal 2002 and 2001, the discontinued Divx operations had no impact on the net earnings of Circuit City Stores, Inc. In fiscal 2000, the loss from the discontinued Divx operations totaled $16.2 million after an income tax benefit of $9.9 million and the loss on the disposal of the Divx business totaled $114.0 million after an income tax benefit of $69.9 million. The loss on the disposal included a provision for operating losses to be incurred during the phase-out period. It also included provisions for commitments under licensing agreements with motion picture distributors, the write-down of assets to net realizable value, lease termination costs, employee severance and benefit costs and other contractual commitments.

As of February 28, 2002, entities comprising the Divx operations have been dissolved and the related net liabilities have been assumed by the Company. Net liabilities reflected in the accompanying consolidated balance sheets as of February 28 were as follows:

(Amounts in thousands)	2002			2001
Current assets	$	—		$	8
Other assets		—			324
Current liabilities		(18,457	)		(27,522	)
Other liabilities		—			(14,082	)
Net liabilities of discontinued operations	$	(18,457	)	$	(41,272	)

16.    Recent Accounting Pronouncements

In July 2000, the Financial Accounting Standards Board issued Emerging Issues Task Force Issue No. 00-14, “Accounting for Certain Sales Incentives,” which is effective for fiscal quarters beginning after December 15,

E-27

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2001. EITF No. 00-14 provides that sales incentives, such as mail-in rebates, offered to customers should be classified as a reduction of revenue. The Company offers certain mail-in rebates that are currently recorded in cost of sales, buying and warehousing. However, in the first quarter of fiscal 2003, the Company expects to reclassify these rebate expenses from cost of sales, buying and warehousing to net sales and operating revenues to be in compliance with EITF No. 00-14. On a pro forma basis, this reclassification would have increased the fiscal 2002 Circuit City Stores, Inc. gross profit margin by 12 basis points and the expense ratio by 10 basis points. For fiscal 2001, this reclassification would have increased the gross profit margin and the expense ratio by 20 basis points. The Company does not expect the adoption of EITF No. 00-14 to have a material impact on its financial position, results of operations or cash flows.

In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” effective for business combinations initiated after June 30, 2001, and SFAS No. 142, “Goodwill and Other Intangible Assets,” effective for fiscal years beginning after December 15, 2001. Under SFAS No. 141, the pooling of interests method of accounting for business combinations is eliminated, requiring that all business combinations initiated after the effective date be accounted for using the purchase method. Also under SFAS No. 141, identified intangible assets acquired in a purchase business combination must be separately valued and recognized on the balance sheet if they meet certain requirements. Under the provisions of SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the pronouncement. Other intangible assets that are identified to have finite useful lives will continue to be amortized in a manner that reflects the estimated decline in the economic value of the intangible asset and will be subject to review when events or circumstances arise which indicate impairment. For the CarMax Group, goodwill totaled $20.1 million and covenants not to compete totaled $1.5 million as of February 28, 2002. In fiscal 2002, goodwill amortization was $1.8 million and amortization of covenants not to compete was $931,000. Covenants not to compete will continue to be amortized on a straight-line basis over the life of the covenant not to exceed five years. Application of the nonamortization provisions of SFAS No. 142 in fiscal 2003 is not expected to have a material impact on the financial position, results of operations or cash flows of the Company. During fiscal 2003, the Company will perform the first of the required impairment tests of goodwill, as outlined in the new pronouncement. Based on preliminary estimates, as well as ongoing periodic assessments of goodwill, the Company does not expect to recognize any material impairment losses from these tests.

In August 2001, the FASB issued SFAS No. 143, “Accounting For Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible

long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company has not yet determined the impact, if any, of adopting this standard.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes both SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” related to the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with

E-28

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SFAS No. 121. The Company is required to adopt SFAS No. 144 no later than the fiscal year beginning after December 15, 2001, and plans to adopt the provisions in the first quarter of fiscal 2003. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its financial position, results of operations or cash flows.

17.    Operating Segment Information

The Company conducts business in two operating segments: Circuit City and CarMax. These segments are identified and managed by the Company based on the different products and services offered by each. Circuit City refers to the retail operations bearing the Circuit City name and to all related operations, such as its finance operation. This segment is engaged in the business of selling brand-name consumer electronics, personal computers and entertainment software. CarMax refers to the used- and new-car retail locations bearing the CarMax name and to all related operations, such as its finance operation. Financial information for these segments for fiscal 2002, 2001 and 2000 are shown in Table 4.

TABLE 4

(Amounts in thousands)	Circuit City		CarMax		Total Segments
Revenues from external customers	$	9,589,803	$	3,201,665	$	12,791,468
Interest expense		881		4,958		5,839
Depreciation and amortization		134,371		16,340		150,711
Earnings from continuing operations before income taxes		206,439		146,456		352,895
Provision for income taxes		78,446		55,654		134,100
Earnings from continuing operations		127,993		90,802		218,795
Total assets	$	3,821,811	$	720,222	$	4,539,386
2001
Revenues from external customers	$	10,458,037	$	2,500,991	$	12,959,028
Interest expense		7,273		12,110		19,383
Depreciation and amortization		126,297		26,793		153,090
Earnings from continuing operations before income taxes		185,875		73,482		259,357
Provision for income taxes		70,637		27,918		98,555
Earnings from continuing operations		115,238		45,564		160,802
Total assets	$	3,160,048	$	710,953	$	3,871,001
2000
Revenues from external customers	$	10,599,406	$	2,014,984	$	12,614,390
Interest expense		13,844		10,362		24,206
Depreciation and amortization		132,923		15,241		148,164
Earnings from continuing operations before income taxes		526,955		1,803		528,758
Provision for income taxes		200,243		685		200,928
Earnings from continuing operations		326,712		1,118		327,830
Total assets	$	3,278,728	$	675,495	$	3,954,223

Earnings from continuing operations and total assets for Circuit City in this table exclude: (1) the reserved CarMax Group shares and (2) the discontinued Divx operations as discussed in Note 15.

E-29

CIRCUIT CITY STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18.    Quarterly Financial Data (Unaudited)

(Amounts in thousands	First Quarter				Second Quarter				Third Quarter					Fourth Quarter				Year
except per share data)	2002		2001		2002		2001		2002		2001			2002		2001		2002		2001
Net sales and operating revenues	$	2,678,474	$	3,074,851	$	2,887,915	$	3,179,781	$	3,054,232	$	2,887,269		$	4,170,847	$	3,817,127	$	12,791,468	$	12,959,028
Gross profit	$	566,353	$	683,262	$	605,070	$	673,465	$	642,177	$	582,128		$	918,075	$	856,467	$	2,731,675	$	2,795,322
Net earnings (loss) attributed to:
Circuit City Group Common Stock	$	10,135	$	57,123	$	6,822	$	55,341	$	21,134	$	(64,407	)	$	152,708	$	101,190	$	190,799	$	149,247
CarMax Group Common Stock	$	6,832	$	3,535	$	8,028	$	4,126	$	6,554	$	1,920		$	6,582	$	1,974	$	27,996	$	11,555
Net earnings (loss) per share attributed to:
Circuit City Group Common Stock:
Basic	$	0.05	$	0.28	$	0.03	$	0.27	$	0.10	$	(0.32	)	$	0.74	$	0.50	$	0.93	$	0.73
Diluted	$	0.05	$	0.28	$	0.03	$	0.27	$	0.10	$	(0.32	)	$	0.73	$	0.49	$	0.92	$	0.73
CarMax Group Common Stock:
Basic	$	0.26	$	0.14	$	0.27	$	0.16	$	0.18	$	0.08		$	0.18	$	0.08	$	0.87	$	0.45
Diluted	$	0.25	$	0.13	$	0.25	$	0.15	$	0.17	$	0.07		$	0.17	$	0.07	$	0.82	$	0.43

E-30

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, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in 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, 2002 and 2001, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 28, 2002, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Richmond, Virginia

April 2, 2002

E-31

CIRCUIT CITY STORES, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(Amounts in thousands) Description	Balance at Beginning of Year		Charged to Income		Charge-offs less Recoveries			Balance at End of Year
Year ended February 29, 2000:
Allowance for doubtful accounts	$	16,282	$	7,758	$	(5,727	)	$	18,313
Year ended February 28, 2001:
Allowance for doubtful accounts	$	18,313	$	8,878	$	(18,219	)	$	8,972
Year ended February 28, 2002:
Allowance for doubtful accounts	$	8,972	$	5,552	$	(9,777	)	$	4,747

Certain prior year amounts have been changed to conform to current presentation.

E-32

INDEPENDENT AUDITORS’ REPORT ON FINANCIAL STATEMENT SCHEDULE

The Board of Directors and Stockholders of Circuit City Stores, Inc.:

Under the date of April 2, 2002, we reported on the consolidated balance sheets of Circuit City Stores, Inc. and subsidiaries (the Company) as of February 28, 2002 and 2001, 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, 2002, which are included in this proxy statement/prospectus. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related Circuit City Stores, Inc. financial statement schedule included in this proxy statement/prospectus. 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 audit.

In our opinion, such financial statement 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 LLP

Richmond, Virginia

April 2, 2002

E-33

ANNEX F

SEPARATION AGREEMENT

THIS SEPARATION AGREEMENT, dated as of May 21, 2002, by and between Circuit City Stores, Inc., a Virginia corporation (“Circuit City Stores”), and CarMax, Inc., a Virginia corporation (“CarMax”);

WHEREAS, CarMax is a direct wholly owned Subsidiary of Circuit City Stores, and the CarMax Subsidiaries are direct or indirect wholly owned Subsidiaries of CarMax;

WHEREAS, Circuit City Stores has filed under the Securities Act with the Securities and Exchange Commission a registration statement on Form S-4 (File No. 333-85240) (as amended, the “Registration Statement”);

WHEREAS, Circuit City Stores will distribute to all Circuit City Stockholders the proxy statement/prospectus (the “Proxy/Prospectus”) included in the Registration Statement soliciting Circuit City Stockholders’ approval, among other things, of a comprehensive plan (including an amendment to the Articles necessary to effect such plan (the “Amendment”)) to separate CarMax from Circuit City Stores so that CarMax would become an independent, separately traded public company (the “Separation”);

WHEREAS, the Separation will be effected by (i) the redemption of all CarMax Group Stock by Circuit City Stores in exchange for shares of common stock, par value $.50 per share, of CarMax, Inc. (the “CarMax Common Stock”) in accordance with paragraph B(5)(b)(i) of Article V of the Articles (the “Redemption”) and (ii) the distribution of CarMax Common Stock as a dividend by Circuit City Stores to all holders of its Circuit City Group Stock (the “Distribution”);

WHEREAS, Circuit City Stores and CarMax wish to provide for certain payments to be made by CarMax to Circuit City Stores in connection with the Separation and for certain relationships to exist between Circuit City Stores and CarMax after the Separation;

WHEREAS, the Board has determined that the Separation will, among other things, allow Circuit City Stores and CarMax to better focus on their respective businesses by (i) alleviating capital restraints currently imposed on CarMax because of its affiliation with Circuit City Stores, (ii) allowing Circuit City Stores and CarMax to establish the most appropriate capital structures for their respective businesses, (iii) allowing Circuit City Stores and CarMax to create appropriate retirement arrangements for the employees of each business and (iv) allowing CarMax to conduct business with the most appropriate vendors;

WHEREAS, the Board has unanimously approved and declared the advisability of this Agreement and the transactions and future actions contemplated hereby, including, without limitation, the Separation, the Redemption, the Distribution and the Amendment;

WHEREAS, it is the intention of Circuit City Stores and CarMax that the Separation be a tax-free transaction under Section 355 of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder;

WHEREAS, Morgan Stanley & Co. Incorporated has rendered to the Board an opinion respecting the fairness from a financial point of view of the Separation to the holders of Circuit City Group Stock and the holders of CarMax Group Stock;

WHEREAS, paragraph B(5)(b)(i) of Article V of the Articles permits the Board at any time at which all of the assets and liabilities attributed to the CarMax Group (and no other assets or liabilities of Circuit City Stores or any subsidiary thereof) are held directly or indirectly by a wholly owned subsidiary of Circuit City Stores, to

F-1

redeem all of its outstanding CarMax Group Stock in exchange for the number of shares of common stock of such subsidiary equal to the number of such shares to be outstanding immediately following such exchange of shares multiplied by the “Outstanding CarMax Fraction” (as defined in the Articles);

WHEREAS, Circuit City Stores and the Board intend that all of the assets and liabilities of Circuit City Stores and its subsidiaries attributed to the CarMax Group (and no other assets or liabilities of Circuit City Stores or any subsidiary thereof) will be held by CarMax or one of the CarMax Subsidiaries at or prior to the time the Separation is consummated; and

WHEREAS, when the Amendment becomes effective, the CarMax Group Assets and the CarMax Group Liabilities will constitute, pursuant to the Articles, all of the assets and liabilities attributed to the CarMax Group (and no other assets or liabilities of Circuit City Stores or any subsidiary thereof);

NOW, THEREFORE, in consideration of the foregoing and the mutual promises set forth hereinafter, the parties hereby agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1     Definitions.

“Affiliate” of any Person shall mean any Person directly or indirectly controlling, controlled by, or under common control with, such Person; provided that, for the purposes of this definition, “control” (including with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or partnership interests, by contract or otherwise.

“Action” shall mean any action, claim (whether or not filed), suit, arbitration, inquiry, demand, proceeding or investigation.

“Agreement” shall mean this Separation Agreement.

“Allocation Policies” shall mean those certain allocation policies adopted by the Board since October 14, 1996 with respect to the Circuit City Group and the CarMax Group.

“Amendment” shall have the meaning given to such term in the recitals of this Agreement.

“Ancillary Contracts” shall mean the Tax Allocation Agreement, the Transition Services Agreement, the Employee Benefits Agreement and the Confidentiality Agreement.

“Articles” shall mean the Amended and Restated Articles of Incorporation of Circuit City Stores, as amended.

“Beneficial Assets” shall have the meaning given to such term in Section 2.8 of this Agreement.

“Board” shall mean the Board of Directors of Circuit City Stores.

“Business Day” shall mean a day other than a Saturday, a Sunday or a day on which banks in New York, New York or Richmond, Virginia are permitted or required to close.

F-2

“CarMax” shall have the meaning given to such term in the recitals of this Agreement.

“CarMax Action” shall have the meaning given to such term in Section 8.4(b) of this Agreement.

“CarMax Common Stock” shall have the meaning given to such term in the recitals to this Agreement.

“CarMax Group” shall mean, as of any date (i) all assets and liabilities of Circuit City Stores and its Subsidiaries attributed by the Board to the CarMax Group, (ii) all properties and assets transferred to the CarMax Group from the Circuit City Group pursuant to transactions in the ordinary course of business of the Circuit City Group and the CarMax Group or otherwise as the Board may have directed as permitted by the Articles and (iii) the interest of Circuit City Stores or any of its Subsidiaries in any business or asset acquired and any liabilities assumed by Circuit City Stores or any of its Subsidiaries outside of the ordinary course of business and attributed to the CarMax Group, as determined by the Board.

“CarMax Group Assets” shall mean all of the following assets of Circuit City Stores and its Subsidiaries: (i) all assets held by CarMax or one of the CarMax Subsidiaries on the date hereof which are assets of the CarMax Group under clauses (i), (ii), (iii), (iv) or (v) of paragraph B(7)(a) of Article V of the Articles; (ii) to the extent not included in other clauses of this definition, all assets attributed or transferred after the date hereof and on or before the Redemption Date, to the CarMax Group pursuant to action of the Board under paragraph B(7)(a) of Article V of the Articles; and (iii) to the extent not included in other clauses of this definition, any asset or assets arising after the Redemption Date that would have been attributed or transferred to the CarMax Group in accordance with paragraph B(7)(a) of Article V of the Articles had such asset or assets arisen prior to the Redemption Date; with such changes to the assets described in the clauses of this definition (including additions and subtractions) as are contemplated by this Agreement or otherwise shall have occurred or shall occur in the ordinary course of the business of the CarMax Group after the date hereof.

“CarMax Group Liabilities” shall mean all of the following liabilities of Circuit City Stores and its Subsidiaries: (i) liabilities held by CarMax or one of the CarMax Subsidiaries on the date hereof which are liabilities of the CarMax Group under clauses (i), (ii) or (v) of paragraph B(7)(a) of Article V of the Articles; (ii) to the extent not included in other clauses of this definition, all liabilities attributed, after the date hereof and on or prior to the Redemption Date, to the CarMax Group pursuant to action of the Board under paragraph B(7)(a) of Article V of the Articles; and (iii) to the extent not included in the other clauses of this definition, any liability or liabilities arising after the Redemption Date that would have been attributed or transferred to the CarMax Group in accordance with paragraph B(7)(a) of Article V of the Articles had such liability or liabilities arisen prior to the Redemption Date; with such changes to the liabilities described in the clauses of this definition (including additions and subtractions) as are contemplated by this Agreement or otherwise shall have occurred or shall occur in the ordinary course of the business of the CarMax Group after the date hereof.

“CarMax Group Stock” shall mean Circuit City Stores, Inc.–CarMax Group Common Stock, par value $.50 per share.

“CarMax Subsidiaries” shall mean all of the Subsidiaries of CarMax, which Subsidiaries are listed on Schedule 1.1 hereto.

“Circuit City Action” shall have the meaning given to such term in Section 8.4(a) of this Agreement.

“Circuit City Group” shall mean, as of any date (i) the interest of Circuit City Stores or any of its Subsidiaries on such date in all of the assets, liabilities and businesses of Circuit City Stores or any of its Subsidiaries (and any successor companies), other than any assets, liabilities and businesses attributed in accordance with the Articles to the CarMax Group, (ii) all properties and assets transferred to the Circuit City Group from the CarMax Group pursuant to transactions in the ordinary course of business of both the Circuit

F-3

City Group and the CarMax Group or otherwise as the Board may have directed as permitted by the Articles and (iii) the interest of Circuit City Stores or any of its Subsidiaries in any business or asset acquired and any liabilities assumed by Circuit City Stores or any of its Subsidiaries outside of the ordinary course of business and attributed to the Circuit City Group, as determined by the Board.

“Circuit City Group Stock” shall mean Circuit City Stores, Inc.–Circuit City Group Common Stock, par value $.50 per share.

“Circuit City Indemnified Persons” shall have the meaning given to such term in Section 4.1 of this Agreement.

“Circuit City Stockholders” shall mean, collectively, the holders of the Circuit City Group Stock and the holders of the CarMax Group Stock.

“Circuit City Stores” shall have the meaning given to such term in the recitals of this Agreement.

“Circuit City Stores Information” shall mean (i) all information contained in the Proxy/Prospectus under the captions “Circuit City Stores, Inc. Selected Historical Consolidated Financial Information,” “Circuit City Group Selected Historical Financial Information,” “Circuit City Stores, Inc. Selected Unaudited Pro Forma Consolidated Financial Information,” “Risk Factors—Risk Factors Relating to the Circuit City Business,” “Information about Circuit City Stores after the Separation” and (ii) all information not explicitly relating to CarMax or to the CarMax Group contained in the Proxy/Prospectus under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Circuit City Stores, Inc.,” “Special Note Regarding Forward-Looking Statements” and “Annex E—Circuit City Stores, Inc. Historical Consolidated Financial Statements.”

“Circuit City Subsidiaries” shall mean the Subsidiaries of Circuit City Stores other than CarMax and the CarMax Subsidiaries.

“Closing” shall have the meaning given to such term in Section 9.1 of this Agreement.

“Closing Intercompany Amount” shall have the meaning given to such term in Section 2.6(b) of this Agreement.

“Confidentiality Agreement” shall have the meaning given to such term in Section 7.2 of this Agreement.

“Corporate Contract” shall have the meaning given to such term in Section 8.1 of this Agreement.

“Deeds and Assignments” shall have the meaning given to such term in Section 2.3 hereof.

“Dispute” shall have the meaning given to such term in Section 10.1(a) hereof.

“Dispute Notice” shall have the meaning given to such term in Section 10.1(a) hereof.

“Distribution” shall have the meaning given to such term in the recitals of this Agreement.

“Effective Date” shall have the meaning given to such term in Section 2.1 of this Agreement.

“Employee Benefits Agreement” shall have the meaning given to such term in Section 6.1.

“Excluded Liabilities” shall have the meaning given to such term in Section 2.4 hereof.

F-4

“Fairness Opinion” shall have the meaning given to such term in the recitals of this Agreement.

“Final Intercompany Amount” shall have the meaning given to such term in Section 2.6(d) of this Agreement.

“Governmental Authority” shall mean any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States or any domestic or foreign state, county, city or other political subdivision.

“Indemnified Party” shall have the meaning given to such term in Section 4.4(b) of this Agreement.

“Indemnifying Party” shall have the meaning given to such term in Section 4.4(b) of this Agreement.

“Instruments of Assumption” shall have the meaning given to such term in Section 2.5 hereof.

“Insurance Administration” shall mean, with respect to each Joint Insurance Arrangement, (i) the accounting for premiums, retrospectively rated premiums, defense costs, indemnity payments, deductibles and retentions, as appropriate under the terms and conditions of each of the Joint Insurance Arrangements, (ii) the reporting to Insurers of any losses or claims that may cause the per occurrence, per claim or aggregate limits of any Joint Insurance Arrangement to be exceeded and (iii) the processing of claims made under the Joint Insurance Arrangements, including, without limitation, the reporting of claims to the Insurers’ management and defense of claims and providing for appropriate releases upon settlement of claims.

“Insurance Arrangements” shall mean insurance policies and insurance contracts of any kind (other than insurance policies and insurance contracts which are employee benefit plans or as provided by the Employee Benefits Agreement), including, without limitation, primary and excess policies, commercial general liability policies, automobile policies, product liability policies, directors’ and officers’ liability policies, fiduciary liability policies, workers’ compensation policies, and self-insurance programs and captive insurance company arrangements, together with the rights, benefits and privileges thereunder.

“Insurance Proceeds” shall mean those monies received by an insured from an Insurer or paid by an Insurer on behalf of an insured, in either case net of any applicable premium adjustment, retrospectively rated premium, deductible, retention or cost of reserve paid or held by or for the benefit of such insured.

“Insured Claims” shall mean those liabilities which, individually or in the aggregate, are covered within the terms and conditions of any of the Joint Insurance Arrangements, whether or not subject to deductibles, co-insurance, uncollectability or retrospectively rated premium adjustments.

“Insurer” shall mean a third party insurance carrier.

“Intellectual Property” shall mean all patents, trademarks, trade names, service marks, copyrights together with any registrations and applications therefor, Internet domain names, net lists, schematics, inventories, technology, trade secrets, source codes, know-how, computer software programs or applications, including, without limitation, all object and source codes and tangible or intangible proprietary information or material.

“Intercompany Amount” shall have the meaning given to such term in Section 2.6(a) of this Agreement.

“Joint Insurance Arrangements” shall mean the Insurance Arrangements of Circuit City Stores or any of its Subsidiaries existing at the Redemption Date and/or prior thereto that are owned or maintained by or on behalf of Circuit City Stores or any of its Subsidiaries and that relate to both (a) the Circuit City Group and/or any of the assets or liabilities thereof and (b) the CarMax Group and/or any of the CarMax Group Assets or any of the CarMax Group Liabilities.

F-5

“Liability” shall mean any liability, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, and whether or not the same that is or would properly be reflected on a balance sheet of Circuit City Stores or the Circuit City Group or the CarMax Group, or the notes thereto, including all costs and expenses relating thereto.

“Losses” shall have the meaning given to such term in Section 4.1 of this Agreement.

“Notice of Redemption” shall mean the Notice of Redemption to be sent to holders of CarMax Group Stock pursuant to paragraph B(5)(d)(vi) of Article V of the Articles.

“Person” shall mean and include an association, an individual, a partnership, a joint venture, a joint stock company, a corporation, a trust, an unincorporated organization, a limited liability company, a group, a government or other department or agency thereof and any other entity.

“Property Rights” shall have the meaning given to such term in Section 8.2(b) of this Agreement.

“Proxy/Prospectus” shall have the meaning given to such term in the recitals of this Agreement.

“Real Property” shall have the meaning given to such term in Section 2.2(a) of this Agreement.

“Real Property Rights” shall have the meaning given to such term in Section 8.2(a) of this Agreement.

“Redemption” shall have the meaning given to such term in the recitals of this Agreement.

“Redemption Date” shall mean the date on which the Redemption occurs.

“Registration Statement” shall have the meaning given to such term in the recitals of this Agreement.

“Released Parties” shall have the meaning given such term in Section 3.1 of this Agreement.

“Response” shall have the meaning given to such term in Section 10.1(a) hereof.

“Securities Act” shall mean the Securities Act of 1933, as amended, and the Rules and Regulations promulgated thereunder.

“Senior Party Representative” shall have the meaning given to such term in Section 10.1(a) hereof.

“Separation” shall have the meaning given to such term in the recitals of this Agreement.

“Special Dividend” shall have the meaning given to such term in Section 8.6 of this Agreement.

“Spincos” shall mean CarMax and the CarMax Subsidiaries.

“Spinco Indemnified Persons” shall have the meaning given to such term in Section 4.2 of this Agreement.

“Subsidiary” shall mean, with respect to any Person, (x) any partnership of which such Person or any of its subsidiaries is a general partner or (y) any other entity in which such Person or any of its subsidiaries owns or has the power to vote more than 50% of the equity interests in such entity having general voting power to participate in the election of the governing body of such entity.

“Tax” shall mean all Federal, state, local and foreign tax or taxes, and other assessments of a similar nature (whether imposed directly or through a withholding), including any interest, additions to tax or penalties applicable thereto.

F-6

“Tax Allocation Agreement” shall have the meaning given to such term in Section 8.7.

“Transition Services Agreement” shall have the meaning given to such term in Section 8.8.

“Transaction Liabilities” shall have the meaning given to such term in Section 4.1(b) of this Agreement.

ARTICLE II

TRANSFER OF ASSETS AND LIABILITIES

Section 2.1     Effective Date.     This Agreement shall become effective upon the date that the Proxy/Prospectus is first mailed to Circuit City Stockholders (the “Effective Date”).            

Section 2.2     CarMax Group Assets to Be Contributed to Spincos on or Prior to the Redemption Date.     On or prior to the Redemption Date, Circuit City Stores will, or will cause the Circuit City Subsidiaries to, transfer, convey, assign and deliver to one of the Spincos designated by CarMax any remaining CarMax Group Assets held by Circuit City Stores or any Circuit City Subsidiary, including, without limitation:

(a) all interests in real property set forth on Schedule 2.2(a) (the “Real Property”);

(b) all interests in Intellectual Property set forth on Schedule 2.2(b) hereto.

Notwithstanding the foregoing, the CarMax Group Assets shall not include any assets attributed to the Circuit City Group; and on or prior to the Redemption Date, CarMax will, or will cause the CarMax Subsidiaries to, transfer, convey, assign and deliver to Circuit City Stores or one of the Circuit City Subsidiaries designated by Circuit City Stores any assets held by any of the Spincos that are not CarMax Group Assets (other than rights under this Agreement and the Ancillary Contracts).

Section 2.3     Instruments of Conveyance.    Any conveyance of CarMax Group Assets pursuant to this Agreement shall be effected by the execution and delivery by Circuit City Stores or the applicable Circuit City Subsidiary to CarMax or the applicable CarMax Subsidiary of (i) one or more appropriate deeds conveying all of Circuit City Stores’ or the applicable Circuit City Subsidiary’s right, title and interest in and to all applicable Real Property, (ii) one or more appropriate bills of sale or assignments evidencing the assignment of all personal property included in the applicable CarMax Group Assets, including Intellectual Property; and (iii) such other documents as shall be reasonably necessary or appropriate to vest in or confirm to CarMax or the applicable CarMax Subsidiary title to such conveyed CarMax Group Assets (collectively, the “Deeds and Assignments”).

Section 2.4    CarMax Group Liabilities to Be Assumed by Spincos on or Prior to the Redemption Date.    On or prior to the Redemption Date, CarMax or another Spinco designated by CarMax will assume, upon the terms and subject to the conditions set forth herein, or agree to perform or satisfy, any remaining CarMax Group Liabilities not previously assumed by, or an obligation of, a Spinco, including, without limitation:            

(a) any and all liabilities arising out of or that are expressly contemplated by this Agreement or any Ancillary Contract as liabilities to be assumed by a Spinco, and all agreements, obligations and liabilities of such Spinco under this Agreement or any of the Ancillary Contracts; and

(b) any third-party fees and expenses arising out of or relating to this Agreement or the Ancillary Contracts (or the transactions contemplated thereby).

Notwithstanding the foregoing, the CarMax Group Liabilities shall not include (i) any liability attributed to the Circuit City Group, (ii) any third-party fees and expenses allocated to Circuit City Stores by this Agreement or the Ancillary Contracts, (iii) any liability resulting from claims by the holders of Circuit City Group Stock or the creditors of Circuit City Stores based on the transactions contemplated by this Agreement or the Ancillary

F-7

Contracts (or the transactions contemplated thereby) or (iv) any indebtedness for borrowed money of Circuit City Stores or any of the Circuit City Subsidiaries to a third party except to the extent reflected in the calculation of the Intercompany Amount (collectively, the “Excluded Liabilities”); and on or prior to the Redemption Date, Circuit City Stores will, or will cause the Circuit City Subsidiaries to, assume, or agree to perform and satisfy, any liabilities held by any of the Spincos that are not CarMax Group Liabilities (other than obligations under this Agreement and the Ancillary Contracts).

Section 2.5    Instruments of Assumption.    Any assumption by any of the Spincos of CarMax Group Liabilities pursuant to this Agreement shall be effected by the execution and the delivery to Circuit City Stores or the applicable Circuit City Subsidiary by such Spinco of one or more instruments of assumption and such other documents as shall be reasonably necessary or appropriate to evidence the assumption by such Spinco of such CarMax Group Liabilities (collectively, the “Instruments of Assumption”).

Section 2.6    Resolution of Intercompany Amount.

(a) For purposes of this Agreement, the term “Intercompany Amount” shall mean, as of the end of any fiscal month of Circuit City Stores, the difference between (i) the sum of (A) the aggregate amount of indebtedness of Circuit City Stores and the Circuit City Subsidiaries attributed to the CarMax Group that is reflected as a liability of the CarMax Group in the most recent publicly filed financial statements of Circuit City Stores and its Subsidiaries or (to the extent changed or arising thereafter) would be so reflected in a subsequent filing of such financial statements as determined in accordance with the Allocation Policies applied consistently with past practices but that is not otherwise assumed by one of the Spincos as part of the CarMax Group Liabilities (as of the end of the prior fiscal month) and (B) any items which increase the liabilities of the CarMax Group in the intergroup accounts identified on Schedule 2.6 hereto since the end of such prior fiscal month minus (ii) any items which decrease the liabilities of the CarMax Group in the intergroup accounts identified on Schedule 2.6 hereto since the end of such prior fiscal month.

(b) Not less than five Business Days prior to the then scheduled Redemption Date, Circuit City Stores shall deliver to CarMax its good faith determination of the Intercompany Amount as of the end of the immediately preceding fiscal month (such amount, the “Closing Intercompany Amount”), together with the calculation of the Closing Intercompany Amount and all necessary supporting documentation.

(c) Immediately prior to the Redemption, CarMax shall pay to Circuit City Stores an aggregate amount in cash equal to the Closing Intercompany Amount.

(d) As soon as practicable, but in no event later than 30 days following the Redemption Date, Circuit City Stores shall, on a basis consistent with past practice and the calculation of the Closing Intercompany Amount, prepare and deliver to CarMax an itemized calculation of the Intercompany Amount as of the Redemption Date (as finally determined pursuant to this paragraph, the “Final Intercompany Amount”). Following the determination of the Final Intercompany Amount, Circuit City Stores shall provide CarMax and its authorized representatives with full access to the books and records of Circuit City Stores necessary to review the calculation of the Final Intercompany Amount and cooperate fully with CarMax’s authorized representatives in connection with such review. If CarMax objects to Circuit City Stores’ calculation of the Final Intercompany Amount, it shall provide a detailed analysis of any such objection(s) on or prior to the 30th day following the delivery by Circuit City Stores of its determination of the Final Intercompany Amount (in which case any such disputes shall be resolved in the manner contemplated by Section 10.1 hereof). If CarMax does not object to Circuit City Stores’ calculation of the Final Intercompany Amount within such 30-day period, then Circuit City Stores’ calculation of the Final Intercompany Amount shall be final and binding on the parties for the purposes hereunder.

(e) In the event that the Final Intercompany Amount is less than the Closing Intercompany Amount, then Circuit City Stores shall pay to CarMax an amount in cash equal to the amount of any such difference

F-8

within five Business Days of the time that such determination becomes final pursuant to paragraph (d) above and Section 10.1. In the event that the Final Intercompany Amount is greater than the Closing Intercompany Amount, then CarMax shall pay to Circuit City Stores an amount in cash equal to the amount of any such difference within five Business Days of the time that such determination becomes final pursuant to paragraph (d) above and Section 10.1. Any payment made pursuant to this paragraph (e) shall be accompanied by interest at the prime rate as announced from time to time by Citibank N.A., accrued from the Redemption Date.

Section 2.7    Further Assurances.

(a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto shall use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the transactions contemplated by this Agreement. Without limiting the foregoing, each party hereto shall cooperate with the other party, and execute and deliver, or use commercially reasonable efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment, transfer and assumption, and to make all filings with, and to obtain all consents, approvals or authorizations of, any governmental or regulatory authority or any other Person under any permit, license, agreement, indenture or other instrument, and take all such other actions as such party may reasonably be requested to take by the other party hereto from time to time, consistent with the terms of this Agreement and the Ancillary Contracts, in order to effectuate the provisions and purposes of this Agreement and the transfers of assets and assumptions of liabilities and the other transactions contemplated hereby.

(b) If any transfer of assets or assumption of liabilities contemplated by this Agreement is not consummated prior to or at the time of Redemption, then the party hereto retaining such asset or liability shall continue to take the actions required by this Section 2.7 to consummate and make effective such transfer as soon as commercially practicable after the Redemption Date and, in the case of assets, shall use its commercially reasonable efforts to preserve the value of such assets until the time of transfer. If and when any such asset or liability becomes transferable, such transfer shall be effected forthwith. The parties hereto agree that, no later than the Redemption Date, each party hereto shall be deemed to have acquired complete and sole beneficial ownership to all of the assets, together with all rights, powers and privileges incident thereto, and shall be deemed to have assumed in accordance with the terms of this Agreement and the Ancillary Contracts all of the liabilities, and all duties, obligations and responsibilities incident thereto, that such party is entitled or required to hold or assume pursuant to this Agreement.

(c) If subsequent to the Redemption Date, Circuit City Stores shall either (i) receive written notice from CarMax or (ii) determine that certain specified assets of Circuit City Stores or a Circuit City Subsidiary that properly constitute CarMax Group Assets were not transferred to a Spinco on or prior to the Redemption Date, then, as soon as commercially practicable thereafter, Circuit City Stores shall transfer and deliver, or shall cause the applicable Circuit City Subsidiary to transfer and deliver, any and all of such assets to the applicable Spinco without the payment by such Spinco of any consideration therefor. If subsequent to the Redemption Date, CarMax shall either (i) receive written notice from Circuit City Stores or (ii) determine that certain specified assets of CarMax or a Spinco that do not properly constitute CarMax Group Assets were transferred to or held by a Spinco on or prior to the Redemption Date, then as soon as commercially practicable thereafter, CarMax shall transfer and deliver, or shall cause such Spinco to transfer and deliver, any and all of such assets to Circuit City Stores or the Circuit City Subsidiary designated by Circuit City Stores without the payment by Circuit City Stores or such Circuit City Subsidiary of any consideration therefor.

(d) If subsequent to the Redemption Date, Circuit City Stores shall either (i) receive written notice from CarMax or (ii) determine that certain specified liabilities of Circuit City Stores or a Circuit City Subsidiary that properly constitute CarMax Group Liabilities were not assumed by a Spinco on or prior

F-9

to the Redemption Date, then, as soon as commercially practicable thereafter, Circuit City Stores shall permit, or shall cause the applicable Circuit City Subsidiary to permit, a Spinco to assume (and such Spinco as soon as commercially practicable shall assume) such liabilities without payment by Circuit City or any Circuit City Subsidiary of any consideration for such assumption. If subsequent to the Redemption Date, CarMax shall either (i) receive written notice from Circuit City Stores or (ii) determine that certain specified liabilities of a Spinco that do not properly constitute CarMax Group Liabilities were assumed by a Spinco on or prior to the Redemption Date, then, as soon as commercially practicable thereafter, CarMax shall permit, or shall cause the applicable CarMax Subsidiary to permit, Circuit City Stores or a Circuit City Subsidiary to assume (and Circuit City Stores or such Circuit City Subsidiary as soon as commercially practicable shall assume) such liabilities without the payment by any Spinco of any consideration for such assumption.

(e) Any disagreement regarding whether or not any asset or liability was or should have been a CarMax Group Asset or CarMax Group Liability shall be resolved in accordance with the provisions of Section 10.1.

(f) Circuit City Stores will cooperate with CarMax and its advisers in calculating the current and accumulated earnings and profits of the Spincos and in making estimates of such amount as of the Redemption Date. Not less than five Business Days prior to the Redemption Date, Circuit City Stores shall deliver to CarMax combined trial balances for the CarMax Group (including supporting schedules that combine the separate trial balances of each Spinco, together with any other adjustments, that are used in arriving at such CarMax Group combined trial balances) which shall reflect the results of the Carmax Group from the start of the current fiscal year through the end of the second to last full month immediately preceding the Redemption Date. Such combined trial balances shall be prepared consistently with the past practices of the CarMax Group and shall also be adjusted to take into account transactions that are expected to occur on or before the Redemption Date.

Section 2.8    Unassignable Assets.     Notwithstanding anything in this Agreement to the contrary, neither this Agreement nor any of the Deeds and Assignments shall constitute an agreement to assign any CarMax Group Asset without the consent of another Person if an assignment or attempted assignment thereof without the consent of such Person would constitute a breach thereof or in any way impair the rights thereunder. If any such consent is not obtained or if an attempted assignment thereof would be ineffective or would impair any party’s rights with respect to such CarMax Group Asset so that a Spinco would not receive all such rights, then Circuit City Stores and CarMax will cooperate in commercially reasonable arrangements to provide or cause to be provided to the Spincos the benefits of any such CarMax Group Asset (the “Beneficial Assets”), subject to the burdens thereof. In addition, Circuit City Stores shall take such other actions as may be reasonably requested by CarMax in order to place the Spincos, insofar as reasonably possible, in the same position as if such Beneficial Asset had been transferred as contemplated hereby, so that all the benefits and burdens relating thereto shall inure to the Spincos. If and when any such consents and approvals are obtained, the transfer of the applicable Beneficial Asset shall be promptly effected in accordance with the terms of this Agreement.

ARTICLE III

MUTUAL RELEASE; LIMITED REPRESENTATIONS AND WARRANTIES

Section 3.1    Mutual Release.     From and after the Redemption Date, CarMax, on the one hand, and Circuit City Stores, on the other hand, releases and forever discharges the other and its Subsidiaries and each of their respective officers, directors, agents, Affiliates, record and beneficial security holders (including, without limitation, trustees and beneficiaries of trusts holding such securities), advisors and representatives and their respective successors and assigns (collectively “Released Parties”), of and from all debts, demands, actions, causes of action, suits, accounts, covenants, contracts, agreements, damages, claims and liabilities whatsoever of

F-10

every name and nature, both in law and in equity, which the releasing party has or ever had, which arise out of or relate to, in whole or in part, events, circumstances or actions, whether known or unknown, taken by such other party occurring or failing to occur or any conditions existing on or prior to the Redemption Date, but only to the extent any of the foregoing have been resolved in accordance with the Allocation Policies prior to the Redemption Date; provided, however, that the foregoing general release shall not apply to (a) any CarMax Group Liabilities, any liabilities attributed to the Circuit City Group or any liabilities or obligations under the Ancillary Contracts; (b) any party’s rights to enforce this Agreement or any of the instruments delivered pursuant to this Agreement; and (c) any liability the release of which would result in the release of any Person other than a Released Party (provided that the parties agree not to bring suit or permit any of their Affiliates to bring suit against any Released Party with respect to any liability to the extent such Released Party would be released with respect to such liability by this Section 3.1 but for this clause (c). The parties hereto acknowledge that the foregoing general release shall not apply to any liabilities or obligations assigned by the parties to third parties prior to the Redemption Date. In addition, each of the parties hereto separately acknowledges, and shall be deemed by operation of this Section 3.1 to have acknowledged, that the foregoing mutual release was separately bargained for and a key element of the transaction of which this mutual release is a part, and expressly waives (i) the benefits of the provisions of Section 1542 of the California Civil Code, which provides that “A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor” and (ii) the benefits of any similar, comparable or equivalent law, statute, regulation or legal principle of any other jurisdiction.

Section 3.2    Waiver of Conflict.    The parties acknowledge that each of the Spincos, on the one hand, and Circuit City Stores and the Circuit City Subsidiaries, on the other hand, are both currently represented by members of Circuit City Stores’ legal department and Circuit City Stores’ outside counsel. Each of CarMax (on behalf of the Spincos), on the one hand, and Circuit City Stores (on behalf of itself and the Circuit City Subsidiaries), on the other hand, waives any conflict with respect to such common representation that may arise before, at or after the Closing Date.

Section 3.3    Limited Representations and Warranties.    CarMax agrees and acknowledges that neither Circuit City Stores nor any of the Circuit City Subsidiaries nor any of their respective Affiliates is, in this Agreement or in any other agreement or document, making any representation or warranty to the Spincos as to any aspect of the CarMax Group, the CarMax Group Assets or the CarMax Group Liabilities or as to any consents or approvals required in connection with the consummation of the transactions contemplated by this Agreement, it being understood and agreed that each of the Spincos shall take the CarMax Group Assets, and shall assume, perform and discharge the CarMax Group Liabilities, on an “AS IS, WHERE IS” basis. The Spincos shall bear the economic and legal risk that any conveyance of CarMax Group Assets contemplated hereby shall be insufficient to convey anything more than all of Circuit City Stores’ or the applicable Circuit City Subsidiary’s right, title and interest to the applicable CarMax Group Assets.

ARTICLE IV

INDEMNIFICATION

Section 4.1    Indemnification by Spincos.    From and after the Redemption Date, CarMax shall indemnify and hold harmless, and shall cause the other Spincos to indemnify and hold harmless, Circuit City Stores and the Circuit City Subsidiaries and their respective officers, directors, agents, Affiliates, record and beneficial security holders (including, without limitation, trustees and beneficiaries of trusts holding such securities), advisors and representatives (the “Circuit City Indemnified Persons”) and their respective successors and assigns against any and all claims, debts, obligations, damages, losses, liabilities (whether absolute, accrued, contingent, fixed or

F-11

otherwise, or whether known or unknown, or due or to become due or otherwise), fines, fees, penalties, deficiencies, costs and expenses (including, without limitation, amounts paid in settlement and any reasonable legal, expert, accounting or other expenses for investigating or defending any actions or threatened actions) (collectively, “Losses”) incurred by the Circuit City Indemnified Persons arising out of, relating to, due to, or in connection with, directly or indirectly:

(a) any breach of any covenant, agreement or obligation of any Spinco contained in this Agreement or any of the Ancillary Contracts or in the Deeds and Assignments or the Instruments of Assumption;

(b) any and all liabilities arising out of or relating to the Separation, the Redemption, the Distribution and/or the Proxy/Prospectus (other than the Circuit City Stores Information) (together, the “Transaction Liabilities”) (in addition to any indemnification provided for in Section 4.1(a) above, and to the extent not arising out of or relating to a Circuit City Indemnified Person’s failure to perform its obligations arising out of or relating thereto); or

(c) any failure to perform or satisfy any of the CarMax Group Liabilities by any of the Spincos.

Section 4.2    Indemnification by Circuit City Stores and the Circuit City Subsidiaries.    Subject to Section 4.3, from and after the Redemption Date, Circuit City Stores shall indemnify and hold harmless, and shall cause the Circuit City Subsidiaries to indemnify and hold harmless, each Spinco and their respective officers, directors, agents, Affiliates, record and beneficial security holders (including, without limitation, trustees and beneficiaries of trusts holding such securities), advisors and representatives (the “Spinco Indemnified Persons”) and their respective successors and assigns against any and all Losses incurred by the Spinco Indemnified Persons arising out of, relating to, due to, or in connection with, directly or indirectly:

(a) any breach of any covenant, agreement or obligation of Circuit City Stores or a Circuit City Subsidiary contained in this Agreement or any of the Ancillary Contracts or in the Deeds and Assignments or the Instruments of Assumption;

(b) any and all liabilities arising out of or relating to the Circuit City Stores Information; or

(c) any failure to perform or satisfy any liabilities attributed to the Circuit City Group (including any Excluded Liabilities).

Section 4.3    Other Liabilities.    This Article IV shall not be applicable to:

(a) any matters covered by the Tax Allocation Agreement, which matters shall be governed by such agreement;

(b) any matters covered by the Employee Benefits Agreement, which matters shall be governed by such agreement; or

(c) any Losses relating to, arising out of or due to any breach of the provisions of any other contract between or among Circuit City Stores or any of its Subsidiaries (other than the Spincos), on the one hand, and any of the Spincos, on the other hand, which shall be governed by the terms of such other contract.

Section 4.4    Indemnification Procedure.

(a) In the event an Indemnified Party shall claim a right to payment pursuant to this Agreement, such Indemnified Party shall send written notice of such claim to the appropriate Indemnifying Party. Such notice shall specify the basis for such claim. As promptly as possible after the Indemnified Party has given such notice, such Indemnified Party and the appropriate Indemnifying Party shall establish the merits and amount of such claim but in no event later than 30 days after receipt of such notice and, within five business days of the final determination of the merits and amount of such claim, the Indemnifying Party shall deliver to the Indemnified Party immediately available funds in an amount equal to such claim as determined hereunder.

F-12

(b) Promptly after receipt by a Circuit City Indemnified Person or a Spinco Indemnified Person (in each case, an “Indemnified Party”) of notice by a third party of any complaint or the commencement of any action or proceeding with respect to which indemnification is being sought hereunder, such Indemnified Party shall notify Circuit City Stores, if the Indemnified Party is a Spinco Indemnified Person, or CarMax, if the Indemnified Party is a Circuit City Indemnified Person (the “Indemnifying Party”), of such complaint or of the commencement of such action or proceeding; provided, however, that the failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party from liability for such claim arising under this Agreement or otherwise, unless the Indemnifying Party is materially prejudiced by such failure to so notify. The Indemnifying Party shall have the right, upon written notice to the Indemnified Party, to assume the defense of such action or proceeding, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of the fees and disbursements of such counsel. In the event, however, that the Indemnifying Party declines or fails to assume the defense of the action or proceeding or to employ counsel reasonably satisfactory to the Indemnified Party, in either case in a timely manner, then such Indemnified Party may employ counsel to represent or defend it in any such action or proceeding and the Indemnifying Party shall pay the reasonable fees and disbursements of such counsel as incurred; provided, however, that the Indemnifying Party shall not be required to pay the fees and disbursements of more than one counsel for all Indemnified Parties in any jurisdiction in any single action or proceeding. In any action or proceeding with respect to which indemnification is being sought hereunder, the Indemnified Party or the Indemnifying Party, whichever is not assuming the defense of such action, shall have the right to participate in such litigation and to retain its own counsel at such party’s own expense. The Indemnifying Party or the Indemnified Party, as the case may be, shall at all times use reasonable efforts to keep the Indemnifying Party or the Indemnified Party, as the case may be, reasonably apprised of the status of the defense of any action, the defense of which it is maintaining and to cooperate in good faith with the Indemnifying Party or the Indemnified Party, as the case may be, with respect to the defense of any such action.

(c) No Indemnified Party may settle or compromise any claim or consent to the entry of any judgment with respect to which indemnification is being sought hereunder without the prior written consent of the Indemnifying Party, unless such settlement, compromise or consent (i) includes an unconditional release of the Indemnifying Party from all liability arising out of such claim, (ii) does not contain an admission of guilt and (iii) does not require the Indemnifying Party to make or forego any payment or forego or take any action. An Indemnifying Party may not, without the prior written consent of the Indemnified Party, settle or compromise any claim or consent to the entry of any judgment with respect to which indemnification is being sought hereunder unless such settlement, compromise or consent (i) includes an unconditional release of the Indemnified Party from all liability arising out of such claim, (ii) requires no payment by the Indemnified Party and (iii) does not contain any equitable order, judgment or term which in any manner affects, restrains or interferes with the business of the Indemnified Party or any of the Indemnified Party’s respective Affiliates and does not contain an admission of guilt.

(d) The amount of any Loss for which indemnification is provided under this Article IV shall be (i) increased to take account of any net Tax cost incurred by the Indemnified Party arising from the receipt or accrual of an indemnity payment hereunder (grossed up for such increase) and (ii) reduced to take into account any net Tax benefit realized by the Indemnified Party arising from incurring or paying such Loss. In computing the amount of any such Tax cost or Tax benefit, the Indemnified Party shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt or accrual of any indemnity payment hereunder or incurring or paying any indemnified Loss. Any indemnity payment hereunder shall initially be made without regard to this Section 4.4(d) and shall be increased or reduced to reflect any such net Tax cost or net Tax benefit only after the Indemnified Party has actually realized such cost or benefit. For purposes of this Agreement, an Indemnified Party shall be deemed to have “actually realized” a net Tax cost or a net Tax benefit to the extent that, and at such time as, the amount of Taxes payable by such Indemnified Party is

F-13

increased above or reduced below, as the case may be, the amount of Taxes that such Indemnified Party would be required to pay but for the receipt or accrual of such indemnity payment of the incurrence or payment of such Loss, as the case may be. The amount of any increase or reduction hereunder shall be adjusted to reflect any final determination with respect to the Indemnified Party’s liability for Taxes, and payments between the Indemnifying Party and the Indemnified Party shall be made to reflect such adjustments if necessary. Any indemnity payment made pursuant to this Article IV shall relate back to the Redemption and shall for tax purposes be treated by the parties as occurring immediately before the Redemption.

(e) The amount which an Indemnifying Party is required to pay to any Indemnified Party under this Article IV shall be reduced, including retroactively, by any insurance proceeds or other amounts actually recovered by such Indemnified Party in reduction of the related Loss, it being understood and agreed that each such party shall use commercially reasonable efforts to collect any such proceeds or other amounts to which it or any of its Affiliates may be entitled, without regard to whether it is the Indemnifying Party hereunder. No Indemnified Party shall be required, however, to collect any such proceeds or other amounts prior to being entitled to indemnification from an Indemnifying Party hereunder. If any Indemnified Party received an indemnity payment in respect of a Loss and subsequently receives insurance proceeds or other amounts in respect of such Loss, then the Indemnified Party shall pay to the Indemnifying Party an amount equal to the difference between (a) the sum of the amount of the indemnity payment and the amount of such proceeds or other amounts actually received and (b) the amount of such Loss, adjusted (at such time as appropriate adjustment can be determined) in each case to reflect any premium adjustment attributable to such claim.

ARTICLE V

INSURANCE MATTERS

Section 5.1    Joint Insurance Arrangements.    Other than as set forth on Schedule 5.1, as of the Redemption Date, all of the Joint Insurance Arrangements shall be discontinued and each of Circuit City Stores and the Circuit City Subsidiaries, on the one hand, and the Spincos, on the other hand, shall be responsible for arranging separate Insurance Arrangements with respect to injuries, losses, liabilities, damages and expenses arising after the Redemption Date with respect to their respective businesses. At the Redemption Date, all prepaid and unused premiums with respect to each discontinued Joint Insurance Arrangement shall be allocated to Circuit City Stores and the Circuit City Subsidiaries, on the one hand, and the Spincos, on the other hand, in the same ratio in which such premiums were allocated by Circuit City Stores to the Circuit City Group and to the CarMax Group prior to the Redemption Date. Following the Redemption Date, any refunds received by the parties with respect to a discontinued Joint Insurance Arrangement shall be allocated to Circuit City Stores and the Circuit City Subsidiaries, on the one hand, and the Spincos, on the other hand, in the same ratio in which premiums payable with respect to such discontinued Joint Insurance Arrangement were allocated by Circuit City Stores to the Circuit City Group and to the CarMax Group prior to the Redemption Date. To the extent any party receives any such refund, the party receiving such refund shall promptly transfer to the other party the portion of such refund to which such other party is entitled. Following the Redemption Date, each of Circuit City Stores and the Circuit City Subsidiaries, on the one hand, and the Spincos, on the other hand, shall pay the premiums on any continuing Joint Insurance Arrangements as set forth on Schedule 5.1.

Section 5.2    Administration; Other Matters.

(a) From and after the Redemption Date, Circuit City Stores shall be responsible for Insurance Administration under the Joint Insurance Arrangements with respect to all liabilities other than the CarMax Group Liabilities and the Spincos shall be responsible for Insurance Administration under the Joint Insurance Arrangements with respect to the CarMax Group Liabilities. The disbursements, out-of-pocket expenses and costs of employees or agents of any party relating to Insurance Administration

F-14

contemplated by this Section 5.2(a) shall be borne by the party incurring such expenses or costs. Insurance Proceeds with respect to claims, costs and expenses under the Joint Insurance Arrangements shall be paid by the Insurer to the party making the Insured Claim thereunder. In the event Circuit City Stores or a Circuit City Subsidiary, on the one hand, or a Spinco, on the other hand, makes an Insured Claim under a Joint Insurance Arrangement, such party shall deliver notice to the other party of such Insured Claim and shall keep the other party periodically updated as to the status of such Insured Claim.

(b) From and after the Redemption Date, Circuit City Stores and the Circuit City Subsidiaries, on the one hand, and each of the Spincos, on the other hand, shall have the right to claim coverage for Insured Claims under each Joint Insurance Arrangement with respect to any claim covered by such Joint Insurance Arrangement as and to the extent that such insurance is available up to the full extent of the applicable limits of liability, if any, of such Joint Insurance Arrangement (and may receive any Insurance Proceeds with respect thereto); provided, however, that, prior to making any Insured Claim under a Joint Insurance Arrangement, Circuit City Stores, a Circuit City Subsidiary or a Spinco, as the case may be, shall be required to have retained a portion of the liability underlying such Insured Claim equal to the amount of the self-insured retention or deductible, if any, of such party with respect to such liability. In the event that the total Insurance Proceeds payable to Circuit City Stores and the Circuit City Subsidiaries and the Spincos under a Joint Insurance Arrangement shall have exhausted the limits of liability, if any, under such Joint Insurance Arrangement, payment of any future claims which are not reimbursed under such Joint Insurance Arrangement as a result of such exhaustion of the limits of liability under such policy shall be the sole responsibility of the party to which such liability is allocated under the terms of this Agreement. The parties agree to use commercially reasonable efforts to maximize available coverage under those Joint Insurance Arrangements applicable to it, and to take all commercially reasonable steps to recover from all other responsible parties in respect of an Insured Claim made thereunder.

Section 5.3    Cooperation; Disagreements.    The parties shall use their commercially reasonable efforts to cooperate with respect to the various insurance matters contemplated by this Agreement. Circuit City Stores shall use its commercially reasonable efforts to assist CarMax in (i) obtaining separate Insurance Arrangements and (ii) enforcing its rights and receiving benefits and privileges under Joint Insurance Arrangements relating to Insured Claims arising prior to the Redemption Date. Any disagreements between the parties under this Article V shall be submitted and resolved in accordance with the provisions of Section 10.1 hereof.

ARTICLE VI

EMPLOYEE MATTERS

Section 6.1     Employee Benefits Agreement.    Prior to or on the Redemption Date, Circuit City Stores and CarMax shall execute the Employee Benefits Agreement (the “Employee Benefits Agreement”) substantially in the form of Exhibit C.

Section 6.2    Non-Solicitation of Employees.    Without the prior written consent of Circuit City Stores, CarMax shall not, and shall cause each of the CarMax Subsidiaries not to, for a period of two years from and after the Redemption Date, either directly or indirectly, solicit for employment any senior or key employee of Circuit City Stores or any Circuit City Subsidiary. Without the prior written consent of CarMax, Circuit City Stores shall not, and shall cause each of the Circuit City Subsidiaries not to, for a period of two years from and after the Redemption Date, either directly or indirectly, solicit for employment any senior or key employee of CarMax or any CarMax Subsidiary. Notwithstanding the foregoing, solicitations of senior or key employees of

F-15

Circuit City Stores or any Circuit City Subsidiary or CarMax or any CarMax Subsidiary will be permitted if such senior or key employees unilaterally (i) approach Circuit City Stores or CarMax, as the case may be, on an unsolicited basis or (ii) respond to a widely-published recruitment advertisement.

ARTICLE VII

BOOKS/RECORDS; OTHER INFORMATION

Section 7.1    Provision of Corporate Records.    Prior to or as promptly as practicable after the Redemption Date, Circuit City Stores and the Circuit City Subsidiaries shall deliver to the applicable Spinco all corporate books and records of the CarMax Group in its possession and copies of the relevant portions of all corporate books and records of Circuit City Stores relating directly and primarily to the business of the CarMax Group, the CarMax Group Assets and the CarMax Group Liabilities, including, without limitation, original corporate minute books, stock ledgers and certificates and the corporate seal of each corporation the capital stock of which is included in the CarMax Group Assets and documentation relating to the CarMax Group Liabilities, including, in each case, all active agreements, active litigation files and government filings. From and after the Redemption Date, all such books, records and copies shall be the property of the respective Spincos. Prior to or as promptly as practicable after the Redemption Date, each Spinco shall deliver to Circuit City Stores or the applicable Circuit City Subsidiary all corporate books and records of the Circuit City Group in its possession and copies of the relevant portions of all corporate books and records of the CarMax Group relating directly and primarily to the Circuit City Group, including, in each case, all active agreements, active litigation files and government filings. From and after the Redemption Date, all such books, records and copies shall be the property of Circuit City Stores or the applicable Circuit City Subsidiary.

Section 7.2    Access to Information; Confidentiality Agreement.    From and after the Redemption Date, each of Circuit City Stores and the Circuit City Subsidiaries, on the one hand, and the Spincos, on the other hand, shall afford to the other and to the other’s representatives reasonable access and duplicating rights, during normal business hours and upon reasonable advance notice, to all information within the possession or control of such party relating to the other party’s business, assets or liabilities or relating to or arising in connection with the relationship between the Circuit City Group and the CarMax Group, insofar as such access is reasonably required for a reasonable purpose, subject to the terms of the confidentiality agreement, dated the date hereof, between Circuit City Stores and CarMax (the “Confidentiality Agreement”) substantially in the form attached hereto as Exhibit D, which the parties shall execute prior to or on the Redemption Date.

Section 7.3    Retention of Records.    Except as otherwise agreed in writing, or as otherwise provided in the Ancillary Contracts, Circuit City Stores and the Circuit City Subsidiaries, on the one hand, and the Spincos, on the other hand, shall comply with the current records retention policy of Circuit City Stores with respect to all information in such party’s possession or under its control relating directly and primarily to the business, assets or liabilities of the other party.

Section 7.4    Cooperation with Respect to Government Reports and Filings.    Circuit City Stores, on the one hand, and CarMax, on the other hand, agree to provide the other or their respective Affiliates, with such cooperation and information as may be reasonably requested by the other in connection with the preparation or filing of any government report or other government filing contemplated by this Agreement or the Ancillary Contracts or in conducting any other government proceeding relating to the business, assets or liabilities of either party or relating to or in connection with the relationship between the Circuit City Group and the CarMax Group on or prior to the Redemption Date. Such cooperation and information shall include, without limitation, promptly forwarding copies of appropriate notices and forms or other communications received from or sent to any

F-16

Governmental Authority which relate to the Circuit City Group, in the case of the Spincos, or the CarMax Group, in the case of Circuit City Stores and the Circuit City Subsidiaries. Each party shall make its employees and facilities available during normal business hours and on reasonable prior notice to provide explanation of any documents or information provided hereunder.

Section 7.5    Certain Limitations with Respect to Information.

(a) Any confidential or proprietary information owned by Circuit City Stores or the Circuit City Subsidiaries, on the one hand, or any of the Spincos, on the other hand, that is provided to the other pursuant to this Agreement or any Ancillary Contract shall be deemed to remain the property of the providing party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such information.

(b) A party providing information hereunder or under any Ancillary Contract shall be entitled to receive from the requesting party the reasonable costs, if any, of creating, gathering and copying such information, to the extent that such costs are incurred for the benefit of the requesting party. Except as may be otherwise specifically provided elsewhere in this Agreement or in any of the Ancillary Contracts, such costs shall be computed solely in accordance with the providing party’s standard methodology and procedures.

(c) No party shall have any liability to any other party in the event that any information exchanged or provided pursuant to this Article VII which is an estimate or forecast, or which is based on an estimate or forecast, is found to be inaccurate, in the absence of willful misconduct by the party providing such information. No party shall have any liability to any other party if any information is destroyed after reasonable best efforts are made by such party to comply with the provisions of Section 7.3 hereof.

(d) The rights and obligations granted under this Article VII are subject to the specific limitations, qualifications or additional provisions on the sharing, exchange or confidential treatment of information set forth in each of the Ancillary Contracts.

Section 7.6    Protective Arrangements.    In the event that any party determines on the advice of its counsel that it is required to disclose any information pursuant to applicable law or receives any demand under lawful process or from any Governmental Authority to disclose or provide information concerning any other party that is subject to the confidentiality provisions hereof, such party shall notify the other party prior to disclosing or providing such information and shall cooperate at the expense of the requesting party in seeking any reasonable protective arrangements requested by such other party. Subject to the foregoing, the Person that received such request may thereafter disclose or provide information to the extent required by such law (as so advised by counsel) or by lawful process or such Governmental Authority.

ARTICLE VIII

OTHER AGREEMENTS

Section 8.1    Corporate Contracts.    Each of the parties hereto agrees to use its commercially reasonable efforts to permit the other party hereto to obtain the benefits of contracts with nationally-based vendors and suppliers utilized by both the Circuit City Group and the CarMax Group prior to the Redemption Date until the expiration of the primary term of such contracts (each such contract, individually, a “Corporate Contract” and, collectively, the “Corporate Contracts”). Each party hereby agrees to cooperate with respect to obtaining favorable prices under such Corporate Contracts by combining or consolidating orders made under such Corporate Contracts during the remainder of the primary term of such Corporate Contracts. Circuit City Stores shall administer these Corporate Contracts and the Spincos shall be responsible for the portions attributable to the CarMax Group or, following the Separation, CarMax of any order or delivery of goods and services received under each Corporate Contract (including costs of administration). Any arrangement under any of the Corporate Contracts relating to employee matters shall be governed by the terms of the Employee Benefits Agreement.

F-17

Section 8.2    Access to Property.

(a) On or prior to the Redemption Date, each of Circuit City Stores and CarMax shall review all instances in which the Circuit City Group has heretofore enjoyed or made use of, whether or not subject to any agreement, contract or formal arrangement, any rights of entry or access or use, rights of ingress and egress, water rights, utility easements or similar rights or benefits relating to the Real Property (the “Real Property Rights”) in connection with the conduct of business by the Circuit City Group in and around the Real Property, and before the date that is six months after the Redemption Date the Spincos agree to execute and deliver such leases, easements, licenses or other instruments as shall be commercially reasonably necessary to vest in Circuit City Stores or the applicable Circuit City Subsidiary, without royalty, fee or other payment by Circuit City Stores or any Circuit City Subsidiary, continued enjoyment of the Real Property Rights.

(b) On or prior to the Redemption Date, each of Circuit City Stores and CarMax shall review all instances in which the CarMax Group has heretofore enjoyed or made use of, whether or not subject to any agreement, contract or formal arrangement, any rights of entry or access or use, rights of ingress and egress, water rights, utility easements or similar rights or benefits relating to the real property of Circuit City Stores (other than the Real Property) (the “Property Rights”) in connection with the conduct of business by the Carmax Group in and around such real property, and before the date that is six months after the Redemption Date Circuit City Stores and the Circuit City Subsidiaries agree to execute and deliver such leases, easements, licenses or other instruments as shall be commercially reasonably necessary to vest in CarMax or the applicable Spinco, without royalty, fee or other payment by CarMax or any Spinco, continued enjoyment of the Property Rights.

Section 8.3    Corporate Name.

(a) The Spincos shall have the right, for a period of 90 days after the Redemption Date, to use any name or trade name, service mark, trade mark or logo which includes the name “Circuit City” or any derivative thereof or similar name. As soon as commercially practicable after the Redemption Date, but in any event within 90 days thereafter, except as mutually agreed in writing by the parties hereto, each Spinco will, at its own expense, remove (or, if necessary, on an interim basis, cover up) any and all exterior signs and other identifiers located on any of property or premises included in the CarMax Group Assets which refer or pertain to Circuit City Stores or any Circuit City Subsidiary or which include any name, logo or other trademark of Circuit City Stores or any Circuit City Subsidiary (other than any CarMax Group Intellectual Property).

(b) As soon as is commercially practicable after the Redemption Date, but in any event within 90 days thereafter, except as mutually agreed in writing by the parties hereto, each Spinco will remove from all letterhead, envelopes, invoices and other communications media of any kind, all references to Circuit City Stores or any Circuit City Subsidiary and any name, logo or other trademark of Circuit City Stores or any Circuit City Subsidiary (other than any CarMax Group Intellectual Property).

Section 8.4    Litigation.

(a) Subject to subsection (c) of this Section 8.4 and except as provided in Section 4.4(c) or otherwise provided in the Tax Allocation Agreement, after the Redemption Date, Circuit City Stores shall have exclusive authority and control over the investigation, prosecution, defense and appeal of all pending Actions not relating primarily to CarMax, the CarMax Group Assets and/or the CarMax Group Liabilities, including, but not limited to, Actions relating to the Transaction Liabilities and the pending Actions listed on Schedule 8.4(a) hereto (each, a “Circuit City Action”), and may settle or compromise, or consent to the entry of any judgment with respect to, any such Circuit City Action without the consent of CarMax.

(b) Subject to subsection (c) of this Section 8.4 and except as provided in Section 4.4(c) or otherwise provided in the Tax Allocation Agreement, following the Redemption Date, CarMax shall have

F-18

exclusive authority and control over the investigation prosecution, defense and appeal of all pending Actions relating primarily to CarMax, the CarMax Group Assets and/or the CarMax Group Liabilities, including, but not limited to, the pending Actions listed on Schedule 8.4(b) hereto (each, a “CarMax Action”), and may settle or compromise, or consent to the entry of any judgment with respect to, any such CarMax Action without the consent of Circuit City Stores.

(c) Except as provided in Section 4.4(c) with respect to an Indemnified Party, but notwithstanding any other provision of this Agreement, if Circuit City Stores or any of its respective directors, officers or employees is named as a party to a CarMax Action or if CarMax or any of its respective directors, officers or employees is named as a party to a Circuit City Action, neither CarMax nor Circuit City Stores, as the case may be, may settle or compromise, or consent to the entry of any judgment with respect to, any such Action without the prior written consent of such other named party (which consent may not be unreasonably withheld), unless such settlement (i) includes a complete release of such other named party and such party’s directors, officers or employees (to the extent such directors, officers or employees are named in such Action) and (ii) does not require such other named party or such party’s directors, officers or employees (to the extent such directors, officer or employees are named in such Action) to admit any liability or make or forego any payment or forego or take any action, Each of CarMax and Circuit City Stores shall cooperate fully with the other and its counsel in the investigation, defense and settlement of any Circuit City Action or CarMax Action.

Section 8.5    Restriction on Competitive Activities.    During the three-year period following the Redemption Date (the “Restriction Period”), Circuit City Stores shall not, directly or indirectly, engage in, invest in, provide financing for or become associated with any venture or entity, whether as principal, partner, joint venturer, member, consultant, advisor, agent or shareholder, that is engaged in the CarMax Business. During the Restriction Period, CarMax shall not, directly or indirectly, engage in, invest in, provide financing for or become associated with any venture or entity, whether as principal, partner, joint venturer, member, consultant, advisor, agent or shareholder, that is engaged in the Circuit City Business. “CarMax Business” shall mean the used-car superstore business utilizing the non-negotiated low price concept as well as the sale of new vehicles under franchise agreements with new vehicle manufacturers in any state (or the District of Columbia) in which CarMax is doing business as a retailer as of the Redemption Date. “Circuit City Business” shall mean the retail sale of consumer electronics, personal computers, entertainment software, including video equipment, audio equipment, mobile electronics, video and security systems, home office products, wireless phones, digital and 35 mm cameras, and a range of accessories in any state (or the District of Columbia) in which Circuit City Stores is doing business as a retailer as of the Redemption Date; provided that the Circuit City Business shall not include any such sale which is incidental to the sale of motor vehicles. The foregoing shall not prohibit Circuit City Stores or CarMax from owning or holding an ownership interest of no more than five percent (5%) of any class of securities of any publicly held corporation or from participating to any degree in an investment fund managed by a third party and not controlled, directly or indirectly, by Circuit City Stores or CarMax, respectively.

Section 8.6    Contingent Lease Payment.    In recognition of Circuit City Stores’ continuing contingent liability on 23 leases previously assigned by Circuit City Stores to a subsidiary of CarMax, on the Closing date and immediately prior to the Separation, CarMax shall make a one-time special dividend payment (the “Special Dividend”) to Circuit City Stores in the amount of $28.4 million. CarMax shall pay the Special Dividend in immediately available funds by wire transfer to the account of Circuit City Stores identified by Circuit City Stores to CarMax at least two business days prior to the Closing date.

Section 8.7    Tax Allocation Agreement.    Prior to or on the Redemption Date, Circuit City Stores and CarMax shall execute the Amended and Restated Tax Allocation Agreement (the “Tax Allocation Agreement”) substantially in the form of Exhibit A.

F-19

Section 8.8    Transition Services Agreement.    Prior to or on the Redemption Date, Circuit City Stores and CarMax shall execute the Transition Services Agreement (the “Transition Services Agreement”) substantially in the form of Exhibit B.

ARTICLE IX

CLOSING

Section 9.1    The closing of the Separation (the “Closing”) will take place at the offices of McGuireWoods LLP, 901 East Cary Street Richmond, Virginia 23219 at 9:00 a.m. on August 1, 2002, unless the parties hereto agree in writing to another time, date and place.

ARTICLE X

DISPUTE RESOLUTION

Section 10.1    Dispute Resolution; Mediation.

(a) Either party may commence the dispute resolution process of this Section 10.1 by giving the other party written notice (a “Dispute Notice”) of any controversy, claim or dispute of whatever nature arising out of or relating to this Agreement or the breach, termination, enforceability or validity thereof (a “Dispute”) which has not been resolved in the normal course of business. The parties shall attempt in good faith to resolve any Dispute by negotiation between executives of each party hereto (“Senior Party Representatives”) who have authority to settle the Dispute and who are at a higher level of management than the persons who have direct responsibility for the administration of this Agreement. Within 15 days after delivery of the Dispute Notice, the receiving party shall submit to the other a written response (the “Response”). The Dispute Notice and the Response shall include (i) a statement setting forth the position of the party giving such notice and a summary of arguments supporting such position and (ii) the name and title of such party’s Senior Party Representative and any other persons who will accompany the Senior Party Representative at the meeting at which the parties will attempt to settle the Dispute. Within 30 days after the delivery of the Dispute Notice, the Senior Party Representatives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the Dispute. The parties shall cooperate in good faith with respect to any reasonable requests for exchanges of information regarding the Dispute or a Response thereto.

(b) If the Dispute has not been resolved within 60 days after delivery of the Dispute Notice, or if the parties fail to meet within 30 days after delivery of the Dispute Notice as hereinabove provided, the parties shall make a good faith attempt to settle the Dispute by mediation pursuant to the provisions of this Section 10.1 before resorting to arbitration contemplated by Section 10.2 or any other dispute resolution procedure that may be agreed by the parties.

(c) All negotiations, conferences and discussions pursuant to this Section 10.1 shall be confidential and shall be treated as compromise and settlement negotiations. Nothing said or disclosed, nor any document produced, in the course of such negotiations, conferences and discussions that is not otherwise independently discoverable shall be offered or received as evidence or used for impeachment or for any other purpose in any current or future arbitration.

(d) Unless the parties agree otherwise, the mediation shall be conducted in accordance with the CPR Institute for Dispute Resolution (“CPR”) Model Procedure for Mediation of Business Disputes in effect on the date of this Agreement by a mediator mutually selected by the parties.

F-20

(e) Within 30 days after the mediator has been selected as provided above, both parties and their respective attorneys shall meet with the mediator for one mediation session of at least four hours, it being agreed that each party representative attending such mediation session shall be a Senior Party Representative with authority to settle the Dispute. If the Dispute cannot be settled at such mediation session or at any mutually agreed continuation thereof, either party may give the other and the mediator a written notice declaring the mediation process at an end.

Section 10.2    Arbitration.    If the Dispute has not been resolved by the dispute resolution process described in either Section 10.1(a) or Section 10.1(e) above, the parties agree that any such Dispute shall be settled by binding arbitration before the American Arbitration Association (“AAA”) in Richmond, Virginia pursuant to the Commercial Rules of the AAA. Any arbitrator(s) selected to resolve the Dispute shall be bound exclusively by the laws of the Commonwealth of Virginia without regard to its choice of law rules. Any decisions of award of the arbitrator(s) will be final and binding upon the parties and may be entered as a judgment by the parties hereto. Any rights to appeal or review such award by any court or tribunal are hereby waived to the extent permitted by law.

Section 10.3    Costs.    The costs of any mediation or arbitration pursuant to this Article X shall be shared equally between the parties.

ARTICLE XI

MISCELLANEOUS

Section 11.1    Termination; Survival.    This Agreement may be terminated, and the obligations of the parties to consummate the transactions contemplated hereunder, including, without limitation, the Separation and the Redemption, may be abandoned, by the Board, in its sole discretion, at any time prior to the date of first mailing of the Notice of Redemption to holders of CarMax Group Stock. Thereafter, this Agreement may be terminated solely upon the issuance by a Governmental Authority of an order, injunction or decree that shall prohibit or prevent the consummation of the Separation and the transactions contemplated hereunder. Notwithstanding the foregoing, the provisions of Article X of this Agreement shall survive any termination of this Agreement.

Section 11.2    Jurisdiction and Forum.    Except as otherwise provided herein, the parties hereto hereby agree that the appropriate forum and venue for any disputes between any of the parties hereto arising out of this Agreement shall be any state or federal court sitting in Richmond, Virginia and each of the parties hereto hereby submits to the personal jurisdiction of any such court. The foregoing shall not limit the rights of any party to obtain execution of judgment in any other jurisdiction.

Section 11.3    Applicable Law.    This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without regard to its conflicts of law rules.

Section 11.4    Notices.    Each notice, communication and delivery under this Agreement shall be made in writing and shall be deemed to have been duly given if delivered by courier or sent by registered or certified mail, postage prepaid, or by facsimile transmission to the parties at the following addresses or at such other addresses as shall be specified by the parties by like notice; provided that a notice of change of address shall be effective only upon receipt thereof:

If to Circuit City Stores or the Circuit City Subsidiaries to:

Circuit City Stores, Inc.

9950 Mayland Drive

Richmond, Virginia 23223-1464

Attn: Michael T. Chalifoux

Fax: (804) 418-8286

F-21

With a copy to:

McGuireWoods LLP

901 East Cary Street

Richmond, Virginia 23219

Attn: Clifford A. Cutchins, IV, Esq.

Fax: (804) 225-5344

and

Simpson Thacher & Bartlett

425 Lexington Avenue

New York, NY 10017

Attn: Raymond W. Wagner, Esq.

Fax: (212) 445-2502

If to the Spincos to:

CarMax, Inc.

4900 Cox Road

Glen Allen, Virginia 23060-3314

Attn: Keith D. Browning

Fax: (804) 967-2978

With a copy to:

McGuireWoods LLP

901 East Cary Street

Richmond, Virginia 23219

Attn: Clifford A. Cutchins, IV, Esq.

Fax: (804) 225-5344

and

Simpson Thacher & Bartlett

425 Lexington Avenue

New York, NY 10017

Attn: Raymond W. Wagner, Esq.

Fax: (212) 445-2502

and

Skadden, Arps, Slate, Meagher & Flom LLP

One Rodney Square

P.O. Box 636

Wilmington, DE 19899

Attn: Robert B. Pincus, Esq.

Fax: 888-329-4133

Section 11.5    Waiver and Amendment.    Any term or provision of this Agreement may be waived in writing at any time by the party that is entitled to the benefits thereof. No amendment of this Agreement shall be effective unless in a writing signed by the parties hereto.

F-22

Section 11.6    Entire Agreement.    This Agreement and the documents contemplated hereby constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and thereof.

Section 11.7    Counterparts.    This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties.

Section 11.8    Construction.    The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated.

Section 11.9    Successors in Interest.    This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, and any reference to a party hereto shall also be a reference to a successor or permitted assigns.

Section 11.10    Number; Gender.    Whenever the context so requires, the singular number shall include the plural and the plural shall include the singular, and the gender of any pronoun shall include the other genders.

Section 11.11    Third-Party Beneficiaries.    Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person, firm or corporation other than the parties hereto, and their respective successors or permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, or result in such person, firm or corporation being deemed a third party beneficiary of this Agreement.

Section 11.12    Severability.    In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

F-23

IN WITNESS WHEREOF, Circuit City Stores and CarMax have executed this Agreement as of the date first above written.

CIRCUIT CITY STORES, INC.
By:	/s/  Philip J. Dunn
Name: Title:	Philip J. Dunn Senior Vice President, Treasurer and Controller

CARMAX, INC.
By:	/s/  W. Austin Ligon
Name: Title:	W. Austin Ligon President

F-24

ANNEX G

FAIRNESS OPINION

[Letterhead of Morgan Stanley & Co. Incorporated]

May 21, 2002

Board of Directors

Circuit City Stores, Inc.

9950 Mayland Drive

Richmond, Virginia 23233

Members of the Board:

We understand that Circuit City Stores, Inc. (“Circuit City”) and CarMax, Inc. (“CarMax”) propose to enter into a separation agreement, substantially in the form attached as Annex F to the Preliminary Proxy Statement/Prospectus (the “Preliminary Proxy Statement/Prospectus”) contained in the Registration Statement on Form S-4 (File No. 333-85240) filed by CarMax with the Securities and Exchange Commission on March 29, 2002 and amended on May 14, 2002 (the “Separation Agreement”), which provides for, among other things, the proposed separation of the automotive retailing business of Circuit City (the “CarMax Group”) from Circuit City. The common stock of Circuit City currently consists of two series that are intended to reflect the performance of Circuit City’s two businesses: (i) the Circuit City Group common stock, par value $0.50 per share (the “Circuit City Group Common Stock”) which is intended to reflect the performance of the Circuit City Group, including its consumer electronics business and store-related operations, its retained interest in the CarMax Group and its investment in Digital Video Express (which has been discontinued) (together, the “Circuit City Group”) and (ii) the CarMax Group common stock, par value $0.50 per share (the “CarMax Group Common Stock”) which is intended to reflect the performance of the CarMax Group’s operations.

Pursuant to the Separation Agreement, the separation would be effected in two simultaneous steps: (i) the redemption (the “Redemption”) of each outstanding share of CarMax Group Common Stock in exchange for one share of CarMax common stock, par value $0.50 per share (the “CarMax Common Stock”) and (ii) the distribution to the holders of Circuit City Group Common Stock, as a dividend on a pro-rata basis, of shares of CarMax Common Stock equal in total number to the shares of CarMax Group Common Stock reserved for issuance to the holders of Circuit City Group Common Stock or otherwise for the benefit of the Circuit City Group (the “Distribution”). Immediately after the Redemption and Distribution, the businesses, assets and liabilities of the CarMax Group would be owned and operated by CarMax as an independent, separately traded public company. Following the Redemption, the CarMax Group Common Stock would cease to exist, and the businesses, assets and liabilities of the Circuit City Group would continue to be owned by the holders of the Circuit City Group Common Stock. Circuit City Group Common Stock would be redesignated as common stock, par value $0.50 per share, of Circuit City (the “Circuit City Common Stock”). The Separation Agreement also provides for, among other things, a payment of a special dividend (the “Special Dividend”) by CarMax to Circuit City in recognition of Circuit City’s continuing contingent liability on 23 leases assigned by Circuit City to a subsidiary of CarMax (together, the “Leased Properties”). For the purposes of this letter, the Redemption, the Distribution and payment of the Special Dividend shall collectively be referred to as the “Separation.” The terms and conditions of the Separation are more fully described in the Separation Agreement and the Preliminary Proxy Statement/Prospectus.

You have asked for our opinion as to whether the financial effects, taken as a whole, of the proposed Separation as described in the Separation Agreement and the Preliminary Proxy Statement/Prospectus are fair, from a financial point of view, to the holders of Circuit City Group Common Stock and the holders of CarMax Group Common Stock.

G-1

For purposes of the opinion set forth herein, we have, among other things:

(i) reviewed certain publicly available financial statements and other business and financial information of Circuit City, the Circuit City Group and the CarMax Group;

(ii) reviewed certain internal financial statements and other financial and operating data concerning Circuit City, the Circuit City Group and the CarMax Group prepared by management of Circuit City, the Circuit City Group and the CarMax Group, respectively;

(iii) reviewed certain financial forecasts prepared by the managements of the Circuit City Group and the CarMax Group, respectively;

(iv) reviewed information relating to certain strategic, financial and operational benefits anticipated from the Separation, prepared by the managements of the Circuit City Group and the CarMax Group, respectively;

(v) discussed with senior executives of the Circuit City Group the past and current operations and financial condition and the prospects of the Circuit City Group, including information relating to certain strategic, financial and operational benefits anticipated from the Separation;

(vi) discussed with senior executives of the CarMax Group the past and current operations and financial condition and the prospects of the CarMax Group, including information relating to certain strategic, financial and operational benefits anticipated from the Separation;

(vii) discussed with senior executives of the Circuit City Group and the CarMax Group the strategic and structural rationales for the Separation;

(viii) reviewed the pro forma impact of the Separation on Circuit City’s and the CarMax’s earnings per share;

(ix) reviewed the reported prices and trading activity for the Circuit City Group Common Stock and the CarMax Group Common Stock;

(x) compared the financial performance of the CarMax Group with that of certain other comparable companies with publicly traded securities;

(xi) compared the financial performance of Circuit City (excluding the CarMax Group) with that of certain other comparable companies with publicly traded securities;

(xii) reviewed certain information relating to the Leased Properties, including, but not limited to, analyses prepared by management of the Circuit City Group and the CarMax Group and analyses and real estate appraisals prepared by certain third parties;

(xiii) discussed with management of Circuit City and the CarMax Group certain alternatives with respect to the Leased Properties and their discussions relating to the Special Dividend;

(xiv) discussed with certain third parties the possibility of insuring Circuit City from liability arising from Circuit City’s obligations associated with the Leased Properties;

(xv) reviewed the signed Internal Revenue Service private letter ruling, dated April 10, 2002 (PLR-105619-02) (the “Private Letter Ruling”) stating, among other things, that the Separation will not be a taxable transaction to Circuit City, CarMax or their respective shareholders under U.S. federal income tax laws (except to the extent of any cash distributed in lieu of fractional shares of CarMax);

(xvi) participated in discussions among representatives of Circuit City, CarMax and their legal advisors;

(xvii) reviewed the Separation Agreement, the Preliminary Proxy Statement/Prospectus and certain documents related thereto; and

(xviii) performed such other analyses and considered such other factors as we have deemed appropriate.

G-2

We have assumed and relied upon, without independent verification, the accuracy and completeness of the information supplied or otherwise made available to us by Circuit City, the Circuit City Group and the CarMax Group for the purposes of this opinion. With respect to financial forecasts, including information relating to certain strategic, financial and operational benefits anticipated from the Separation, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Circuit City Group and the CarMax Group. We have not made any independent valuation or appraisal of the assets or liabilities of the Circuit City Group or the CarMax Group, nor have we been furnished with any such appraisals; however, we have reviewed certain analyses prepared by management of Circuit City and the CarMax Group and analyses and real estate appraisals prepared by certain third parties and have relied without independent verification upon such analyses and appraisals for the purposes of this opinion. We have also relied upon the assessment of management of Circuit City and the CarMax Group of (i) alternatives with respect to the Leased Properties, including Circuit City’s ability to extricate itself from the obligations associated with the Leased Properties and the potential costs associated therewith and Circuit City’s ability to obtain third party insurance related to such obligations, (ii) the Special Dividend as the best alternative practicable with respect to the Leased Properties, (iii) the amount of the Special Dividend, and (iv) the tax consequences (or lack thereof) associated with the Special Dividend. In rendering our opinion, we did not analyze the impact to Circuit City or CarMax in the event that Circuit City defaults on the leases and thereby minimizes its loss in the case of a default by CarMax. We have assumed that the Separation will be consummated in accordance with the terms set forth in the Separation Agreement, without waiver, amendment or modification of any material term, condition or agreement set forth therein. We have also assumed that the Separation Agreement, and the other related documents, when executed will conform to the drafts reviewed by us in all respects material to our analyses.

We have further relied upon the Private Letter Ruling and have assumed that the Separation will not be a taxable transaction to Circuit City, CarMax or their respective shareholders under U.S. federal income tax laws (except to the extent of any cash distributed in lieu of fractional shares of CarMax). We have further assumed the correctness of the conclusions set forth in such ruling. We have further assumed that the Separation will comply with all applicable laws, except for any noncompliance with such other applicable laws that would not have a material adverse effect on Circuit City or CarMax.

In rendering our opinion, we have, with your consent, not considered the effect of any terms or arrangements relating to the Separation (other than as set forth in the second paragraph of this letter or as described in the Preliminary Proxy Statement/Prospectus), including the terms of any tax, employee benefits or other similar agreement or arrangement, or any amendment or modification to any existing such agreement or arrangement, except that you have informed us and we have assumed that (i) the existing tax consolidation between Circuit City and CarMax will be terminated as of the date of the Separation and (ii) the effects of such termination will be as represented to us by the respective managements of Circuit City and CarMax. In addition, in rendering our opinion, we have not taken into account the effects of the 10% mark-up for certain costs and services currently allocated at cost to the CarMax Group by Circuit City. We have not been requested to opine as to, and our opinion does not in any manner address, the solvency of Circuit City or CarMax after giving effect to the Separation. Further, we have not been requested to opine as to, and our opinion does not in any manner address, Circuit City’s underlying business decision to proceed with or effect the proposed Separation or the manner of such Separation. We did not participate in the negotiation of any terms of the Separation Agreement, including, without limitation, the amount of the Special Dividend. We note that we express no opinion as to (i) whether the terms of the Separation are the most favorable terms that could have been obtained by either the holders of Circuit City Group Common Stock or the CarMax Group Common Stock or (ii) the relative fairness of the financial effects of the proposed Separation to the holders of Circuit City Group Common Stock or the CarMax Group Common Stock. You have not authorized us to solicit, and we have not solicited, any indications of interest or proposals for the acquisition of, or any business combination or extraordinary transaction involving, either the stock or assets of Circuit City, the Circuit City Group or the CarMax Group, nor have we made any determination as to whether any such indications of interest or proposals could be obtained, if solicited.

G-3

Our opinion is rendered on the basis of securities markets, economic and general business and financial conditions prevailing as of the date hereof and the conditions and prospects, financial and otherwise, of the Circuit City Group and the CarMax Group as they are represented to us as of the date hereof or as they were reflected in the information and documents reviewed by us. Our opinion assumes that the Separation is completed on the basis set forth in the first and second paragraphs of this letter and that the shares of Circuit City Common Stock and CarMax Common Stock are fully and widely distributed among investors and are subject only to normal trading activity. We note that trading in the Circuit City Group Common Stock and the CarMax Group Common Stock for a period commencing with the public announcement of the Separation and, with respect to Circuit City Common Stock and CarMax Common Stock, continuing for a time following completion of the Separation, may involve a redistribution of such securities among Circuit City’s and CarMax’s shareholders and other investors and, accordingly, during such period, such securities may trade at prices below those at which they traded prior to the public announcement of the Separation and those at which they would trade on a fully distributed basis after the Separation. The estimation of market trading prices of newly distributed securities is subject to uncertainties and contingencies, all of which are difficult to predict and beyond the control of the firm making such estimates. In addition, the market prices of such securities will fluctuate with changes in market conditions, the conditions and prospects, financial and otherwise, of Circuit City and CarMax, and other factors which generally influence the prices of securities. In rendering our opinion, we are not opining as to the price at which the Circuit City Group Common Stock, the CarMax Group Common Stock, the Circuit City Common Stock or the CarMax Common Stock will actually trade at any time.

We have acted as financial advisor to the Board of Directors of Circuit City in connection with this transaction and will receive a fee for our services, which fee is contingent upon the completion of the Separation. In the past, Morgan Stanley & Co. Incorporated (“Morgan Stanley”) and its affiliates have provided financial advisory and financing services for Circuit City, including in respect of the Circuit City Group and the CarMax Group, and have received fees for the rendering of these services. In the ordinary course of business, Morgan Stanley or its affiliates may from time to time trade in the securities of or indebtedness of Circuit City for its own account, the accounts of investment funds and other clients under the management of Morgan Stanley and for the accounts of its customers and, accordingly, may at any time hold a long or short position in these securities or indebtedness.

It is understood that this letter is directed to the Board of Directors of Circuit City and may not be disclosed without our prior written consent. In addition, Morgan Stanley expresses no opinion or recommendation as to how the holders of the Circuit City Group Common Stock or holders of the CarMax Group Common Stock should vote at the special meeting of such holders held in connection with the Separation.

Based upon and subject to the foregoing, we are of the opinion on the date hereof that the financial effects, taken as a whole, of the proposed Separation as described in the Separation Agreement and the Preliminary Proxy Statement/Prospectus are fair, from a financial point of view, to the holders of Circuit City Group Common Stock and the holders of the CarMax Group Common Stock.

Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By:	/S/  KEITH HENNESSEY
	Keith Hennessey Managing Director

G-4

ANNEX H

CARMAX, INC.

ANNUAL PERFORMANCE-BASED BONUS PLAN

1.    Purpose.    The purpose of the CarMax, Inc. Annual Performance-Based Bonus Plan (the “Plan”) is to provide an annual performance based incentive for executive officers who are in a position to contribute materially to the success of the Company and its Subsidiaries.

2.    Definitions.

(a)    “Award” means an award made pursuant to the Plan.

(b)    “Award Agreement” means the agreement entered into between the Company and a Participant, setting forth the terms and conditions applicable to an Award granted to the Participant.

(c)    “Board” means the Board of Directors of the Company.

(d)    “Change of Control” means the occurrence of either of the following events: (i) a third person, including a “group” as defined in Section 13(d)(3) of the Act, becomes, or obtains the right to become, the beneficial owner of Company securities having 20% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors to the Board of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business); or (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, the persons who were directors of the Company before such transactions shall cease to constitute a majority of the Board or of the board of directors of any successor to the Company.

(e)    “Code” means the Internal Revenue Code of 1986, as amended.

(f)    “Code Section 162(m) Award” means an Award intended to satisfy the requirements of Code Section 162(m) and designated as such in an Award Agreement.

(g)    “Committee” means the committee appointed by the Board as described under Section 4.

(h)    “Company” means CarMax, Inc., a Virginia corporation.

(i)    “Covered Employee” means a covered employee within the meaning of Code Section 162(m)(3).

(j)    “Executive Employee” means all executive officers (as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as amended) of the Company (or any Parent or Subsidiary of the Company, whether now existing or hereafter created or acquired).

(k)    “Parent” means, with respect to any corporation, a parent of that corporation within the meaning of Code Section 424(e).

(l)    “Participant” means an Executive Employee selected from time to time by the Committee to participate in the Plan.

(m)    “Performance Adjustment” means the percentage(s), as set forth in an award schedule, that will, when multiplied by a Participant’s Target Bonus, determine the amount of a Participant’s Award.

(n)    “Performance Criteria” means the criteria selected by the Committee to measure performance for a Plan Year from among one or more of the following: (i) Pre-tax earnings, as shown in the Company’s annual report to shareholders, calculated in accordance with generally accepted accounting principles consistently applied by the Company; and (ii) Earnings per share, as shown in the Company’s annual report to shareholders, calculated in accordance with generally accepted accounting principles consistently applied by the Company.

H-1

(o)    “Performance Goal” means one or more levels of performance as to each Performance Criteria, as established by the Committee, that will result in the Performance Adjustment that is established by the Committee for each such level of performance.

(p)    “Plan Year” means the fiscal year of the Company.

(q)    “Retirement” means, with respect to a Participant, the earliest date on which the Participant is eligible to retire under any qualified Code Section 401(a) plan of the Company, or, if there is no such plan, age 65.

(r)    “Subsidiary” means, with respect to any corporation, a subsidiary of that corporation within the meaning of Code Section 424(f).

(s)    “Target Bonus” means the bonus payable to a Participant if there is a 100-percent Performance Adjustment for each Performance Criteria.

3.     Eligibility.    All present and future Executive Employees shall be eligible to receive Awards under the Plan. The Committee shall have the power and complete discretion to select eligible Executive Employees to receive Awards and to determine for each Participant the terms and conditions and the amount of each Award.

4. Awards.

(a)    Each Award shall be evidenced by an Award Agreement setting forth the Performance Goals for each Performance Criteria, the Target Bonus, the maximum bonus payable and such other terms and conditions applicable to the Award, as determined by the Committee, not inconsistent with the terms of the Plan. Anything else in this Plan to the contrary notwithstanding, the aggregate maximum amount payable under the Plan to any Participant in any Plan Year shall be the lesser of 200 percent of the Participant’s base salary or $2,000,000. In the event of any conflict between an Award Agreement and the Plan, the terms of the Plan shall govern.

(b)    The Committee shall establish the Performance Goals for the Company and/or its Subsidiaries each Plan Year. The Committee shall also determine the extent to which each Performance Criteria shall be weighted in determining Awards. The Committee may vary the Performance Criteria, Performance Goals and weightings from Participant to Participant, Award to Award and Plan Year to Plan Year. The Committee may increase, but not decrease, any Performance Goal during a Plan Year.

(c)    The Committee shall establish for each Award the percentage of the Target Bonus for such Participant payable at specified levels of performance, based on the Performance Goal for each Performance Criteria and the weighting established for such criteria. The Award payable to any Participant may range from zero (0) to two hundred percent of the Participant’s Target Bonus, depending upon whether, or the extent to which, the Performance Goals have been achieved. All such determinations regarding the achievement of any Performance Goals will be made by the Committee; provided, however, that the Committee may not increase during a Plan Year the amount of the Award that would otherwise be payable upon achievement of the Performance Goal or Goals.

(d)    The actual Award for a Participant will be calculated by multiplying the Participant’s Target Bonus by the Performance Adjustments in accordance with the Award. All calculations of actual Awards shall be made by the Committee.

(e)    Awards will be paid, in a lump sum cash payment, as soon as practicable after the close of the Plan Year for which they are earned; provided, however, that no Awards shall be paid except to the extent that the Committee has certified in writing that the Performance Goals have been met. Notwithstanding the foregoing provisions of this Section 4(e), the Committee shall have the right to allow Participants to elect to defer the payment of Awards subject to such terms and conditions as the Committee may determine.

H-2

(f)    Whenever payments under the Plan are to be made, the Company and/or the Subsidiary will withhold therefrom an amount sufficient to satisfy any applicable governmental withholding tax requirements related thereto.

(g)    Nothing contained in the Plan will be deemed in any way to limit or restrict the Company, its Subsidiaries, or the Committee from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect.

5.     Administration.    The Plan shall be administered by a Committee, which shall be appointed by the Board, consisting of not less than two members of the Board. Subject to paragraph (d) below, the Committee shall be the Compensation and Personnel Committee unless the Board shall appoint another Committee to administer the Plan. The Committee shall have general authority to impose any limitation or condition upon an Award the Committee deems appropriate to achieve the objectives of the Award and the Plan and, in addition, and without limitation and in addition to powers set forth elsewhere in the Plan, shall have the following specific authority:

(a)    The Committee shall have the power and complete discretion to determine (i) which Executive Employees shall receive an Award and the nature of the Award, (ii) the amount of each Award, (iii) the time or times when an Award shall be granted, (iv) whether a disability exists, (v) the terms and conditions applicable to Awards, and (vi) any additional requirements relating to Awards that the Committee deems appropriate.

(b)    The Committee may adopt rules and regulations for carrying out the Plan. The interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive. The Committee may consult with counsel, who may be counsel to the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel.

(c)    A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members, and any action so taken shall be fully effective as if it had been taken at a meeting.

(d)    All members of the Committee must be “outside directors” as described in Code Section 162(m).

(e)    The Board from time to time may appoint members previously appointed and may fill vacancies, however caused, in the Committee.

(f)    As to any Code Section 162(m) Awards, it is the intent of the Company that this Plan and any Code Section 162(m) Awards hereunder satisfy, and be interpreted in a manner that satisfy, the applicable requirements of Code Section 162(m). If any provision of this Plan or if any Code Section 162(m) Award would otherwise conflict with the intent expressed in this Section 4(f), that provision to the extent possible shall be interpreted so as to avoid such conflict. To the extent of any remaining irreconcilable conflict with such intent, such provision shall be deemed void as applicable to Covered Employees. Nothing herein shall be interpreted to preclude a Participant who is or may be a Covered Employee from receiving an Award that is not a Code Section 162(m) Award.

(g)    The Committee’s determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. Without limiting the generality of the foregoing, the Committee will be entitled, among other things, to make non-uniform and selective determinations and to establish non-uniform and selective Performance Criteria, Performance Goals, the weightings thereof, and Target Bonuses.

6.     Change of Control.    In the event of a Change of Control of the Company, in addition to any action required or authorized by the terms of an Award Agreement, the Committee may, in its sole discretion, take any of the following actions as a result, or in anticipation, of any such event to assure fair and equitable treatment

H-3

of Participants: (a) accelerate time periods for purposes of vesting in, or receiving any payment with regard to, any outstanding Award, or (b) make adjustments or modifications to outstanding Awards as the Committee deems appropriate to maintain and protect the rights and interests of Participants following such Change of Control. Any such action approved by the Committee shall be conclusive and binding on the Company and all Participants.

7.    Nontransferability of Awards.    An Award shall not be assignable or transferable by the Participant except by will or by the laws of descent and distribution.

8.    Termination, Modification, Change.    If not sooner terminated by the Board, this Plan shall terminate at the close of business on February 29, 2004. No Awards shall be granted under the Plan after its termination. The Board may terminate the Plan or may amend the Plan in such respects as it shall deem advisable; provided that, if and to the extent required by the Code, no change shall be made that changes the Performance Criteria, or materially increases the maximum potential benefits for Participants under the Plan, unless such change is authorized by the shareholders of the Company. Notwithstanding the foregoing, the Board may unilaterally amend the Plan and Awards as it deems appropriate to cause Awards to meet the requirements of Code Section 162(m), and regulations thereunder. Except as provided in the preceding sentence, a termination or amendment of the Plan shall not, without the consent of the Participant, adversely affect a Participant’s rights under an Award previously granted to him.

9.    Unfunded Plan.    The Plan shall be unfunded. No provision of the Plan or any Award Agreement will require the Company or its Subsidiaries, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor will the Company or its Subsidiaries maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Participants will have no rights under the Plan other than as unsecured general creditors of the Company and its Subsidiaries, except that insofar as they may have become entitled to payment of additional compensation by performance of services, they will have the same rights as other employees under generally applicable law.

10.    Liability of Company.    Any liability of the Company or a Subsidiary to any Participant with respect to an Award shall be based solely upon contractual obligations created by the Plan and the Award Agreement. Neither the Company nor a Subsidiary, nor any member of the Board or of the Committee, nor any other person participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, shall have any liability to any party for any action taken or not taken in good faith under the Plan. Status as an eligible Executive Employee shall not be construed as a commitment that any Award will be made under this Plan to such eligible Executive Employee or to eligible Executive Employees generally. Nothing contained in this Plan or in any Award Agreement (or in any other documents related to this Plan or to any Award or Award Agreement) shall confer upon any Executive Employee or Participant any right to continue in the employ or other service of the Company or a Subsidiary or constitute any contract or limit in any way the right of the Company or a Subsidiary to change such person’s compensation or other benefits.

11.    Interpretation.    If any term or provision contained herein will to any extent be invalid or unenforceable, such term or provision will be reformed so that it is valid, and such invalidity or unenforceability will not affect any other provision or part hereof. The Plan, the Award Agreements and all actions taken hereunder or thereunder shall be governed by, and construed in accordance with, the laws of the Commonwealth of Virginia without regard to the conflict of law principles thereof.

12. Effective Date of the Plan.

(a)    The Plan shall be effective as of date the Company is separated from Circuit City Stores, Inc. and shall be submitted to the shareholders of Circuit City Stores, Inc. for approval prior to the separation. No Award shall be payable to a Covered Employee until the Plan has been approved by the shareholders.

H-4

(b)    As of the date of separation between the Company and Circuit City Stores, Inc., this Plan shall assume obligations, including outstanding awards for the current Fiscal Year, from the Circuit City Stores, Inc. Annual Performance-Based Bonus Plan, to the extent provided in an agreement between the Company and Circuit City Stores, Inc.

CARMAX, INC.

By:                                                                                                  

H-5

ANNEX I

CARMAX, INC.

2002 STOCK INCENTIVE PLAN

1.    Purpose.    The purpose of this CarMax, Inc. 2002 Stock Incentive Plan (the “Plan”) is to further the long term stability and financial success of CarMax, Inc. (the “Company”) by attracting and retaining key employees of the Company through the use of stock incentives. It is believed that ownership of Company Stock will stimulate the efforts of those employees upon whose judgment and interest the Company is and will be largely dependent for the successful conduct of its business. It is also believed that Incentive Awards granted to employees under this Plan will strengthen their desire to remain with the Company and will further the identification of those employees’ interests with those of the Company’s shareholders.

2.    Definitions.    As used in the Plan, the following terms have the meanings indicated:

(a)    “Act” means the Securities Exchange Act of 1934, as amended.

(b)    “Applicable Withholding Taxes” means the minimum aggregate amount of federal, state and local income and payroll taxes that the Company is required by applicable law to withhold in connection with any Incentive Award.

(c)    “Board” means the Board of Directors of the Company.

(d)    “Change of Control” means the occurrence of either of the following events: (i) a third person, including a “group” as defined in section 13(d)(3) of the Act, becomes, or obtains the right to become, the beneficial owner of Company securities having 20% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors to the Board of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business); or (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, the persons who were directors of the Company before such transactions shall cease to constitute a majority of the Board or of the board of directors of any successor to the Company.

(e)    “Code” means the Internal Revenue Code of 1986, as amended. A reference to any provision of the Code shall include reference to any successor or replacement provision of the Code.

(f)    “Committee” means the committee appointed by the Board as described under Section 14.

(g)    “Company” means CarMax, Inc., a Virginia corporation.

(h)    “Company Stock” means the common stock of the Company. In the event of a change in the capital structure of the Company, the shares resulting from such a change shall be deemed to be Company Stock within the meaning of the Plan.

(i)    “Date of Grant” means the date on which an Incentive Award is granted by the Committee.

(j)    “Disability” or “Disabled” means, as to an Incentive Stock Option, a Disability within the meaning of Code section 22(e)(3). As to all other forms of Incentive Awards, the Committee shall determine whether a Disability exists and such determination shall be conclusive.

(k)    “Fair Market Value” means, for any given date, the fair market value of the Company Stock as of such date, as determined by the Committee based on the then prevailing prices of the Company Stock on the exchange on which it generally has the greatest trading volume.

(l)    “Incentive Award” means, collectively, the award of an Option, Stock Appreciation Right, or Restricted Stock under the Plan.

(m)    “Incentive Stock Option” means an Option intended to meet the requirements of, and qualify for favorable federal income tax treatment under, Code section 422.

I-1

(n)    “Mature Shares” means shares of Company Stock for which the holder thereof has good title, free and clear of all liens and encumbrances and which such holder either (i) has held for at least six (6) months or (ii) has purchased on the open market.

(o)    “Nonstatutory Stock Option” means an Option that does not meet the requirements of Code section 422 or, even if meeting the requirements of Code section 422, is not intended to be an Incentive Stock Option and is so designated.

(p)    “Option” means a right to purchase Company Stock granted under Section 7 of the Plan, at a price determined in accordance with the Plan.

(q)    “Parent” means, with respect to any corporation, a parent of that corporation within the meaning of Code section 424(e).

(r)    “Participant” means any employee who receives an Incentive Award under the Plan.

(s)    “Reload Feature” means a feature of an Option described in a Participant’s stock option agreement that authorizes the automatic grant of a Reload Option in accordance with the provisions of Section 9(e).

(t)    “Reload Option” means an Option automatically granted to a Participant equal to the number of shares of Mature Shares delivered by the Participant in payment of the exercise price of an Option having a Reload Feature.

(u)    “Restricted Stock” means Company Stock awarded upon the terms and subject to the restrictions set forth in Section 6.

(v)    “Restricted Stock Award” means an award of Restricted Stock granted under the Plan.

(w)    “Rule 16b-3” means Rule 16b-3 adopted pursuant to section 16(b) of the Act. A reference in the Plan to Rule 16b-3 shall include a reference to any corresponding rule (or number redesignation) of any amendments to Rule 16b-3 adopted after the effective date of the Plan’s adoption.

(x)    “Stock Appreciation Right” means a right to receive amounts from the Company awarded upon the terms and subject to the restrictions set forth in Section 8.

(y)    “Subsidiary” means, with respect to any corporation, a subsidiary of that corporation within the meaning of Code section 424(f).

(z)    “10% Shareholder” means a person who owns, directly or indirectly, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company. Indirect ownership of stock shall be determined in accordance with Code section 424(d).

3.    General.    Incentive Awards may be granted under the Plan in the form of Options, Stock Appreciation Rights, and Restricted Stock. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options. The provisions of the Plan referring to Rule 16b-3 shall apply only to Participants who are subject to section 16 of the Act.

4.    Stock.    Subject to Section 13 of the Plan, there shall be reserved for issuance under the Plan an aggregate of 10,000,000 shares of Company Stock, which shall be authorized, but unissued shares. Subject to Section 13 of the Plan, no more than 1,500,000 shares of Company Stock may be allocated to the Incentive Awards that are granted to any one employee during any single calendar year. Shares of Company Stock that have not been issued under the Plan and that are allocable to Incentive Awards or portions thereof that expire or otherwise terminate unexercised may again be subjected to an Incentive Award under the Plan. Similarly, if any shares of Restricted Stock issued pursuant to the Plan are reacquired by the Company as a result of a forfeiture of such shares pursuant to the Plan, such shares may again be subjected to an Incentive Award under the Plan. For purposes of determining the number of shares of Company Stock that are available for Incentive Awards under the Plan, such number shall include the number of shares of Company Stock under an Incentive Award surrendered by a Participant or retained by the Company in payment of Applicable Withholding Taxes.

I-2

5.    Eligibility.

(a)    All present and future employees of the Company (or any Parent or Subsidiary of the Company, whether now existing or hereafter created or acquired) shall be eligible to receive Incentive Awards under the Plan. The Committee shall have the power and complete discretion, as provided in Section 14, to select which employees shall receive Incentive Awards and to determine for each such Participant the terms and conditions, the nature of the award and the number of shares to be allocated to each Participant as part of each Incentive Award.

(b)    The grant of an Incentive Award shall not obligate the Company or any Parent or Subsidiary of the Company to pay a Participant any particular amount of remuneration, to continue the employment of the Participant after the grant or to make further grants to the Participant at any time thereafter.

6.    Restricted Stock Awards.

(a)    Whenever the Committee deems it appropriate to grant a Restricted Stock Award, notice shall be given to the Participant stating the number of shares of Restricted Stock for which the Restricted Stock Award is granted and the terms and conditions to which the Restricted Stock Award is subject. This notice may be given in writing or in electronic form and shall be the award agreement between the Company and the Participant. A Restricted Stock Award may be made by the Committee in its discretion without cash consideration.

(b)    Restricted Stock issued pursuant to the Plan shall be subject to the following restrictions:

(i)    None of such shares may be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered or disposed of until the restrictions on such shares shall have lapsed or shall have been removed pursuant to paragraph (d) or (e) below.

(ii)    The restrictions on such shares must remain in effect and may not lapse for a period of three years beginning on the Date of Grant, except as provided under paragraph (d) or (e) in the case of Disability, retirement, death or a Change in Control.

(iii)    If a Participant ceases to be employed by the Company or a Parent or Subsidiary of the Company, the Participant shall forfeit to the Company any shares of Restricted Stock, the restrictions on which shall not have lapsed or shall not have been removed pursuant to paragraph (d) or (e) below, on the date such Participant shall cease to be so employed.

(iv)     The Committee may establish such other restrictions on such shares that the Committee deems appropriate, including, without limitation, events of forfeiture.

(c)     Upon the acceptance by a Participant of a Restricted Stock Award, such Participant shall, subject to the restrictions set forth in paragraph (b) above, have all the rights of a shareholder with respect to the shares of Restricted Stock subject to such Restricted Stock Award, including, but not limited to, the right to vote such shares of Restricted Stock and the right to receive all dividends and other distributions paid thereon. Certificates representing Restricted Stock shall bear a legend referring to the restrictions set forth in the Plan and the Participant’s award agreement. If shares of Restricted Stock are issued without certificates, notice of the restrictions set forth in the Plan and the Participant’s Award Agreement must be given to the shareholder in the manner required by law.

(d)     The Committee shall establish as to each Restricted Stock Award the terms and conditions upon which the restrictions set forth in paragraph (b) above shall lapse. Such terms and conditions may include, without limitation, the lapsing of such restrictions as a result of the Disability, death or retirement of the Participant or the occurrence of a Change of Control.

(e)     Notwithstanding the forfeiture provisions of paragraph (b)(iii) above, the Committee may at any time, in its sole discretion, accelerate the time at which any or all restrictions will lapse or remove any and all such restrictions.

I-3

(f)    Each Participant shall agree at the time his Restricted Stock Award is granted, and as a condition thereof, to pay to the Company or make arrangements satisfactory to the Company regarding the payment to the Company of, Applicable Withholding Taxes. Until such amount has been paid or arrangements satisfactory to the Company have been made, no stock certificates free of a legend reflecting the restrictions set forth in paragraph (b) above shall be issued to such Participant. If Restricted Stock is being issued to a Participant without the use of a stock certificate, the restrictions set forth in paragraph (b) shall be communicated to the shareholder in the manner required by law. As an alternative to making a cash payment to the Company to satisfy Applicable Withholding Taxes, if the grant so provides, or the Committee by separate action so permits, the Participant may elect to (i) deliver Mature Shares or (ii) have the Company retain that number of shares of Company Stock that would satisfy all or a specified portion of the Applicable Withholding Taxes. Any such election shall be made only in accordance with procedures established by the Committee. The Committee has the express authority to change any election procedure it establishes at any time.

7.    Stock Options.

(a)    Whenever the Committee deems it appropriate to grant Options, notice shall be given to the eligible employee stating the number of shares for which Options are granted, the Option price per share, whether the Options are Incentive Stock Options or Nonstatutory Stock Options, the extent, if any, to which Stock Appreciation Rights are granted, and the conditions to which the grant and exercise of the Options are subject. This notice may be given in writing or in electronic form and shall be the stock option agreement between the Company and the eligible employee.

(b)    The exercise price of shares of Company Stock covered by an Incentive Stock Option shall be not less than 100% of the Fair Market Value of such shares on the Date of Grant; provided that if an Incentive Stock Option is granted to an employee who, at the time of the grant, is a 10% Shareholder, then the exercise price of the shares covered by the Incentive Stock Option shall be not less than 110% of the Fair Market Value of such shares on the Date of Grant.

(c)    The exercise price of shares of Company Stock covered by a Nonstatutory Stock Option shall be not less than 100% of the Fair Market Value of such shares on the Date of Grant.

(d)    Options may be exercised in whole or in part at such times as may be specified by the Committee in the Participant’s stock option agreement; provided that the exercise provisions for Incentive Stock Options shall in all events not be more liberal than the following provisions:

(i)    No Incentive Stock Option may be exercised after the first to occur of:

(x)    Ten years (or, in the case of an Incentive Stock Option granted to a 10% Shareholder, five years) from the Date of Grant,

(y)    Three months following the date of the Participant’s termination of employment with the Company and any Parent or Subsidiary of the Company for reasons other than death or Disability; or

(z)    One year following the date of the Participant’s termination of employment by reason of death or Disability.

(ii)    Except as otherwise provided in this paragraph, no Incentive Stock Option may be exercised unless the Participant is employed by the Company or a Parent or Subsidiary of the Company at the time of the exercise and has been so employed at all times since the Date of Grant. If a Participant’s employment is terminated other than by reason of death or Disability at a time when the Participant holds an Incentive Stock Option that is exercisable (in whole or in part), the Participant may exercise any or all of the then exercisable portion of the Incentive Stock Option (to the extent exercisable on the date of termination) within three months after the Participant’s termination of employment. If a Participant’s employment is terminated by reason of his Disability at a time when the Participant holds

I-4

an Incentive Stock Option that is exercisable (in whole or in part), the Participant may exercise any or all of the then exercisable portion of the Incentive Stock Option (to the extent exercisable on the date of Disability) within one year after the Participant’s termination of employment. If a Participant’s employment is terminated by reason of his death at a time when the Participant holds an Incentive Stock Option that is exercisable (in whole or in part), the then exercisable portion of the Incentive Stock Option may be exercised (to the extent exercisable on the date of death) within one year after the Participant’s death by the person to whom the Participant’s rights under the Incentive Stock Option shall have passed by will or by the laws of descent and distribution.

(iii)    An Incentive Stock Option, by its terms, shall be exercisable in any calendar year only to the extent that the aggregate Fair Market Value (determined at the Date of Grant) of the Company Stock with respect to which Incentive Stock Options are exercisable for the first time during the calendar year does not exceed $100,000 (the “Limitation Amount”). Incentive Stock Options granted under the Plan and all other plans of the Company and any Parent or Subsidiary of the Company shall be aggregated for purposes of determining whether the Limitation Amount has been exceeded. The Committee may impose such conditions as it deems appropriate on an Incentive Stock Option to ensure that the foregoing requirement is met. If Incentive Stock Options that first become exercisable in a calendar year exceed the Limitation Amount, the excess Options will be treated as Nonstatutory Stock Options to the extent permitted by law.

(e)    The Committee may, in its discretion, grant Options that by their terms become fully exercisable upon a Change of Control notwithstanding other conditions on exercisability in the stock option agreement, and, in such event, paragraph (e) shall not apply.

8.    Stock Appreciation Rights.

(a)    Whenever the Committee deems it appropriate, Stock Appreciation Rights may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or, if the Option is a Nonstatutory Stock Option, by an amendment to the Option at any time thereafter during the term of the Option. Stock Appreciation Rights may be exercised in whole or in part at such times and under such conditions as may be specified by the Committee in the Participant’s stock option agreement. The following provisions apply to all Stock Appreciation Rights that are granted in connection with Options:

(i)    Stock Appreciation Rights shall entitle the Participant, upon exercise of all or any part of the Stock Appreciation Rights, to surrender to the Company unexercised that portion of the underlying Option relating to the same number of shares of Company Stock as is covered by the Stock Appreciation Rights (or the portion of the Stock Appreciation Rights so exercised) and to receive in exchange from the Company an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the Company Stock covered by the surrendered portion of the underlying Option over (y) the exercise price of the Company Stock covered by the surrendered portion of the underlying Option. The Committee may limit the amount that the Participant will be entitled to receive upon exercise of the Stock Appreciation Right.

(ii)    Upon the exercise of a Stock Appreciation Right and surrender of the related portion of the underlying Option, the Option, to the extent surrendered, shall not thereafter be exercisable.

(iii)    The Committee may, in its discretion, grant Stock Appreciation Rights in connection with Options which by their terms become fully exercisable upon a Change of Control, which Stock Appreciation Rights shall only be exercisable following a Change of Control. The underlying Option may provide that such Stock Appreciation Rights shall be payable solely in cash. The terms of the underlying Option shall provide the method by which Fair Market Value of the Company Stock on the date of exercise shall be calculated based on one of the following alternatives:

(x)    the closing price of the Company Stock on the exchange on which it is then traded on the business day immediately preceding the day of exercise;

I-5

(y)    the highest closing price of the Company Stock on the exchange on which it is then traded, during the 90 days immediately preceding the Change of Control; or

(z)    the greater of (x) or (y).

(iv)    Subject to any further conditions upon exercise imposed by the Committee, a Stock Appreciation Right shall be exercisable only to the extent that the related Option is exercisable, and shall expire no later than the date on which the related Option expires.

(v)    A Stock Appreciation Right may only be exercised at a time when the Fair Market Value of the Company Stock covered by the Stock Appreciation Right exceeds the exercise price of the Company Stock covered by the underlying Option.

(b)    Whenever the Committee deems it appropriate, Stock Appreciation Rights may be granted without related Options. The terms and conditions of the award shall be set forth in a Stock Appreciation Rights agreement between the Company and the Participant in written or electronic form. The following provisions apply to all Stock Appreciation Rights that are granted without related Options:

(i)    Stock Appreciation Rights shall entitle the Participant, upon the exercise of all or any part of the Stock Appreciation Rights, to receive from the Company an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the Company Stock covered by the surrendered Stock Appreciation Rights over (y) the Fair Market Value on the Date of Grant of the Company Stock covered by the Stock Appreciation Rights. The Committee may limit the amount that the Participant may be entitled to receive upon exercise of the Stock Appreciation Right.

(ii)    Stock Appreciation Rights shall be exercisable, in whole or in part, at such times as the Committee shall specify in the Participant’s Stock Appreciation Rights agreement.

(c)    The manner in which the Company’s obligation arising upon the exercise of a Stock Appreciation Right shall be paid shall be determined by the Committee and shall be set forth in the Participant’s stock option agreement (if the Stock Appreciation Rights are related to an Option) or Stock Appreciation Rights agreement. The Committee may provide for payment in Company Stock or cash, or a fixed combination of Company Stock or cash, or the Committee may reserve the right to determine the manner of payment at the time the Stock Appreciation Right is exercised. Shares of Company Stock issued upon the exercise of a Stock Appreciation Right shall be valued at their Fair Market Value on the date of exercise.

9.    Method of Exercise Of Options And Stock Appreciation Rights.

(a)    Options and Stock Appreciation Rights may be exercised by the employee by giving notice of the exercise to the Company, stating the number of shares the employee has elected to purchase under the Option or the number of Stock Appreciation Rights he has elected to exercise. In the case of a purchase of shares under an Option, such notice shall be effective only if accompanied by the exercise price in full paid in cash; provided that, if the terms of an Option so permit, or the Committee by separate action so permits, the employee may (i) deliver Mature Shares (valued at their Fair Market Value on the date of exercise) in satisfaction of all or any part of the exercise price, (ii) deliver a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company, from the sale or loan proceeds with respect to the sale of Company Stock or a loan secured by Company Stock, the amount necessary to pay the exercise price and, if required by the Committee, Applicable Withholding Taxes, or (iii) deliver an interest bearing promissory note, payable to the Company, in payment of all or part of the exercise price together with such collateral as may be required by the Committee at the time of exercise. The interest rate under any such promissory note shall be equal to the minimum interest rate required at the time to avoid imputed interest under the Code. The employee shall not be entitled to make payment of the exercise price other than in cash unless provisions for an alternative payment method are included in the employee’s stock option agreement or are agreed to in writing by the Company with the approval of the Committee prior to exercise of the Option.

I-6

(b)    The Company may place on any certificate representing Company Stock issued upon the exercise of an Option or a Stock Appreciation Right any legend deemed desirable by the Company’s counsel to comply with federal or state securities laws, and the Company may require of the employee a customary written indication of his investment intent. Until the employee has made any required payment, including any Applicable Withholding Taxes, and has had issued to him a certificate for the shares of Company Stock acquired, he shall possess no shareholder rights with respect to the shares.

(c)    Each Participant shall agree as a condition of the exercise of an Option or a Stock Appreciation Right to pay to the Company Applicable Withholding Taxes, or make arrangements satisfactory to the Company regarding the payment to the Company of such amounts. Until Applicable Withholding Taxes have been paid or arrangements satisfactory to the Company have been made, no stock certificate shall be issued upon the exercise of an Option or a Stock Appreciation Right.

As an alternative to making a cash payment to the Company to satisfy Applicable Withholding Taxes if the Option or Stock Appreciation Rights agreement so provides, or the Committee by separate action so provides, a Participant may elect to (i) deliver Mature Shares or (ii) have the Company retain that number of shares of Company Stock that would satisfy all or a specified portion of the Applicable Withholding Taxes. Any such election shall be made only in accordance with procedures established by the Committee.

(d)    Notwithstanding anything herein to the contrary, if the Company is subject to section 16 of the Act, Options and Stock Appreciation Rights shall always be granted and exercised in such a manner as to conform to the provisions of Rule 16b-3.

(e)    If a Participant exercises an Option that has a Reload Feature by delivering Mature Shares in payment of the exercise price, the Participant shall automatically be granted a Reload Option. At the time the Option with a Reload Feature is awarded, the Committee may impose such restrictions on the Reload Option as it deems appropriate, but in any event the Reload Option shall be subject to the following restrictions:

(i)    The exercise price of shares of Company Stock covered by a Reload Option shall be not less than 100% of the Fair Market Value of such shares on the Date of Grant of the Reload Option;

(ii)    If and to the extent required by Rule 16b-3, or if so provided in the Option agreement, a Reload Option shall not be exercisable within the first six months after it is granted; provided that, subject to the terms of the Participant’s stock option agreement, this restriction shall not apply if the Participant becomes Disabled or dies during the six-month period;

(iii)    The Reload Option shall be subject to the same restrictions on exercisability imposed on the underlying Option (possessing the Reload Feature) that was exercised unless the Committee specifies different limitations;

(iv)    The Reload Option shall not be exercisable until the expiration of any retention holding period imposed on the disposition of any shares of Company Stock covered by the underlying Option (possessing the Reload Feature) that was exercised; and

(v)    The Reload Option shall not have a Reload Feature.

10.    Nontransferability of Incentive Awards.    Incentive Awards shall not be transferable unless so provided in the award agreement or an amendment to the award agreement. Options and Stock Appreciation Rights which are intended to be exempt under Rule 16b-3 (to the extent required by Rule 16b-3 at the time of grant or amendment of the award agreement), by their terms, shall not be transferable by the Participant except by will or by the laws of descent and distribution and shall be exercisable, during the Participant’s lifetime, only by the Participant or by his guardian or legal representative. Notwithstanding the foregoing, the Committee, in its sole discretion, may provide for transferability of particular Incentive Awards so long as such transferability will not disqualify the exemption under Rule 16b-3 for other Incentive Awards.

I-7

11.    Effective Date of the Plan and Transition.

(a) This Plan shall be effective as of the date of separation between the Company and Circuit City Stores, Inc., and shall be submitted to the shareholders of Circuit City Stores, Inc. for approval prior to the separation. No Option or Stock Appreciation Right shall be exercisable and no Company Stock shall be issued under the Plan until (i) the Plan has been approved by shareholders, (ii) shares issuable under the Plan have been registered with the Securities and Exchange Commission and accepted for listing on the New York Stock Exchange upon notice of issuance, and (iii) the requirements of any applicable state securities laws have been met.

(b) As of the date of separation between the Company and Circuit City Stores, Inc., this Plan shall assume obligations, including outstanding awards, from the Circuit City Stores, Inc. 1988 Stock Incentive Plan and the Circuit City Stores, Inc. 1994 Stock Incentive Plan with respect to employees of the Company or otherwise, to the extent provided in an agreement between the Company and Circuit City Stores, Inc.

12.    Termination, Modification, Change.    If not sooner terminated by the Board, this Plan shall terminate at the close of business on the day immediately preceding the tenth anniversary of the date of separation between the Company and Circuit City Stores, Inc. No Incentive Awards shall be granted under the Plan after its termination. The Board may terminate the Plan or may amend the Plan in such respects as it shall deem advisable; provided that, if and to the extent required by the Code or Rule 16b-3, no change shall be made that increases the total number of shares of Company Stock reserved for issuance pursuant to Incentive Awards granted under the Plan (except pursuant to Section 13), expands the class of persons eligible to receive Incentive Awards, materially increases the benefits accruing to Participants under the Plan or permits repricing of Options unless such change is authorized by the shareholders of the Company. Notwithstanding the foregoing, the Board may unilaterally amend the Plan and Incentive Awards as it deems appropriate to ensure compliance with Rule 16b-3 and to cause Incentive Awards to meet the requirements of the Code, including Code sections 162(m) and 422, and regulations thereunder. Except as provided in the preceding sentence, a termination or amendment of the Plan shall not, without the consent of the Participant, adversely affect a Participant’s rights under an Incentive Award previously granted to him.

13.    Change in Capital Structure.

(a)    In the event of a stock dividend, stock split or combination of shares, recapitalization, merger in which the Company is the surviving corporation, reorganization, reincorporation, consolidation, or other change in the Company’s capital stock without the receipt of consideration by the Company (including, but not limited to, the creation or issuance to shareholders generally of rights, options or warrants for the purchase of common stock or preferred stock of the Company), the number and kind of shares of stock or securities of the Company to be subject to the Plan and to Incentive Awards then outstanding or to be granted thereunder, the aggregate and individual maximum number of shares or securities which may be delivered under the Plan pursuant to Section 4, and the exercise price and other terms and relevant provisions of Incentive Awards shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. If the adjustment would produce fractional shares with respect to any Restricted Stock or unexercised Option or Stock Appreciation Right, the Committee may adjust appropriately the number of shares covered by the Incentive Award so as to eliminate the fractional shares.

(b)    If the Company is a party to a consolidation or merger in which the Company is not the surviving corporation, a transaction that results in the acquisition of substantially all of the Company’s outstanding stock by a single person or entity, or a sale or transfer of substantially all of the Company’s assets, the Committee may take such actions with respect to outstanding Incentive Awards as the Committee deems appropriate.

(c) Any determination made or action taken under this Section 13 by the Committee shall be final and conclusive and may be made or taken without the consent of any Participant.

I-8

14.    Administration Of The Plan.    The Plan shall be administered by a Committee, which shall be appointed by the Board, consisting of not less than three members of the Board. Subject to paragraph (e) below, the Committee shall be the Compensation Committee of the Board unless the Board shall appoint another Committee to administer the Plan. The Committee shall have general authority to impose any limitation or condition upon an Incentive Award that the Committee deems appropriate to achieve the objectives of the Incentive Award and the Plan and, without limitation and in addition to powers set forth elsewhere in the Plan, shall have the following specific authority:

(a)    The Committee shall have the power and complete discretion to determine (i) which eligible employees shall receive an Incentive Award and the nature of the Incentive Award, (ii) the number of shares of Company Stock to be covered by each Incentive Award, (iii) whether Options shall be Incentive Stock Options or Nonstatutory Stock Options, (iv) when, whether and to what extent Stock Appreciation Rights shall be granted in connection with Options, (v) the Fair Market Value of Company Stock, (vi) the time or times when an Incentive Award shall be granted, (vii) whether an Incentive Award shall become vested over a period of time and when it shall be fully vested, (viii) when Options or Stock Appreciation Rights may be exercised, (ix) whether a Disability exists, (x) the manner in which payment will be made upon the exercise of Options or Stock Appreciation Rights, (xi) conditions relating to the length of time before disposition of Company Stock received upon the exercise of Options or Stock Appreciation Rights is permitted, (xii) whether to approve a Participant’s election (A) to deliver Mature Shares to satisfy Applicable Withholding Taxes or (B) to have the Company withhold from the shares to be issued upon the exercise of a Nonstatutory Stock Option or a Stock Appreciation Right the number of shares necessary to satisfy Applicable Withholding Taxes (xiii) the terms and conditions applicable to Restricted Stock Awards, (xiv) the terms and conditions on which restrictions upon Restricted Stock shall lapse, (xv) whether to accelerate the time at which any or all restrictions with respect to Restricted Stock will lapse or be removed, (xvi) notice provisions relating to the sale of Company Stock acquired under the Plan, and (xvii) any additional requirements relating to Incentive Awards that the Committee deems appropriate. Notwithstanding the foregoing, no “tandem stock options” (where two stock options are issued together and the exercise of one option affects the right to exercise the other option) may be issued in connection with Incentive Stock Options. The Committee shall have the power to amend the terms of previously granted Incentive Awards so long as the terms as amended are consistent with the terms of the Plan and provided that the consent of the Participant is obtained with respect to any amendment that would be detrimental to the Participant, except that such consent will not be required if such amendment is for the purpose of complying with Rule 16b-3 or any requirement of the Code applicable to the Incentive Award.

(b)    The Committee may adopt rules and regulations for carrying out the Plan. The interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive. The Committee may consult with counsel, who may be counsel to the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel.

(c)    A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members, and any action so taken shall be fully effective as if it had been taken at a meeting.

(d)    The Board from time to time may appoint members previously appointed and may fill vacancies, however caused, in the Committee. If a Committee of the Board is appointed to serve as the Committee, such Committee shall have, in connection with the administration of the Plan, the powers possessed by the Board, including the power to delegate a subcommittee of the administrative powers the Committee is authorized to exercise, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board.

(e)    All members of the Committee must be “outside directors” as described in Code section 162(m). In addition, all members of the Committee must be “non-employee directors” as defined in Rule 16b-3.

I-9

15.    Notice.    All notices and other communications required or permitted to be given under this Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows:

(a)    If to the Company—at its principal business address to the attention of the Secretary;

(b) If to any Participant — at the last address of the Participant known to the sender at the time the notice or other communication is sent.

16.    Shareholder Rights.    No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Company Stock subject to an Incentive Award unless and until such Participation has satisfied all requirements under the terms of the Incentive Award.

17.    No Employment or Other Service Rights.    Nothing in the Plan or any instrument executed or Incentive Award granted under the Plan shall confer upon any Participant any right to continue to serve the Company (or a Parent or Subsidiary of the Company) in the capacity in effect at the time the Incentive Award was granted or shall affect the right of the Company (or a Parent or Subsidiary of the Company) to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant’s agreement with the Company (or a Parent or Subsidiary of the Company), or (iii) the service of a Non-Employee Director pursuant to the bylaws of the Company (or a Parent or Subsidiary of the Company), and any applicable provisions of the corporate law of the state in which the Company (or a Parent or Subsidiary of the Company) is incorporated, as the case may be.

18.    Interpretation.    The terms of the Plan shall be governed by the laws of the Commonwealth of Virginia, without regard to conflict of law provisions at any jurisdiction. The terms of this Plan are subject to all present and future regulations and rulings of the Secretary of the Treasury or his delegate relating to the qualification of Incentive Stock Options under the Code. If any provision of the Plan conflicts with any such regulation or ruling, then that provision of the Plan shall be void and of no effect. As to all Incentive Stock Options and all Nonstatutory Stock Options with an exercise price of at least 100% of Fair Market Value of the Company Stock on the Date of Grant, this Plan shall be interpreted for such Options to be excluded from applicable employee remuneration for purposes of Code section 162(m).

IN WITNESS HEREOF, this instrument has been executed this      day of                                 , 2002.

CARMAX, INC.

By:                                                                                      

I-10

ANNEX J

CARMAX, INC. 2002 NON-EMPLOYEE DIRECTORS

STOCK INCENTIVE PLAN

1.    Purpose.    The purpose of this CarMax, Inc. 2002 Non-Employee Directors Stock Incentive Plan (the “Plan”) is to encourage ownership in CarMax, Inc. (the “Company”) by non-employee members of the Board of Directors of the Company, in order to promote long-term shareholder value and to provide non-employee directors with an incentive to continue as directors of the Company.

2.    Definitions.    As used in the Plan, the following terms have the meanings indicated:

(a)    “Act” means the Securities Exchange Act of 1934, as amended.

(b)    “Board” means the Board of Directors of the Company.

(c)    “Change of Control” means the occurrence of either of the following events: (i) a third person, including a “group” as defined in section 13(d)(3) of the Act, becomes, or obtains the right to become, the beneficial owner of Company securities having 20% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors to the Board of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business); or (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, the persons who were directors of the Company before such transactions shall cease to constitute a majority of the Board or of the board of directors of any successor to the Company.

(d)    “Code” means the Internal Revenue Code of 1986, as amended.

(e)    “Company” means CarMax, a Virginia corporation.

(f)    “Company Stock” means shares of CarMax Common Stock subject to the limits of Section 4. Such shares shall be subject to adjustment as provided in Section 14.

(g)    “Date of Grant” means the date on which an Incentive Award is granted by the Board.

(h)    “Disability” or “Disabled” means a disability as determined by the Board.

(i)    “Fair Market Value” means, for any given date, the fair market value of the Company Stock as of such date, as determined by the Board based on the then prevailing prices of the Company Stock on the exchange on which it generally has the greatest trading volume.

(j)    “Incentive Award” means, collectively, the award of an Option, Stock Appreciation Right, Restricted Stock, or Stock Grants under the Plan.

(k)    “Nonstatutory Stock Option” means an Option that does not meet the requirements of Code section 422 or, even if meeting the requirements of Code section 422, is not intended to be an incentive stock option under Code section 422 and is so designated.

(l)    “Option” means a right to purchase Company Stock granted under the Plan, at a price determined in accordance with the Plan.

(m)    “Participant” means any non-employee member of the Board who receives an Incentive Award under the Plan.

(n)    “Restricted Stock” means Company Stock awarded upon the terms and subject to the restrictions set forth in Section 6.

(o)    “Restricted Stock Award” means an award of Restricted Stock granted under the Plan.

J-1

(p)    “Rule 16b-3” means Rule 16b-3 adopted pursuant to section 16(b) of the Act. A reference in the Plan to Rule 16b-3 shall include a reference to any corresponding rule (or number redesignation) of any amendments to Rule 16b-3 adopted after the effective date of the Plan’s adoption.

(q)    “Stock Appreciation Right” means a right to receive amounts from the Company awarded upon the terms and subject to the restrictions set forth in Section 8.

(r)    “Stock Grant” means Company Stock awarded without restrictions in accordance with Section 9.

3.    General.    Incentive Awards may be granted under the Plan in the form of Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, and Stock Grants.

4.    Stock.    Subject to Section 14 of the Plan, there shall be reserved for issuance under the Plan (i) an aggregate of     ·     shares of CarMax Common Stock, which shall be authorized, but unissued shares. Shares of CarMax Common Stock that have not been issued and allocated to options or portions thereof that expire or otherwise terminate unexercised may be subjected to an Incentive Award under the Plan. Shares of a series of Company Stock that have not been issued under the Plan and that are allocable to Incentive Awards or portions thereof that expire or otherwise terminate unexercised may again be subjected to an Incentive Award under the Plan relating to shares of the same series of Company Stock. Similarly, if any shares of Restricted Stock issued pursuant to the Plan are reacquired by the Company as a result of a forfeiture of such shares pursuant to the Plan, such shares may again be subjected to an Incentive Award under the Plan relating to shares of the same series of Company Stock as those reacquired.

5.    Eligibility.

(a)    Each director of the Company who is not a full-time employee of the Company or any parent or subsidiary of the Company shall be eligible to receive Incentive Awards under the Plan. The Board shall have the power and complete discretion, as provided in Section 15, to select which directors shall receive Incentive Awards and to determine for each such Participant the terms and conditions, the nature of the award and the number of shares to be allocated to each Participant as part of each Incentive Award.

(b)    The grant of an Incentive Award shall not obligate the Company to pay a Participant any particular amount of remuneration or to make further grants to the Participant at any time thereafter.

6.    Restricted Stock Awards.

(a)    Whenever the Board deems it appropriate to grant a Restricted Stock Award, notice shall be given to the Participant stating the number of shares of Restricted Stock for which the Restricted Stock Award is granted and the terms and conditions to which the Restricted Stock Award is subject. This notice shall become an award agreement between the Company and the Participant. A Restricted Stock Award may be made by the Board in its discretion without cash consideration.

(b)    Restricted Stock issued pursuant to the Plan shall be subject to the following restrictions:

(i)    None of such shares may be sold, assigned, transferred, pledged, hypothecated, or otherwise encumbered or disposed of until the restrictions on such shares shall have lapsed or shall have been removed pursuant to paragraph (d) or (e) below.

(ii)    The restrictions on such shares must remain in effect and may not lapse for a period of three years beginning on the date of grant, except as provided under paragraph (d) or (e) in the case of Disability, retirement, death or a Change in Control.

(iii)    If a Participant ceases to be a director of the Company, the Participant shall forfeit to the Company any shares of Restricted Stock, the restrictions on which shall not have lapsed or shall not have been removed pursuant to paragraph (d) or (e) below, on the date such Participant shall cease to serve as a member of the Board.

J-2

(iv)    The Board may establish such other restrictions on such shares that the Board deems appropriate, including, without limitation, events of forfeiture.

(c)    Upon the acceptance by a Participant of a Restricted Stock Award, such Participant shall, subject to the restrictions set forth in paragraph (b) above, have all the rights of a shareholder with respect to the shares of Restricted Stock subject to such Restricted Stock Award, including, but not limited to, the right to vote such shares of Restricted Stock and the right to receive all dividends and other distributions paid thereon. Certificates representing Restricted Stock shall bear a legend referring to the restrictions set forth in the Plan and the Participant’s award agreement. If shares of Restricted Stock are issued without certificates, notice of the restrictions set forth in the Plan and the Participant’s Award Agreement must be given to the shareholder in the manner required by law.

(d)    The Board shall establish as to each Restricted Stock Award the terms and conditions upon which the restrictions set forth in paragraph (b) above shall lapse. Such terms and conditions may include, without limitation, the lapsing of such restrictions as a result of the Disability, death or retirement of the Participant or the occurrence of a Change of Control.

(e)    Notwithstanding the forfeiture provisions of paragraph (b)(iii) above, the Board may at any time, in its sole discretion, accelerate the time at which any or all restrictions will lapse or remove any and all such restrictions.

7.    Stock Options.

(a)    Whenever the Board deems it appropriate to grant Options, notice shall be given to the eligible non-employee director stating the number of shares for which Options are granted, the Option price per share, the extent, if any, to which Stock Appreciation Rights are granted, and the conditions to which the grant and exercise of the Options are subject. This notice shall become a stock option agreement between the Company and the eligible non-employee director.

(b)    The exercise price of shares of Company Stock covered by a Nonstatutory Stock Option shall be not less than 100% of the Fair Market Value of such shares on the Date of Grant.

(c)    The Board may, in its discretion, grant Options that by their terms become fully exercisable Options may be exercised in whole or in part at such times as may be specified by the Board in the Participant’s stock option agreement.

(d)    Upon a Change of Control notwithstanding other conditions on exercisability in the stock option agreement.

8.    Stock Appreciation Rights.

(a)    Whenever the Board deems it appropriate, Stock Appreciation Rights may be granted. The terms and conditions of the award shall be set forth in a stock appreciation rights agreement between the Company and the Participant. The following provisions apply to all Stock Appreciation Rights that are granted:

(i)    Stock Appreciation Rights shall entitle the Participant, upon the exercise of all or any part of the Stock Appreciation Rights, to receive from the Company an amount equal to the excess of (x) the fair market value on the date of exercise of the Company Stock covered by the Stock Appreciation Rights over (y) the fair market value on the Date of Grant of the Company Stock covered by the Stock Appreciation Rights. The Board may limit the amount that the Participant may be entitled to receive upon exercise of the Stock Appreciation Right.

(ii)    Stock Appreciation Rights shall be exercisable, in whole or in part, at such times as the Board shall specify in the Participant’s stock appreciation rights agreement.

(b)    The manner in which the Company’s obligation arising upon the exercise of a Stock Appreciation Right shall be paid shall be determined by the Board and shall be set forth in the Participant’s stock appreciation rights agreement. The Board may provide for payment in Company Stock or cash, or a fixed

J-3

combination of Company Stock or cash, or the Board may reserve the right to determine the manner of payment at the time the Stock Appreciation Right is exercised. Shares of Company Stock issued upon the exercise of a Stock Appreciation Right shall be valued at their Fair Market Value on the date of exercise.

9.    Stock Grants.

(a)    Whenever the Board deems it appropriate, a Stock Grant may be made to eligible non-employee directors. The Board shall have complete discretion to make such Stock Grants and may do so whenever it considers it appropriate.

(b)    Whenever the Board deems it appropriate, it may permit eligible non-employee directors to elect to receive a Stock Grant in lieu of retainer, meeting fees or other such fees to which such directors would otherwise be entitled. The Company Stock to be issued in connection with such a Stock Grant shall have a Fair Market Value equal to such fees otherwise payable, determined as of the date on which such payment of fees would otherwise become payable to such member of the Board.

10.    Method of Exercise of Options and Stock Appreciation Rights.

(a)    Options and Stock Appreciation Rights may be exercised by the Participant giving notice of the exercise to the Company, stating the number of shares the Participant has elected to purchase under the Option or the number of Stock Appreciation Rights he has elected to exercise. In the case of a purchase of shares under an Option, such notice shall be effective only if accompanied by the exercise price in full paid in cash; provided that, if the terms of an Option so permit, the Participant may: (i) deliver shares of Company Stock (valued at their Fair Market Value on the date of exercise) in satisfaction of all or any part of the exercise price; or (ii) deliver a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company, from the sale or loan proceeds with respect to the sale of Company Stock or a loan secured by Company Stock, the amount necessary to pay the exercise price. The Participant shall not be entitled to make payment of the exercise price other than in cash unless provisions for an alternative payment method are included in the Participant’s stock option agreement or are agreed to in writing by the Company with the approval of the Board prior to exercise of the Option.

(b)    Until the Participant has made any required payment, and has had issued to him a certificate for the shares of Company Stock acquired, he shall possess no shareholder rights with respect to the shares.

(c)    Notwithstanding anything herein to the contrary, if the Company is subject to section 16 of the Act, Options and Stock Appreciation Rights shall always be granted and exercised in such a manner as to conform to the provisions of Rule 16b-3.

(d)    Any shares of already owned Company Stock that are delivered by a Participant in satisfaction of all or any part of the exercise price of an Option shall be of the same series of Company Stock as the shares of Company Stock to which such Incentive Award relates.

11.    Transferability of Incentive Awards.    Nonstatutory Stock Options and Stock Appreciation Rights may be transferable by a Participant and exercisable by a person other than the Participant, but only to the extent specifically provided in the Incentive Award.

12.    Effective Date of the Plan and Transition.

(a)    This Plan shall be effective as of the date of separation between the Company and Circuit City Stores, Inc., and shall be submitted to the shareholders of Circuit City Stores, Inc. for approval prior to the separation. No Option or Stock Appreciation Right shall be exercisable and no Company Stock shall be issued under the Plan until (i) the Plan has been approved by the Company’s shareholders, (ii) shares issuable under the Plan have been registered with the Securities and Exchange Commission and accepted for listing on the New York Stock Exchange upon notice of issuance, and (iii) the requirements of any applicable state securities laws have been met.

J-4

(b)    As of the date of separation between the Company and Circuit City Stores, Inc., this Plan shall assume obligations, including outstanding awards, from the Circuit City Stores, Inc. Amended And Restated 1989 Non-Employee Directors Stock Option Plan, to the extent provided in an agreement between the Company and Circuit City Stores, Inc.

13.    Termination, Modification, Change.    If not sooner terminated by the Board, this Plan shall terminate at the close of business on the day immediately preceding the tenth anniversary of the separation between the Company and Circuit City Stores, Inc. No Incentive Awards shall be granted under the Plan after its termination. The Board may terminate the Plan or may amend the Plan in such respects as it shall deem advisable; provided that no change shall be made that increases the total number of shares of Company Stock reserved for issuance pursuant to Incentive Awards granted under the Plan (except pursuant to Section 14) or permit repricing of options, unless such change is authorized by the shareholders of the Company. Notwithstanding the foregoing, the Board may unilaterally amend the Plan and Incentive Awards as it deems appropriate to ensure compliance with Rule 16b-3. Except as provided in the preceding sentence, a termination or amendment of the Plan shall not, without the consent of the Participant, adversely affect a Participant’s rights under an Incentive Award previously granted to him.

14.    Change in Capital Structure.

(a)    The number of shares reserved for issuance under the Plan, the terms of Incentive Awards, and all computations under the Plan shall be appropriately adjusted by the Board should the Company effect one or more stock dividends, stock splits, subdivisions or consolidations of shares, or other similar changes in capitalization, or if the par value of Company Stock is altered. If the adjustment would produce fractional shares with respect to any unexercised Option, the Board may adjust appropriately the number of shares covered by the Option so as to eliminate the fractional shares.

(b)    If the Company is a party to a consolidation or merger in which the Company is not the surviving corporation, a transaction that results in the acquisition of substantially all of the Company’s outstanding stock by a single person or entity, or a sale or transfer of substantially all of the Company’s assets, the Board may take such actions with respect to outstanding Incentive Awards as the Board deems appropriate.

(c)    Any determination made or action taken under this Section 14 by the Board shall be final and conclusive and may be made or taken without the consent of any Participant.

15.    Administration of the Plan.    The Plan shall be administered by the Board. The Board shall have general authority to impose any limitation or condition upon an Incentive Award that the Board deems appropriate to achieve the objectives of the Incentive Award and the Plan and, without limitation and in addition to powers set forth elsewhere in the Plan, shall have the following specific authority:

(a)    The Board shall have the power and complete discretion to determine (i) which eligible non-employee directors shall receive an Incentive Award and the nature of the Incentive Award, (ii) the number of shares of Company Stock to be covered by each Incentive Award, (iii) when, whether and to what extent Stock Appreciation Rights shall be granted, (iv) the fair market value of Company Stock, (v) the time or times when an Incentive Award shall be granted, (vi) whether an Incentive Award shall become vested over a period of time and when it shall be fully vested, (vii) when Options and Stock Appreciation Rights may be exercised, (viii) whether a Disability exists, (ix) the manner in which payment will be made upon the exercise of Options or Stock Appreciation Rights, (x) conditions relating to the length of time before disposition of Company Stock received upon the exercise of Options or Stock Appreciation Rights is permitted, (xi) the terms and conditions applicable to Restricted Stock Awards, (xii) the terms and conditions on which restrictions upon Restricted Stock shall lapse, (xiii) whether to accelerate the time at which any or all restrictions with respect to Restricted Stock will lapse or be removed, (xiv) notice provisions relating to the sale of Company Stock acquired under the Plan, and (xv) any additional requirements relating to Incentive Awards that the Board deems appropriate. The Board shall have the power to amend the terms of previously granted Incentive Awards so long as the terms as amended are

J-5

consistent with the terms of the Plan and provided that the consent of the Participant is obtained with respect to any amendment that would be detrimental to the Participant, except that such consent will not be required if such amendment is for the purpose of complying with Rule 16b-3.

(b)    The Board may adopt rules and regulations for carrying out the Plan. The interpretation and construction of any provision of the Plan by the Board shall be final and conclusive. The Board may consult with counsel, who may be counsel to the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel.

(c)    A majority of the members of the Board shall constitute a quorum, and all actions of the Board shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members, and any action so taken shall be fully effective as if it had been taken at a meeting.

16.    Notice.    All notices and other communications required or permitted to be given under this Plan may be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows:

(a)    If to the Company—at its principal business address to the attention of the Secretary;

(b)    If to any Participant—at the last address of the Participant known to the sender at the time the notice or other communication is sent.

17.    Miscellaneous.    By accepting any Incentive Award under the Plan, each Participant, and each person claiming under or through such person, shall be conclusively deemed to have given his or her acceptance and ratification of, and consent to, any action taken with respect thereto by the Company or the Board.

IN WITNESS HEREOF, this instrument has been executed this             day of             , 2002.

CARMAX, INC.

By:                                                                                                  

J-6

CIRCUIT CITY STORES, INC.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JULY 12, 2002.

The undersigned, having received the accompanying Notice of Special Meeting of Shareholders and Proxy Statement/Prospectus for the Special Meeting of Shareholders of Circuit City Stores, Inc. (the “Company”) to be held July 12, 2002 at 9:00 a.m., Richmond, Virginia time, hereby appoints W. Alan McCollough and Robert L. Burrus, Jr., and each of them, proxies, with full power of substitution, and hereby authorizes them to represent and vote the shares of Circuit City Group Common Stock and CarMax Group Common Stock of the Company, which the undersigned would be entitled to vote if personally present at the Special Meeting of Shareholders of the Company and any adjournment thereof, and especially to vote as set forth below.

The Board of Directors Recommends a Vote FOR Items 1, 2, 3, 4 and 5.

(1) Approval of the CarMax Separation Proposal (described in the Proxy Statement/Prospectus).

¨  FOR ¨  AGAINST ¨  ABSTAIN

(2) Approval of the Clean-Up Amendment Proposal (described in the Proxy Statement/Prospectus).

¨  FOR ¨  AGAINST ¨  ABSTAIN

(3) Approval of the CarMax, Inc. Annual Performance-Based Bonus Plan.

¨  FOR ¨  AGAINST ¨  ABSTAIN

(4) Approval of the CarMax, Inc. 2002 Stock Incentive Plan.

¨  FOR ¨  AGAINST ¨  ABSTAIN

(5) Approval of the CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan.

¨  FOR ¨  AGAINST ¨  ABSTAIN

IF YOU SPECIFY A CHOICE AS TO THE ACTION TO BE TAKEN ON AN ITEM, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SUCH CHOICE. IF YOU DO NOT SPECIFY A CHOICE, IT WILL BE VOTED FOR ITEMS 1, 2, 3, 4 and 5.

Any proxy or proxies previously given for the meeting are revoked.

PLEASE MARK, SIGN, DATE AND RETURN PROXY CARD PROMPTLY, USING THE ENCLOSED ENVELOPE.

Address Change? Mark Box  ¨
Indicate changes below:	Date
	Signature(s) in Box Please sign exactly as your name(s) appear on the proxy. If held in joint tenancy, all persons must sign. Trustees, administrators, etc., should include title and authority. Corporations should provide full name of corporation and title of authorized officer signing the proxy.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20.    Indemnification of Directors and Officers

The laws of the Commonwealth of Virginia pursuant to which CarMax, Inc. is incorporated permit it to indemnify its officers and directors against certain liabilities with the approval of its shareholders. The CarMax, Inc. Amended and Restated Articles of Incorporation, as amended, provide for the indemnification of each director and officer (including former directors and officers and each person who may have served at the request of CarMax, Inc. as a director or officer of any other legal entity and, in all such cases, his or her heirs, executors and administrators) against liabilities (including expenses) reasonably incurred by him or her in connection with any actual or threatened action, suit or proceeding to which he or she may be made a party by reason of his or her being or having been a director or officer of CarMax, Inc., except in relation to any action, suit or proceeding in which he or she has been adjudged liable because of willful misconduct or a knowing violation of the criminal law.

CarMax, Inc. has purchased directors’ and officers’ liability insurance policies. Within the limits of their coverage, the policies insure (1) the directors and officers of CarMax, Inc. and its subsidiaries against certain losses resulting from claims against them in their capacities as directors and officers to the extent that such losses are not indemnified by CarMax, Inc. and (2) CarMax, Inc. to the extent that it indemnifies such directors and officers for losses as permitted under the laws of Virginia.

Under the separation agreement, Circuit City Stores, Inc. and its subsidiaries have agreed to indemnify CarMax, Inc. and its subsidiaries and the respective officers, directors, agents, affiliates, record and beneficial security holders (including, without limitation, trustees and beneficiaries of trusts holding such securities), advisors and representatives of CarMax, Inc. and its subsidiaries for any losses arising out of any breach of the separation agreement, the tax allocation agreement, the transition services agreement, the employee benefits agreement, any instrument conveying any of the CarMax group assets or CarMax group liabilities to CarMax or any failure by Circuit City Stores to perform any of the Circuit City group liabilities.

Item 21.    Exhibits and Financial Statement Schedules

(a)    Exhibits. See Exhibit Index.

(b)    Financial Statement Schedules.

Schedule II—CarMax, Inc.—Valuation and Qualifying Accounts and Reserves is included in the CarMax, Inc. Historical Consolidated Financial Statements in Annex D of the proxy statement/prospectus that is part of this registration statement.

Schedule II—Circuit City Stores, Inc.—Valuation and Qualifying Accounts and Reserves is included in the Circuit City Stores, Inc. Historical Consolidated Financial Statements in Annex E of the proxy statement/prospectus that is part of this registration statement.

(c)    Reports, Opinions or Appraisals. To be filed by pre-effective amendment if applicable.

Item 22.    Undertakings

The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-1

The undersigned registrant hereby undertakes as follows: That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form.

The registrant undertakes that every prospectus (i) that is filed pursuant to the immediately preceding paragraph, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, pursuant to the provisions described under Item 20 or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification by it is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.

The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.

II-2

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Richmond, Commonwealth of Virginia, on the 5th day of June 2002.

CarMax, Inc.
By:	/s/    W. AUSTIN LIGON
	W. Austin Ligon President

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 has been signed by the following persons in the capacities indicated on the 5th day of June 2002.

Name	Title
/s/    W. AUSTIN LIGON         W. Austin Ligon	President and Director (Principal Executive Officer)
/s/    KEITH D. BROWNING*          Keith D. Browning	Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer)
/s/    MICHAEL T. CHALIFOUX*          Michael T. Chalifoux	Director
/s/    PHILIP J. DUNN          Philip J. Dunn	Director
/s/    W. ALAN MCCOLLOUGH*          W. Alan McCollough	Director
*By:                    /s/    PHILIP J. DUNN                  Philip J. Dunn Attorney-in-Fact

II-3

EXHIBIT INDEX

Exhibit No.	Document
2.1	Separation Agreement, dated May 21, 2002 between Circuit City Stores, Inc. and CarMax Inc. (attached as Annex F to the proxy statement/prospectus which is part of this Registration Statement)
3.1	Form of CarMax, Inc. Amended and Restated Articles of Incorporation**
3.2	Form of CarMax, Inc. Bylaws**
4.1	Rights Agreement, dated as of May 21, 2002, between CarMax, Inc. and Wells Fargo Bank Minnesota, N.A., as Rights Agent*
5.1	Opinion of McGuireWoods LLP, regarding the validity of the securities being registered*
10.1	Form of Amended and Restated Tax Allocation Agreement*
10.2	Form of Transition Services Agreement**
10.3	Form of Employee Benefits Agreement*
10.4	Employment Agreement between Circuit City Stores, Inc. and W. Austin Ligon*
10.5	Form of Employment Agreement between CarMax Auto Superstores, Inc. and certain executive officers*
10.6	CarMax, Inc. Benefit Restoration Plan**
10.7	CarMax, Inc. 2002 Non-employee Directors Stock Incentive Plan (attached as Annex J to the proxy statement/prospectus which is part of this Registration Statement)
10.8	CarMax, Inc. 2002 Stock Incentive Plan (attached as Annex I to the proxy statement/prospectus which is part of this Registration Statement)
10.9	CarMax, Inc. Annual Performance-Based Bonus Plan (attached as Annex H to the proxy statement/prospectus which is part of this Registration Statement)
10.10	Form of Confidentiality Agreement**
10.11	Credit Agreement dated May 17, 2002 among CarMax Auto Superstores, Inc., CarMax, Inc., Various Financial Institutions and DaimlerChrysler Services North America LLC*
10.12	Security Agreement, dated May 17, 2002 among CarMax Auto Superstores, Inc., various other debtors and DaimlerChrysler Service North America LLC*
10.13	Guaranty, dated May 17, 2002, executed in favor of DaimlerChrysler North America LLC and the Lender Parties*
21.1	Subsidiaries of CarMax, Inc.**
23.1	Consents of KPMG LLP*
23.2	Consent of McGuireWoods LLP (included in Exhibit 5.1)
23.3	Consent of Morgan Stanley & Co. Incorporated*
24.1	Power of Attorney**
99.1	Fairness Opinion of Morgan Stanley & Co. Incorporated (attached as Annex G to the proxy statement/prospectus which is part of this registration statement)
99.2	Form of proxy card (attached to the proxy statement/prospectus which is part of this Registration Statement)*

*     Filed herewith.

**   Previously filed.

EI-1

EX-4.1

Exhibit 4.1

RIGHTS AGREEMENT

between

CARMAX, INC.

and

WELLS FARGO BANK MINNESOTA, N.A.

Dated as of May 21, 2002

Rights Agreement

Table of Contents

		Page
Section   1.	Certain Definitions	2
Section   2.	Appointment of Rights Agent	7
Section   3.	Issuance of Rights Certificates	7
Section   4.	Form of Rights Certificates	10
Section   5.	Countersignature and Registration	12
Section   6.	Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates	13
Section   7.	Exercise of Rights; Purchase Price; Expiration Date of Rights	14
Section   8.	Cancellation and Destruction of Rights Certificates	18
Section   9.	Reservation and Availability of Preferred Shares and Common Shares	19
Section 10.	Preferred Shares Record Date	22
Section 11.	Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights	23
Section 12.	Certificate of Adjusted Purchase Price or Number of Shares	37
Section 13.	Consolidation, Merger, Statutory Share Exchange or Sale or Transfer of Assets or Earning Power	37
Section 14.	Fractional Rights and Fractional Shares	42
Section 15.	Rights of Action	43
Section 16.	Agreement of Right Holders	44
Section 17.	Rights Certificate Holder Not Deemed a Shareholder	45
Section 18.	Concerning the Rights Agent	46
Section 19.	Merger or Consolidation or Change of Name of Rights Agent	47
Section 20.	Duties of Rights Agent	48
Section 21.	Change of Rights Agent	51
Section 22.	Issuance of New Rights Certificates	53
Section 23.	Redemption and Termination	54
Section 24.	Exchange	55
Section 25.	Notice of Certain Events	57
Section 26.	Notices	58
Section 27.	Supplements and Amendments	59
Section 28.	Successors	60
Section 29.	Determinations and Actions by the Board of Directors, etc.	60
Section 30.	Benefits of this Agreement	61
Section 31.	Severability	61
Section 32.	Governing Law	62
Section 33.	Counterparts	62
Section 34.	Descriptive Headings	62

i

RIGHTS AGREEMENT

This Rights Agreement (the “Agreement”) is entered into as of May 21, 2002, between CarMax, Inc., a Virginia corporation (the “Company”), and Wells Fargo Bank Minnesota, N.A., a national banking association (the “Rights Agent”).

On May 21, 2002, the Board of Directors of the Company authorized and declared a dividend of one preferred share purchase right (a “Right”) for each share of Common Stock outstanding on the record date described below (the “Record Date”) and further authorized the issuance of one Right with respect to each share of Common Stock that shall become outstanding (x) between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are hereinafter defined) or (y) after the Distribution Date but before the earlier of the Redemption Date or the Final Expiration Date, if such share of Common Stock 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 (other than a Right), which option, plan, arrangement or security was granted, established or issued, as the case may be, by the Company before the Distribution Date (collectively, “Post-Distribution Shares Bearing Rights”). The Record Date shall be the day and time which is immediately after the effectiveness of the transaction in which the Company shall have ceased to be a subsidiary of Circuit City Stores, Inc., a Virginia corporation (“Circuit City”) by means of the redemption of one class of Circuit City common stock in exchange for Common Shares and the simultaneous distribution of the remaining outstanding Common Shares as a dividend on the other class of Circuit City common stock.

At the time of the declaration of such dividend, each Right represented the right to purchase one one-thousandth of a share of Cumulative Participating Preferred Stock, Series A,

1

par value $20.00 per share, of the Company (a “Series A Preferred Share”) having the rights and preferences set forth in Exhibit A hereto, 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 who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of Common Shares constituting an “Acquiring Block” (as such term is hereinafter defined), but shall not include the Company, any wholly-owned Subsidiary 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. For the purposes of the next preceding sentence, an “Acquiring Block” shall mean 15% or more of the Common Shares then outstanding. Notwithstanding the foregoing, the term “Acquiring Person” shall not include any person who becomes the Beneficial Owner of an Acquiring Block solely as a result of an acquisition by the Company of any Common Shares that has the effect of increasing the proportion of the Common Shares beneficially owned by such Person; provided, however, that the term “Acquiring Person” shall include such Person from and after the first subsequent date upon which (i) such Person, or any Affiliates or Associates of such Person, shall have acquired Beneficial Ownership of any additional Common Shares and (ii) such Person, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of an Acquiring Block. Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a Person who

2

would be an Acquiring Person but for the provisions of this sentence has become such inadvertently, and if such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an Acquiring Person without regard to such provisions, then such Person shall not be deemed an “Acquiring Person” for any purpose of this Agreement.

(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 Exchange Act, as in effect on the date of this Agreement.

(c) “Articles of Incorporation” shall mean the Amended and Restated Articles of Incorporation of the Company in effect on the date hereof, as may be amended from time to time.

(d) 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

3

deemed the Beneficial Owner of, or to beneficially own, 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 exchange; or (B) the right to vote 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(d)(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.

4

(e) “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.

(f) “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.

(g) “Common Shares” shall mean shares of Common Stock, or any other shares of capital stock of the Company into which the Common Stock shall be reclassified or changed, unless such term shall be used with reference to a Person other than the Company. “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.

(h) “Distribution Date” shall have the meaning set forth in Section 3(a) hereof.

(i) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(j) “Final Expiration Date” shall have the meaning set forth in Section 7(a) hereof.

(k) “Person” shall mean any individual, firm, corporation, partnership or other entity, and shall include any successor (by merger or otherwise) of such entity.

5

(l) “Preferred Shares” shall mean the Series A Preferred Shares, and, to the extent there are not sufficient Series A 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 the Series A Preferred Shares.

(m) “Post-Distribution Shares Bearing Rights” shall have the meaning set forth in the second introductory paragraph of this Agreement.

(n) “Redemption Date” shall have the meaning set forth in Section 7(a) hereof.

(o) “Right” shall have the meaning set forth in the second introductory paragraph of this Agreement.

(p) “Section 11(a)(ii) Event” shall mean any event described in Section 11(a)(ii) hereof.

(q) “Section 13 Event” shall mean any event described in clauses (i), (ii), (iii) or (iv) of Section 13(a) hereof.

(r) “Series A Preferred Shares” shall have the meaning set forth in the third 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

6

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 appoints the Rights Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts 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

7

before the Record Date, the Close of Business on the Record Date) or (ii) the Close of Business on the tenth Business Day (or such later time and day as may be determined by action of the Board of Directors of the Company prior to such time as any Person becomes an Acquiring Person) after the date of the commencement by 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) of, or first public announcement of the intention of any such Person to commence, a tender or exchange offer, the consummation of which would result in any Person becoming the Beneficial Owner of an Acquiring Block (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 7(e). 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 (and subsequently with respect to each issuance of Post-Distribution Shares Bearing Rights), 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

8

the Distribution Date (or the date of issuance in the case of Post-Distribution Shares Bearing Rights), at the address of such holder shown on the records of the Company, a Rights Certificate, in substantially the form of Exhibit B hereto, evidencing one Right for each Common Share so held. From and after 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 will send a copy of a Summary of Rights to Purchase Preferred Shares in substantially the form attached hereto as Exhibit C (the “Summary of Rights”), by first-class, postage prepaid mail, to each record holder of Common Shares 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:

This certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between CarMax, Inc. and Wells Fargo Bank Minnesota, N.A. (the “Rights Agent”), dated as of May 21, 2002, 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 CarMax, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights

9

will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Rights will expire at the Close of Business on May 21, 2012 unless exercised or redeemed prior thereto. CarMax, Inc. will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge promptly after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or any Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void.

Until the earlier of the Distribution Date or the Final Expiration Date, the Rights associated with the Common Shares represented by certificates for Common Shares whether or not containing the foregoing legend shall be evidenced by such certificates alone and registered holders of Common Shares shall also be the registered holders of the associated Rights, and the transfer of any of such certificates shall also constitute the transfer of the Rights associated with the Common Shares represented by such certificates. In the event that the Company purchases any Common Shares after the Record Date but prior to the Distribution Date with the effect that such Common Shares cease to be outstanding, any Rights associated with such Common Shares shall be deemed cancelled and retired.

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 hereto and may have such marks of identification or designation and such legends,

10

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 one-thousandth of a share of Preferred Shares as shall be set forth therein at the price per one one-thousandth 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,

11

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 hereby may be or become null and void in the circumstance specified in Section 7(e) of such Agreement.

The provisions of Section 7(e) of this Agreement shall be operative whether or not the foregoing legend is contained on any such Rights Certificates.

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

12

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 any time after the Close of Business on the Distribution Date, and at or prior to the Close of Business on the earlier of the Redemption Date or the Final Expiration Date, 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 one-thousandths 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

13

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 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), Section

14

11(a)(iii) and Section 23(a) 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 one-thousandths 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 earliest of (i) the Close of Business on May 21, 2012 (the “Final Expiration Date”), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the “Redemption Date”), or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof.

(b) The purchase price for each one one-thousandth of a Series A Preferred Share pursuant to the exercise of a Right shall initially be $140 (as adjusted, the “Purchase Price”). The 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.

(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 one-thousandth 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 one-thousandths of a Preferred Share to be purchased and

15

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 one-thousandths 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

16

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 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 Triggering 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

17

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 canceled. 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

18

shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be canceled 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 canceled Rights Certificates to the Company or shall, at the written request of the Company and after any retention period required by the Securities and Exchange Commission, destroy such canceled Rights Certificates, and in such case shall deliver a certificate of destruction thereof 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, CommonShares and/or other securities) that, as provided in this Agreement including Section 11(a)(iii) hereof, 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

19

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), or as soon as is required by law or regulation following the Distribution Date, as the case may be, 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 and, in the event the Preferred Shares or other securities are not then registered under the Exchange Act, file an appropriate form to so register such Preferred Shares or other securities, (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

20

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 Incorporation 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.

21

(d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all one one-thousandths of a Preferred Share (and, following the occurrence of a Triggering Event, Common Shares and/or other securities, as the case may be) 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 one-thousandths 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 one-thousandths 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 one-thousandths 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 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 one-thousandths of a Preferred Share (or Common Shares and/or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be

22

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 the Preferred Shares payable in Preferred Shares or other capital stock, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of Preferred Shares or (D) issue any shares of its capital

23

stock in a reclassification 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) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii).

(ii) In the event any Person shall become an Acquiring Person then 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 one-thousandths of a Preferred Share, such number of Common Shares as shall equal the result obtained by (x) multiplying the then current Purchase Price by the then number of one one-thousandths of a Preferred Share for which a Right was exercisable immediately before such 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

24

Common Share (determined pursuant to Section 11(d)) on the date of the first occurrence of such event (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 Common Shares authorized by the Company’s Articles of Incorporation 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 Rights in 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) d*etermine 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 Common Shares (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;

25

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 Rights 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

26

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 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 Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Shares (or shares having the same rights, privileges and preferences as the Preferred Shares (“equivalent preferred shares”) or securities convertible into the Preferred Shares or equivalent preferred shares at a price per Preferred Share or equivalent preferred share (or having a conversion price per share, if a security convertible into the Preferred Shares or equivalent preferred shares) less than the Current Market Price per share of the 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 the Preferred Shares outstanding on such record date plus the number of the Preferred Shares which the aggregate offering price of the total number of the Preferred Shares or equivalent preferred shares or both so to be offered (and/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 the Preferred Shares outstanding on such record date plus the number of additional the Preferred Shares or equivalent preferred shares or both to be offered for subscription or purchase (or into which the convertible

27

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 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 the 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, cash (other than a regular quarterly cash dividend), assets (other than a dividend payable in the 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 the 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, 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 Preferred Share and the denominator of which shall be such Current Market

28

Price per share of the 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 take into account ex-dividend trading or trading after any subdivision, combination or reclassification. 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,

29

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 and shall be conclusive for all purposes. The term “Trading Day” shall mean a day on which the principal national securities exchange on which the Common Shares are listed or admitted 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.

30

(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 the Preferred Shares shall be conclusively deemed to be the Current Market Price per share of the Common Shares (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof), multiplied by 1000. If neither the Common Shares nor the 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 one-thousandths of a Preferred Share shall be equal to the “Current Market Price” of one Preferred Share divided by 1000.

(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 one-millionth 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

31

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 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, 12, 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 one-thousandths of a Preferred Share (or other consideration, as the case may be) 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 one-thousandths of a Preferred Share, that number of one one-thousandths of a Preferred Share (calculated to the nearest one one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number of one one-thousandths of a share covered by a Right immediately prior to this

32

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 one-thousandths 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 one-thousandths 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

33

the date of adjustment, 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 one-thousandths 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 one-thousandths of a share and the number of one-thousandths 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 the then par value, if any, of the number of one one-thousandths 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 such number of fully paid and nonassessable one one-thousandths of a Preferred Share 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 one-thousandths of a Preferred Share and other capital stock or securities of the Company, if any, issuable upon such exercise over and above

34

the number of one one-thousandths 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.

(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), (iii) effect a statutory share exchange with any Person (other than a Subsidiary of the Company in a transaction which complies with Section 11(o) hereof, or (iv) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction, or a series of related

35

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, statutory share exchange 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, statutory share exchange 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 Sections 23, 24 or 27 hereof, take or permit any Subsidiary to take any action (including, without limitation, any conversion or redemption of any series of Common Shares otherwise permitted under the Articles of Incorporation) 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 the outstanding Common Shares payable in Common Shares or (ii) effect a subdivision, combination or consolidation 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 one-thousandths of a Preferred Share purchasable after such

36

event upon proper exercise of each Right shall be determined by multiplying the number of one one-thousandths 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 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).

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, Statutory Share Exchange or Sale or Transfer of Assets or Earning Power.

(a) In the event that, following the date any Person has become an Acquiring Person, directly or indirectly, (i) the Company shall consolidate with, or merge with and into,

37

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, (iii) the Company shall be a party to a statutory share exchange with 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) after which the Company is a Subsidiary of any other Person, or (iv) 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 Purchase Price, in accordance with the terms of this Agreement, such number of validly authorized and issued, fully

38

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 one-thousandths 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), (ii) or (iii) of the first sentence of Section 13(a), the Person that is the issuer of any securities

39

into which Common Shares of the Company are converted or exchanged in such merger, consolidation or statutory share exchange, and if no securities are so issued, the Person that is the other party to such merger, consolidation or statutory share exchange; and

(ii) in the case of any transaction described in clause (iv) 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 are and have been so registered, “Principal Party” shall refer to such other Person; (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; and (3) in case such Person is owned, directly or indirectly, by a joint venture formed by two or more persons that are not owned, directly or indirectly, by the same Person, the rules set forth in (1) and (2) above shall apply to each of the chains of ownership having an interest in such joint venture as if such party were a “Subsidiary” of both or all of such joint ventures and the Principal Parties in each such chain shall bear the obligations set forth in this Section 13 in the same ratio as their direct or indirect interests in such Person bear to the total of such interests.

40

(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;

(ii) use its best efforts to qualify or register the Rights and the securities purchasable upon exercise of the Rights under the Blue Sky laws of such jurisdictions as may be necessary or appropriate; and

(iii) 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 statutory share exchange 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

41

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 of the Rights 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 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

42

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 and shall be conclusive for all purposes.

(b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions which are integral multiples of one one-thousandths 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 one-thousandths of a Preferred Share). Fractions of Preferred Shares in integral multiples of one one-thousandths 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 Section 11(d)(ii) hereof) 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,

43

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. Holders of Rights shall be entitled to recover the reasonable costs and expenses, including attorneys’ fees, incurred by them in any action to enforce the provisions of this Agreement.

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

44

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, 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

45

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.

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

46

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 countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name

47

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) 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.

48

(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 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.

49

(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

50

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 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

51

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

52

effective date of any 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

53

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 such time as any Person becomes an Acquiring Person, redeem all but not less than all the then outstanding Rights at a redemption price of $.01 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 as of a date determined by the Board) or cash. The redemption of the Rights by the Board of Directors of the Company may be made effective at such time, on such basis and with such conditions as the Board of Directors of the Company, in its sole discretion, may establish.

(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

54

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. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at anytime in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of Common Shares before the Distribution Date.

Section 24.    Exchange.

(a) 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 Common Share per Right, 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

55

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 Common Shares equal to the number of such Rights held by such holder multiplied by the applicable Exchange Ratio. The Company shall 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 Preferred Shares (or equivalent preferred shares, as such term is defined in Section 11(b) hereof) for Common Shares at the initial rate of one one-thousandth of a Preferred Share (or equivalent preferred share) for each 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

56

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 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, at any time after the Distribution Date, (a) to pay any dividend payable in stock of any class or series to the holders of the Preferred Shares or to make any other distribution to the holders of the Preferred Shares (other than a regular quarterly cash dividend) or (b) to offer to the holders of the Preferred Shares rights or warrants to subscribe for or to purchase any additional 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 the Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), 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 a statutory share exchange with any 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

57

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, statutory share exchange, 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:

CarMax, Inc.

4900 Cox Road

Glen Allen, VA 23060

58

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 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:

Wells Fargo Bank Minnesota, N.A.

161 North Concord Exchange

South St. Paul, Minnesota 55075

Attention: CarMax Account Manager

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 time any Person shall become an Acquiring Person 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 Rights Certificates (or, before the Distribution Date, the Common Shares). From and after such time as any Person shall become an Acquiring Person 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, or (iii) to change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable and which shall not adversely

59

affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person). 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 one-thousandths of a Preferred Share for which a Right is exercisable, provided that this Agreement may be amended to change the type and number of securities into which a right is exercisable before the occurrence of any Triggering Event if, after giving effect to such amendment, the new securities into which each Right is so exercisable have a value equal to the value of, and have voting rights at least equal to the voting rights of, the securities into which such Right was exercisable prior to such amendment (excluding any value attributable to any minimum dividend payments and excluding any voting rights operable in case of non-payment of dividends). 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).

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

60

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 shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board 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

61

invalid, void or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

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.

62

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.

	CARMAX, INC.
Attest:

By    /S/    PHILIP J. DUNN	By    /S/    W. AUSTIN LIGON
Title    Assistant Secretary	Title    President

	WELLS FARGO BANK MINNESOTA, N.A.
Attest:
By    /S/    SUSAN ROEDER	By    /S/    BARBARA M. NOVAK
Title    Vice President	Title    Vice President

63

EXHIBIT A

The following provisions are or will be set forth as Section B of Article IV of the Articles of Incorporation:

B.    Series A Preferred Stock.

The Board of Directors of the Corporation has heretofore designated 300,000 shares of the Preferred Stock as the Cumulative Participating Preferred Stock, Series A (“Series A Stock”). Such number may from time to time be decreased (but not below the number of shares of Series A Stock then outstanding) by the Board of Directors of the Corporation. The relative rights and preferences of such series and the holders of the outstanding shares thereof are as set forth in this Section B.

1.    Dividends and Distributions.

(a) The holders of shares of the Series A Stock, in preference to the holders of shares of the Common 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 A 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, 1000 times the aggregate per share amount of all cash dividends, and 1000 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 Common Stock, or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common 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 A Stock. In the event the Corporation shall at any time after the first issuance of any share or fraction of a share of the Series A Stock declare or pay any dividend on Common Stock payable in shares of Common 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 Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount per share to which holders of shares of the Series A 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 Series A 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 Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(b) The Corporation shall declare a dividend or distribution on the Series A Stock as provided in paragraph (B)(1)(a) of this Article immediately after it declares a

A-1

dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common 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 A 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 A Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of the Series A 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 A 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 A 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 A 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. The holders of shares of the Series A Stock shall have the following voting rights:

(a) Subject to the provision for adjustment hereinafter set forth, each share of the Series A Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time after the first issuance of any share or fraction of a share of the Series A Stock declare or pay any dividend on Common Stock payable in shares of Common 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 Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of the Series A Stock shall be entitled shall be adjusted by multiplying the number of votes per share to which holders of shares of the Series A Stock were entitled immediately prior to such event by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(b) Except as otherwise provided herein or by law, the holders of shares of the Series A Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation.

A-2

(c) Except as set forth herein or as provided by law, holders of the Series A Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.

(3)    Certain Restrictions.

(a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Stock as provided in paragraph (B)(1) of this Article are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of the Series A 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 A 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 A Stock, except dividends paid ratably on the Series A 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 A Stock, any such parity stock or any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) with the Series A 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 (B)(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 A Stock redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled 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 May 21, 2062, redeem all or any portion of the outstanding shares of Series A Stock.

A-3

(b) The redemption price shall be an amount per share equal to the greater of (i) $140,000 or (ii) subject to the provision for adjustment hereinafter set forth, 1000 times the current market price per share of Common Stock on the date fixed for redemption, plus in each such case an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date fixed for redemption. The current market price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common 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 Common Stock is listed or admitted to trading or, if the Common 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 Common 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 Common Stock. If no professional market maker is then making a market in the Common Stock, the current market price per share of the Common 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 Common Stock is listed or admitted to trading is open for the transaction of business or, if the Common 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 the first issuance of any share or fraction of a share of the Series A Stock declare or pay any dividend on Common Stock payable in shares of Common 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 Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount per share to which holders of shares of the Series A 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 A 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 Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(c) In case less than all of the outstanding shares of Series A 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

A-4

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 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 A 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 A 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 A 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 A Stock otherwise than by redemption pursuant to paragraph (B)(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 A Stock shall not have been declared and paid or declared and a sum sufficient for the payment thereof set apart, neither the Corporation nor any subsidiary shall so acquire

A-5

any shares of Series A Stock except in accordance with a purchase offer made on the same terms to all the holders of the outstanding shares of Series A Stock.

(6)    Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination, statutory share exchange or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of the Series A Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. If the Corporation shall at any time after the first issuance of any shares of the Series A Stock declare or pay any dividend on Common Stock payable in shares of Common 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 Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of the Series A Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(7)    Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (a) to the holders of shares of Common Stock or of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Stock unless, prior thereto, the holders of shares of the Series A Stock shall have received an amount per share equal to the greater of (i) $140,000 or (ii) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate amount to be distributed per share to holders of Common Stock, plus in each such case an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (b) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Stock, except distributions made ratably on the Series A Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after the first issuance of any share or fraction of a share of the Series A Stock declare or pay any dividend on Common Stock payable in shares of Common 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 Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount per share to which holders of shares of the Series A Stock shall be entitled under the provision of clause (a) of the preceding sentence shall be adjusted by multiplying the amount per share to which holders of shares of the Series A Stock would have been entitled immediately prior to such event under the provision of clause (a) of the preceding sentence by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

A-6

(8)    Amendment. The Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Stock so as to affect them adversely without the affirmative vote of the holders of more than two-thirds of the outstanding shares of the Series A Stock, voting together as a single voting group.

A-7

EXHIBIT B

[Form of Rights Certificate]

Certificate No. CCR-             Rights

NOT EXERCISABLE [BEFORE THE DISTRIBUTION DATE (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) OR]ñ AFTER MAY 21, 2012 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.]**

* 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

Rights Certificate

CarMax, 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, subject to the terms, provisions and conditions of the Rights Agreement dated as of May 21, 2002 and as amended from time to time (the “Rights Agreement”) between CarMax, Inc., a Virginia corporation (the “Company”), and Wells Fargo Bank Minnesota, N.A., a national banking association (Wells Fargo 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 May 21, 2012 (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 one-thousandth of a fully paid nonassessable share of Cumulative Participating Preferred Stock, Series A, par value $20.00 per share (the “Preferred Shares”), of the Company, at a purchase price of $             per one one-thousandth 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                          ,             , based on the Preferred Shares as constituted at such date.

Upon the occurrence of a Triggering 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

B-2

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 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 one-thousandths 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 at a redemption price of $.01 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 one-thousandths 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-3

WITNESS the facsimile signatures of the proper officers of the Company and its corporate seal. Dated as of:

Attest:	CARMAX, INC.
	By:
Title:	Title:
Countersigned:
[INSERT NAME OF RIGHTS AGENT]
By
Authorized Signature

B-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 within-named Rights Certificate on the books of the within-named Company, with full power of substitution.

Dated:                                               ,                                                                      

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.

Dated:                                               ,                                                                      

Signature

B-5

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-6

[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: CarMax, 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:                                      ,                                                                                                                        

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-7

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:                                      ,                                                                                                                                 

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:                                  ,                                                                                                                                

Signature

B-8

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-9

EXHIBIT C

SUMMARY OF RIGHTS TO PURCHASE

PREFERRED STOCK

On May 21, 2002, the Board of Directors of CarMax, Inc., a Virginia corporation (the “Company”), declared a dividend distribution of one Preferred Stock Purchase Right (a “ Right”) for each share of Common Stock, par value $20 per share (the “Common Stock”) outstanding on the record date described below (the “Record Date”), and further authorized the issuance of one Right with respect to each share of Common Stock that in certain cases shall become outstanding thereafter. At the time of the declaration of such dividend, each Right represented the right to purchase from the Company one one-thousandth of a share of the Company’s Series A Cumulative Participating Preferred Stock, par value $20 per share (the “Series A Preferred Stock”), at a price of $140 (the “Series A Purchase Price”), subject to adjustment in certain circumstances. The description and terms of the Rights are set forth in a Rights Agreement, dated as of May 21, 2002, between the Company and Wells Fargo Bank Minnesota, N.A., as rights agent (the “Rights Agent”). The Record Date was the day and time which was immediately after the effectiveness of the transaction in which the Company ceased to be a subsidiary of Circuit City Stores, Inc., a Virginia corporation, by means of the redemption of one class of Circuit City common stock in exchange for Common Shares and the simultaneous distribution of the remaining outstanding Common Shares as a dividend on the other class of Circuit City common stock.

Initially, the Right will be attached to and represented by the certificates representing outstanding shares of Common Stock. The Rights will separate from the Common Stock on the date (the “Distribution Date”) which is the earlier of (i) ten days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired beneficial ownership of an Acquiring Block (as hereinafter defined), or (ii) ten business days (or such later date as may be set by the Board of Directors prior to any person becoming an Acquiring Person) following the commencement of, or first public announcement of the intent of any person to commence, a tender offer or exchange offer if, upon consummation thereof, the person or group making such offer would be the beneficial owner of an Acquiring Block. For this purpose, an Acquiring Block means 15% or more of the outstanding Common Stock.

Until the Distribution Date, (i) no Rights certificates will be distributed, (ii) the Rights will be transferable with and only with the Common Stock certificates, and (iii) the surrender for transfer of any Common Stock certificates will also constitute the transfer of the Rights associated with the Common Stock represented by such certificates. Following the Distribution Date, Rights certificates will be mailed to holders of record of the Common Stock as of the Close of Business on the Distribution Date and, thereafter, such separate Rights certificates alone will evidence the Rights. Except in certain limited circumstances, only shares of Common Stock issued prior to the Distribution Date will be issued with Rights.

C-1

The Rights are not exercisable until the Distribution Date and will expire at the Close of Business on May 21, 2012, unless earlier exercised or redeemed by the Company as described below.

If any person becomes an Acquiring Person, each holder of a Right will thereafter have the right to receive, upon the exercise thereof, in lieu of shares of the associated series of Preferred Stock, shares of the associated series of Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Right. Notwithstanding any of the foregoing, following such occurrence any Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by an Acquiring Person will immediately become null and void.

For example, at an exercise price of $140 per Right, each Right not owned by an Acquiring Person (or by certain related parties) following an event set forth in the preceding paragraph would entitle its holder to purchase $280 worth of Common Stock (or other securities or assets, as noted above) for $140. Assuming that the Common Stock had a per share value of $40 at such time, the holder of each valid Circuit City Right would be entitled to purchase seven shares of Common Stock for $140.

At any time following the date any person acquires an Acquiring Block, if (i) the Company engages in a merger or consolidation in which the Company is not the surviving corporation, (ii) the Company engages in a merger or consolidation with another person in which the Company is the surviving corporation, but in which all or part of the Common Stock is changed or exchanged, (iii) the Company engages in a statutory share exchange or (iv) 50% or more of the Company’s assets or earning power is sold or transferred, the Rights Agreement requires that proper provision be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof, common stock of the acquiring company having a value equal to two times the exercise price of the Right. Notwithstanding any of the foregoing, following the occurrence of any of the events set forth in this paragraph, any Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by an Acquiring Person will immediately become null and void.

The Rights Agreement provides that, after the Distribution Date, the Company generally may not take any action which would diminish substantially the benefits of the Rights, including any consolidation or merger with, or sale of 50% of the Company’s assets or earning power to, any person which has securities or is bound by agreements which would have such effect.

The Series A Purchase Price (the “Purchase Price”), payable, and the number of one one-thousandth of a share of Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on the Preferred Stock or other capital stock, or a subdivision, combination or reclassification of the Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights or warrants to subscribe for Preferred Stock or securities convertible into Preferred Stock at less than the current market price of the Preferred Stock, or (iii) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above).

C-2

With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. The Company may, in lieu of issuing fractional shares of Preferred Stock (other than fractions which are integral multiples of one one-thousandth of a share) upon exercise of the Rights, make a cash payment based on the market price of the Preferred Stock on the last trading date prior to the date of exercise.

If the Company is not able to issue shares of the applicable series of Preferred Stock or Common Stock because of the absence of necessary regulatory approval, restrictions contained in the Company’s Amended and Restated Articles of Incorporation or for any other reason, a person exercising Rights will be entitled to receive a combination of cash or property or other securities having a value equal to the value of the shares of Preferred Stock or Common Stock which would otherwise have been issued upon exercise of the Rights.

At any time until the date any person acquires an Acquiring Block, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right, payable in cash or securities or both (the “Redemption Price”). Immediately upon the action of the Board of Directors of the Company ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. Any such redemption may be made effective at such time, on such basis and with such conditions as may be established by the Board of Directors.

After a person becomes an Acquiring Person and before any Acquiring Person acquires 50% or more in voting power of the outstanding shares of Common Stock, the Company may require a holder to exchange all or any portion of the holder’s Rights at an exchange ratio of (1) one share of Common Stock or one one-thousandth of a share of Series A Preferred Stock (or in certain circumstances, other securities of the Company) per Right.

Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to stockholders or to the Company, stockholders may, depending upon the circumstances, recognize taxable income at such time as the Rights become exercisable or are exercised for Common Stock (or other consideration) of the Company or for common stock of the acquiring company as set forth above.

Certain provisions of the Rights Agreement relating to the principal economic terms of the Rights generally may not be amended at any time. Other provisions may be amended by the Board of Directors of the Company prior to the time any person acquires an Acquiring Block. Thereafter, these other provisions of the Rights Agreement may be amended by the Board in order to cure any ambiguity, defect or inconsistency, or in any other respect that will not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person).

Each one one-thousandth of a share of Series A Preferred Stock will be entitled to (i) a quarterly dividend equal to the greater of (a) the quarterly dividend declared per share of

C-3

Common Stock or (b) $.01, (ii) upon liquidation, a minimum preferential liquidation payment equal to the greater of (a) $140 or (b) the market price of a share of Common Stock at the time of liquidation, plus accrued and unpaid dividends, and (iii) in the event of any merger, consolidation or other transaction in which shares of Common Stock are exchanged, the same amount received per share of Common Stock. After May 21, 2062, the Company may redeem all or any portion of the Series A Preferred Stock at a price equal to the respective liquidation payments described above. The foregoing rights are protected by customary anti-dilution provisions. The holders of shares of Preferred Stock are not entitled to vote on any matter except to the extent provided by law. Because of the nature of the Preferred Stock’s dividend, liquidation and redemption rights, the value of each one one-thousandth of a share of Preferred Stock purchasable upon exercise of each Right should approximate the value of one share of the associated series of Common Stock subject to the effect on such value of the fact that holders of Preferred Stock have no voting rights other than those provided by law.

A copy of the Rights Agreement is filed with the Securities and Exchange Commission as an exhibit to a Registration Statement of the Company on Form S-4 (including any amendments thereto). A copy of the Rights Agreement is available free of charge from the Company upon written request. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated herein by reference.

C-4

EX-5.1

Exhibit 5.1

[McGUIREWOODS LLP LETTERHEAD]

June 5, 2002

CarMax, Inc.

4900 Cox Road

Richmond, Virginia 23060

CarMax, Inc. (the “Company”)

Registration Statement on Form S-4

Registration No. 333-85240

Ladies and Gentlemen:

We have advised the Company in connection with the Registration Statement on Form S-4 (Reg. No. 333-85240) (the “Registration Statement”) filed by the Company with the Securities and Exchange Commission for the purpose of registering under the Securities Act of 1933, as amended (the “Act”), the issuance and delivery of (i) $1,283,292,929 maximum aggregate offering price of shares of CarMax, Inc. Common Stock, par value $.50 per share (the “CarMax Stock”) and (ii) and Rights to purchase CarMax, Inc. Preferred Stock, Series A, attached in equal number to the shares of CarMax Stock (“CarMax Rights”).

In rendering this opinion, we have examined such certificates of public officials, certificates of officers of the Company, documents and records of the Company (or copies of such documents and records certified to our satisfaction) and such other documents, certificates, records and papers as we have deemed necessary as a basis for such opinion.

Based on the foregoing and on such legal considerations as we deem relevant, we are of the opinion that:

1.    The CarMax Stock has been duly authorized, and, when issued and delivered as described in the Registration Statement, will be validly issued, fully paid and nonassessable.

2.    All corporate action required under the laws of the Commonwealth of Virginia has been taken for the CarMax Rights, if and when issued pursuant to the terms and provisions of the Rights Agreement, dated as of May 21, 2002 (the “Rights Agreement”), between the Company and Wells Fargo Bank Minnesota, N.A., as rights agent, to be validly issued.

The opinion set forth in paragraph 2 concerning the CarMax Rights is limited to the valid issuance of the CarMax Rights under the Virginia Stock Corporation Act. In this connection, we have not been asked to, and accordingly do not, express any opinion herein with respect to any other aspect of the CarMax Rights, the effect of any equitable principles or fiduciary considerations relating to the adoption of the Rights Agreement or the issuance of the CarMax Rights, the enforceability of any particular provisions of the Rights Agreement, or the provisions of the Rights Agreement which discriminate among shareholders or among any series of stock.

We consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to references to us under the heading “Legal Matters” in the proxy statement/prospectus that is part of the Registration Statement, and in any amendment or supplement to the proxy statement/prospectus, and any related registration statements filed pursuant to Rule 462(b) under the Act. We do not admit by giving this consent that we are in the category of persons whose consent is required under Section 7 of the Act.

Very truly yours,

/s/    McGuireWoods LLP

EX-10.1

Exhibit 10.1

FORM OF AMENDED AND RESTATED

TAX ALLOCATION AGREEMENT

This AMENDED AND RESTATED TAX ALLOCATION AGREEMENT is dated as of [            ], 2002, by and among Circuit City Stores, Inc. (“Circuit City”), a Virginia corporation, and those corporations listed on Exhibit A hereto (together with Circuit City, the “Parties”).

WHEREAS, as of the date hereof, Circuit City is the common parent of an affiliated group of domestic corporations within the meaning of Section 1504(a) of the Code, and the members of the affiliated group have heretofore joined in filing consolidated federal income Tax returns (the “Affiliated Group”);

WHEREAS, Circuit City and members of its Affiliated Group previously executed that certain Tax Allocation Agreement dated as of May 1, 1994 (the “Original Tax Allocation Agreement”);

WHEREAS, Circuit City intends to separate the business of the CarMax Group from the rest of Circuit City Stores (the “Separation”) such that following the Separation CarMax, Inc., a Virginia corporation and currently a wholly-owned subsidiary of Circuit City, will become an independent separately traded public company;

WHEREAS, the Separation will be consummated by Circuit City Stores by means of (i) the redemption (the “Redemption”) of all of the issued and outstanding shares of CarMax Group Stock in exchange for shares of common stock, par value $.50 per share, of CarMax (the “CarMax Common Stock”) and (ii) the distribution (“the “Distribution”) of CarMax Common Stock to the holders of Circuit City Group Stock as a pro rata dividend;

WHEREAS, as a result of the Separation, the Parties desire to amend and restate the Original Tax Allocation Agreement to provide for certain Tax matters, including the assignment of responsibility for the preparation and filing of Tax Returns, the payment of Taxes (including Taxes with respect to the Separation), and the prosecution and defense of any Tax controversies;

NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the Parties hereby agree as follows:

ARTICLE I.  

DEFINITIONS

SECTION 1.1.    General.    Capitalized terms used in this Agreement and not defined herein shall have the meanings that such terms have in the Separation Agreement. As used in this Agreement, the following terms shall have the following meanings:

“Agreement” shall mean this Tax Allocation Agreement.

“Benefit Amount” shall mean the amount derived by adding (i) a Loss Company’s net operating loss multiplied by the highest marginal corporate income tax rate applicable for the taxable period to (ii) total credits generated by the Loss Company.

“Business Day” or “Business Days” shall mean a day which is not a Saturday, Sunday or a day on which the Federal Reserve banks are authorized or required by law to close.

“CarMax” shall have the meaning set forth in the recitals hereof.

“CarMax Group” shall mean CarMax, and each Subsidiary of CarMax, immediately after the Separation.

“Circuit City” shall have the meaning set forth in the recitals hereof.

“Circuit City Group” shall mean Circuit City, and each Subsidiary of Circuit City, immediately after the Separation.

“Circuit City Return” shall mean the federal income tax return of Circuit City prepared on a stand-alone basis for all taxable periods.

“Code” shall mean the Internal Revenue Code of 1986, as amended, and the Treasury regulations promulgated thereunder, including any successor legislation.

“Consolidated Return” shall mean any federal income tax return where Circuit City and at least one Subsidiary jointly file.

“Control” shall have the meaning set forth in Section 355(a) of the Code.

“Final Determination” shall mean the final resolution of liability for any Tax for any taxable period, including any related interest or penalties, by or as a result of: (1) a final and unappealable decision, judgment, decree or other order by any court of competent jurisdiction; (2) a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code, or comparable agreement under the laws of other jurisdictions which resolves the entire Tax liability for any taxable period; or (3) any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered by the jurisdiction imposing the Tax.

“Indemnified Liability” shall mean any liability imposed upon or incurred by any Member of the Circuit City Group for which it is indemnified and held harmless under Section 4.3(a).

“IRS” shall mean the Internal Revenue Service.

“Loss Company” shall mean any Member whose Separate Return shows a net operating loss.

2

“Member” shall mean each corporation that is a member of the Affiliated Group.

“Member Return” shall mean the federal income tax return of a Member prepared on a stand-alone basis for all taxable periods.

“Party” shall mean any of Circuit City or the corporations listed on Exhibit A hereto.

“Person” shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof.

“Proceeding” shall mean any audit, examination or other proceeding brought by a Taxing Authority with respect to Taxes.

“Prohibited Acts” shall have the meaning specified in Section 4.2.

“Ruling” shall mean the private letter ruling issued by the IRS to Circuit City dated April 10, 2002.

“Restricted Period” shall mean the two-year period commencing with the Separation.

“Separate Return” shall mean (i) for a Member other than Circuit City, the Member Return, after consideration of intercompany adjustments and eliminating entries, that is involved in the Consolidated Return and (ii) for Circuit City, the Circuit City Return, after consideration of intercompany adjustments and eliminating entries, that is involved in the Consolidated Return.

“Separation” shall have the meaning set forth in the recitals hereof.

“Separation Agreement” shall mean the agreement between Circuit City and CarMax dated as of [DATE].

“Separation Date” shall mean the Business Day on which the Separation is effected.

“Subsidiary” shall mean an entity more than 50% of the equity interest in which is owned directly or indirectly by Members.

“Tax” or “Taxes” shall mean any taxes, charges, fees, levies, imposts, duties, or other assessments of a similar nature, including without limitation, income, alternative or add-on minimum, gross receipts, excise, employment, sales, use, transfer, license, payroll, franchise, severance, stamp, occupation, windfall profits, withholding, Social Security, unemployment, disability, ad valorem, estimated, highway use, commercial rent, capital stock, paid up capital, recording, registration, property, real property gains, value added, business license, custom duties, or other tax or governmental fee of any kind

3

whatsoever, imposed or required to be withheld by any Taxing Authority including any interest, additions to tax, or penalties applicable thereto.

“Taxing Authority” shall mean any governmental authority (whether United States or non-United States, and including, without limitation, any state, municipality, political subdivision or governmental agency) responsible for the imposition of any Tax.

“Tax Due” shall mean all federal income taxes, alternative minimum taxes, environmental taxes, penalties, interest, and any other amount properly included as being due for the return in question net of all available credits and deductions. Tax Due may not be less than zero.

“Tax Returns” shall mean all reports or returns (including information returns) required to be filed or that may be filed for any period with any Taxing Authority in connection with any Tax or Taxes (whether domestic or foreign).

SECTION 1.2.    References; Interpretation.    References in this Agreement to any gender include references to all genders, and references to the singular include references to the plural and vice versa. The words “include”, “includes” and “including” when used in this Agreement shall be deemed to be followed by the phrase “without limitation”. Unless the context otherwise requires, references in this Agreement to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, such Agreement. Unless the context otherwise requires, the words “hereof”, “hereby” and “herein” and words of similar meaning when used in this Agreement refer to this Agreement in its entirety and not to any particular Article, Section or provision of this Agreement.

ARTICLE II.

ALLOCATION OF TAX LIABILITIES

SECTION 2.1.    Allocation of Tax Liabilities.

(a) The Affiliated Group shall apportion its consolidated federal income tax liability among the Members on a separate company basis. Each Member shall be allocated liability for the Tax Due shown on its Separate Return.

For each taxable period, Circuit City will compute each Member’s Tax Due on a Separate Return basis. Circuit City will then allocate the tax liability to each Member based on the following method:

(i) Step 1: The Tax Due shown on the Consolidated Return is allocated to each Member in the ratio that each Member’s Separate Return Tax Due bears to the sum of the Members’ Tax Due on their Separate Returns.

(ii) Step 2: An additional amount is allocated to each Member equal to 100% of the excess of (1) the Member’s Separate Return Tax Due,over (2) the Consolidated Return Tax Due allocated to the Member in Step 1.

4

(iii) Step 3: The total of the amounts allocated under Step 2 is credited to all Loss Companies in the ratio that each Loss Company’s Benefit Amount bears to the total Benefit Amounts of all Loss Companies.

(b) If Tax Due on a Separate Return changes as the result of the filing of amended tax returns, carrybacks, carryovers, tax audits or for any other reasons, Circuit City shall recalculate the allocation of tax liability and pay to the applicable Member or the applicable Member shall pay to Circuit City, as the case may be, such amount within 90 days of the date such change is finally determined.

SECTION 2.2.    Estimated Tax Payments.    Circuit City will calculate each Member’s share of the Affiliated Group’s estimated tax payments consistent with the provisions of Section 2.1 and each Member will pay that amount to Circuit City within a reasonable time before the due date of the estimated tax payment. Any amounts paid under this Section 2.2 shall be credited against the amounts payable to Circuit City pursuant to Section 2.1 hereof. Circuit City will solely be responsible for making the required tax payments and will be responsible for any penalty or interest due with respect to any amount not paid timely.

SECTION 2.3.    Procedures.

(a) The Affiliated Group shall file a Consolidated Return for each taxable year with respect to which this Agreement is in effect and for which the Affiliated Group is required or permitted to file a Consolidated Return, unless the Parties elect not to file a Consolidated Return by mutual consent. Circuit City shall execute and file any consents, elections, and other documents required or appropriate for the proper filing of such Returns.

(b) Unless otherwise agreed by the Parties in writing, Circuit City will deliver to each Member for its review and consent (which will not be unreasonably withheld) a draft of its Member Return as prepared on a separate basis, together with an explanation of applicable intercompany adjustments and eliminating entries, upon the request of each Member, not later than 30 days prior to the due date, including extensions, for the applicable Consolidated Return. If the Parties cannot agree with respect to such Member Return, the Parties will negotiate in good faith to resolve any such disagreement, and if it cannot be resolved will be subject to the provisions of Section 2.5, provided that notwithstanding this Section 2.3 Circuit City shall be entitled to file any Tax Return before its due date (including extensions). Each Member will allow Circuit City access to all work papers and other materials needed in the preparation of the Member Return and warrants that it will respond to any information requested concerning these items on a timely basis. In connection with the foregoing and other matters covered by this Agreement, Circuit City agrees to furnish accounting, administrative, technical and any other similar tax and accounting assistance requested by any Member for an agreed-on fee that shall be not less than the cost of such services to Circuit City.

(c) Circuit City will prepare the Circuit City Return and the Affiliated Group’s Consolidated Return. Circuit City will be responsible for and bear all additional costs and efforts associated with the preparation of the Consolidated Return.

5

(d) Circuit City will provide each Member with a complete copy of the Consolidated Return, upon the request of each Member, within a reasonable time after filing such return, and will grant each Member access to the work papers used to prepare the Member Return.

SECTION 2.4.    Audit.

(a) Circuit City will defend on audit the Consolidated Returns. Each Party agrees (1) to notify the other of any contact that may be construed as indicating that a Tax Authority may or will question, or is questioning the treatment of any items covered by this Agreement, and (2) keep the other party appropriately informed of all matters relating to audits, submissions to tax authorities, protests, conferences, litigation, and similar items.

(b) Within 90 days after any amended return is filed, any audit is settled, or any other event that causes a change in a Consolidated Return is finally resolved, the Tax Due for the applicable return will be recomputed and payment made on the basis set forth in Section 2.1 hereof.

SECTION 2.5.    Dispute Resolution.    If there is a conflict between any Member and Circuit City relating to any matters covered by this Agreement, such dispute shall be resolved by a mutually agreed upon nationally recognized firm of certified public accountants.

SECTION 2.6.    Application.    This Article will apply to all taxable years for which the Affiliated Group files a Consolidated Return, and shall terminate except as otherwise specifically provided herein with respect to any party when such party ceases to be a Member of the Affiliated Group. Notwithstanding termination of this Agreement or the filing of Consolidated Returns, this Agreement shall continue in effect with respect to any payment or refunds due or other matters relating to all taxable periods (or portions thereof) for which this Agreement was in effect.

SECTION 2.7.    Miscellaneous.    State and local taxes which are based upon net income shall be treated in a manner consistent with the methods applicable to federal income taxes if and when the Members file jointly on a consolidated, combined or unitary basis with respect to such taxes.

ARTICLE III.

RETURNS AND TAXES ATTRIBUTABLE TO MEMBERS OF THE CARMAX GROUP

SECTION 3.1.    Short Period.

For the taxable period that includes the Separation Date, Circuit City shall include the Members of the CarMax Group in the Consolidated Return of the Affiliated Group for the portion of the taxable year ending on the Separation Date (the “Short Period”) on the basis of the closing of the books method. Any tax liability of the Members of the CarMax Group for the Short Period shall be determined under Article II hereof. To the extent permitted by law or administrative practice with respect to other Tax Returns, the taxable period of the Members of the CarMax Group shall be treated as ending on the Separation Date, and if the taxable period

6

does not end on the Separation Date, the Parties shall apportion all tax items between the portions of the taxable period before and after the Separations Date on the closing of the books method.

SECTION 3.2.    Post-Separation CarMax Group Taxes.    Unless otherwise provided in this Agreement, CarMax shall pay all Taxes and shall be entitled to receive and retain all refunds of Taxes with respect to taxable periods beginning on or after the Separation Date that are attributable to any Member of the CarMax Group.

SECTION 3.3.    Post-Separation CarMax Group Tax Returns.

(a) The filing of all Tax Returns relating to Members of the CarMax Group for periods beginning on or after the Separation Date shall be the responsibility of CarMax.

(b) In the case of any partnership in which a Member of the CarMax Group is the designated Tax matters partner, CarMax shall cause such Member to continue to prepare and file such partnership’s Tax Returns.

SECTION 3.4.    Manner of Preparation.

(a) Unless otherwise agreed by the Parties in writing, with regard to Tax Returns to be prepared and filed by Circuit City or any other Member of the Circuit City Group with respect to which CarMax has liability under this Agreement, Circuit City shall submit such Tax Return to CarMax at least 30 days prior to the date on which such Tax Return is due (including extensions). CarMax shall submit its comments to Circuit City within 10 days of receipt of such Tax Return.

(b) All Tax Returns filed on or after the Separation Date shall be prepared in a manner that is consistent with the rulings obtained from the IRS or any other Taxing Authority in connection with the Separation (in the absence of a Final Determination to the contrary) and shall be filed on a timely basis (including pursuant to extensions) by the Party responsible for such filing under this Agreement. In the absence of a Final Determination to the contrary and unless deviation from past practice would have no material adverse effect on either Circuit City or CarMax, all Tax Returns filed after the date of this Agreement shall be prepared on a basis consistent with the elections, accounting methods, conventions, assumptions and principles of taxation used for the most recent taxable periods for which Tax Returns of the Affiliated Group have been filed.

SECTION 3.5.    Carrybacks.    In the event any net operating loss, capital loss or credit of the CarMax Group for any taxable period ending after the Separation Date is eligible to be carried back to a taxable period beginning prior to the Separation Date (any such amount, an “Eligible Amount”), CarMax shall, where applicable, elect to carry such Eligible Amount forward to subsequent taxable periods. If such Eligible Amount must be carried back to a taxable period of the Affiliated Group beginning prior to the Separation Date, any refund payable to CarMax shall be determined under the principles of Section 2.1 hereof.

SECTION 3.6.    Retention of Records; Access.

7

(a) Circuit City and CarMax shall, and shall cause each of their Subsidiaries to, retain adequate records, documents, accounting data and other information (including computer data) necessary for the preparation and filing of all Tax Returns required to be filed by any Member of the Circuit City Group or the CarMax Group and for any Proceeding relating to such Tax Returns or to any Taxes payable by any Member of the Circuit City Group or the CarMax Group.

(b) Circuit City and CarMax shall, and shall cause each of their Subsidiaries to, provide reasonable access to (i) all records, documents, accounting data and other information (including computer data) necessary for the preparation and filing of all Tax Returns required to be filed by any Member of the Circuit City Group or the CarMax Group and for any Proceeding relating to such Tax Returns or to any Taxes payable by any Member of the Circuit City Group or the CarMax Group and (ii) its personnel and premises, for the purpose of the review or audit of such reports or returns to the extent relevant to an obligation or liability of a Party under this Agreement and in accordance with the procedures provided in Section 7.4 of the Separation Agreement.

(c) The obligations set forth above in Sections 3.6(a) and 3.6(b) shall continue until the longer of (i) the time of a Final Determination or (ii) expiration of all applicable statutes of limitations, to which the records and information relate. For purposes of the preceding sentence, each Party shall assume that no applicable statute of limitations has expired unless such Party has received notification or otherwise has actual knowledge that such statute of limitations has expired.

SECTION 3.7.    Confidentiality; Ownership of Information; Privileged Information.    The provisions of Article 7.2 and Exhibit D of the Separation Agreement relating to confidentiality of information, ownership of information, privileged information and related matters shall apply with equal force to any records and information prepared and/or shared by and among the Parties in carrying out the intent of this Agreement.

ARTICLE IV.

SEPARATION TAX MATTERS

Notwithstanding anything herein to the contrary, the provisions of this Article IV shall govern all matters among the Parties related to an Indemnified Liability.

SECTION 4.1.    Compliance with the Ruling.    CarMax hereby confirms and agrees to comply with any and all covenants, agreements and representations in the Ruling applicable to CarMax or any member of the CarMax Group, including but not limited to agreeing that CarMax will not cease the active conduct of its trade or business within the meaning of Section 355(b) of the Code during the Restricted Period.

SECTION 4.2.    Opinion Requirement for Major Transactions Undertaken by CarMax During the Restricted Period.    CarMax agrees that during the Restricted Period it will not (i) merge or consolidate with or into any other corporation, (ii) liquidate or partially liquidate (within the meaning of such terms as defined in Section 346 and Section 302, respectively, of the Code), (iii) sell or transfer all or substantially all its assets (within the meaning of Rev. Proc. 77-37, 1977-2 C.B. 568) in a single transaction or series of related transactions, (iv) redeem or

8

otherwise repurchase any of CarMax’s capital stock other than pursuant to open market stock repurchase programs meeting the requirements of section 4.05(1)(b) of Rev. Proc. 96-30, 1996-1 C.B. 696, or (v) enter into any negotiations, agreements or arrangements with respect to transactions or events (including, without limitation, stock issuances, pursuant to the exercise of options or otherwise, option grants, capital contributions or acquisitions, or a series of such transactions or events, but excluding the Separation) that may cause the Separation to be treated as part of a plan pursuant to which one or more persons acquire directly or indirectly stock of CarMax representing a “50-percent or greater interest” therein within the meaning of Section 355(d)(4) of the Code (collectively the “Prohibited Acts”), unless CarMax first obtains an opinion of a nationally recognized law firm reasonably satisfactory to Circuit City, or a supplemental ruling from the Internal Revenue Service, that such transaction, and any transaction related thereto, will not affect the qualification of the Separation under Section 355 of the Code or cause the stock of CarMax distributed in the Separation to fail to be treated as qualified property pursuant to Section 355(e) of the Code.

SECTION 4.3.    Indemnification.    If CarMax takes any action or enters into any agreement to take any action at any time on or following the Separation Date, including, without limitation, any Prohibited Act, or if there is a breach of Section 4.1 hereof, and the Separation shall fail to qualify under Section 355 of the Code or the stock of CarMax distributed in the Separation shall fail to be treated as qualified property pursuant to Section 355(e) of the Code as a result of such action, actions or breach, then CarMax shall indemnify and hold harmless Circuit City and each Member of the Circuit City Group against any and all Taxes imposed upon or incurred by any Member of the Circuit City Group and against any liability imposed on Circuit City or any Member of the Circuit City Group for Taxes of any stockholder of Circuit City as a result. Circuit City and each other Member of the Circuit City Group shall be indemnified and held harmless under this Section 4.3 without regard to the fact that CarMax may have obtained an opinion or supplemental ruling pertaining to the action pursuant to Section 4.2 hereof.

SECTION 4.4.    Procedural Matters.

(a) Notice.    If either CarMax or Circuit City receives any written notice of deficiency, claim or adjustment or any other written communication from a Taxing Authority that may result in an Indemnified Liability, the Party receiving such notice or communication shall promptly give written notice thereof to the other Party, provided that any delay by Circuit City in so notifying CarMax shall not relieve CarMax of any liability to Circuit City hereunder except to the extent CarMax is materially and adversely prejudiced by such delay. Circuit City undertakes and agrees that from and after such time as Circuit City obtains knowledge that any representative of a Taxing Authority has begun to investigate or inquire into the Separation (whether or not such investigation or inquiry is a formal or informal investigation or inquiry), Circuit City shall (i) notify CarMax thereof, provided that any delay by Circuit City in so notifying CarMax shall not relieve CarMax of any liability to Circuit City hereunder except to the extent CarMax is materially and adversely prejudiced by such delay, (ii) consult with CarMax from time to time as to the conduct of such investigation or inquiry, (iii) provideCarMax with copies of all correspondence between Circuit City or its representatives and such Taxing Authority or any representative thereof pertaining to such investigation or inquiry and (iv) arrange for a representative of CarMax to be present at (but not participate in, except as

9

otherwise provided in Section 4.4(c) below) all meetings with such Taxing Authority or any representative thereof pertaining to such investigation or inquiry.

(b) Written Acknowledgment.    Promptly upon receipt of notice as provided in Section 4.4(a), CarMax shall confirm in writing to Circuit City that the liability asserted in the notice of deficiency, claim or adjustment or other written communication would, if imposed upon or incurred by any Member of the Circuit City Group, be an Indemnified Liability, unless CarMax believes in good faith that such liability would not be an Indemnified Liability in which case CarMax shall set forth in writing to Circuit City the grounds for such belief.

(c) Tax Proceedings Controlled by CarMax.    Any Proceeding that may result in an Indemnified Liability, which is acknowledged as such by CarMax pursuant to Section 4.4(b) hereof, shall be conducted in accordance with this Section 4.4(c) hereof.

(i) Promptly upon CarMax’s written acknowledgment that the asserted liability is an Indemnified Liability pursuant to Section 4.4(b) hereof, CarMax shall assume and direct the defense or settlement of the Proceeding, subject to the participation and consultation of Circuit City. If the Indemnified Liability is grouped with other unrelated asserted liabilities or issues in the Proceeding, Circuit City and CarMax shall use their respective commercially reasonable efforts to cause the Indemnified Liability to be the subject of a separate Proceeding. If such severance is not possible, CarMax shall assume and direct and be responsible only for the matters relating to the Indemnified Liability.

(ii) Upon request, during the course of the Proceeding, CarMax shall from time to time furnish Circuit City with evidence reasonably satisfactory to Circuit City of its ability to pay the full amount of the Indemnified Liability. If at any time during such Proceeding, Circuit City reasonably determines, after due investigation, that CarMax may not be able to pay the full amount of the Indemnified Liability, if required, then CarMax shall be required to furnish a guarantee or performance bond satisfactory to Circuit City in an amount equal to the amount of the Indemnified Liability asserted by the Taxing Authority. If CarMax fails to furnish such guarantee or bond, Circuit City may assume control of the Proceedings in accordance with Section 4.4(d) hereof, provided, however, that Circuit City will not settle any Proceeding of which it assumes control pursuant to this Section 4.4(c)(ii) without the consent of CarMax, which consent will not be unreasonably withheld.

(iii) CarMax shall pay all expenses related to the Indemnified Liability, including but not limited to fees for attorneys, accountants, expert witnesses or other consultants retained by it and, to the extent that any such expenses have been or are paid by Circuit City or any Member of the Circuit City Group, CarMax shall promptly reimburse Circuit City or such Member therefor.

(iv) Circuit City shall not pay (unless otherwise required by a proper notice of assessment and after prompt notification to CarMax of Circuit City’s receipt of notice and demand for payment), settle, compromise or concede any portion of the Indemnified Liability without the written consent of CarMax. Circuit City shall, at CarMax’s sole cost (including but not limited to any reasonable out-of-pocket costs incurred by Circuit

10

City), take such action as CarMax may reasonably request (including but not limited to the execution of powers of attorney for one or more persons designated by CarMax and the filing of a petition, complaint, amended Tax Return or claim for refund) in contesting the Indemnified Liability. CarMax shall, on a timely basis, keep Circuit City informed of all developments in the Proceeding and provide Circuit City with copies of all pleadings, briefs, orders, and other written papers pertaining thereto.

(v) Subject to satisfaction of the conditions herein set forth, CarMax may direct Circuit City to settle the Indemnified Liability on such terms and for such amount as CarMax may direct. Circuit City may condition such settlement on receipt, prior to the settlement, from CarMax of the indemnity payment with respect to the Indemnified Liability less any amounts to be paid directly by CarMax to the Taxing Authority. CarMax may direct Circuit City, at CarMax’s expense, to pay an asserted deficiency for the Indemnified Liability out of funds provided by CarMax, and to file a claim for refund.

(d) Tax Proceedings Controlled by Circuit City.    Should CarMax not provide Circuit City with the confirmation contemplated by Section 4.4(b) hereof within thirty (30) days following receipt of notice provided in Section 4.4(a) hereof or, following such confirmation, should CarMax fail within thirty (30) days following request therefor to furnish to Circuit City evidence of its ability to pay the full amount of the Indemnified Liability, or should Circuit City reasonably believe after due investigation that CarMax may not be able to pay the full amount of the Indemnified Liability, if required, and CarMax fails to furnish a guarantee or performance bond satisfactory to Circuit City in an amount equal to the amount of the Indemnified Liability then being asserted by the Taxing Authority, then Circuit City may assume control of the Proceeding upon the following terms: (1) Circuit City will diligently defend against the claim of the Taxing Authority, including the pursuit of the appeal of any adverse determinations to the appropriate tribunal (unless advised in writing by independent outside counsel at CarMax’s sole cost in its reasonable judgment that Circuit City would not prevail upon any such appeal) and shall employ such resources, including independent counsel, in conducting such defense as are reasonably commensurate to the nature and magnitude of the claim; (2) Circuit City will consult with CarMax as to the conduct of all Proceedings, will provide CarMax with copies of all protests, pleadings, briefs, filings, correspondence and similar materials relative to the Proceedings and will arrange for a representative of CarMax to be present at (but not to participate in) all meetings with the relevant Taxing Authority and all hearings before any court; and (3) Circuit City will not settle, compromise or concede any claim that would result in an Indemnified Liability unless Circuit City has made the determination, and has been so advised in writing by independent outside counsel at CarMax’s sole expense, that such settlement is reasonable in the circumstance. Subject to the above, any such Proceeding shall be controlled and directed exclusively by Circuit City and may be contested, defended, paid, settled, compromised or conceded by Circuit City and any related expenses incurred by any Member of the Circuit City Group, including but not limited to, fees for attorneys, accountants, expert witnesses or other consultants shall be reimbursed by CarMax, if CarMax admits or is found to have incorrectly failed to acknowledge the asserted liability as an Indemnified Liability as provided in Section 4.4(b) hereof; provided, however, that Circuit City will not be required to pursue the claim in the federal district court, Court of Claims or any state court if as a prerequisite to such court’s jurisdiction, it is required to pay the asserted liability unless the funds necessary to invoke such jurisdiction are provided by CarMax at no cost to Circuit City.

11

(e) Time and Manner of Payment.    Unless otherwise agreed in writing, CarMax shall pay to Circuit City the amount with respect to an Indemnified Liability (less any amount paid directly by CarMax to the Taxing Authority or made available to Circuit City under Section 4.4(d) hereof) at least two (2) Business Days prior to the date payment of the Indemnified Liability is to be made to the Taxing Authority. Such payment shall be paid by CarMax to Circuit City by wire transfer of immediately available funds to an account designated by Circuit City by written notice to CarMax prior to the due date of such payment. If CarMax delays making payment beyond the due date hereunder, CarMax shall pay interest to Circuit City on the amount unpaid at the rate of the monthly average of the “prime rate” as published in the Wall Street Journal for each day and the actual number of days for which any amount due hereunder is unpaid; provided, however, that this provision for interest shall not be construed to give CarMax the right to defer payment beyond the due date hereunder.

(f) Refund of Amounts Paid by CarMax.    Should Circuit City or any other Member of the Circuit City Group receive a refund in respect of amounts paid by CarMax to any Taxing Authority on Circuit City’s behalf or paid by CarMax to Circuit City for payment to a Taxing Authority, or should any such amounts that would otherwise be refundable to Circuit City be applied or credited by the Taxing Authority to obligations of Circuit City or any other Member of the Circuit City Group unrelated to an Indemnified Liability, then Circuit City shall, promptly following receipt (or notification of credit), remit such refund (including any statutory interest that is included in such refund or credited amount) to CarMax.

(g) Cooperation.    Subject to the provisions of Section 3.7 hereof, Circuit City and CarMax shall reasonably cooperate with one another in a timely manner in any Proceeding involving any matter that may result in an Indemnified Liability. Circuit City and CarMax agree that such cooperation shall include, without limitation, making available to the other party, during normal business hours, all books, records and information, officers and employees (without substantial interruption of employment) necessary or useful in connection with any such judicial or administrative Proceeding. The party requesting or otherwise entitled to any books, records, information, officers or employees pursuant to this Section 4.4(g) shall bear all reasonable out-of-pocket costs and expenses (except reimbursement of salaries, employee benefits and general overhead) incurred in connection with providing such books, records, information, officers or employees.

ARTICLE V.

MISCELLANEOUS

SECTION 5.1.    Complete Agreement; Construction.    This Agreement shall constitute the entire agreement between the Parties with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter.

SECTION 5.2.    Counterparts.    This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by both Parties.

12

SECTION 5.3.    Survival of Agreements.    Except as otherwise contemplated by this Agreement, all covenants and agreements of the Parties contained in this Agreement shall survive the Separation Date in accordance with their terms.

SECTION 5.4.    Expenses.    Except as otherwise set forth in this Agreement, all costs and expenses incurred on or prior to the Separation Date (whether or not paid on or prior to the Separation Date) in connection with the preparation, execution, delivery and implementation of this Agreement shall be charged to and paid by Circuit City. Except as otherwise set forth in this Agreement, the CarMax Group shall bear its own costs and expenses incurred after the Separation Date.

SECTION 5.5.    Notices.    All notices and other communications hereunder shall be in writing and hand delivered or mailed by registered or certified mail (return receipt requested) or sent by any means of electronic message transmission with delivery confirmed (by voice or otherwise) to the Parties at the following addresses (or at such other addresses for a Party as shall be specified by like notice) and will be deemed given on the date on which such notice is received:

To any Member of the Circuit City Group:

Circuit City Stores, Inc.

9950 Mayland Drive

Richmond, VA 23233-1464

Attn: [General Counsel]

To any Member of the CarMax Group:

CarMax, Inc.

4900 Cox Road

Glen Allen, VA 23060-3314

Attn: [General Counsel]

SECTION 5.6.    Waivers.    The failure of any Party to require strict performance by the other Party of any provision in this Agreement will not waive or diminish that Party’s right to demand strict performance thereafter of that or any other provision hereof.

SECTION 5.7.    Amendments.    This Agreement may not be modified or amended except by an agreement in writing signed by the Parties hereto; provided that this Agreement may be amended or terminated by the Members of the Circuit City Group for any taxable period beginning after the Separation without the consent of any Member of the CarMax Group.

SECTION 5.8.    Assignment.    This Agreement shall not be assignable, in whole or in part, directly or indirectly, by any Party hereto without the prior written consent of the other Party hereto, and any attempt to assign any rights or obligations arising under this Agreement without such consent shall be void.

13

SECTION 5.9.    Successors and Assigns.    The provisions to this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Parties and their respective successors and permitted assigns.

SECTION 5.10.    Additional Members.    Any new Members of the Affiliated Group shall automatically become a Party to this Agreement upon becoming Members.

SECTION 5.11.    Third Party Beneficiaries.    This Agreement is solely for the benefit of the Parties hereto and should not be deemed to confer upon third parties any remedy, claim, liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement.

SECTION 5.12.    Title and Headings.    Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.

SECTION 5.13.    Exhibits.    The Exhibits to this Agreement shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein.

SECTION 5.14.    GOVERNING LAW.    THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF VIRGINIA, WITHOUT REGARD TO ITS CONFLICTS OF LAW RULES.

SECTION 5.15.    Consent to Jurisdiction.    The Parties hereto hereby agree that the appropriate forum and venue for any disputes between any of the Parties hereto arising out of this Agreement shall be any state or federal court sitting in Richmond, Virginia and each of the Parties hereto hereby submits to the personal jurisdiction of any such court. The foregoing shall not limit the rights of any party to obtain execution of judgment in any other jurisdiction.

SECTION 5.16.    Severability.    In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The Parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

[remainder of page intentionally left blank]

14

IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed as of the day and year first above written.

CIRCUIT CITY STORES, INC., for itself and on behalf of the Members of the Circuit City Group
By:
	Name:
	Title:
CARMAX, INC., for itself and on behalf of the Members of the CarMax Group
By:
	Name:
	Title:

15

EX-10.3

Exhibit 10.3

FORM OF EMPLOYEE BENEFITS AGREEMENT

BY AND BETWEEN CIRCUIT CITY STORES, INC. AND

CARMAX, INC.

Effective as of May 21, 2002

FORM OF EMPLOYEE BENEFITS AGREEMENT

This EMPLOYEE BENEFITS AGREEMENT, dated as of             , 2002 (the “Effective Date”) is by and between Circuit City Stores, Inc., a Virginia corporation (“Circuit City”), and CarMax, Inc., a Virginia corporation and a wholly owned subsidiary of Circuit City (“CarMax”).

WHEREAS, the Board of Directors of Circuit City has determined that it is in the best interests of Circuit City and its shareholders to separate CarMax from Circuit City’s remaining businesses such that CarMax will become an independent, separately traded public business (the “Separation”);

WHEREAS, in furtherance of the foregoing, Circuit City and CarMax have entered into a Separation Agreement, dated as of May 21, 2002 (the “Separation Agreement”), and other specific agreements that will govern certain matters relating to the Separation and the relationship of Circuit City, CarMax, and their respective Affiliates following the Separation Date; and

WHEREAS, Circuit City and CarMax have agreed to enter into this Agreement to provide for the allocation of assets, liabilities, and responsibilities with respect to certain employee compensation and benefit plans and programs between them.

NOW, THEREFORE, the parties, intending to be legally bound, agree as follows:

ARTICLE I

DEFINITIONS

For purposes of this Agreement the following terms shall have the following meanings:

1.1	“Administration Period” means the period from the consummation of the Separation until the date on which CarMax determines it can properly administer the applicable employee benefit plan or payroll practice without assistance from Circuit City, which period may differ as between benefit plans and practices. CarMax shall notify Circuit City at least thirty days in advance of any termination of the Administration Period, with respect to any benefit plan or payroll practice, and provided however that the Administration Period shall in no event extend for a period in excess of one year from the consummation of the Separation with respect to any benefit plan or payroll practice.
1.2	“Affiliate” means a member of an entity’s controlled group of corporations within the meaning of Section 414 of the Code.
1.3	“Agreement” means this Employee Benefits Agreement, including all the Schedules hereto.
1.4	“Auditing Party” is defined in Section 6.5(a).
1.5	“Award,” when immediately preceded by “Circuit City,” means an award under the Circuit City Stock Incentive Plan; when immediately preceded by “CarMax,” means an award under the CarMax Stock Incentive Plan.
1.6	“CarMax” is defined in the recitals to this Agreement.
1.7	“CarMax Common Stock” means common shares, par value of $0.50 per share, of CarMax to be issued to holders of CarMax Group Common Stock and holders of Circuit City Group Common Stock in the Separation and that also trades before and through the CarMax Dividend Date on a “When issued” basis.
1.8	“CarMax Dividend” shall mean the distribution by Circuit City of CarMax Common Stock as a dividend to holders of Circuit City Group Common Stock in the Separation.
1.9	“CarMax Dividend Date” means the date on which the CarMax Common Stock held by Circuit City is distributed as a dividend to holders of Circuit City Group Common Stock and the date on which Circuit City Stores Common Stock ceases to trade on a “when issued” basis.
1.10	“CarMax Employee” means any individual who, as of the consummation of the Separation, is either actively employed by or then on a leave of absence from CarMax or a CarMax Entity.

2

1.11	“CarMax Entity” means CarMax and any Person that is, at the relevant time, an Affiliate of CarMax or is otherwise controlled, directly or indirectly, by CarMax.
1.12	“CarMax Executive” means a CarMax Employee or Circuit City Transferee who is eligible to participate in or receive a benefit under any CarMax Executive Benefit Plan.
1.13	“CarMax Executive Benefit Plans” means the executive benefit and nonqualified plans, programs, and arrangements (exclusive of Individual Agreements) established and sponsored by CarMax, for the benefit of employees and former employees of CarMax or a CarMax Entity after the Close of the Separation Date.
1.14	“CarMax Exchange Date” means the date on which CarMax Group Common Stock is redeemed in exchange for CarMax Common Stock.
1.15	“CarMax 401(k) Plan” means the CarMax, Inc. 401(k) Savings Plan.
1.16	“CarMax Group Common Stock” means common shares, par value of $0.50 per share, of Circuit City designated as “Circuit City Stores, Inc.—CarMax Group Common Stock” in the Circuit City Amended and Restated Articles of Incorporation, to be redeemed by Circuit City in the Separation.
1.17	“CarMax Group Option” means an option (either nonqualified or incentive) to purchase shares of CarMax Group Common Stock pursuant to a Circuit City Stock Incentive Plan.
1.18	“CarMax Stock Incentive Plan” means the Stock Incentive Plan or program to be established by CarMax, effective immediately prior to the CarMax Dividend Date, in connection with the treatment of options as described in Article V.
1.19	“CarMax Post-Dividend Stock Value” means the average of the sum of the closing sales prices of CarMax Common Stock as reported on the NYSE Composite Transaction Tape as of 4:00 P.M., Eastern Standard Time or Eastern Daylight Time (whichever shall then be in effect) for each of the five trading days consisting of the CarMax Dividend Date and the four trading days immediately preceding the CarMax Dividend Date.
1.20	“CarMax Pre-Dividend Stock Value” means the average of the sum of the closing sale prices of CarMax Group Common Stock Reported on the NYSE Composite Transaction Tape as of 4:00 P.M., Eastern Standard Time or Eastern Daylight Time (whichever shall then be in effect) for each of the five trading days consisting of the CarMax Dividend Date and the four trading days immediately preceding the CarMax Dividend Date.
1.21	“CarMax Option” means an option (either nonqualified or incentive) to purchase shares of CarMax Common Stock pursuant to the CarMax Stock Incentive Plan.
1.22	“CarMax Retirement Plan” means the Retirement Plan of CarMax, Inc., established on March 1, 2002.
1.23	“Circuit City” is defined in the recitals to this Agreement.

3

1.24	“Circuit City Common Stock” means the common shares, par value $.50 per share, of Circuit City designated as “Common Stock” in the Circuit City Amended and Restated Articles of Incorporation immediately after the Separation, such shares having previously been designated as Circuit City Group Common Stock and having been redesignated as “Common Stock” pursuant to an amendment to the Amended and Restated Articles of Incorporation to be filed by Circuit City in connection with the Separation.
1.25	“Circuit City Employee” means any individual who, as of the consummation of the Separation, is either actively employed by or then on a leave of absence from Circuit City or a Circuit City Entity, but does not include any Circuit City Transferee or any CarMax Employee.
1.26	“Circuit City Entity” means any entity that is, at the time relevant to the applicable provision of this Agreement, an Affiliate of Circuit City, except that, for periods beginning after the Separation Date, the term “Circuit City Entity” shall not include CarMax or a CarMax Entity.
1.27	“Circuit City Executive” means an employee or former employee of Circuit City who, immediately before the Close of the Separation Date, is eligible to participate in or receive a benefit under any Circuit City Executive Benefit Plan.
1.28	“Circuit City Executive Benefit Plans” means the executive benefit and nonqualified plans, programs, and arrangements (exclusive of Individual Agreements) established and sponsored by Circuit City, to the extent maintained, agreed upon, or assumed by Circuit City or a Circuit City Entity (other than CarMax or a CarMax Entity) for the benefit of employees and former employees of Circuit City or a Circuit City Entity (other than CarMax or a CarMax Entity) before the Close of the Separation Date.
1.29	“Circuit City 401(k) Plan” means the Circuit City Stores, Inc. 401(k) Plan.
1.30	“Circuit City Group Common Stock” means common shares, par value of $0.50 per share, of Circuit City designated as “Circuit City Stores, Inc.—Circuit City Group Common Stock” in the Circuit City Amended and Restated Articles of Incorporation that trade before the CarMax Dividend Date “with due bills” to reflect the right to receive the CarMax Dividend.
1.31	“Circuit City Group Option” means an option (either nonqualified or incentive) to purchase shares of Circuit City Group Common Stock pursuant to a Circuit City Stock Incentive Plan.
1.32	“Circuit City Stock Incentive Plan” means either or both of the Circuit City Stores, Inc. 1988 Stock Incentive Plan and the Circuit City Stores, Inc.1994 Stock Incentive Plan.
1.33	“Circuit City Post-Dividend Stock Value” means the average of the sum of the closing sale prices of Circuit City Stores Common Stock reported on the NYSE Composite

4

	Transaction Tape as of 4:00 P.M., Eastern Standard Time or Eastern Daylight Time (whichever shall then be in effect) for each of the five trading days consisting of the CarMax Dividend Date and the four trading days immediately preceding the CarMax Dividend Date.
1.34	“Circuit City Pre-Dividend Stock Value” means the average of the sum of the closing sale prices of Circuit City Group Common Stock reported on the NYSE Composite Transaction Tape as of 4:00 P.M., Eastern Standard Time or Eastern Daylight Time (whichever shall then be in effect) for each of the five trading days consisting of the CarMax Dividend Date and the four trading days immediately preceding the CarMax Dividend Date.
1.35	“Circuit City Retirement Plan” means the Retirement Plan of Circuit City Stores, Inc.
1.36	“Circuit City Stores Common Stock” means common shares, par value of $0.50 per share, of Circuit City designated as “Circuit City Stores, Inc.—Common Stock” in the Circuit City Amended and Restated Articles of Incorporation of Circuit City Stores, Inc. that trade before and through the CarMax Dividend Date on a “when issued” basis to denote no rights to receive the CarMax Dividend and continue to trade after the CarMax Dividend Date.
1.37	“Circuit City Stores Option” means an option (either nonqualified or incentive) to purchase shares of Circuit City Stores Common Stock pursuant to a Circuit City Stock Incentive Plan.
1.38	“Circuit City Transferees” means individuals who are employees of Circuit City or a Circuit City Entity (other than CarMax or a CarMax Entity) at any time after February 28, 2002 and who become employees of CarMax or a CarMax Entity after the Separation Date and prior to March 1, 2003; provided however, that such individuals shall not be deemed to be Circuit City Transferees hereunder until such transfer of employment has occurred.
1.39	“Close of the Separation Date” means 11:59:59 P.M., Eastern Standard Time or Eastern Daylight Time (whichever shall then be in effect), on the Separation Date.
1.40	“COBRA” means the continuation coverage requirements for “group health plans” under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and as codified in Code Section 4980B and ERISA Sections 601 through 608.
1.41	“Code” means the Internal Revenue Code of 1986, as amended, or any successor federal income tax law. Reference to a specific Code provision also includes any proposed, temporary, or final regulation in force under that provision.
1.42	“Disposition Year” means the Circuit City fiscal year during which the Separation Date occurs or the first CarMax fiscal year that ends after the Separation Date, as applicable.
1.43	“ERISA” means the Employee Retirement Income Security Act of 1974, as amended. Reference to a specific provision of ERISA also includes any proposed, temporary, or final regulation in force under that provision.

5

1.44	“Health and Welfare Plans,” when immediately preceded by “Circuit City,” means the health and welfare plans established and sponsored by Circuit City, to the extent maintained, agreed upon, or assumed by Circuit City for the benefit of employees and retirees of Circuit City and Circuit City Entities (other than CarMax or a CarMax Entity after the consummation of the Separation), and such other health and welfare plans or programs as may apply to such employees and retirees and, when immediately preceded by “CarMax,” means the health and welfare plans sponsored and maintained by CarMax or a CarMax Entity before or after the Separation.
1.45	“HIPAA” means the health insurance portability and accountability requirements for “group health plans” under the Health Insurance Portability and Accountability Act of 1996, as amended.
1.46	“Individual Agreement” means an individual contract or agreement (whether written or unwritten) entered into between Circuit City, a Circuit City Entity, CarMax, or a CarMax Entity and a Circuit City Executive or a CarMax Executive that establishes the terms and conditions of the employment of such individual, including any rights to special executive compensation or benefits.
1.47	“Liabilities” means any liability, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, and whether or not the same that is or would properly be reflected on a balance sheet of Circuit City, any Circuit City Entity, CarMax, or any CarMax Entity, or the notes thereto, including all costs and expenses relating thereto.
1.48	“NYSE” means the New York Stock Exchange.
1.49	“Participating Company” means (a) Circuit City, (b) any Person (other than an individual) that Circuit City has approved for participation in, and which is participating in, a Plan sponsored by Circuit City or a Circuit City Entity, and (c) any Person (other than an individual) which, by the terms of such a Plan, participates in such Plan or any employees or retirees of which, by the terms of such Plan, participate in or are covered by such Plan.
1.50	“Person” means and includes an association, an individual, a partnership, a joint venture, a joint stock company, a corporation, a trust, an unincorporated organization, a limited liability company, a group, a government or other department or agency thereof and any other entity.
1.51	“Plan,” when immediately preceded by “Circuit City,” means any plan, policy, program, payroll practice, on-going arrangement, contract, trust, insurance policy or other agreement or funding vehicle, to the extent amended from time to time, for which the eligible classes of participants include employees or former employees of Circuit City or a Circuit City Entity, and when immediately preceded by “CarMax,” means any plan, policy, program, payroll practice, on-going arrangement, contract, trust, insurance policy

6

	or other agreement or funding vehicle as amended from time to time, for which the eligible classes of participants are limited to employees or former employees of CarMax or a CarMax Entity, but no other Circuit City Entity.
1.52	“Separation Date” means the last date as of which CarMax is a member of Circuit City’s controlled group of corporations within the meaning of Code Section 414.

7

ARTICLE II

GENERAL PRINCIPLES

2.1	Assumption and Retention of Liabilities.
	(a)    CarMax shall not assume any Liabilities not expressly provided to be assumed in this Agreement.
	(b)    As of the consummation of the Separation, CarMax shall assume and agree to pay, perform, fulfill, and discharge, except as expressly provided in this Agreement, (i) all Liabilities under CarMax Plans, (ii) all employment or service-related Liabilities with respect to (A) all CarMax Employees (and their dependents and beneficiaries), (B) former employees of CarMax or a CarMax Entity (and their dependents and beneficiaries) whose last employment with a Circuit City Entity was primarily connected to CarMax or a CarMax Entity and (C) any individual who is, or was, an independent contractor, temporary employee, temporary service worker, consultant, freelancer, agency employee, leased employee, on-call worker, incidental worker, or nonpayroll worker or in any other employment relationship primarily connected to CarMax or a CarMax Entity, in each case for periods during which such individuals were employees of, or primarily performed services for CarMax or a CarMax Entity, as applicable, (iii) all employment-related Liabilities with respect to all Circuit City Transferees for periods of service with CarMax or a CarMax Entity after the Separation Date and (iv) any Circuit City Liabilities expressly transferred to CarMax or a CarMax Entity under this Agreement.
	(c)    Circuit City shall retain all Liabilities not expressly transferred to and assumed by CarMax pursuant to this Agreement, including Liabilities other than those described in Section 2.1(b)(ii) relating to CarMax Employees, Circuit City Transferees, and their dependents and beneficiaries, arising out of or resulting from employment as employees of Circuit City or a Circuit City Entity for periods on or before the Separation Date (including without limitation all Liabilities under Circuit City Plans) or that are expressly retained by Circuit City in this Agreement or any other written agreement between CarMax and Circuit City.
	(d)    Notwithstanding anything to the contrary in this Section 2.1, Liabilities relating to the CarMax Retirement Plan shall be treated as described in Section 3.2.
2.2	CarMax Participation in the Circuit City Plans.    Effective as of the consummation of the Separation, CarMax and each CarMax Entity shall cease to be a Participating Company in any Circuit City Plan, and Circuit City and CarMax and each CarMax Entity shall take all necessary action before the Separation Date to effectuate such cessation as a Participating Company.

8

2.3	Sponsorship of the CarMax Plans.    Effective no later than immediately after the Separation Date, CarMax shall assume, or shall cause a CarMax Entity to assume, sponsorship of (a) the CarMax Retirement Plan and (b) each other CarMax Plan (each of which is listed on Schedule 2.3 of the Agreement).
2.4	Terms of Participation by CarMax Employees in CarMax Plans.    Circuit City and CarMax shall adopt, or cause to be adopted, all reasonable and necessary Plan amendments and procedures to prevent CarMax Employees and former employees from receiving duplicative benefits from the Circuit City Plans and the CarMax Plans. With respect to CarMax Employees and Circuit City Transferees, each CarMax Plan shall provide that all service, all compensation, and all other benefit-affecting determinations that, as of the consummation of the Separation, were recognized under the corresponding Circuit City Plan shall, as of immediately after the consummation of the Separation (or the transfer employment for purposes of Circuit City Transferees) receive full recognition, credit, and validity and be taken into account under such CarMax Plan, except to the extent that duplication of benefits would result.
2.5	Service Crediting.    With respect to CarMax Employees and Circuit City Transferees, each CarMax Plan shall provide that for purposes of determining eligibility to participate, vesting, and entitlement to benefits (but not for accrual of pension benefits under any defined benefit pension plan), service prior to the Separation Date with Circuit City or a Circuit City Entity shall be treated as service with CarMax or the applicable CarMax entity; provided, however, that such service shall not be recognized to the extent that such recognition would result in a duplication of benefits. Such service also shall apply for purposes of satisfying any waiting periods, evidence of insurability requirements, or the application of any preexisting condition limitations under any CarMax Plan. Each CarMax Plan shall waive pre-existing condition limitations with respect to CarMax Employees and Circuit City Transferees. CarMax Employees and Circuit City Transferees shall be given credit under the applicable CarMax Plan for amounts paid during the Disposition Year prior to the Separation Date for purposes of applying deductibles, copayments and out-of-pocket maximums as though such amounts had been paid in accordance with the terms and conditions of the CarMax Plan. With respect to individuals who, following the Separation Date but prior to March 1, 2003, either (i) cease employment with Circuit City or a Circuit City Entity and immediately become employees of CarMax or a CarMax Entity or (ii) are CarMax Employees and cease employment with CarMax or a CarMax Entity and immediately become employees of Circuit City or a Circuit City Entity, Circuit City and CarMax and their respective Affiliates shall (i) credit service recognized by the other under the terms of their respective benefit plans and programs where appropriate (but not for purposes of benefit accruals under any pension plan except as provided in Section 3.2), (ii) transfer accounts between the Circuit City 401(k) Plan and the CarMax 401(k) Plan and (iii) provide coverage and benefits relating to health and welfare plans in a manner consistent with the provisions of Article IV. The service crediting described above shall be subject to any applicable “service bridging” or “break in service” rules under the Circuit City Retirement Plan and 401(k) Plan and the CarMax Retirement Plan and 401(k) Plan.health and welfare plans in a manner consistent with the provisions of Article IV. The service crediting described above shall be subject to any applicable “service bridging” or “break in service” rules under the Circuit City Retirement Plan and 401(k) Plan and the CarMax Retirement Plan and 401(k) Plan.health and welfare plans in a manner consistent with the provisions of Article IV. The service crediting described above shall be subject to any applicable “service bridging” or “break in service” rules under the Circuit City Retirement Plan and 401(k) Plan and the CarMax Retirement Plan and 401(k) Plan.

9

2.6

Approval of Plans.    Prior to the Separation Date, Circuit City shall cause CarMax to adopt (i) the CarMax Stock Incentive Plan, which shall have terms and conditions that are substantially similar to the Circuit City Stock Incentive Plan; (ii) the CarMax Employee Stock Purchase Plan; (iii) the CarMax Annual Performance-Based Bonus Plan, which shall have terms and conditions that are substantially similar to the Circuit City Annual Performance-Based Bonus Plan; and (iv) the CarMax Supplemental Executive Retirement Plan, which shall have terms and conditions substantially similar to the Circuit City Supplemental Executive Retirement Plan, which plans shall be approved prior to the Separation Date by Circuit City shareholders.

2.7

CarMax Transferees.    In the event that a CarMax Employee or a Circuit City Transferee becomes an employee of Circuit City or a Circuit City Entity on or after the Separation Date but before February 28, 2003, the individual and his or her associated employment Liabilities, including but not limited to those liabilities under the CarMax health and welfare plans, and assets and accrued benefits with respect to the CarMax 401(k) Plan and Retirement Plan shall be transferred to Circuit City or the applicable Circuit City benefit plans under the same general principles as those provided in this Agreement for transferring the employment Liabilities, assets and accrued benefits of Circuit City Transferrees to CarMax or the CarMax employee benefit plans.

10

ARTICLE III

DEFINED CONTRIBUTION AND DEFINED BENEFIT PLANS

3.1	CarMax 401(k) Plan.
	(a)    CarMax, Inc. 401(k) Savings Plan and Trust.    Circuit City and CarMax shall adopt or cause to be adopted any amendments to any trust agreements or plan documents reasonably necessary to transfer settlor responsibility and sponsorship of the CarMax 401(k) Plan and related trust from Circuit City and the trustees appointed by Circuit City to CarMax and trustees appointed by CarMax. Such amendments will be effective as of the consummation of the Separation.
	(b)    Assumption of Liabilities and Transfer of Assets.    Circuit City and CarMax shall cause, in the manner described herein, the accounts under the Circuit City 401(k) Plan of each former and current CarMax Employee and Circuit City Transferee to be transferred to the CarMax 401(k) Plan as soon as practicable after the Separation Date or such earlier date as Circuit City and CarMax shall mutually determine; provided, however, that such transfer (and the related assumption of liabilities) shall not occur if Circuit City, CarMax or any other Circuit City or CarMax Plan fiduciary reasonably believes that the transfer could result in the failure of the Circuit City 401(k) Plan or the CarMax 401(k) Plan to qualify under Code Section 401(a). Circuit City agrees to provide to CarMax, in connection with the transfer to the CarMax 401(k) Plan, a list of the CarMax Employees, former employees and Circuit City Transferees who were participants in or are otherwise entitled to benefits under the Circuit City 401(k) Plan, including descriptions of their respective account balances and the protected benefits (within the meaning of Code Section 411(d)(6)) attached to their accounts. As soon as practicable after the Separation Date: (i) Circuit City shall cause the accounts (including any outstanding loan balances) of each CarMax Employee and Circuit City Transferee in the Circuit City 401(k) Plan (without regard to any applicable vesting schedule) to be transferred to the CarMax 401(k) Plan and its related trust in kind based on the investment election of the individuals; (ii) CarMax (or any successor CarMax Entity) and the CarMax 401(k) Plan shall assume and be solely responsible for all liabilities under the CarMax 401(k) Plan relating to the accounts that are so transferred as of the time of such transfer; and (iii) CarMax shall cause such transferred accounts to be accepted by the CarMax 401(k) Plan and its related trust and shall cause the CarMax 401(k) Plan to satisfy all protected benefit requirements under the Code and applicable law with respect to the transferred accounts. In determining whether a CarMax Employee is vested in his or her account under the CarMax 401(k) Plan, the CarMax 401(k) Plan shall credit each CarMax Employee, former employee or Circuit City Transferee with all the individual’s service credited under the Circuit City 401(k) Plan. Prior to the date upon which the transfer described above occurs, Circuit City shall

11

	contribute to the Circuit City 401(k) Plan all matching contributions, if any, due to the CarMax Employees, former employees and Circuit City Transferees pursuant to the terms and conditions of such Plan prior to the transfer date.
	(c)    Circuit City and CarMax agree to use commercially reasonable efforts to coordinate the nondiscrimination testing for the Circuit City 401(k) Plan and the CarMax 401(k) Plan for the plan year ending February 27, 2003, to the extent deemed advisable.
3.2	CarMax Retirement Plan.    Effective no later than the consummation of the Separation, Circuit City shall transfer sponsorship of the CarMax Retirement Plan to CarMax. Each Circuit City Transferee who is transferred to CarMax or a CarMax Entity after the Separation but on or prior to March 1, 2003 and who has an accrued benefit under the Circuit City Retirement Plan that has not been transferred to the CarMax Retirement Plan (“Subsequent Transferee”) shall have his accrued benefit and associated benefit liabilities transferred to the CarMax Retirement Plan as soon as practicable after February 28, 2003. CarMax shall ensure that the CarMax Retirement Plan accepts and Circuit City shall ensure that the Circuit City Retirement Plan makes any transfer of benefits and liabilities required under this Section 3.2. Circuit City shall cause the trustee of the Circuit City Retirement Plan to transfer cash from the trust under the Circuit City Retirement Plan to the trust under the CarMax Retirement Plan, in an amount determined by a certified actuary chosen by Circuit City and CarMax (the “Actuary”) to be equal to the present value of all accrued benefits as of February 28, 2002 (the “Valuation Date”) with respect to Subsequent Transferees on a termination basis in accordance with Section 414(1) of the Code and the regulations promulgated thereunder. If the market value of assets as of the Valuation Date is not sufficient to fund such present value, assets will be allocated to various priority categories under section 4044 of ERISA. The calculation of the present value of such benefits shall be performed by the Actuary. From the Valuation Date to the date of transfer, the assets to be transferred shall be credited with interest at the rate per annum mutually agreed to by Circuit City and CarMax and an amount equal to such interest shall be transferred to the trust under the CarMax Retirement Plan on the date the transfer of assets occurs. Effective as of the date the transfer of employment, Subsequent Transferees shall cease to accrue benefits under the Circuit City Retirement Plan and shall commence to accrue benefits under the CarMax Retirement Plan. Effective as of the date the transfer of assets occurs, CarMax shall assume all liabilities and obligations with respect to benefits accrued by the Subsequent Transferees under the Circuit City Retirement Plan and shall indemnify and hold harmless Circuit City, its officers, directors, employees and agents and affiliates from and against any and all liabilities with respect to such benefits.

12

ARTICLE IV

HEALTH AND WELFARE PLANS

4.1	Assumption of Health and Welfare Plan Liabilities.
	(a)    All Liabilities relating to, arising out of, or resulting from health and welfare coverage or claims incurred by or on behalf of CarMax Employees on or before the Separation Date for periods of employment with CarMax before the Separation Date, or their covered dependents under the Circuit City Health and Welfare Plans shall become Liabilities of CarMax as of the consummation of the Separation, and, except as provided in Section 4.1(b), all Liabilities relating to health and welfare coverage or claims incurred by or on behalf of CarMax Employees, Circuit City Transferees, or their covered dependents after the Separation Date shall be Liabilities of CarMax under the corresponding CarMax Health and Welfare Plans. Except as provided in Section 4.1(b), a claim or Liability (i) for medical and dental benefits shall be deemed to be incurred upon the rendering of health services giving rise to the obligation to pay such benefits; (ii) for life insurance and accidental death and dismemberment insurance benefits shall be deemed to be incurred upon the occurrence of the event giving rise to the entitlement to such benefits; and (iii) for disability benefits shall be deemed to be incurred on the date an individual is deemed to be disabled, as defined under the applicable plan.
	(b)    As of the Separation Date for periods of time following the Separation Date or date of transfer as the case may be, CarMax also shall be responsible for all Liabilities that relate to, arise out of, or result from any denture work, bridge work, crown installation, or root canal therapy for a CarMax Employee, Circuit City Transferee, or his or her covered dependent for which preparatory dental services have been rendered under a Circuit City Health and Welfare Plan on or before the Separation Date or date of transfer as the case may be for such dental treatment that occurs after the Separation Date. Coverage for any such hospitalization or dental services shall be provided after the Separation Date without interruption under the appropriate CarMax Health and Welfare Plan subject to applicable plan rules and limitations.
4.2	Health and Welfare Plan Transitional Coverage Rules.
	(a)    CarMax Employees, Circuit City Transferees and their covered dependents who participate in Circuit City Health and Welfare Plans immediately before the Separation Date (i) will be treated in the same manner under the Circuit City Health and Welfare Plans as any other similarly situated employee of Circuit City or a Circuit City Entity with the same years of service and age who may otherwise terminate his or her employment with Circuit City and all Circuit City Entities on the Separation Date; and (ii) will automatically be enrolled on the day following the

13

	Separation Date in CarMax Health and Welfare Plans corresponding to the Circuit City Health and Welfare Plans in which the CarMax Employee, Circuit City Transferee, and his or her covered dependents, if any, participated immediately before the Separation Date. CarMax will maintain the CarMax Health and Welfare Plans as a continuation of the Circuit City Health and Welfare Plans, so that CarMax will give CarMax Employees and Circuit City Transferees credit under the CarMax Health and Welfare Plans for payments made under the Circuit City Health and Welfare Plans for purposes of deductibles and maximum out-of-pocket limits for the Disposition Year.
	(b)    With respect to any CarMax Employee, Circuit City Transferee and his or her dependents (if any) who were covered under a Circuit City Health and Welfare Plan immediately before the Close of the Separation Date, CarMax shall take the appropriate actions reasonably necessary to ensure that the proof of insurability requirements (if any) and the preexisting condition exclusions (if any) applicable to new enrollees under the corresponding CarMax Health and Welfare Plans (if any) are waived with respect to such CarMax Employee, Circuit City Transferee and his or her dependents, provided that to the extent necessary, such individual or his or her dependents enroll for coverage in the corresponding CarMax Health and Welfare Plan within no more than 31 days after the last day of the month in which the Separation Date or date of transfer as the case may be occurs.
	(c)    The transfer of employment from Circuit City or a Circuit City Entity to CarMax or a CarMax Entity as of the consummation of the Separation shall not be required to be treated as a “status change” with respect to any CarMax Employee or Circuit City Transferee under the Circuit City Health and Welfare Plans or the CarMax Health and Welfare Plans.
4.3	Post-Disposition Transitional Rules.    Effective as of or prior to the Separation Date, CarMax shall establish a dependent care assistance plan (the “CarMax DCA Plan”) that is substantially similar to the Circuit City Dependent Care Assistance Plan (the “Circuit City DCA Plan”), to cover CarMax Employees and Circuit City Transferees. The CarMax Employees and Circuit City Transferees who elected to participate in the Circuit City DCA Plan for the Disposition Year automatically will be eligible to participate in the CarMax DCA Plan for that part of the Disposition Year remaining after the Separation Date. CarMax shall maintain the CarMax DCA Plan as a continuation of the Circuit City DCA Plan for the Disposition Year, so that the aggregate benefit that any CarMax Employee or Circuit City Transferee receives under the Circuit City DCA Plan and the CarMax DCA Plan is not less than the benefits such CarMax Employee or Circuit City Transferee would have received had he or she remained a Circuit City Employee through the Disposition Year.
	(a)    If the aggregate amount contributed by CarMax Employees and Circuit City Transferees for the Disposition Year to the Circuit City DCA Plan exceeds the aggregate claims paid by Circuit City for the Disposition Year with respect to the accounts of individuals under such plan, Circuit City will pay CarMax an amount in cash equal to such excess, to the extent that the aggregate amount contributed

14

	by the CarMax Employees or Circuit City Transferees for the Disposition Year to the CarMax DCA Plan is less than the aggregate claims paid by CarMax for the Disposition Year with respect to the such individuals under those plans.
	(b)    If the aggregate amount contributed by CarMax Employees and Circuit City Transferees for the Disposition Year to the Circuit City DCA Plan is less than the aggregate claims paid by Circuit City for Disposition Year with respect to the accounts of such individuals under such plan, CarMax will pay Circuit City an amount in cash equal to such deficit, to the extent that the aggregate amount contributed by the CarMax Employees and Circuit City Transferees for the Disposition Year to the CarMax DCA Plan exceeds the aggregate claims paid by CarMax for the Disposition Year with respect to such individuals under those plans.
	(c)    The foregoing payments will be made as soon as practicable after all claims have been paid with respect to the Disposition Year.
4.4	Workers’ Compensation Liabilities.    Except as provided below, all workers’ compensation Liabilities relating to, arising out of, or resulting from any claim by CarMax Employees or Circuit City Transferees that result from an accident or from an occupational disease which is incurred or becomes manifest, as the case may be, on or before the Separation Date and while such individual was employed by Circuit City or a Circuit City Entity shall be retained by Circuit City. CarMax and each CarMax Entity shall be solely responsible for all workers’ compensation Liabilities relating to, arising out of, or resulting from any claim incurred for a compensable injury sustained (i) by CarMax Employees at any time; and (ii) by Circuit City Transferees after the date their employment is transferred. For purposes of this Agreement, an injury shall be deemed to be sustained upon the occurrence of the event giving rise to eligibility for workers’ compensation benefits or in the case of an occupational disease, at such time as the occupational disease is diagnosed by a qualified medical professional, as the case may be. Circuit City, each Circuit City Entity, CarMax and each CarMax Entity shall cooperate with respect to any notification to appropriate governmental agencies of the disposition and the issuance of new, or the transfer of existing, workers’ compensation insurance policies and claims handling contracts.
4.5	Payroll Taxes and Reporting.    Circuit City and CarMax shall, to the extent practicable, (i) treat CarMax (or a CarMax Entity designated by CarMax) as a “successor employer” and Circuit City (or the appropriate Circuit City Entity) as a “predecessor,” within the meaning of Sections 3121(a)(1) and 3306(b)(1) of the Code, with respect to CarMax Employees and Circuit City Transferees for purposes of taxes imposed under the United States Federal Unemployment Tax Act or the United States Federal Insurance Contributions Act, and (ii) cooperate with each other to avoid, to the extent possible, the filing of more than one IRS Form W-2 with respect to each CarMax Employee and Circuit City Transferee for the Disposition Year. Circuit City, each Circuit City Entity, CarMax and each CarMax Entity shall each bear its responsibility for payroll tax obligations and for the proper reporting to the appropriate governmental authorities of

15

compensation earned by their respective employees after the Separation Date, including compensation related to the exercise of Options.

4.6

COBRA and HIPAA Liability and Compliance.    As of the Separation Date, CarMax shall be responsible for all COBRA Liabilities relating to, arising out of, or resulting from any claim by any CarMax Employee or former CarMax Employee or his or her qualified dependents that result from a qualifying event occuring on or before the Separation Date and while such individual was employed by CarMax. As of the Separation Date, for periods of time following the Separation Date or date of transfer as the case may be, CarMax also shall be responsible for all COBRA Liabilities that relate to, arise out of, or result from qualifying events for any CarMax Employee, former CarMax Employee, Circuit City Transferee, or their qualified dependents. Circuit City shall be responsible for administering compliance with the health care continuation requirements of COBRA, the certificate of creditable coverage requirements of HIPAA, and the corresponding provisions of the Circuit City Health and Welfare Plans with respect to CarMax Employees and their covered dependents who incur a COBRA qualifying event or loss of coverage under the Circuit City Health and Welfare Plans at any time on or before the consummation of the Separation and Circuit City Transferees who incur a COBRA qualifying event or loss of coverage after the date their employment is transferred. Subject to Section 6.2, effective immediately after the Separation Date, CarMax shall be responsible for administering compliance with the health care continuation requirements of COBRA, the certificate of creditable coverage requirements of HIPAA, and the corresponding provisions of the CarMax Health and Welfare Plans with respect to CarMax Employees, Circuit City Transferees and their covered dependents who incur a COBRA qualifying event or loss of coverage under the CarMax Health and Welfare Plans at any time after the consummation of the Separation.

16

ARTICLE V

EXECUTIVE BENEFITS AND OTHER BENEFITS

5.1	Individual Agreements—Assumption of Liabilities and Consents.
	(a)    Circuit City has been providing compensation and benefits, subject to reimbursement from CarMax, to certain Circuit City Transferees, during the period those Circuit City Transferees have been providing services on a substantially full-time basis to a CarMax Entity. Circuit City shall continue to provide such compensation and benefits through the Separation Date, and be entitled to reimbursement from a CarMax Entity, in accordance with established practices.
	(b)    Certain plans and programs of Circuit City, as well as certain Individual Agreements, provide for the payment of certain compensation and benefits in the event of the termination of employment of the individual covered by the terms of such plans or Individual Agreements. Prior to the Separation Date, Circuit City shall take all necessary and appropriate actions so that a termination of a CarMax Employee’s or Circuit City Transferee’s employment with Circuit City described in Section 2.7 shall not constitute a termination of employment for purposes of any Individual Agreement, the Circuit City Supplemental Executive Retirement Plan, or other similar plans and programs. A termination of employment from Circuit City of a CarMax Employee or a Circuit City Transferee in connection with or in anticipation of the consummation of the transactions contemplated by the Separation shall not be deemed to be a termination of employment for purposes of administering benefits under such Individual Agreements or any other plan or program, the payment or vesting of which is conditioned upon termination of employment
5.2	Circuit City Annual Performance-Based Bonus Plan.    CarMax shall be responsible for determining all awards payable under the CarMax Annual Performance-Based Bonus Plan to CarMax Employees and Circuit City Transferees for the Disposition Year. CarMax shall also determine for Circuit City Transferees (a) the extent to which established performance criteria (as interpreted by CarMax, in its sole discretion, after taking into account the effects of the Separation) have been met, and (b) the payment level for each Circuit City Transferee. CarMax shall assume all Liabilities with respect to any such awards payable to CarMax Employees and Circuit City Transferees for the Disposition Year.
5.3	Awards under the Circuit City Stock Incentive Plan or Otherwise.    Circuit City and CarMax shall use their commercially reasonable efforts to take all actions necessary or appropriate so that each outstanding Circuit City Award granted under any Circuit City Stock Incentive Plan held by any individual who is either a current or former employee of Circuit City or a Circuit City Entity (as determined by Circuit City) and any CarMax

17

Employee or Circuit City Transferee shall be adjusted as set forth in this Article V and as illustrated in Schedule 5.3(a) hereto.

(a) Circuit City Group Options Held by Circuit City Employees.

(i)     This Section 5.3(a) shall apply to any individual who is not a CarMax Employee as of the Close of the Separation Date and who is holding a Circuit City Group Option at that time. As determined by the Committee (as that term is defined in the Circuit City Stock Incentive Plan) pursuant to its authority under any of the Circuit City Stock Incentive Plans, each Circuit City Group Option outstanding under any Circuit City Stock Incentive Plan as of the CarMax Dividend Date shall be adjusted so that each individual who is the holder of a Circuit City Group Option will have such option converted, immediately after the CarMax Dividend, into a Circuit City Stores Option under the applicable Circuit City Stock Incentive Plan.

(ii)    The adjustment set forth in Section 5.3(a)(i) shall be made as follows:

The exercise price per share of Circuit City Stores Common Stock subject to a Circuit City Stores Option will be equal to the product obtained by multiplying (a) times (b) where “(a)” equals the exercise price per share of the Circuit City Group Option with respect to which an adjustment is being made immediately before the CarMax Dividend, and “(b)” equals the quotient obtained by dividing the Circuit City Post-Dividend Stock Value by the Circuit City Pre-Dividend Stock Value.

The number of shares of Circuit City Stores Common Stock subject to a Circuit City Stores Option will equal the product obtained by multiplying (a) times (b) where “(a)” equals the number of shares of Circuit City Group Common Stock covered by the Circuit City Group Option, and “(b)” equals the quotient obtained by dividing the Circuit City Pre-Dividend Stock Value by the Circuit City Post-Dividend Stock Value.

(iii)  After the Separation Date, Circuit City Stores Options, regardless of by whom held, shall be settled by Circuit City pursuant to the terms of the applicable Circuit City Stock Incentive Plan.

(b) Circuit City Group Options Held by CarMax Employees.

(i)     This Section 5.3(b) shall apply to any individual who is a CarMax Employee holding a Circuit City Group Option as of the Close of the Separation Date. Each Circuit City Group Option outstanding under any Circuit City Stock Incentive Plan as of the CarMax Dividend Date shall be adjusted so that each individual who is the holder of a Circuit City Group

18

Option will have such option converted, immediately after the CarMax Dividend, into a CarMax Option under the CarMax Stock Incentive Plan.

(ii)    The adjustment set forth in Section 5.3(b)(i) shall be made as follows:

The exercise price per share of CarMax Common Stock subject to a CarMax Option will be equal to the product obtained by multiplying (a) times (b) where “(a)” equals the exercise price per share of the Circuit City Group Option with respect to which an adjustment is being made immediately before the CarMax Dividend, and “(b)” equals the quotient obtained by dividing the CarMax Post-Dividend Stock Value by the Circuit City Pre-Dividend Stock Value.

The number of shares of CarMax Common Stock subject to a CarMax Option will equal the product obtained by multiplying (a) times (b) where “(a)” equals the number of shares of Circuit City Group Common Stock covered by the Circuit City Group Option, and “(b)” equals the quotient obtained by dividing the Circuit City Closing Stock Value by the CarMax Opening Stock Value.

(c)    CarMax Group Options Held by CarMax Employees.

(i)     This Section 5.3(c) shall apply to any individual who is a CarMax Employee holding a CarMax Group Option as of the Close of the Separation Date. This Section 5.3(c) shall also apply to any individual holding a CarMax Group Option as of the Close of the Separation Date who is not a CarMax Employee or a Circuit City Employee at that time. The CarMax Group Option shall be modified to be a CarMax Option by substituting CarMax Common Stock for CarMax Group Common Stock under the option. The per share exercise price, number of shares and all other terms of a CarMax Option after the Separation Date will be the same as the applicable CarMax Group Option before the Separation Date.

(ii)    After the Separation Date, CarMax Options, regardless of by whom held, shall be settled by CarMax pursuant to the terms of the CarMax Stock Incentive Plan.

(d)    CarMax Group Options Held by Circuit City Employees.

(i)     This Section 5.3(c) shall apply to any individual who is a Circuit City Employee as of the Close of the Separation Date and who is holding a CarMax Group Option at that time. As determined by the Committee (as that term is defined in the Circuit City Stock Incentive Plan) pursuant to its authority under any of the Circuit City Stock Incentive Plans, each CarMax Group Option outstanding under any Circuit City Stock Incentive Plan as of the CarMax Dividend Date shall be adjusted so that each

19

individual who is the holder of a CarMax Group Option will have such option converted, immediately after the CarMax Dividend, into a Circuit City Stores Option under the Circuit City Stock Incentive Plan.

(ii)    The adjustment set forth in Section 5.3(d)(i) shall be made as follows:

The exercise price per share of Circuit City Common Stock subject to a Circuit City Stores Option will be equal to the product obtained by multiplying (a) times (b) where “(a)” equals the exercise price per share of the CarMax Group Option with respect to which an adjustment is being made immediately before the CarMax Dividend, and “(b)” equals the quotient obtained by dividing the Circuit City Post-Dividend Stock Value by the CarMax Pre-Dividend Stock Value.

The number of shares of Circuit City Common Stock subject to a Circuit City Stores Option will equal the product obtained by multiplying (a) times (b) where “(a)” equals the number of shares of CarMax Group Common Stock covered by the CarMax Group Option, and “(b)” equals the quotient obtained by dividing the CarMax Opening Stock Value by the Circuit City Closing Stock Value.

(e)    Option Terms.    Each Circuit City Stores Option issued as part of the adjustment to Circuit City Group Options or CarMax Group Options pursuant to Section 5.3(a) or (d) shall be subject to the same terms and conditions regarding term, vesting, and other provisions regarding exercise as set forth in the original Circuit City Group Option or CarMax Group Option. Each CarMax Option issued as part of the adjustment to CarMax Group Options or Circuit City Group Options pursuant to Section 5.3(b) or (c) shall be subject to the same terms and conditions regarding term, vesting, and other provisions regarding exercise as set forth in the CarMax Group Option or Circuit City Group Option. Notwithstanding the foregoing, Circuit City will take such action as is necessary to ensure that with respect to the Circuit City Stores Option grants that are held by Circuit City Employees who become CarMax Employees after the Separation Date but on or before February 28, 2003, such individuals will not incur a termination of employment for purposes of the Circuit City Stores Options. CarMax will take such action as is necessary to ensure that with respect to the CarMax Option grants that are held by CarMax Employees who become Circuit City Employees after the Separation Date but on or before February 28, 2003, such individuals will not incur a termination of employment for purposes of the CarMax Options.

The Circuit City Stores Options and CarMax Options shall not be exercisable until the adjustments provided in Sections 5.3(a)-(d) have been made.

(f)     Circuit City and CarMax Restricted Stock.    The restricted shares of Circuit City Group Common Stock that are outstanding under any Circuit City Stock Incentive Plan or otherwise as of the CarMax Dividend Date shall not be adjusted except for

20

adjustments applicable to all shares of Circuit City Group Common Stock and shall remain subject to all prior restrictions following the CarMax Dividend Date. Circuit City will hold the shares of CarMax Common Stock issued in the CarMax Dividend subject to the same restrictions as applicable to the restricted shares of Circuit City Group Common Stock on which the CarMax Dividend was paid. The restricted shares of CarMax Group Common Stock that are outstanding under any Circuit City Stock Incentive Plan or otherwise as of the CarMax Dividend Date (i) shall be assumed by the CarMax Stock Incentive Plan, (ii) shall not be adjusted except for adjustments applicable to all shares of CarMax Group Common Stock, and (iii) shall remain subject to all prior restrictions following the CarMax Dividend Date.

(g)    Circuit City Stock Appreciation Rights and CarMax Stock Appreciation Rights.

(i)     As determined by the Committee (as that term is defined in the Circuit City Stock Incentive Plan or the CarMax Stock Incentive Plan) pursuant to its authority under any of the Circuit City Stock Incentive Plans or the CarMax Stock Incentive Plan, each Circuit City Stock Appreciation Right (“Circuit City SAR”) outstanding under any Circuit City Stock Incentive Plan and held by an employee of a Circuit City Entity or a CarMax Entity as of the CarMax Dividend Date shall be adjusted in the same manner as the related Circuit City Group Option is adjusted under Section 5.3(a) or (b).

(ii)    As determined by the Committee (as that term is defined in the Circuit City Stock Incentive Plan or the CarMax Stock Incentive Plan) pursuant to its authority under any of the Circuit City Stock Incentive Plans or the CarMax Stock Incentive Plan, each CarMax Stock Appreciation Right (“CarMax SAR”) outstanding under any Circuit City Stock Incentive Plan and held by an employee of a Circuit City Entity or a CarMax Entity as of the CarMax Dividend Date shall be adjusted in the same manner as the related CarMax Group Option is adjusted under Section 5.3(c) or (d).

(iii)  After the Separation Date, Circuit City SARs, regardless of by whom held, shall be settled by Circuit City pursuant to the terms of the Circuit City Stock Incentive Plan. After the Separation Date, CarMax SARs, regardless of by whom held, shall be settled by CarMax pursuant to the terms of the CarMax Stock Incentive Plan.

(h)    Taxes.    Except as may be provided pursuant to a separate agreement between Circuit City and CarMax, Circuit City shall claim the benefit of federal, state, and local tax deductions related to the exercise of all Circuit City Stores Options, and Circuit City SARs that are exercised by Circuit City Employees after the Separation Date and CarMax shall not claim any such tax deductions. Circuit City shall be responsible for the proper payroll tax treatment and the proper reporting to the appropriate governmental authorities of compensation relating to

21

	all option and SAR exercises by Circuit City Employees. Except as may be provided pursuant to a separate agreement between Circuit City and CarMax, CarMax shall claim the benefit of federal, state, and local tax deductions related to the exercise of all Circuit City Group Options, Circuit City SARs, CarMax Options and CarMax SARs that are exercised by both CarMax Employees after the Separation Date and Circuit City Transferees after their transfer date and Circuit City shall not claim any such tax deductions. CarMax shall be responsible for the proper payroll tax treatment and the proper reporting to the appropriate governmental authorities of compensation relating to all option and SAR exercises by CarMax Employees and Circuit City Transferees. Circuit City and CarMax agree to act (or to take such action) with respect to such federal, state, or local tax deductions, and with respect to fulfilling the payroll tax and reporting obligations on compensation as are reasonably necessary or appropriate to achieve, maintain and/or preserve such tax results. Any amounts required to be reimbursed by one party to another under this subsection shall be paid within 30 days of invoice.
	(h)    Partial Interests in Shares.    To the extent that any adjustment in stock options or stock appreciation rights results in any fractional interest in shares, such fractional interest shall be rounded to the nearest whole share. No fractional interests in shares or stock appreciation rights shall be payable in cash or otherwise.
	(i)     Incentive Stock Options.    Circuit City and CarMax agree to use their commercially reasonable efforts to preserve the value and tax treatment accorded incentive stock options awarded under the Circuit City Stock Incentive Plan.
5.4	Employee Stock Purchase Plans.    As of the consummation of the Separation, CarMax will assume and accept all assets and liabilities of the 1997 Circuit City Stores, Inc. Employee Stock Purchase Plan for CarMax Group Employees. All transferred amounts will be applied on the next exercise date coincident with or next following the Separation Date toward the purchase of CarMax Common Stock.
5.5	Registration Requirements.    As soon as practicable following the time as of which the Form 10 or Form 8-A for CarMax, Inc., as the case may be, is declared effective by the Securities and Exchange Commission, CarMax agrees that it shall cause to be registered pursuant to the Securities Act of 1933, as amended, the shares of CarMax Common Stock authorized for issuance under the CarMax Stock Incentive Plan and the CarMax Employee Stock Purchase Plan. Circuit City shall use commercially reasonable efforts to assist CarMax in completing such registration.
5.7	Confidentiality and Proprietary Information.    No provision of the Separation Agreement or this Agreement shall be deemed to release any individual for any violation of any agreement or policy pertaining to confidential or proprietary information of Circuit City or any of its Affiliates or of CarMax or any of its Affiliates, respectively, or otherwise relieve any individual of his or her obligations under any such agreements or policies.

22

5.8	Circuit City Nonqualified Pension Plans and Arrangements.    CarMax will assume all Liabilities relating to CarMax Employees, former employees of CarMax and Circuit City Transferees under the CarMax Supplemental Executive Retirement Plan and any individual nonqualified pension arrangements identified in Schedule 5.8 hereto as of the consummation of the Separation and for all service after the Separation Date, and shall make benefit payments to CarMax Employees and Circuit City Transferees at such times and in such manner as is provided for under the terms of the respective nonqualified pension plans and arrangements.
5.9	Circuit City Director Plans.    Circuit City and CarMax shall use their commercially reasonable efforts to take all actions necessary or appropriate so that each outstanding Circuit City Award granted under Circuit City Stores, Inc. Amended And Restated 1989 Non-Employee Directors Stock Option Plan and Circuit City Stores, Inc. 2000 Non-Employee Directors Stock Incentive Plan held by any individual who is either a current or former member of the Board of Directors of Circuit City shall be adjusted as set forth in this Section 5.9.
	(a)    Continuing Circuit City Directors.    This Section 5.9(a) shall apply to options and SARs held by individuals who continue to be members of the Board of Directors of Circuit City after the Separation Date. Each Circuit City Group Option and SAR shall be adjusted in the manner provided in Section 5.3(a). Each CarMax Group Option and SAR shall be adjusted in the manner provided in Section 5.3(c).
	(b)    CarMax Directors.    This Section 5.9(b) shall apply to options held by individuals who cease to be members of the Board of Directors of Circuit City after the Separation Date and become members of the Board of Directors of CarMax. Each Circuit City Group Option and SAR shall be adjusted in the manner provided in Section 5.3(a). Each CarMax Group Option and SAR shall be adjusted in the manner provided in Section 5.3(c).

23

ARTICLE VI

GENERAL AND ADMINISTRATIVE

6.1	Payment of Liabilities.    CarMax shall pay directly, or reimburse Circuit City promptly for, all compensation payable to Circuit City Transferees for services rendered to CarMax while in the employ of Circuit City or a Circuit City Entity on or before the consummation of the Separation to the extent not previously reimbursed. To the extent the amount of such Liabilities is not yet determinable because the status of individuals as Circuit City Transferees is not yet determined, except as otherwise specified herein or in another ancillary agreement with respect to particular Liabilities, CarMax shall make such payments or reimbursements based upon Circuit City’s reasonable estimates of the amounts thereof, and when such status is determined, CarMax shall make additional reimbursements or payments, or Circuit City shall reimburse CarMax, to the extent necessary to reflect the actual amount of such Liabilities.
6.2	Administration of the CarMax Plans.    During the Administration Period, with respect to a plan or a payroll practice, Circuit City shall assist CarMax in (i) all aspects of the delivery of employee benefits to CarMax Employees and Circuit City Transferees, (ii) the administration of and tax and reporting obligations related to CarMax’s payroll processes, and (iii) the administration of the CarMax Plans, including the CarMax 401(k) Plan, CarMax Retirement Plan, CarMax Supplemental Executive Retirement Plan, CarMax Health and Welfare Plans, CarMax Employee Stock Purchase Plan, and any other plans or programs that are implemented by CarMax on and after the Separation Date and which are substantially similar to the benefit plans provided by Circuit City to its employees. CarMax shall pay Circuit City for such services in accordance with the terms of a transition services agreement between Circuit City and CarMax. During the Administration Period with respect to a plan, CarMax may not change any CarMax Plan without the consent of Circuit City if the change would materially and adversely affect the administration of the CarMax Plan.
6.3	Sharing of Participant Information.    Circuit City and CarMax shall share, Circuit City shall cause each applicable Circuit City Entity to share, and CarMax shall cause each applicable CarMax Entity to share, with each other and their respective agents and vendors (without obtaining releases) all participant information necessary for the efficient and accurate administration of each of the Circuit City Plans and the CarMax Plans. Circuit City and CarMax and their respective authorized agents shall, subject to applicable laws on confidentiality, be given reasonable and timely access to, and may make copies of, all information relating to the subjects of this Agreement in the custody of the other party, to the extent necessary for such administration. Until the consummation of the Separation, all participant information shall be provided in the manner and medium applicable to Participating Companies in the Circuit City Plans generally, and thereafter until the time at which the parties subsequently determine, all participant information shall be provided in a manner and medium that are compatible

24

	with the data processing systems of Circuit City as in effect as of the consummation of the Separation, unless otherwise agreed to by Circuit City and CarMax.
6.4	Non-Termination of Employment; No Third Party Beneficiaries.    Except as expressly provided in this Agreement, no provision of this Agreement or the Separation Agreement shall be construed to create any right, or accelerate entitlement, to any compensation or benefit whatsoever on the part of any future, present, or former employee of Circuit City, a Circuit City Entity, CarMax, or a CarMax Entity under any Circuit City Plan or CarMax Plan or otherwise. Without limiting the generality of the foregoing: (i) except as expressly provided in this Agreement, neither the occurrence of the consummation of the Separation nor the termination of the Participating Company status of CarMax or a CarMax Entity shall cause any employee to be deemed to have incurred a termination of employment which entitles such individual to the commencement of benefits under any of the CarMax Plans or any of the Individual Agreements; (ii) except as expressly provided in this Agreement, nothing in this Agreement shall preclude CarMax or any CarMax Entity, at any time after the consummation of the Separation, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any CarMax Plan, any benefit under any Plan or any trust, insurance policy or funding vehicle related to any CarMax Plan; and (iii) except as expressly provided in this Agreement, nothing in this Agreement shall preclude Circuit City or any Circuit City Entity, at any time after the Close of the Separation Date, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any Circuit City Plan, any benefit under any Plan or any trust, insurance policy or funding vehicle related to any Circuit City Plan.
6.5	Audit Rights with Respect to Information Provided.
	(a)    Each of Circuit City and CarMax, and their duly authorized representatives, shall have the right to conduct audits with respect to all information provided to it by the other party. The party conducting the audit (the “Auditing Party”) shall have the sole discretion to determine the procedures and guidelines for conducting audits and the selection of audit representatives under this Section 6.5(a). The Auditing Party shall have the right to make copies of any records at its expense, subject to the confidentiality provisions set forth in the Separation Agreement, which are incorporated by reference herein. The party being audited shall provide the Auditing Party’s representatives with reasonable access during normal business hours to its operations, computer systems and paper and electronic files, and provide workspace to its representatives. After any audit is completed, the party being audited shall have the right to review a draft of the audit findings and to comment on those findings in writing within five business days after receiving such draft.
	(b)    The Auditing Party’s audit rights under this Section 6.5 shall include the right to audit, or participate in an audit facilitated by the party being audited, of any Affiliates of the party being audited and of any benefit providers and third parties with whom the party being audited has a relationship, or agents of such party, to

25

	the extent any such persons are affected by or addressed in this Agreement (collectively, the “Non-parties”), subject to the consent of such party. The party being audited shall, upon written request from the Auditing Party, provide an individual (at the Auditing Party’s expense) to supervise any audit of a Non-party. The Auditing Party shall be responsible for supplying, at the Auditing Party’s expense, additional personnel sufficient to complete the audit in a reasonably timely manner. The responsibility of the party being audited shall be limited to providing, at the Auditing Party’s expense, a single individual at each audited site for purposes of facilitating the audit.
6.6	Fiduciary Matters.    Circuit City and CarMax each acknowledge that actions required to be taken pursuant to this Agreement may be subject to fiduciary duties or standards of conduct under ERISA or other applicable law, and no party shall be deemed to be in violation of this Agreement if it fails to comply with any provisions hereof based upon its good faith determination that to do so would violate such a fiduciary duty or standard. Each party shall be responsible for taking such actions as are deemed necessary and appropriate to comply with its own fiduciary responsibilities and shall fully release and indemnify the other party for any Liabilities caused by the failure to satisfy any such responsibility.
6.7	Consent of Third Parties.    If any provision of this Agreement is dependent on the consent of any third party (such as a vendor or a union) and such consent is withheld, Circuit City and CarMax shall use commercially reasonable efforts to implement the applicable provisions of this Agreement to the full extent practicable. If any provision of this Agreement cannot be implemented due to the failure of such third party to consent, Circuit City and CarMax shall negotiate in good faith to implement the provision in a mutually satisfactory manner. The phrase “commercially reasonable efforts” as used herein shall not be construed to require the incurrence of any non-routine or unreasonable expense or liability or the waiver of any right.

26

ARTICLE VII

MISCELLANEOUS

7.1	Effect if Disposition Does Not Occur.    If the consummation of the Separation does not occur, then all actions and events that are, under this Agreement, to be taken or occur effective immediately prior to or as of the consummation of the Separation, or immediately after the Separation Date, or otherwise in connection with the Separation, shall not be taken or occur except to the extent specifically agreed by CarMax and Circuit City.
7.2	Relationship of Parties.    Nothing in this Agreement shall be deemed or construed by the parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the parties, it being understood and agreed that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties other than the relationship set forth herein.
7.3	Affiliates.    Each of Circuit City and CarMax shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth in this Agreement to be performed by a Circuit City Entity or a CarMax Entity, respectively.
7.4	Governing Law.    To the extent not preempted by applicable federal law, this Agreement shall be governed by, construed and interpreted in accordance with the laws of the Commonwealth of Virginia as to all matters, including matters of validity, construction, effect, performance and remedies.
7.5	References.    All references to Sections, Articles or Schedules contained herein mean Sections, Articles or Schedules of or to this Agreement, as the case may be, unless otherwise stated or unless the context otherwise requires.
7.6	Counterparts.    This Agreement may be executed in separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts will together constitute the same agreement.
7.7	Assignment.    No party to this Agreement will convey, assign or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of the other party.
7.8	Cooperation.    Circuit City and CarMax will cooperate in taking all such action as may be necessary or appropriate to implement the provisions of this Agreement, including making all appropriate filings as may be required under ERISA or the Code, the regulations thereunder and any other applicable laws, exchanging and sharing all appropriate records, amending plan, trust, record keeping and other related documents and implementing all appropriate communications with participants.
7.9	Notices.    All notices, requests, claims, demands and other communications required or permitted to be given hereunder will be in writing and will be delivered by hand,

27

telecopied, e-mailed or sent, postage prepaid, by registered, certified or express mail or reputable overnight courier service and will be deemed given when so delivered by hand or telecopied, when e-mail confirmation is received if delivered by e-mail, or three business days after being so mailed (one business day in the case of express mail or overnight courier service). All such notices, requests, claims, demands and other communications will be addressed as set forth in the Separation Agreement, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.

7.10

Waivers; Remedies; Dispute Resolution.    No failure or delay on the part of Circuit City or CarMax in exercising any right, power or privilege hereunder will operate as a waiver thereof, nor will any waiver on the part of Circuit City or CarMax of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder, nor will any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. It is understood and agreed that any dispute, controversy or question arising under this Agreement shall be subject to the dispute resolution provisions of Article X of the Separation Agreement.

* * * * *

IN WITNESS WHEREOF, the parties have caused this Employee Benefits Agreement to be duly executed as of the day and year first above written.

CIRCUIT CITY STORES, INC.

By:                                                                                                  

Name:

Title:

CARMAX, INC.

By:                                                                                                  

Name:

Title:

28

EX-10.4

Exhibit 10.4

Employment Agreement for

W. Austin Ligon

Circuit City Stores, Inc.

March 1 2002

1

Circuit City Stores, Inc.

Employment Agreement for W. Austin Ligon

This EMPLOYMENT AGREEMENT is made, entered into, and is effective as of the first day of March 2002 (the “Effective Date”), by and between Circuit City Stores, Inc. (the “Company”) and W. Austin Ligon (the “Executive”).WHEREAS, the Company desires to employ the Executive as Carmax Group President; and

WHEREAS, the Company recognizes the Executive’s intimate knowledge and experience in the business of the Company, and desires to secure the employment of the Executive in the role of Carmax Group President of the Company.

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties set forth in this Agreement, and of other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:

Article 1.     Term of Employment

The Company hereby agrees to employ the Executive and the Executive hereby accepts employment as Carmax Group President of the Company, in accordance with the terms and conditions set forth herein, for an initial period of three (3) years, commencing as of the Effective Date of this Agreement, as indicated above; subject, however, to earlier termination as expressly provided herein.

The initial three (3) year period of employment automatically shall be extended for one (1) additional year at the end of the initial three (3) year term, and then again after each successive year thereafter. However, either party may terminate this Agreement at the end of the initial three (3) year period, or at the end of any successive one (1) year term thereafter, by giving the other party written notice of intent not to renew, delivered at least three (3) months prior to the end of the initial period or each successive term thereafter. In the event of a Change in Control (as defined in Section 8.2) of the Company, the term of this Agreement shall not be less than two (2) years from the date of the Change in Control.

The Executive’s employment period hereunder (“Employment Period”) shall begin on March 1, 2002 and end on March 1, 2005, on which its term expires by reason of an election not to renew by the Company or the Executive (“Expiration Date”), except that if Executive’s employment is terminated on a date prior to the Expiration Date (“Effective Date of Termination”) pursuant to Article 6 or Article 8 hereof, the Employment Period shall terminate on said date.

2

Article 2.     Position and Responsibilities

During the term of this Agreement, the Executive agrees to serve as Carmax Group President of the Company. In his capacity as Carmax Group President of the Company, the Executive shall report directly to the CEO and shall have the duties and responsibilities of Carmax Group President, and such other duties and responsibilities not inconsistent with the performance of his duties as Carmax Group President.

Article 3.     Standard of Care

During the term of this Agreement, the Executive agrees to devote substantially his full-time attention and energies to the Company’s business. The Executive covenants, warrants, and represents that he shall:

(a) Devote his full and best efforts to the fulfillment of his employment obligations; and

(b) Exercise the highest degree of loyalty and the highest standards of conduct in the performance of his duties.

This Article 3 shall not be construed as preventing the Executive from investing assets in such form or manner as will not require his services in the daily operations of the affairs of the companies in which such investments are made, nor will this article prohibit his serving on the board of directors of a noncompeting company.

Article 4.     Compensation and Benefits

As remuneration for all services to be rendered by the Executive during the Employment Period, and as consideration for complying with the covenants herein, the Company shall pay and provide to the Executive the following:

4.1.    Base Salary.     The Company shall pay the Executive a Base Salary in an amount which shall be established and approved by the Compensation Committee of the Board of Directors; provided, however, that such Base Salary shall not be less than dollars $625,000 per year. This Base Salary shall be subject to all appropriate federal and state withholding taxes and payable in accordance with the normal payroll practices of the Company. The Base Salary shall be reviewed at least annually following the Effective Date of this Agreement, while this Agreement is in force, to ascertain whether, in the judgment of the Compensation Committee, such Base Salary should be increased. If so increased, the Base Salary as stated above shall, likewise, be increased for all purposes of this Agreement.

4.2.    Annual Bonus.    In addition to his salary, the Executive shall be entitled to participate in the Company’s short-term incentive program, as such program may exist from time to time, with bonus opportunities equal to a minimum of 60% of Base Salary and commensurate with the position of Carmax Group President, as determined at the sole discretion of the Company’s Compensation Committee. If so increased, the Annual Bonus Rate as stated above shall, likewise, be increased for all purposes of this Agreement.

3

4.3.    Long-Term Incentives.    The Executive shall be eligible to participate in the Company’s long-term incentive plan, to the extent that the Board of Directors of the Company or the Compensation Committee, in their discretion, determines is appropriate. The Board of Directors will make its determination consistent with the methodology used by the Company for compensating its senior management employees.

4.4.    Retirement Benefits.    The Company shall provide to the Executive participation in all Company pension, insurance, fringe benefit, and executive compensation plans and programs, subject to the eligibility and participation requirements of such plans.

4.5.    Employee Benefits.    The Company shall provide to the Executive all benefits, as commensurate with the position of Carmax Group President, but at a minimum not less than those provided by the Company to other senior executives subject to the eligibility requirements and other provisions of such arrangements. Such benefits may include group term life insurance, comprehensive health and major medical insurance, dental and life insurance, and short-term and long-term disability.

4.6.    Perquisites.    The Company shall provide to the Executive, at the Company’s cost, all perquisites, which are commensurate with the position of Carmax Group President but at a minimum not less than those provided by the Company to other senior executives.

4.7.    Right to Change Plans.    By reason of Sections 4.5 and 4.6 herein, the Company shall not be obligated to institute, maintain, or refrain from changing, amending, or discontinuing any benefit plan or perquisite, so long as such changes are similarly applicable to executive employees generally.

Article 5.     Expenses

The Company shall pay or reimburse the Executive for all ordinary and necessary expenses, in a reasonable amount, which the Executive incurs in performing his duties under this Agreement including, but not limited to, travel, entertainment, professional dues and subscriptions, and all dues, fees, and expenses associated with membership in various professional, business, and civic associations and societies in which the Executive’s participation is in the best interests of the Company.

Article 6.     Employment Terminations

6.1.    Termination Due to Retirement or Death.    In the event the Executive’s employment is terminated while this Agreement is in force, by reason of Retirement (defined as voluntary Normal Retirement under the then established rules of the Company’s tax-qualified retirement plan) or death, the Executive’s benefits shall be determined in accordance with the Company’s retirement, survivor’s benefits, insurance, and other applicable programs of the Company then in effect. In addition all stock grants, except performance based grants in the case of retirement, will become immediately vested and may be exercised by you, your personal representatives, distributees, legatees, or estate at any time before the expiration date of the grant.

4

The Effective Date of Termination shall be ninety (90) days following the date the Executive provides the Company with written notice that the Executive is terminating employment by reason of Retirement or on the Executive’s date of death. Upon the Effective Date of Termination, the Company shall be obligated to pay the Executive or, if applicable, the Executive’s estate: (a) any salary that was accrued but not yet paid as of the Effective Date of Termination; (b) the unpaid Annual Bonus, if any, with respect to the calendar year preceding the Effective Date of Termination (such Annual Bonus, if any, to be determined in the manner it would have been determined and payable at the time it would have been payable under Section 4.2 had there been no termination of the Employment Period); (c) a pro rata share of target Annual Bonus for the calendar year in which the Effective Date of Termination occurs (the calculation by which the Annual Bonus is multiplied by a fraction, the numerator of which is the number of full completed days in the bonus plan year through the Effective Date of Termination, and the denominator of which is three hundred sixty-five (365)); and (d) all other rights and benefits that the Executive is vested in, pursuant to other plans and programs of the Company.

6.2.    Termination Due to Disability.    In the event that the Executive terminates employment by reason of Disability (as defined below) during the term of this Agreement and is, therefore, unable to perform his duties herein for more than one hundred eighty (180) total calendar days during any period of twelve (12) consecutive months, or in the event of the CEO’s reasonable expectation that the Executive’s Disability will exist for more than a period of one hundred eighty (180) calendar days, the Company shall have the right to terminate the Executive’s active employment as provided in this Agreement.

The Effective Date of Termination shall be specified by the CEO in a written notice that shall be delivered to the Executive of the Company’s intent to terminate for Disability, but shall be no less than thirty (30) calendar days after the CEO delivers the written notice to the Executive. Upon the Effective Date of Termination, the Company shall be obligated to pay the Executive or, if applicable, the Executive’s estate: (a) any salary that was accrued but not yet paid as of the Effective Date of Termination; (b) the unpaid Annual Bonus, if any, with respect to the calendar year preceding the Effective Date of Termination (such Annual Bonus, if any, to be determined in the manner it would have been determined and payable at the time it would have been payable under Section 4.2 had there been no termination of the Employment Period); (c) a pro rata share of target Annual Bonus for the calendar year in which the Effective Date of Termination occurs (the calculation by which the Annual Bonus is multiplied by a fraction, the numerator of which is the number of full completed days in the bonus plan year through the Effective Date of Termination, and the denominator of which is three hundred sixty-five (365)); and (d) all other rights and benefits that the Executive is vested in, pursuant to other plans and programs of the Company.

The term “Disability” shall mean, for all purposes of this Agreement, the incapacity of the Executive, due to injury, illness, disease, or bodily or mental infirmity, to engage in the performance of substantially all of the usual duties of employment with the Company as contemplated by Article 2 herein, such Disability to be determined by the CEO of the Company upon receipt of and in reliance on competent medical advice from one (1) or more individuals, selected by the CEO, who are qualified to give such professional medical advice.

5

It is expressly understood that the Disability of the Executive for a period of one hundred eighty (180) calendar days or less in the aggregate during any period of twelve (12) consecutive months, in the absence of any reasonable expectation that his Disability will exist for more than such a period of time, shall not constitute a failure by him to perform his duties hereunder and shall not be deemed a breach or default, and the Executive shall receive full compensation for any such period of Disability or for any other temporary illness or incapacity during the term of this Agreement.

If your employment by the Company terminates because you become disabled all of your outstanding stock grants, including performance based grants, will become immediately vested, effective as of the date of your disability. Then, you, your personal representatives, distributees, or legatees may exercise your grants at any time before the expiration date of the grant.

6.3.    Voluntary Termination by the Executive.    The Executive may terminate this Agreement at any time by giving the CEO of the Company written notice of intent to terminate, delivered at least thirty (30) calendar days prior to the Effective Date of Termination that is specified by the Executive in the written notice. Upon the Effective Date of Termination, the Company shall pay the Executive his full Base Salary, at the rate then in effect as provided in Section 4.1 herein, through the Effective Date of Termination, plus all other benefits to which the Executive has a vested right to at that time (for this purpose, the Executive shall not be paid any Annual Bonus with respect to the fiscal year in which voluntary termination under this Section 6.3 occurs). The Company thereafter shall have no further obligations under this Agreement.

6.4.    Involuntary Termination by the Company Without Cause.    At all times during the term of this Agreement, the CEO may terminate the Executive’s employment, as provided under this Agreement, at any time, for reasons other than death, Disability, Retirement, or for Cause, by notifying the Executive in writing of the Company’s intent to terminate, at least thirty (30) calendar days prior to the Effective Date of Termination that is specified by the Company in the written notice. In addition, the Company’s unilateral decision to refrain from renewing the term of this Agreement at the Expiration Date shall be deemed an involuntary termination without Cause.

Upon the Effective Date of Termination, the Company shall pay to the Executive an amount payable in equal monthly installments over the following twenty-four (24) months equal to the product of two (2) times both the Base Salary and the Executive’s target Annual Bonus established for the fiscal year in which the Executive’s Effective Date of Termination occurs. The Company shall also pay to the Executive the amount equal to a pro rata share of target Annual Bonus for the calendar year in which the Effective Date of Termination occurs (the calculation by which the Annual Bonus is multiplied by a fraction, the numerator of which is the number of full completed days in the bonus plan year through the Effective Date of Termination, and the denominator of which is three hundred sixty-five (365). In addition, the Company shall continue, at the same cost to the Executive as existed as of the Effective Date, all health, welfare, and benefit plan participation for two (2) full years following employment termination provided that the applicable COBRA health insurance benefit continuation period shall begin as of the Effective Date of Termination. The Company shall also provide the Executive with outplacement services not to exceed a cost of fifty thousand dollars ($50,000).

6

a) Any unvested stock options or any outstanding restricted stock, excluding restricted stock grants issued under a performance based plan, that would become vested (that is, transferable and nonforfeitable) if the Executive remained an employee through the Term of this Agreement will become vested as of the date of the Executive’s termination of employment. The Executive must satisfy the tax withholding requirements described in Section 10 with respect to the restricted stock.

The Executive will be credited with age and service credit through the end of the Term of this Agreement for purposes of computing benefits under the Company’s pension, medical and other benefit plans, and the Company will continue the executive’s coverage under the company’s benefit plans as if the executive remained employed through the end of the term of this agreement. Service credited to the executive for purposes of the company’s pension plans pursuant to this subsection (ii) shall be in addition to any service credited to the executive pursuant to section 5(c). Notwithstanding the foregoing, if the company determines that giving such age and service credit or continued coverage could adversely affect the tax qualification or tax treatment of a benefit plan, or otherwise have adverse legal ramifications, the company may pay the executive a lump sum cash amount that reasonably approximates the after-tax value to the executive of such age and service credit and continued coverage through the end of the term of this agreement, in lieu of giving such credit and continued coverage.

The Company thereafter shall have no further obligations under this Agreement.

6.5.    Termination For Cause.    Nothing in this Agreement shall be construed to prevent the Company from terminating the Executive’s employment under this Agreement for “Cause.”

“Cause” means the Executive’s:

(a) Willful and continued failure to perform substantially the Executive’s duties with the Company after the Company delivers to the Executive written demand for substantial performance specifically identifying the manner in which the Executive has not substantially performed the Executive’s duties;

(b) Conviction for a felony;

(c) Willfully engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company or

(d) Failure of the Employee to disclose to the CEO a conflict of interest, of which he knew or, with reasonable diligence, would have known, in connection with any transaction entered into on behalf of the Company.

7

For purposes of this Section 6.5, no act or omission by the Executive shall be considered “willful” unless it is done or omitted in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act or failure to act based upon advice of counsel for the Company or CEO, shall be conclusively presumed to be done or omitted to be done by the Executive in good faith and in the best interests of the Company.

In the event this Agreement is terminated for Cause, the Company shall pay the Executive his Base Salary through the Effective Date of Termination and the Executive shall immediately thereafter forfeit all rights and benefits (other than vested benefits) he would otherwise have been entitled to receive under this Agreement. The Company thereafter shall have no further obligations under this Agreement.

6.6.    Termination for Good Reason.    At any time during the term of this Agreement, the Executive may terminate this Agreement for Good Reason (as defined below) by giving the CEO of the Company thirty (30) calendar days’ written notice of intent to terminate, which notice sets forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination.

The Effective Date of Termination shall occur upon the expiration of the thirty (30) day notice period, and the Company shall pay and provide to the Executive the benefits set forth in this Section 6.6.

Good Reason shall mean, without the Executive’s express written consent, the occurrence of any one (1) or more of the following:

(a) Assigning to the Executive duties inconsistent with the Executive’s position (including status, offices, titles, and reporting requirements), authority, or responsibilities in effect on the Effective Date of this Agreement, or any other action by the Company which results in a diminution of the Executive’s position, authority, duties, or responsibilities as constituted as of the Effective Date of this Agreement (excluding an isolated, insubstantial, and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof if notice is given by Executive);

(b) Reducing the Executive’s Base Salary;

(c) Failing to maintain the Executive’s participation in the Company’s annual bonus and long-term incentive plan in a manner that is consistent with the Executive’s position, authority, or responsibilities;

(d) Failing to maintain the Executive’s amount of benefits under, or relative level of participation in, the Company’s employee benefit or retirement plans, perquisites, policies, practices, or arrangements in which the Executive participates as of the Effective Date of this Agreement;

8

(e) Purportedly terminating the Executive’s employment otherwise than as expressly permitted by this Agreement; or

(f) Failing to comply with and satisfy Section 9.1 hereof by requiring any successor to the Company to assume and agree to perform the Company’s obligations hereunder.

Upon the Effective Date of Termination, the Executive shall be entitled to receive the same payments and benefits as he is entitled to receive following an involuntary termination of his employment by the Company without Cause, as specified in Section 6.4 herein. Said payment shall commence within thirty (30) calendar days following the Effective Date of Termination.

The Executive’s right to terminate employment for Good Reason shall not be affected by the Executive’s incapacity due to physical or mental illness.

The Executive’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein.

Article 7.    Noncompetition and Confidentiality

7.1.    Noncompetition.    During the Employment Period and for a period of two (2) years after the Effective Date of Termination, the Executive shall not: (a) directly or indirectly act in concert or conspire with any person employed by the Company in order to engage in or prepare to engage in or to have a financial or other interest in any business which is a Direct Competitor (as defined below); or (b) serve as an employee, agent, partner, shareholder, director, or consultant for, or in any other capacity participate, engage, or have a financial or other interest in, any business which is a Direct Competitor (provided, however, that notwithstanding anything to the contrary contained in this Agreement, the Executive may own up to two percent (2%) of the outstanding shares of the capital stock of a company whose securities are registered under Section 12 of the Securities Exchange Act of 1934).

For purposes of this Agreement, the term “Direct Competitor” is any business entity which: (a) through the Executive’s efforts, induces the Company’s employees to terminate employment for the purpose of being employed by such business entity; or (b) is engaged in the business of the Company and engages in Substantial Competition with the Company in one or more Metropolitan Statistical Areas (“MSAs”) in which the Company has its operations, or in which, at the date the Executive’s employment terminates, the Company is engaged in real estate site selection or has taken further steps toward the commencement of operations in the future, either alone or in association with another entity, and in which the Company collectively produced, or is projected to produce in the first year of operations, more than five million dollars ($5,000,000) of gross sales. A business will not be considered to be in “Substantial Competition” with the Company if: (i) the business or the operating unit of the business in which the Executive is employed or with which the Executive is associated (the “Business Unit”) is not engaged in the retail sales and service of consumer electronics or (ii) if sales of the Business Unit’s products or services in the retail sales and service of consumer electronics constitute less than ten percent (10%) of such Business Unit’s sales; or (iii) if the sales of the Business Unit in the retail sales and service of consumer electronics do constitute more than ten percent (10%) of the sales of the Business Unit, but there is not significant geographic overlap between such Business Unit’s and the Company’s business locations.

9

In the event that the Executive’s employment is terminated within two (2) years following a Change in Control (as defined in Section 8.2), under circumstances described in Section 8.3, the Executive shall not be bound by the provisions of this section.

7.2.    Confidentiality.    The Company has advised the Executive and the Executive acknowledges that it is the policy of the Company to maintain as secret and confidential all Protected Information (as defined below), and that Protected Information has been and will be developed at substantial cost and effort to the Company. The Executive shall not at any time, directly or indirectly, divulge, furnish, or make accessible to any person, firm, corporation, association, or other entity (otherwise than as may be required in the regular course of the Executive’s employment), nor use in any manner, either during the Employment Period or after the termination, for any reason, of the Employment Period, any Protected Information, or cause any such information of the Company to enter the public domain.

For purposes of this Agreement, “Protected Information” means trade secrets, confidential and proprietary business information of the Company, and any other information of the Company, including, but not limited to, customer lists (including potential customers), sources of supply, processes, plans, materials, pricing information, internal memoranda, marketing plans, internal policies, and products and services which may be developed from time to time by the Company and its agents or employees, including the Executive; provided, however, that information that is in the public domain (other than as a result of a breach of this Agreement), approved for release by the Company or lawfully obtained from third parties who are not bound by a confidentiality agreement with the Company, is not Protected Information.

7.3.    Acknowledgement of Covenants.    The parties hereto acknowledge that the Executive’s services are of a special, extraordinary, and intellectual character which gives him unique value, and that the business of the Company and its subsidiaries is highly competitive, and that violation of any of the covenants provided in this Section 7 would cause immediate, immeasurable, and irreparable harm, loss, and damage to the Company not adequately compensable by a monetary award. The Executive acknowledges that the time, geographical area, and scope of activity restrained by the provisions of this Section 7 are reasonable and do not impose a greater restraint than is necessary to protect the goodwill of the Company’s business. The Executive further acknowledges that he and the Company have negotiated and bargained for the terms of this Agreement and that the Executive has received adequate consideration for entering into this Agreement. In the event of any such breach or threatened breach by the Executive of any one or more of such covenants, the Company shall be entitled to such equitable and injunctive relief as may be available to restrain the Executive from violating the provisions hereof. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available at law or in equity for such breach or threatened breach, including the recovery of damages and the immediate termination of the employment of the Executive hereunder.

7.4.    Enforceability.    If any court determines that the foregoing covenant, or any part thereof, is unenforceable because of the duration or geographical scope of such provision, or for any other reason, the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced.

10

Article 8.    Change in Control

8.1.    Change in Control.    This Article 8 shall not become effective, and the Company shall have no obligation hereunder, if the employment of the Executive with the Company shall terminate prior to a Change in Control (as defined in Section 8.2 below) of the Company.

8.2.    Definition of Change in Control.    Change in Control of the Company means, and shall be deemed to have occurred upon, the first to occur of any of the following events:

(a) The acquisition by any individual, entity, or group (a “Person”), including a “person” within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), but excluding an Affiliate (as defined below) of the Company, of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 15 percent (15%) or more of either: (i) the then outstanding shares of common stock of the Circuit City Group (the “Outstanding Common Stock”); or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Voting Securities”); excluding, however, the following: (A) any acquisition directly from the Company (excluding an acquisition resulting from the exercise of an option, conversion right, or exchange privilege unless the security being so exercised, converted or exchanged was acquired directly from the Company); (B) any acquisition by the Company; (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii), and (iii) of subsection (c) of this Section 8.2;

(b) Individuals who, as of the Effective Date, constitute the Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the Effective Date, whose election, or nomination for election by the Company’s stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall not be deemed a member of the Incumbent Board;

(c) The consummation of a reorganization, merger or consolidation of the Company or sale or other disposition of all or substantially all of the assets of the Company (a “Corporate Transaction”); excluding, however, a Corporate Transaction pursuant to which: (i) all or substantially all of the individuals or entities who are the beneficial owners, respectively, of the Outstanding Common Stock and the Outstanding Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than sixty percent (60%) of,

11

respectively, the outstanding shares of common stock, and the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation, which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or indirectly) in substantially the same proportions relative to each other as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Common Stock and the Outstanding Voting Securities, as the case may be; (ii) no Person (other than: the Company; any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; the corporation resulting from such Corporate Transaction; and any Person which beneficially owned, immediately prior to such Corporate Transaction, directly or indirectly, twenty-five percent (25%) or more of the Outstanding Common Stock or the Outstanding Voting Securities, as the case may be) will beneficially own, directly or indirectly, twenty-five percent (25%) or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors; and (iii) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or

(d) The consummation of a plan of complete liquidation, dissolution, or sale of substantially all the assets of the Company.

For purposes of this Article 8, “Affiliate” shall mean with reference to a specified Person, any Person that directly or indirectly through one (1) or more intermediaries controls or is controlled by or is under common control with the specified Person. For purposes of this definition, “control” (including, with correlative meaning, the terms “controlled by” and “under common control with”), as used in respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of such Person, whether through ownership of voting securities or by contract or otherwise.

12

8.3.    Change-in-Control Severance Benefits.    If at any time during the term of this Agreement there is a Change in Control of the Company and the Executive’s employment is terminated for any reason other than death, Disability, Retirement, Voluntary Termination (other than for Good Reason), or Cause within two (2) years following the Change in Control [or the Executive voluntarily terminates for any reason in the thirteenth month following a Change in Control of the Company ], the Company shall provide to the Executive the following:

(a) Base Salary and all other benefits due him as if he had remained an employee pursuant to Article 4 through the remainder of the month in which the termination occurs, less applicable withholding taxes and other authorized payroll deductions;

(b) The amount equal to a pro rata share of target Annual Bonus for the calendar year in which the Effective Date of Termination occurs (the calculation by which the Annual Bonus is multiplied by a fraction, the numerator of which is the number of full completed days in the bonus plan year through the Effective Date of Termination, and the denominator of which is three hundred sixty-five (365);

(c) A lump-sum severance allowance in an amount which is equal to the product of three (3) times both the Executive’s Base Salary at the rate in effect immediately prior to the termination and the Executive’s target Annual Bonus established for the fiscal year in which the Executive’s termination of employment occurs;

(d) Continuation at the same cost to the Executive as existed as of the Effective Date, of all health, welfare, and benefit plan participation for three (3) full years following employment termination, provided that the applicable COBRA health insurance benefit continuation period shall begin as of the Effective Date of Termination;

(e) Provision of outplacement services for the Executive not to exceed a cost of fifty thousand dollars ($50,000); and

(f) A lump-sum payment equal to the three (3) year costs of perquisites outlined in Section 4.6 above.

8.4.    Excise Tax Equalization Payment.    In the event that the Executive becomes entitled to severance benefits or any other payment or benefit under this Agreement, or under any other agreement with or plan of the Company (in the aggregate, the “Total Payments”), if any of the Total Payments will be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Code (or any similar excise tax that may hereafter be imposed), the Company shall pay to the Executive in cash an additional amount (the “Gross-Up Payment”), such that the net amount retained by the Executive after deduction of any Excise Tax upon the Total Payments and any federal, state, and local income tax and Excise Tax upon the Gross-Up Payment provided for by this Section 8.4 (including FICA and FUTA), shall be equal to the Total Payments. The Company shall make such payment to the Executive as soon as practicable following the Effective Date of Termination, but in no event beyond thirty (30) days from such date.

13

For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the Effective Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

The Company’s Compensation Committee shall determine, based upon the advice of the Company’s independent certified public accountants, whether any payments or benefits hereunder are subject to the Excise Tax.

8.5.    Subsequent Recalculation.    In the event the Internal Revenue Service adjusts the computation of the Company under Section 8.4 herein so that the Executive did not receive the greatest net benefit, the Company shall reimburse the Executive for the full amount necessary to make the Executive whole, plus a market rate of interest, as determined by the Compensation Committee.

Article 9.    Assignment

9.1.    Assignment by Company.    This Agreement may and shall be assigned or transferred to, and shall be binding upon and shall inure to the benefit of, any successor of the Company, and any such successor shall be deemed substituted for all purposes of the “Company” under the terms of this Agreement. As used in this Agreement, the term “successor” shall mean any person, firm, corporation, or business entity which at any time, whether by merger, purchase, or otherwise, acquires all or substantially all of the assets or the business of the Company. Notwithstanding such assignment, the Company shall remain, with such successor, jointly and severally liable for all its obligations hereunder.

Failure of the Company to obtain the agreement of any successor to be bound by the terms of this Agreement prior to the effectiveness of any such succession shall be a breach of this Agreement, and shall immediately entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled in the event of a termination of employment for Good Reason as provided in Section 8.3 herein. Except as herein provided, the Company may not otherwise assign this Agreement.

9.2.    Assignment by Executive.    The services to be provided by the Executive to the Company hereunder are personal to the Executive, and the Executive’s duties may not be assigned by the Executive; provided, however, that this Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, and administrators, successors, heirs, distributees, devisees, and legatees. If the Executive dies while any amounts payable to the Executive hereunder remain outstanding, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s devisee, legatee, or other designee or, in the absence of such designee, to the Executive’s estate.

14

Article 10.    Dispute Resolution and Notice

10.1.    Issue Resolution.    Any disagreement between you and the Company concerning anything covered by this Agreement or concerning other terms or conditions of your employment or the termination of your employment will be settled by final and binding arbitration pursuant to the Company’s Associate Issue Resolution Program. The Dispute Resolution Agreement and the Dispute Resolution Rules and Procedures are incorporated herein by reference as if set forth in full in this Agreement. The decision of the arbitrator will be final and binding on both you and the Company and may be enforced in a court of appropriate jurisdiction.

10.2.    Notice.    Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal offices.

Article 11.    Miscellaneous

11.1.    Entire Agreement.    This Agreement supersedes any prior agreements or understandings, oral or written, between the parties hereto, with respect to the subject matter hereof, and constitutes the entire agreement of the parties with respect thereto. Without limiting the generality of the foregoing sentence, this Agreement completely supersedes any and all prior employment agreements entered into by and between the Company and the Executive, and all amendments thereto, in their entirety.

11.2.    Modification.    This Agreement shall not be varied, altered, modified, canceled, changed, or in any way amended except by mutual agreement of the parties in a written instrument executed by the parties hereto or their legal representatives.

11.3.    Severability.    In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.

11.4.    Counterparts.    This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement.

11.5.    Tax Withholding.    The Company may withhold from any benefits payable under this Agreement all federal, state, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling.

11.6.    Beneficiaries.    The Executive may designate one (1) or more persons or entities as the primary and/or contingent beneficiaries of any amounts to be received under this Agreement. Such

15

designation must be in the form of a signed writing acceptable to the CEO. The Executive may make or change such designation at any time.

11.7.    Payment Obligation Absolute.    The Company’s obligation to make the payments and the arrangement provided for herein shall be absolute and unconditional, and shall not be affected by any circumstances, including, without limitation, any offset, counterclaim, recoupment, defense, or other right which the Company may have against the Executive or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company shall not seek to recover all or any part of such payment from the Executive or from whomsoever may be entitled thereto, for any reasons whatsoever.

The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and the obtaining of any such other employment shall in no event effect any reduction of the Company’s obligations to make the payments and arrangements required to be made under this Agreement; provided, however, that continued health, welfare, and benefit plan participation pursuant to Section 6.4 or Section 8.3 herein shall be discontinued in the event the Executive becomes eligible to receive substantially similar benefits from a successor employer.

11.8.    Contractual Rights to Benefits.    This Agreement establishes and vests in the Executive a contractual right to the benefits to which he is entitled hereunder. However, nothing herein contained shall require or be deemed to require, or prohibit or be deemed to prohibit, the Company to segregate, earmark, or otherwise set aside any funds or other assets, in trust or otherwise, to provide for any payments to be made or required hereunder.

Article 12.    Governing Law

To the extent not preempted by federal law, the provisions of this Agreement shall be construed and enforced in accordance with the laws of the Commonwealth of Virginia, without reference to Virginia’s choice of law statutes or decisions.

IN WITNESS WHEREOF, the Executive and the Company have executed this Agreement as of the Effective Date.

Circuit City Stores, Inc.	Executive: W. Austin Ligon
By:
Attest:

16

EX-10.5

Exhibit 10.5

FORM OF CARMAX EXECUTIVE OFFICER EMPLOYMENT AGREEMENT

[Date]

[Executive Officer Name & Address]

Dear [Name]:

This letter will confirm the terms of your employment with CarMax Auto Superstores, Inc., a Virginia corporation (also referred to in this letter as the “Company” or “CarMax”):

1.    Position and Compensation and consideration.

a. Position.    You have agreed to accept the position of [name of position]. During your employment, you shall perform such services as may be assigned to you by your manager or other member of management.

b. Compensation    Your initial base rate will be [rate/frequency of pay]. The Company annually reviews performance and salaries. You are eligible to participate in our CarMax fiscal year-end bonus program initially at [    %] of your base salary. Year-end bonuses are governed by the provisions of the Company’s bonus program, are based on both individual and Company performance (compared to its profit objectives), and are not guaranteed [insert any exception applicable to the individual officer’s bonus for the first year]. This bonus is prorated for the number of months you are employed during the fiscal year. To receive a bonus, you must have been employed before the preceding December 1st. Bonuses, if issued, are distributed in May, and you must be actively employed with the Company at that time to receive a bonus.

c. Consideration.    In consideration of your executing this Agreement and agreeing to be bound by its terms, the Company will:

(1) pay you the severance mentioned in paragraph 12.a. below, (in the event that your employment is terminated “without cause”);

(2) [insert any specific stock grant included in the individual officer’s initial compensation; and]

(3) continue your eligibility for future grants in [name of stock based compensation plan] (subject to meeting the other requirements of participation, such as full-time active status, position, etc.).

2.    Your Best Effort.    As an Associate of the Company, you have agreed to put forth your best and full effort on behalf of the Company and will not, without prior written consent of the Company, be engaged in any other business activity, whether or not such business activity is pursued for gain, profit, or other pecuniary advantage.

[Name]

Employment Agreement

[Date]

Page 2

3.    Associate Benefits.    You will be entitled to participate in such Associate benefit programs as the Company provides from time to time for Associates in your position. In addition to your Associate benefits, the Company will reimburse you in accordance with Company policy for travel and business expenses.

4.    Non-competition.    You agree that during the time you are employed by the Company and for a period of twelve (12) months following the termination of your employment, you will not engage in competition with the Company or its subsidiaries by being associated with any Competing Business in the Territory. For the purposes of this Agreement, you agree that the following definitions apply:

a. You will be deemed to “be associated with” a Competing Business if you: (1) become an employee of; or (2) directly or indirectly, alone or as a member of a partnership, own greater than a 5% interest in; or (3) manage, operate, control, or act as a consultant to; or (4) serve as an officer or director or in any managerial or executive position with; or (5) loan money to any Competing Business. In every case, the good faith judgment of the Board of Directors shall be conclusive as to whether you are associated with a Competing Business.

b. A “Competing Business” is any business entity which engages in the Business of the Company (hereinafter defined and engages in Substantial Competition (hereinafter defined) with the Company or its subsidiaries in one or more Designated Market Area (“DMA”) as defined by the Nielsen Corporation, in which the Company or its subsidiaries have their operation, or in which, as of the date of this Agreement, the Company or its subsidiaries are engaged in real estate site selection or have taken further steps toward the commencement of operation in the future, either alone or in association with another entity (“Future Statistical Areas”), and whether or not such has been publicly announced.

(1) The term “Business of the Company” is defined as the retail sale of automobiles, either new or used, with or without after-sale service.

(2) A business will be deemed to be in “Substantial Competition” if it is a retailer of new or used automobiles which has: at least one (1) site which has, or is expected to have within its first three years of operation, gross sales of at least one (1) million dollars annually; or b) mimics the Business of the Company.

The following is a list of some businesses which, by way of example, as of the date of this Agreement, are among those considered to be a competing business of the Company. These known competitors include, but are not limited to: [insert list of current competitors].

c. The term “Territory” shall mean the United States of America and its territories and Canada (“the Territory”).

                    initials

2

[Name]

Employment Agreement

[Date]

Page 3

5.    Confidential Information.    Your position with the Company is such that you may have access to confidential information, trade secrets, technology and other information about the Company’s business. For purposes of this Agreement (i) the term “Confidential Information” or “Trade Secrets” shall include, but not be limited to, information about the Company’s business methods, purchasing plans, expansion plans, merchandising and marketing plans and techniques, customer lists, financial data, cost and price information and other business records, training techniques, supplier and pricing information, internal corporate planning methods, systems and operating procedures (whether or not embodied in physical form), and (ii) the term “Technology” shall include, but not be limited to, all designs, processes, computer hardware and software, methods, formulate, techniques, know-how, concepts and ideas, whether or not they can be patented, copyrighted or registered as a Service Mark, and all improvement to any of the foregoing used in or relating to the Business of the Company.

You recognize and acknowledge that such Confidential Information, Trade Secrets or Technology, as may exist from time to time, is a valuable, special and unique asset of the Company and its subsidiaries, and that this Confidential Information and its use have been responsible for the growth and expansion of the Company and its subsidiaries, and if known by a Competing Business, would cause irreparable harm to the Company and/or its subsidiaries.

Therefore, during your employment and thereafter until the same shall have been (i) voluntarily disclosed to the public by the Company, (ii) independently developed and disclosed to the public by others, or (iii) otherwise enters the public domain by lawful means, you will not:

a. Make or cause to be made any reproductions of any Confidential Information, Trade Secrets or Technology belonging to or in the possession of the Company or its subsidiaries; or

b. Remove any Confidential Information, Trade Secrets or Technology from the premises of the Company or its subsidiaries or fail or refuse to surrender the same to the Company or its subsidiaries immediately upon their request; or

c. Use for your own benefit or purposes or disclose to or use (or the benefit or purposes of anyone other than the Company or its subsidiaries, any Trade Secrets or other Confidential Information, whether you learned the information before or after signing this Agreement and whether you leave employment with the Company.

6.    Work Product.    All work product included, but not limited to, reports, manuals, inventions, computer software, proposals, technical solutions, patents, other works of authorship, innovations and enhancements (collectively, “Works”) created by you in connection with work performed by you pursuant to this Agreement shall be the sole property of the Company, and the Company shall have full and exclusive rights to use, reproduce, publish or otherwise profit from the Works as the Company deems appropriate. You will assist the Company and its nominees in every proper way, during and subsequent to the term of this Agreement and at no expense to you, to obtain for the Company or its nominees’ benefit patents, copyrights or other forms of legal protection for the Works.

                    initials

3

[Name]

Employment Agreement

[Date]

Page 4

7.    Surrender of Company Property.    Upon the termination of your employment, whether at the instance of the Company or you, you will return to the Company all Company property including, without limitation, any automobiles, equipment, credit cards, keys, building access cards, Company identification, pagers, beepers, cellular phones, all documents, memoranda, notations, letters, computer hardware or software, CD Rom, customer lists, copies of any of the foregoing and any other materials in your possession or under your control (wherever located) relating to Confidential Information, Trade Secrets, Technology or Work Product.

8.    Non-solicitation of Associates.    You agree that while you are employed by the Company and for a period of two (2) years following the termination of your employment, you will not, without the prior written consent of the Company, directly or indirectly engage in efforts to induce employees of the Company, its parent company, Circuit City Stores, Inc., or related companies to terminate their employment for the purpose of being employed by another business entity.

9.    Non-solicitation of Customers.    You agree that while you are employed by the Company and for a period of one (1) year following the termination of your employment, you will not, without the prior written consent of the Company, directly or indirectly, solicit or attempt to solicit on behalf of yourself, a Competing Business or others, any person or entity that was or is a customer or client of the Company or its subsidiaries.

10.    Remedies for Breach.    If you breach the provisions of paragraph 4, 5, 6, 7, 8, or 9, the Company will suffer irreparable harm and the remedies available to it other than your compliance with the provisions will not be sufficient to make the Company whole. You acknowledge that this is a true statement and agree that if such a breach (or threatened breach) occurs, the Company will be entitled to specific performance and injunctive relief in addition to any other remedies to which a court may find the Company is entitled. If you breach the provisions of paragraph 4, 5, 6, 7, 8, or 9, any severance payments not yet paid will be immediately put into an escrow account pending a ruling of the court in the matter. If you are found to be in breach, the Company does not owe you any severance payments beyond the date of the breach.

11.    Termination with Cause.    The Company may terminate your employment at any time, without notice and without further obligation (monetary or other), for “cause.” “Cause” includes, but is not limited to, any one of the following:

a. your neglect of your employment duties;

b. evidence of your use, possession, or distribution of illegal drugs;

c. deliberate misconduct by you in connection with the performance of your duties, including, for example, misappropriation of funds or property of the Company or accepting bribes or kick-backs in connection with any transaction entered into on behalf of the Company;

                    initials

4

[Name]

Employment Agreement

[Date]

Page 5

d. your failure to disclose to the Company any personal interest you have in a Company transaction;

e. your violation of the confidentiality, non-competition, or non-solicitation provisions contained in this Agreement;

f. your conviction of a felony;

g. deliberate actions by you which are contrary to the best interests of the Company;

h. actions by you which are in violation of any state or federal laws or regulations;

i. actions by you which are unethical, as defined by the CarMax Statement of Business Ethics.

j. [insert specific provisions for new hires (if the officer was not previously employed by Circuit City Stores, such as failure to successfully pass the new hire/post-hire screening process and criminal background check; misrepresentation on the employment application or other documents that the officer provided to the Company or the employment agency who referred the person to the Company]

12.    Termination without Cause.    Either you or the Company may terminate employment, without cause, by giving the other written notice. It will be considered a “without cause” termination by the Company if you resign within sixty (60) days after: (i) a reduction in base salary which is not part of a prorata reduction for all Associates at the same level, (ii) a significant reduction in your responsibilities (with or without a reduction in pay), or (iii) you are offered as your only option a transfer to another location not within the same DMA.

a. If the Company terminates your employment without cause, in exchange for your agreeing to and honoring all the provisions of this Agreement (including, but not limited to, paragraph 4 non-competition, paragraph 5 confidential information, paragraph 6 work product, paragraph 7 surrender of Company property, and paragraph 8 non-solicitation, you will receive twelve (12) months of base salary (as of the date of termination), after termination, disbursed according to the Company’s regular biweekly paycheck schedule and sent to you via U.S. mail.

During the period of the payment in 12.a. above, it will be your responsibility to seek alternative employment. Any payments you receive for the performance of services during this period will reduce by one-half the Company’s obligation to pay the remaining payments specified in 12.a. above. You agree to notify the Company immediately if you secure employment.

b. If the Company terminates your employment due to the fact that the Company ceases to be in the business of the Company, in exchange for your agreeing to and honoring all the provisions of this Agreement (except paragraph 4 non-competition), you will receive four

                    initials

5

[Name]

Employment Agreement

[Date]

Page 6

(4) months of base salary (as of the date of termination), after termination, disbursed according to the Company’s regular biweekly paycheck schedule and sent to you via U.S. mail.

c. If you terminate your employment, you will not be entitled to any compensation under this agreement, beyond the date of termination.

d. [insert any additional provisions applicable to the particular executive upon termination]

13.    Death or Disability.    If you die, your employment will terminate as of the date of death. If you become disabled, continuation of employment will be determined in accordance with Company policy. If you die after the termination of your employment and at the time of your death you are receiving severance payments under paragraph 12.a. or 12.b. above, payments will cease as of the end of the month of your death.

14.    Monies Owed.    To the extent that you owe the Company any monies at the time of termination of employment, or to the extent that taxes are due on any Company benefits, you authorize the Company to withhold such amounts from your final paycheck or severance payment(s), or from reimbursements or any other monies due to you.

15.    Assignment.    This Agreement shall not be assignable by you. However, the Company may assign it to an entity under common control with the Company or to an entity which succeeds to the portion of the Company’s business in which you were previously employed.

16.    Term.    Unless you resign or your employment is terminated in accordance with paragraph 11, 12 or 13 above, the term of this agreement is for one year from the date of its acceptance by you. It will be renewed automatically each year on the anniversary date of its original acceptance unless both parties agree, in writing, to terminate it. This notification will be sent to you no later than fifteen (15) days prior to each anniversary date, otherwise the Agreement will be renewed for successive one year terms.

17.    Notices.    If the Company needs to give you any notices about your employment, it will send them to your address of record, as shown on your most recent paycheck. You should send any similar notices to the Company at: 9950 Mayland Drive, Richmond, VA 23233, Attention: Senior Vice President, Human Resources.

18.    Change in Terms.    This agreement supersedes any earlier agreement between you and the Company concerning your employment and, together with the Company’s policies and procedures for Associates at your level and the Company’s Statement of Business Ethics, contains all of the terms and conditions relating to your employment or its termination. Except as provided in paragraph 19 below and except for changes in your position and/or salary, any changes in the terms of this agreement must be in writing and signed by you and the Company. The fact that either you or the Company does not require

                    initials

6

[Name]

Employment Agreement

[Date]

Page 7

strict observance of the terms of this agreement on all occasions does not mean that the terms have been changed or that strict observance cannot be required at a later time.

19.    Separate Provisions.    A determination by a court that a provision of this agreement is unenforceable will not affect the other provisions. If the non-competition provisions of this agreement are found unenforceable, you and the Company agree that the court will have the authority to modify those provisions into ones it considers enforceable and to enforce them as so modified. If the confidentiality, non-competition or non-solicitation clauses, or any other provisions of this agreement are ruled to be unenforceable under any state or local law, all severance payments will cease.

20.    Issue Resolution/Arbitration.    Any disagreement between you and the Company concerning anything covered by this Agreement (other than paragraphs 4, 5, 6, 7, 8 or 9), or concerning other aspects of your employment or the termination of your employment will be settled using the Company’s Issue Resolution Program. The decision of the arbitrator will be final and binding on the Associate and the Company and may be enforced in a court of appropriate jurisdiction.

21.    Virginia Law.    Any questions that arise concerning the interpretation or enforcement of the terms of this agreement shall be decided based on the law of the Commonwealth of Virginia.

The offer contained in this letter remains open until [             a.m./ p.m.] on [date]. To confirm that this letter states our agreement, please initial each page in the space provided, sign the Agreement on the line above your name, date it, and return the signed copy to [Human Resources Administrator], at [address] in the enclosed envelope by [date]. This agreement is not effective until received [Human Resources Administrator], who will initial your copy to verify receipt.

Sincerely yours,

William A. Ligon

President, CarMax

AGREED TO:    By accepting this Agreement, I agree to be bound by all its terms and conditions while in the employ of the Company and following the termination of my employment (for whatever reason) for the period(s) of time as detailed in each individual paragraph.

Date:

                    initials

7

[Name]

SS#      -    -      

RECEIPT VERIFIED:

	Date:
[Human Resources Administrator]

8

EX-10.11

Exhibit 10.11

CREDIT AGREEMENT

dated as of May 17, 2002

among

CARMAX AUTO SUPERSTORES, INC.,

as Borrower

CARMAX, INC.,

as Guarantor

VARIOUS FINANCIAL INSTITUTIONS

and

DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC,

as Agent

TABLE OF CONTENTS

SECTION 1    DEFINITIONS	1
1.1    Definitions	1
1.2    Other Interpretive Provisions	17
SECTION 2    COMMITMENTS OF THE LENDERS; BORROWING PROCEDURES; DRAFTING                     AGREEMENTS AND DRAFTS	18
2.1    Commitments	18
2.1.1    Revolving Loan Commitment	18
2.1.2    Term Loan Commitment	19
2.1.3    Swing Line Loans	19
2.2    Loan Procedures	19
2.3    Title Documents	20
2.4    Issuance of Drafting Agreements	20
2.5    Conditions to Issuance; Termination of Drafting Agreements prior to Termination Date	20
2.6    Notice of Issuance of or Entering into Drafting Agreements	21
2.7    Draft Procedures	21
2.7.1    Generally	21
2.7.2    Participations in Drafting Agreements and Drafts; Funding	22
2.7.3    Obligations Absolute	23
2.7.4    Participation Obligations Unconditional	24
2.7.5    Repayment of Participations	25
2.8    Swing Line Loan Procedures	25
2.8.1    Generally	25
2.8.2    Refunding of, or Funding of Participations in, Swing Line Loans	25
2.8.3    Repayment of Participations	26
2.8.4    Participation Obligations Unconditional	26
2.9    Fronting Lender Advances	26
2.10    Commitments Several	27
2.11    Certain Conditions	27
2.12    Extension of Termination Date	27
SECTION 3    NOTES EVIDENCING LOANS	27
3.1    Notes	27
3.2    Recordkeeping	27
SECTION 4    INTEREST	28
4.1    Interest Rate	28
4.2    Interest Payment Dates	28
4.3    Computation of Interest	28

ii

SECTION 5    FEES.	28
5.1    Agent’s Fee	28
5.2    Computation of Fees	28
SECTION 6    REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT AMOUNT;                     PREPAYMENTS.	28
6.1    Voluntary Reduction or Termination of Revolving Commitment Amount	28
6.2    Voluntary Prepayments	28
6.3    Mandatory Prepayments	29
SECTION 7    MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES	29
7.1    Making of Payments	29
7.2    Application of Certain Payments	30
7.3    Due Date Extension	30
7.4    Setoff	30
7.5    Proration of Payments	30
7.6    Taxes	30
SECTION 8    WARRANTIES	32
8.1    Organization	32
8.2    Authorization; No Conflict	32
8.3    Validity and Binding Nature	32
8.4    Financial Condition	33
8.5    No Material Adverse Change	33
8.6    Litigation and Contingent Liabilities	33
8.7    Ownership of Properties; Liens	33
8.8    Subsidiaries	33
8.9    Pension Plans	33
8.10    Investment Company Act	34
8.11    Public Utility Holding Company Act	34
8.12    Regulation U	34
8.13    Taxes	34
8.14    Solvency, etc.	34
8.15    Environmental Matters	34
8.16    Insurance	36
8.17    Information	36
8.18    Intellectual Property	36
8.19    Burdensome Obligations	36
8.20    Labor Matters	36
8.21    No Default	36
8.22    Engaged in Motor Vehicle Sales	37
8.23    Dealer Franchise Agreements; Material Business Relationships	37

iii

SECTION 9    COVENANTS	37
9.1    Reports, Certificates and Other Information	38
9.1.1    Annual Report	38
9.1.2    Interim Reports	38
9.1.3    Compliance Certificates	38
9.1.4    Reports to the SEC and to Shareholders	39
9.1.5    Notice of Default, Litigation and ERISA Matters	39
9.1.6    Borrowing Base Certificates	40
9.1.7    Management Reports	40
9.1.8    Subordinated Debt Notices	40
9.1.9    Manufacturer/Dealer Statements	40
9.1.10    Inventory Detail Report	40
9.1.11    Dealer Franchise Agreements	40
9.1.12    Other Information	41
9.2    Books, Records and Inspections	41
9.3    Maintenance of Property; Insurance	42
9.4    Compliance with Laws; Payment of Taxes and Liabilities	42
9.5    Maintenance of Existence, etc.	42
9.6    Financial Covenants	43
9.6.1    Current Ratio	43
9.6.2    Ratio of Total Liabilities to Consolidated Tangible Net Worth	43
9.6.3    Fixed Charge Coverage Ratio	43
9.7    Limitation on Indebtedness	43
9.8    Liens	44
9.9    Restricted Payments	44
9.10    Mergers, Consolidations, Sales; Use of Motor Vehicles as Inventory	45
9.11    Modification of Organizational Documents	46
9.12    Use of Proceeds	46
9.13    Further Assurances	46
9.14    Transactions with Affiliates	47
9.15    Employee Benefit Plans	47
9.16    Environmental Matters	47
9.17    Unconditional Purchase Obligations	47
9.18    Inconsistent Agreements	48
9.19    Business Activities	48
9.20    Investments	48
9.21    Restriction of Amendments to Certain Documents	49
9.22    Fiscal Year	49
9.23    Landlord Agreements	50
9.24    Excess Collections	50
9.25    Reports	50

iv

SECTION 10    EFFECTIVENESS; CONDITIONS OF LENDING, ETC	50
10.1    Initial Credit Extension	50
10.1.1    Notes	50
10.1.2    Resolutions	50
10.1.3    Consents, etc.	51
10.1.4    Incumbency and Signature Certificates	51
10.1.5    Guaranty	51
10.1.6    Security Agreement	51
10.1.7    Opinion of Counsel	51
10.1.8    Insurance	51
10.1.9    Copies of Documents	51
10.1.10    Payment of Fees	51
10.1.11    Solvency Certificate	52
10.1.12    Search Results; Lien Terminations	52
10.1.13    Filings, Registrations and Recordings	52
10.1.14    Borrowing Base Certificate	52
10.1.15    Closing Certificate	52
10.1.16    Other	52
10.2    Conditions	52
10.2.1    Compliance with Warranties, No Default, etc.	52
10.2.2    Confirmatory Certificate	53
SECTION 11    EVENTS OF DEFAULT AND THEIR EFFECT	53
11.1    Events of Default	53
11.1.1    Non-Payment of the Loans, etc.	53
11.1.2    Non-Payment of Other Indebtedness	53
11.1.3    Other Material Obligations	54
11.1.4    Bankruptcy, Insolvency, etc.	54
11.1.5    Non-Compliance with Loan Documents	54
11.1.6    Warranties	54
11.1.7    Pension Plans	55
11.1.8    Judgments	55
11.1.9    Invalidity of Guaranty, etc.	55
11.1.10    Invalidity of Collateral Documents, etc.	55
11.1.11    Change in Control	55
11.2    Effect of Event of Default	55
SECTION 12    THE AGENT	56
12.1    Appointment and Authorization	56
12.2    Delegation of Duties	56
12.3    Liability of Agent	57
12.4    Reliance by Agent	57
12.5    Notice of Default	57

v

12.6    Credit Decision	58
12.7    Indemnification	58
12.8    Agent in Individual Capacity	59
12.9    Successor Agent	59
12.10    Collateral Matters	59
12.11    Funding Reliance	60
SECTION 13    GENERAL.	60
13.1    Waiver; Amendments	60
13.2    Confirmations	61
13.3    Notices	61
13.4    Computations	61
13.5    Regulation U	62
13.6    Costs, Expenses and Taxes	62
13.7    Subsidiary References	62
13.8    Captions	62
13.9    Assignments; Participations	62
13.9.1    Assignments	62
13.9.2    Participations	64
13.10    Governing Law	64
13.11    Counterparts	64
13.12    Successors and Assigns	65
13.13    Indemnification by the Company and the Borrower	65
13.14    Nonliability of Lenders	65
13.15    Consent to Jurisdiction	66
13.16    Waiver of Jury Trial	66
13.17    Confidentiality	66
SECTION 14    GUARANTY.	67
14.1    The Guaranty	67
14.2    Guaranty Unconditional	67
14.3    Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances	68
14.4    Waiver	68
14.5    Stay of Acceleration	68
14.6    Delay of Subrogation	69

6

SCHEDULE 2.1	Lenders and Percentages
SCHEDULE 8.6	Litigation and Contingent Liabilities
SCHEDULE 8.8	Subsidiaries
SCHEDULE 8.15	Environmental Matters
SCHEDULE 8.16	Insurance
SCHEDULE 8.20	Labor Matters
SCHEDULE 8.22	Financing Statements
SCHEDULE 8.23	Dealer Franchise Agreements
SCHEDULE 9.7	Existing Indebtedness
SCHEDULE 9.20	Existing Investments
SCHEDULE 13.3	Addresses for Notices
EXHIBITS
EXHIBIT A	Form of Note (Section 3.1)
EXHIBIT B	Form of Compliance Certificate (Section 9.1.3)
EXHIBIT C	Guaranty (Section 1.1)
EXHIBIT D	Security Agreement (Section 1.1)
EXHIBIT E	Subordination Terms (Section 1.1)
EXHIBIT F	Form of Solvency Certificate (Section 10.1.11)
EXHIBIT G	Form of Assignment Agreement (Section 13.9.1)
EXHIBIT H	Form of Opinion of Counsel (Section 10.1.7)
EXHIBIT I	Form of Cover Page of Borrowing Base Certificate (Section 1.1)
EXHIBIT J	Form of Report of Assets and Liabilities (Section 9.1.2)

7

CREDIT AGREEMENT

THIS CREDIT AGREEMENT dated as of May 17, 2002 (this “Agreement”) is entered into among CARMAX AUTO SUPERSTORES, INC., a Virginia corporation (the “Borrower”), CARMAX, INC., a Virginia corporation (the “Company”), the financial institutions that are or may from time to time become parties hereto (together with their respective successors and assigns, the “Lenders”) and DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC (in its individual capacity, “DCSNA”), as agent for the Lenders.

WHEREAS, the Lenders have agreed to make available to the Borrower term loans and a revolving credit facility upon the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows:

SECTION 1    DEFINITIONS.

1.1    Definitions.    When used herein the following terms shall have the following meanings:

Acquisition means an acquisition by the Company or any Subsidiary of all or substantially all the assets of a business unit or a controlling interest in the capital stock or other ownership interests of an Automobile Dealership, whether through a purchase, merger, consolidation or otherwise.

Acquisition Cost means, (x) with respect to any New Motor Vehicle, the wholesale purchase price charged by the Manufacturer thereof as reflected in the invoice in respect of such New Motor Vehicle issued by such Manufacturer to the Company or its applicable Subsidiary less any related deductions set forth on such invoice, and (y) with respect to any Used Motor Vehicle, the cost of the Company or its applicable Subsidiary to purchase such Used Motor Vehicle.

Affiliate of any Person means (i) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person and (ii) any officer or director of such Person. A Person shall be deemed to be “controlled by” any other Person if such Person possesses, directly or indirectly, power to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managers or power to direct or cause the direction of the management and policies of such Person whether by contract or otherwise.

Agent means DCSNA in its capacity as agent for the Lenders hereunder and any successor thereto in such capacity.

Agreement—see the Preamble.

Assignment Agreement—see Section 13.9.1.

Attorney Costs means, with respect to any Person, all reasonable fees and charges of any counsel to such Person, the reasonable allocable cost of internal legal services of such Person (to the extent incurred after the Closing Date), all reasonable disbursements of such internal counsel (to the extent incurred after the Closing Date) and all court costs and similar legal expenses.

Auction House means an auction house that deals in Used Motor Vehicles and which has an established Drafting arrangement with the Fronting Lender that is acceptable to the Fronting Lender.

Automobile Dealership means a business that operates one or more dealerships for the retail sale, or retail sale and lease, of new and/or used automobiles or trucks and businesses ancillary to the operation of dealerships owned or operated by the Company or its Subsidiaries, including service and parts operations, body shops, the sale of finance, extended warranty and insurance products (including after–market items), the financing of the purchase of new and/or used vehicles, the purchase, sale and servicing of finance contracts for new and/or used vehicles and other related businesses.

Borrower—see the Preamble.

Borrowing Base means, as of any date, the aggregate final cost of all Motor Vehicles (other than Motor Vehicles subject to any Lien, other than Permitted Liens of the type described in clauses (i), (ii), (iii) and (x) of the definition of Permitted Lien, and also excluding, for so long as any Ford Restriction exists, any New Motor Vehicles of the Ford, Lincoln and Mercury makes held by Kenosha) as of such date, which amount is reported for each store location in the general ledger of the Company or the applicable Subsidiary (it being understood that the final cost of any Motor Vehicle as of any date shall equal the Acquisition Cost of such Motor Vehicle plus, in the case of Used Motor Vehicles only, all transportation costs and other incremental expenses incurred before such date in connection with the acquisition of such Used Motor Vehicle plus, in the case of Used Motor Vehicles only, all labor costs and other incremental expenses incurred before such date in connection with the reconditioning of such Used Motor Vehicle minus, in the case of Used Motor Vehicles only, any market value adjustments or other downward adjustments made before such date in the value of such Used Motor Vehicles minus, in the case of Used Motor Vehicles only and only if the Company materially changes, without the consent of the Agent, its policies, procedures or methods for valuing its Used Motor Vehicles inventory from those in effect on the date hereof, any market value adjustments reasonably determined by the Agent for such Used Motor Vehicles). The Borrowing Base shall not include any Motor Vehicle securing a Transferred Receivable (as defined in the Security Agreement), which Motor Vehicle has been returned to, repossessed by or foreclosed on by the Company or any Subsidiary (a “Securitization Repossession”); provided that so long as the aggregate final cost of all Securitization Repossessions at any time does not exceed 1% of the Borrowing Base at such

2

time, the final cost of the Securitization Repossessions need not be deducted from the Motor Vehicles included in the Borrowing Base.

Borrowing Base Certificate means a certificate in substantially the form to be agreed upon by the Company and the Agent after the Closing Date pursuant to Section 9.25; until the time such agreement is reached, the Borrowing Base Certificate shall be in substantially the form of the certificate delivered on the Closing Date pursuant to Section 10.1.14; it being understood that the cover page of any Borrowing Base Certificate shall be as set forth in Exhibit I.

Business Day means any day of the year (other than any Saturday or Sunday) which is not a day on which commercial banks are authorized or required by law to close in Detroit, Michigan.

Capital Expenditures means all expenditures which, in accordance with GAAP, would be required to be capitalized and shown on the consolidated balance sheet of the Company, but excluding expenditures made in connection with the replacement, substitution or restoration of assets to the extent financed (i) from insurance proceeds (or other similar recoveries) paid on account of the loss of or damage to the assets being replaced or restored or (ii) with awards of compensation arising from the taking by eminent domain or condemnation of the assets being replaced.

Capital Lease means, as of any date, any lease of property, real or personal, which would be capitalized on a balance sheet of the lessee prepared as of such date in accordance with GAAP.

CarMax Group means the Company and its Subsidiaries.

Cash Collateralize means to deliver cash collateral to the Agent, to be held as cash collateral for outstanding Drafting Agreements, pursuant to documentation satisfactory to the Agent. Derivatives of such term have corresponding meanings.

Cash Equivalent Investment means, at any time, (a) any evidence of Indebtedness, maturing not more than one year after such time, issued or guaranteed by the United States Government or any agency thereof, (b) commercial paper, maturing not more than one year from the date of issue, or corporate demand notes, in each case rated at least A-2 by Standard & Poor’s Ratings Group or P-2 by Moody’s Investors Service, Inc., (c) any certificate of deposit (or time deposits represented by such certificates of deposit) or banker’s acceptance, maturing not more than one year after such time, or overnight Federal Funds transactions that are issued or sold by DCSNA or by a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $100,000,000, (d) any repurchase agreement entered into with DCSNA or any commercial banking institution of the stature referred to in clause (c) which (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c) and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase

3

obligation of DCSNA or such commercial banking institution thereunder and (e) shares of money market mutual funds within the definition of Rule 2a-7 promulgated by the SEC under the Investment Company Act of 1940.

CERCLA—see Section 8.15.

Change in Control means (a) any Person or group of Persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934 (the “Exchange Act”)) shall acquire beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 20% of the Voting Stock of the Company or (b) a majority of the members of the Board of Directors of the Company shall cease to be Continuing Members or (c) the failure of the Company to own, beneficially and of record, 100% of the Voting Stock of the Borrower, free and clear of any Lien (except for Permitted Liens of the type described in clauses (i), (ii) and (iii) of the definition of “Permitted Lien”); provided that clause (a) above shall not apply to Voting Stock of the Company acquired or otherwise held by Circuit City or any of its Affiliates prior to the consummation of the proposed separation of the CarMax Group from Circuit City. For purposes of the foregoing, “Continuing Member” means a member of the Board of Directors of the Company who either (i) was a member of the Company’s Board of Directors on the day before the Closing Date and has been such continuously thereafter or (ii) became a member of such Board of Directors after the Closing Date and whose election or nomination for election was approved by a vote of the majority of the Continuing Members then members of the Company’s Board of Directors.

Circuit City means Circuit City Stores, Inc., a Virginia corporation.

Closing Date—see Section 10.1.

Code means the Internal Revenue Code of 1986.

Collateral means property of the Company and its Subsidiaries in which a Lien is granted under the Collateral Documents.

Collateral Documents means the Security Agreement and any other agreement or instrument pursuant to which the Company, any Subsidiary or any other Person grants collateral to the Agent for the benefit of the Lenders to secure the obligations hereunder and under the other Loan Documents.

Commitment means, as to any Lender, such Lender’s commitment to make Loans, and to issue or participate in Drafting Agreements, Drafts and Swing Line Loans, under this Agreement. The initial amount of each Lender’s Revolving Percentage of the Revolving Commitment Amount and of the aggregate amount of the Term Loans is set forth on Schedule 2.1.

Company—see the Preamble.

4

Computation Period means each period of four consecutive Fiscal Quarters ending on the last day of a Fiscal Quarter.

Consolidated Current Assets means, at any date, the aggregate amount of all assets of the Company and its Subsidiaries, as shown on the most recent consolidated balance sheet of the Company and its Subsidiaries, that would be classified as current assets (including cash, marketable securities, accounts receivable, inventory and prepaid expenses) in accordance with GAAP.

Consolidated Current Liabilities means, at any date, the aggregate amount of all liabilities of the Company and its Subsidiaries, as shown on the most recent consolidated balance sheet of the Company and its Subsidiaries, that would be classified as current liabilities in accordance with GAAP.

Consolidated Net Income means, for any period, the net income (or loss) of the Company and its Subsidiaries for such period, excluding any gains from asset sales (other than in the ordinary course of business), any extraordinary gains (or losses) and any gains (or losses) from discontinued operations, in each case determined in accordance with GAAP.

Consolidated Tangible Net Worth means, at any date, all amounts which, in conformity with GAAP, would be included under stockholder’s equity on the consolidated balance sheet of the Company and its Subsidiaries at such time; provided that, in any event, such amounts are to be net of amounts carried on the consolidated financial statements of the Company and its Subsidiaries for (i) any write-up in the book value of any assets of the Company and its Subsidiaries resulting from a revaluation thereof subsequent to the date of this Agreement, (ii) treasury stock, (iii) patents, patent applications, copyrights, trademarks, trade names, goodwill, experimental or organizational expenses and other like intangibles and (iv) to the extent not otherwise eliminated in the consolidation of the balance sheet of the Company and its Subsidiaries, capital contributions to, or other Investments in, Unrestricted Subsidiaries.

Controlled Group means all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with the Company, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.

Customary Recourse Arrangements means limited recourse arrangements that are customary for Securitizations and that do not impair the characterization of the relevant Securitization as a true sale under applicable law, including bankruptcy and insolvency law (it being understood that Customary Recourse Arrangements shall not include (i) arrangements under which the Company or any Subsidiary (other than the SPE participating in the relevant Securitization) directly assumes the credit risk associated with the securitized assets or (ii) indirect recourse arrangements (such as the use of a subordinated note or the retention of a

5

subordinated certificate) under which the Company or any Subsidiary (other than the SPE participating in the relevant Securitization) would reasonably expect to suffer economic loss based on the historical performance of the securitized assets.

DCSNA—see the Preamble.

Dealer Franchise Agreement—see Section 8.23.

Disposal—see the definition of “Release”.

Dollar and the sign “$” mean lawful money of the United States of America.

Draft means a draft for the account of the Borrower or any Subsidiary (other than an Unrestricted Subsidiary) on the Fronting Lender made by a Manufacturer with respect to New Motor Vehicles or an Auction House with respect to Used Motor Vehicles.

Drafting means the process of presenting a Draft.

Drafting Agreement means an agreement between the Fronting Lender and a Manufacturer, entered into for the account of the Borrower or any Subsidiary (other than an Unrestricted Subsidiary) (and in some cases acknowledged or countersigned by the Borrower or the applicable Subsidiary) under which such Manufacturer is entitled to present Drafts to the Fronting Lender for payment of invoices identifying New Motor Vehicles delivered or shipped by such Manufacturer to the Borrower or such Subsidiary, such agreements to be on terms and conditions satisfactory to the Fronting Lender.

EBITDAR means, for any period, Consolidated Net Income for such period plus, to the extent deducted in determining such Consolidated Net Income, Interest Expense, Rental Expense, income tax expense, depreciation and amortization for such period.

EFT System shall mean the electronic funds transfer system maintained by the Fronting Lender and pursuant to which the Borrower may transfer funds, or cause the transfer of funds, from accounts of the Fronting Lender to accounts of the Borrower and the Subsidiaries (other than Unrestricted Subsidiaries) or from accounts of the Borrower and the Subsidiaries (other than Unrestricted Subsidiaries) to accounts of the Fronting Lender.

Environmental Claims means all claims, however asserted, by any governmental, regulatory or judicial authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for Release or injury to the environment.

Environmental Laws means all present or future Federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case relating to Environmental Matters.

6

Environmental Matters means any matter arising out of or relating to health and safety, or pollution or protection of the environment or workplace, including any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, release, control or cleanup of any Hazardous Substance.

ERISA means the Employee Retirement Income Security Act of 1974.

Event of Default means any of the events described in Section 11.1.

Federal Funds Rate means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor publication, “H.15(519)”) on the preceding Business Day opposite the caption “Federal Funds (Effective)”; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 A.M. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent.

Financed Capital Expenditures means any Capital Expenditure that is financed by a Person other than the Company and its Subsidiaries (other than with the proceeds of Loans hereunder) within 540 days (or within 60 days in the case of Capital Expenditures relating to Property other than real property and improvements thereon) of the making thereof.

Fiscal Quarter means a fiscal quarter of a Fiscal Year.

Fiscal Year means the fiscal year of the Company and its Subsidiaries, which period shall be the 12-month period ending on the last day of February in each year. References to a Fiscal Year with a number corresponding to any calendar year (e.g., “Fiscal Year 2002”) refer to the Fiscal Year ending on the last day of February in such calendar year.

Fixed Charge Coverage Ratio means, for any Computation Period, the ratio of (a) the total for such period of EBITDAR minus the sum of (i) income taxes paid by the Company and its Subsidiaries plus (ii) Capital Expenditures (other than Financed Capital Expenditures) to (b) the sum of (i) Interest Expense for such period plus (ii) Rental Expense for such period.

Ford means Ford Motor Company and its Subsidiaries.

Ford Restriction means any valid and enforceable provision restricting Kenosha from granting a Lien to the Agent on Kenosha’s assets consisting of New Motor Vehicles of the Ford, Lincoln and Mercury makes to secure its obligations under the Loan Documents, which restriction is contained on the date hereof in Kenosha’s Dealer Franchise Agreement with Ford.

7

FRB means the Board of Governors of the Federal Reserve System or any successor thereto.

Fronting Lender means DCSNA in its individual capacity and its successors and assigns in such capacity.

Fronting Lender Advance—see Section 2.9.

GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or organizations with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination.

Guarantee of any Person means any contract, agreement or understanding of such Person pursuant to which such Person guarantees, or in effect guarantees, any Indebtedness of any other Person (the “Primary Obligor”) in any manner, whether directly or indirectly, including agreements: (i) to purchase such Indebtedness or any property constituting security therefor, (ii) to advance or supply funds (A) for the purchase or payment of such Indebtedness, or (B) to maintain net worth or working capital or other balance sheet conditions, or otherwise to advance or make available funds for the purchase or payment of such Indebtedness, (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness of the ability of the Primary Obligor to make payment thereof or (iv) otherwise to assure the holder of such Indebtedness against loss in respect thereof; except that “Guarantee” shall not include (x) the endorsement by the Company or a Subsidiary in the ordinary course of business of negotiable instruments or documents for deposit or collection or (y) any Customary Recourse Arrangements of the Company or any Subsidiary in connection with any Securitization of Motor Vehicle Receivables owing (immediately prior to such Securitization) to the Company or any of its Subsidiaries.

Guaranteed Obligations means all indebtedness, liabilities, obligations, covenants and duties of, and all terms and conditions to be observed by, the Borrower due or owing to, or in favor or for the benefit of, the Agent (for the benefit of the Lenders) and the Lenders under the Loan Documents, in each case, of every kind, nature and description, direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, now existing or hereafter arising.

Guaranty means a guaranty substantially in the form of Exhibit C.

Hazardous Substances—see Section 8.15.

8

Hedging Agreement means any interest rate, currency or commodity swap agreement, cap agreement or collar agreement, and any other agreement or arrangement designed to protect a Person against fluctuations in interest rates, currency exchange rates or commodity prices.

Hedging Obligation means, with respect to any Person, any liability of such Person under any Hedging Agreement.

Indebtedness of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, whether or not evidenced by bonds, debentures, notes or similar instruments, (b) all obligations of such Person as lessee under Capital Leases which have been or should be recorded as liabilities on a balance sheet of such Person in accordance with GAAP, (c) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business), (d) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person (the amount of any such indebtedness of another Person shall not exceed the greater of the book value or fair market value of the property subject to such Lien, provided that recourse with respect to such indebtedness is expressly limited by the instruments governing such indebtedness to the assets of such Person subject to such Lien), (e) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn) and banker’s acceptances issued for the account of such Person, (f) all Hedging Obligations of such Person, (g) all obligations of such Person in respect of any Guarantee, and (h) all indebtedness of any partnership of which such Person is a general partner (other than to the extent that the instrument or agreement evidencing such indebtedness expressly limits the liability of such Person in respect thereof).

Indemnified Liabilities—see Section 13.13.

Interest Expense means, for any period, the consolidated interest expense of the Company and its Subsidiaries for such period (including all imputed interest on Capital Leases), determined in accordance with GAAP.

Interest Rate means, for each day, a rate per annum equal to the sum of (a) (i) in the case of each day from and including the first day of each calendar month through and including the 15th day of such calendar month, the Eurodollar Rate for the first day of such calendar month and (ii) in the case of each day from and including the 16th day of each calendar month through and including the last day of such calendar month, the Eurodollar Rate for the 16th day of such calendar month plus (b) a margin of one and one half percent (1.50%) per annum (provided that at any time an Event of Default exists, if requested by the Required Lenders, the margin shall be three and one half percent (3.50%) per annum). For purposes of this definition, “Eurodollar Rate” means, for any day, (A) the rate of interest (rounded upwards, if necessary, to the next  ¹/16th of 1%) published in The Wall Street Journal (Eastern Edition) on such day (or if not published on such day, for the immediately preceding day on which it was published) in its “Money Rates” column as the one-month London Interbank Offered Rate for

9

Dollar-denominated deposits (if The Wall Street Journal ceases to publish such a rate or substantially changes the methodology used to determine such rate, then the rate shall be the rate of interest (rounded upwards, if necessary, to the next  ¹/16th of 1%) published by Reuters Monitor Rates Service on such day (or if not published on such day, for the immediately preceding day on which it was published) as the one-month London Interbank Offered Rate for Dollar-denominated deposits), and (B) if such rate is not published or available, such rate as shall be otherwise independently determined by the Agent on a basis substantially similar to the methodology used by The Wall Street Journal on the date of this Agreement.

Investment means, relative to any Person, any investment in another Person, whether by acquisition of any debt or equity security, by making any loan or advance or by becoming obligated with respect to a Guarantee in respect of obligations of such other Person (other than travel and similar advances to employees in the ordinary course of business). The amount of any Investment shall be deemed to be the amount of cash invested (or, in the case of property invested other than cash, the fair market value of the property invested) less an amount equal to the lesser of the amount of cash received by the investing person as a return on capital with respect to such Investment and the initial amount of such Investment, in either case, less the cost of disposition of the Investment.

Kenosha means Kenosha Automotive, LLC, a Virginia limited liability company.

Lender—see the Preamble. References to the “Lenders” shall include the Fronting Lender; for purposes of clarification only, to the extent that DCSNA (or any successor Fronting Lender) may have any rights or obligations in addition to those of the other Lenders due to its status as Fronting Lender, its status as such will be specifically referenced.

Lien means, with respect to any Person, any interest granted by such Person in any real or personal property, asset or other right owned or being purchased or acquired by such Person which secures payment or performance of any obligation and shall include any Capital Lease, and any mortgage, lien, encumbrance, charge or other security interest of any kind, whether arising by contract, as a matter of law, by judicial process or otherwise.

Loan Documents means this Agreement, the Notes, the Guaranty and the Collateral Documents.

Loan Party means the Borrower, the Company and each Subsidiary party to any Loan Document.

Loans means Revolving Loans, Swing Line Loans and Term Loans.

Manufacturer means the manufacturer or distributor of a new Motor Vehicle.

10

Manufacturer/Dealer Statement means a financial statement prepared by the Company or one of its Subsidiaries for a Manufacturer and delivered to such Manufacturer on a monthly basis.

Manufacturer’s Certificate means a Manufacturer’s Statement of Origin, Manufacturer’s Certificate, MSO, Certificate of Origin or other document evidencing the ownership or transfer of ownership of a New Motor Vehicle from a Manufacturer to the Company or any of its Subsidiaries.

Margin Stock means any “margin stock” as defined in Regulation U.

Material Adverse Effect means (a) a material adverse change in, or a material adverse effect upon, the financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries taken as a whole, (b) a material impairment of the ability of the Borrower, the Company or any Subsidiary to perform any of its obligations under any Loan Document or (c) a material adverse effect upon any substantial portion of the collateral under the Collateral Documents or upon the legality, validity, binding effect or enforceability against the Borrower, the Company or any Subsidiary of any Loan Document.

Motor Vehicle means an automobile, truck, van or other motor vehicle, including New Motor Vehicles and Used Motor Vehicles that are inventory (as defined in the Uniform Commercial Code) of the Company and its Subsidiaries (other than Unrestricted Subsidiaries), excluding any motor vehicle not held for sale or lease.

Motor Vehicle Receivables means retail installment sale contracts or other agreements under which Motor Vehicles are purchased or leased from the Company or any Subsidiary, all amounts due and owing under such contracts or other agreements and all proceeds thereof.

Multiemployer Pension Plan means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Company or any member of the Controlled Group may have any liability.

New Motor Vehicle means any Motor Vehicle purchased by the Company or any of its Subsidiaries directly from the Manufacturer of such Motor Vehicle which has not been previously owned by any other Person.

Note—see Section 3.1.

Operating Lease means any lease of (or other agreement conveying the right to use) any Property by the Company or any Subsidiary, as lessee, other than any Capital Lease.

11

Outstandings means, at any time, the sum of (a) the aggregate principal amount of all Revolving Loans, Swing Line Loans and funded Drafts then outstanding plus (b) the aggregate principal amount of all Term Loans then outstanding.

PBGC means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA.

Pension Plan means a “pension plan”, as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a Multiemployer Pension Plan), and to which the Company or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA.

Percentage means a Revolving Percentage or a Term Percentage, as the context may require.

Permitted Liens means:

(i)     Liens for taxes, assessments or governmental charges or levies on property of the Company or any Subsidiary if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and with respect to which the Company or such Subsidiary shall have set aside adequate reserves in accordance with GAAP;

(ii)     Liens imposed by law, such as carrier’s, warehousemen’s and mechanic’s liens and other similar liens, which arise in the ordinary course of business with respect to obligations not yet due or being contested in good faith and by appropriate proceedings and with respect to which the Company or any Subsidiary shall have set aside adequate reserves in accordance with GAAP;

(iii)     Liens arising out of pledges or deposits under workers’ compensation laws, unemployment insurance, old age pensions or other social security or retirement benefits or similar legislation;

(iv)     attachments, appeal bonds, judgments and other similar Liens, for sums not exceeding $5,000,000 arising in connection with court proceedings, provided the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings;

(v)     easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of the Company or any Subsidiary;

12

(vi)     subject to the $5,000,000 limitation set forth in Section 9.7(g), (i) Liens arising in connection with Capital Leases (and attaching only to the property being leased), (ii) Liens existing on property at the time of the acquisition thereof by the Company or any Subsidiary (and not created in contemplation of such acquisition) and (iii) Liens that constitute purchase money security interests on any property securing debt incurred for the purpose of financing all or any part of the cost of acquiring such property, provided that (x) any such Lien attaches to such property within 90 days of the acquisition thereof and attaches solely to the property so acquired and (y) no such Lien may attach to any Motor Vehicle;

(vii)     extensions, renewals or replacements (or successive extensions, renewals or replacements) in whole or in part of any Lien referred to in the foregoing clauses (i) through (vi) inclusive, provided that the property subject to such extension, renewal or replacement shall be limited to the property originally subject to the Lien so extended, renewed or replaced (plus improvements, if any, on such property);

(viii)     Liens on Motor Vehicle Receivables created or incurred in connection with any Securitization of such Motor Vehicle Receivables owing (immediately prior to such Securitization) to the Company or any Subsidiary (other than an Unrestricted Subsidiary);

(ix)     Liens in addition to those referred to in the foregoing clauses (i) through (viii) inclusive, provided that the aggregate amount of all Indebtedness secured by such Liens may not exceed 10% of Consolidated Tangible Net Worth as of the end of the Fiscal Quarter immediately preceding the creation or incurrence of such Lien; and

(x)     Liens under the Collateral Documents.

Person means any natural person, corporation, partnership, joint venture, trust, limited liability company, association, governmental authority or unit, or any other entity, whether acting in an individual, fiduciary or other capacity.

Property of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person.

Property Insurance means all insurance insuring any direct physical loss or damage to the Collateral and any lost income or profits resulting from consequences of damage to the Collateral or caused by any interruption in business operations, whether designated as property insurance, business interruption insurance or otherwise, and whether the insurance insures against specific risks or all risks, and includes any reinsurance and excess insurance the Company or its Subsidiaries may obtain; it being understood and agreed that, on the Closing Date, the Property Insurance maintained by the Company and its Subsidiaries is insurance against the direct physical

13

loss or damage to Motor Vehicles for sale at covered locations (including fire and other risks) and also provides for the necessary interruption of business.

RCRA—see Section 8.15.

Regulation U means Regulation U of the FRB.

Release has the meaning specified in CERCLA and the term “Disposal” (or “Disposed”) has the meaning specified in RCRA; provided that in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply as of the effective date of such amendment; and provided, further, that to the extent that the laws of a state wherein any affected property lies establish a meaning for “Release” or “Disposal” which is broader than is specified in either CERCLA or RCRA, such broader meaning shall apply.

Rental Expense means, for any period, all payments made or required to be made during such period by the Company and its Subsidiaries, as lessee or sublessee under any Operating Lease, as rental payments or contingent rentals, as calculated in accordance with GAAP.

Required Lenders means Lenders having Total Percentages aggregating 66 ²/3 % or more.

Revolving Commitment means, as to any Lender, the Commitment of such Lender to make Revolving Loans, and to issue or participate in Drafting Agreements, Drafts and Swing Line Loans, hereunder.

Revolving Commitment Amount means $100,000,000, as reduced from time to time pursuant to Section 6.1.

Revolving Lender means, at any time, any Lender that then has a Revolving Commitment or then holds any Revolving Loan.

Revolving Loan—see Section 2.1.1.

Revolving Outstandings means, at any time, the aggregate principal amount of all Revolving Loans, Swing Line Loans and funded Drafts then outstanding.

Revolving Percentage means, with respect to any Lender, the percentage which (a) the amount of such Lender’s Revolving Commitment is of (b) the Revolving Commitments of all Lenders; provided that, after the Revolving Commitments, all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) have been terminated, “Revolving Percentage” shall mean, as to any Lender, the percentage which the sum of the aggregate principal amount of such Lender’s Revolving Loans plus the participations of such Lender in all funded Drafts and Swing Line Loans is of the sum of the aggregate principal amount of all

14

Revolving Loans and Swing Line Loans plus the amount of all funded Drafts. The initial Revolving Percentage of each Lender is set forth on Schedule 2.1.

SEC means the Securities and Exchange Commission or any other governmental authority succeeding to any of the principal functions thereof.

Security Agreement means a security agreement substantially in the form of Exhibit D.

Securitization means a transaction in which (a) financial assets originated or acquired by the Company or any Subsidiary are transferred (pursuant to a true sale) to one or more SPEs in a manner that legally isolates the transferred assets from a bankruptcy or insolvency of the Company or such Subsidiary and (b) securities evidencing an interest in, or otherwise backed by, such transferred assets are issued to investors.

SPE means a bankruptcy remote, special purpose entity that satisfied, at the time of its formation, the special purpose entity criteria published by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.

Subordinated Debt means all Indebtedness for borrowed money of the Borrower and the Subsidiaries which (a) is made subordinate to the Borrower’s Indebtedness to the Lenders hereunder in the instruments evidencing such subordinated Indebtedness by provisions not more favorable to the holders of such subordinated Indebtedness than those set forth on Exhibit E hereto and (b) has been approved in writing by the Required Lenders.

Subsidiary means, with respect to any Person, a corporation, partnership, limited liability company or other entity of which such Person and/or its other Subsidiaries own, directly or indirectly, such number of outstanding shares or other ownership interests as have more than 50% of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity. Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to Subsidiaries of the Company.

Substantial Portion means, with respect to the Property of the Company and its Subsidiaries, Property which (i) represents more than 10% of the consolidated assets of the Company and its Subsidiaries as shown in the consolidated financial statements of the Company and its Subsidiaries as of the end of the most recent Fiscal Quarter or (ii) is responsible for more than 10% of the consolidated net sales or of the consolidated net income of the Company and its Subsidiaries as reflected in the financial statements referred to in clause (i) above.

Swing Line Loan—see Section 2.1.3.

Taxes—see Section 7.6.

15

Term Commitment means, as to any Lender, the Commitment of such Lender to make Term Loans hereunder.

Term Lender means, at any time, any Lender that then has a Term Commitment or then holds any Term Loan.

Term Loan—see Section 2.1.2.

Term Percentage means, with respect to any Lender, the percentage which (a) the amount of such Lender’s Term Commitment is of (b) the Term Commitments of all Lenders; provided that, after the Closing Date, “Term Percentage” shall mean, as to any Lender, the percentage which the aggregate principal amount of such Lender’s Term Loans is of the aggregate principal amount of all Term Loans. The initial Term Percentage of each Lender is set forth on Schedule 2.1.

Termination Date means the earlier to occur of (a) May 17, 2004 (or any later date that may be established as the Termination Date pursuant to Section 2.12) or (b) such other date on which the Commitments terminate pursuant to Section 6 or 11.

Total Liabilities means, at any time, the total amount of liabilities that would appear on a balance sheet of the Company and its Subsidiaries at such time prepared in accordance with GAAP.

Total Percentage means, with respect to any Lender, the percentage which (a) the amount of such Lender’s Revolving Commitment (or, after the Revolving Commitments, all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) have been terminated, the sum of the aggregate principal amount of such Lender’s Revolving Loans plus the participations of such Lender in all funded Drafts and Swing Line Loans) plus the amount of such Lender’s Term Commitment (or, after the Closing Date, the aggregate principal amount of such Lender’s Term Loan) is of (b) the Revolving Commitments of all Lenders (or, after the Revolving Commitments, all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) have been terminated, the sum of the aggregate principal amount of all Revolving Loans and Swing Line Loans plus the amount of all funded Drafts) and the Term Commitments of all Lenders (or, after the Closing Date, the aggregate principal amount of all Term Loans).

Uniform Commercial Code means the Uniform Commercial Code as in effect from time to time in the State of Michigan.

Unmatured Event of Default means any event that, if it continues uncured, will, with lapse of time or notice or both, constitute an Event of Default.

16

Unrestricted Subsidiary means each Subsidiary of the Company that is (and only for so long as it is) an SPE; on the date hereof, the Unrestricted Subsidiaries are CarMax Funding, LLC, a Virginia limited liability company, CarMax Auto Receivables LLC, a Virginia limited liability company, CPD, Inc., a Virginia corporation, and CFC II, Inc., a Virginia corporation.

Used Motor Vehicle means, at any time, a Motor Vehicle that is not a New Motor Vehicle.

Voting Stock of any Person means outstanding securities (on a fully diluted basis and taking into account any securities or contract rights exercisable, exchangeable or convertible into equity securities) of such Person having voting rights in the election of directors under normal circumstances.

Wholly-Owned Subsidiary means, as to any Person, another Person all of the shares of capital stock or other ownership interests of which (except directors’ qualifying shares) are at the time directly or indirectly owned by such Person and/or another Wholly-Owned Subsidiary of such Person.

1.2     Other Interpretive Provisions.     (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.

(b)     Section, Schedule and Exhibit references are to this Agreement unless otherwise specified.

(c)     The term “including” is not limiting and means “including without limitation.”

(d)     In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”; and the word “through” means “to and including.”

(e)     Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.

(f)     This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms.

17

(g)     This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Borrower, the Company, the Lenders and the other parties thereto and are the products of all parties. Accordingly, they shall not be construed against the Agent or the Lenders merely because of the Agent’s or Lenders’ involvement in their preparation.

(h)     All references in this Agreement or any other Loan Document to financial statements or reports to be delivered with respect to the Company and its Subsidiaries shall, so long as the audited financial statements of Circuit City include separate audited financial statements for the CarMax Group, be deemed to be references to financial statements or reports of the CarMax Group. Compliance with the financial covenants in Section 9.6 hereof with respect to periods that are audited shall, so long as the audited financial statements of Circuit City include separate audited financial statements for the CarMax Group, be measured by reference to such audited financial statements of the CarMax Group.

SECTION 2 COMMITMENTS OF THE LENDERS; BORROWING PROCEDURES; DRAFTING AGREEMENTS AND DRAFTS.

2.1     Commitments.     On and subject to the terms and conditions of this Agreement, each of the Lenders, severally and for itself alone, agrees to make loans to the Borrower, and to issue and participate in Drafting Agreements and Drafts for the account of the Borrower or any Subsidiary (other than Unrestricted Subsidiaries) as follows:

2.1.1     Revolving Loan Commitment.     (a) Each Revolving Lender agrees to make loans on a revolving basis (“Revolving Loans”) to the Borrower from time to time until the Termination Date in such Revolving Lender’s Revolving Percentage of such aggregate amounts as the Borrower may request, provided that (x) the Revolving Outstandings will not, at any time, exceed the Revolving Commitment Amount and (y) 150% of the Outstandings will not, at any time, exceed the Borrowing Base and (b) (i) the Fronting Lender agrees from time to time until the Termination Date to issue Drafting Agreements to Manufacturers for the account of the Borrower and any Subsidiary (other than Unrestricted Subsidiaries and except that, for so long as any Ford Restriction exists, the Fronting Lender shall not be obligated to enter into a Drafting Agreement with Ford), as more fully set forth in Sections 2.4 through 2.6, and to permit Manufacturers that are parties to Drafting Agreements to make Drafts on accounts of the Fronting Lender in accordance with such Drafting Agreements (it being understood that the Fronting Lender may, in its sole and absolute discretion, accept Drafts from Manufacturers and Auction Houses that are not parties to Drafting Agreements), and (ii) as more fully set forth in Section 2.7.2, each Revolving Lender agrees to purchase a participation in each such Drafting Agreement and each such Draft, provided that (x) the Revolving Outstandings will not at any time exceed the Revolving Commitment Amount and (y) 150% of the Outstandings will not, at any time, exceed the Borrowing Base. As more fully described in Section 2.7.1(a), the Borrower agrees to reimburse the Fronting Lender for each Draft made against it and each reimbursement

18

obligation of the Borrower with respect thereto shall be automatically refunded with a Revolving Loan.

2.1.2    Term Loan Commitment.    Each Term Lender agrees to make a term loan (the “Term Loans”) to the Borrower on the Closing Date in such Term Lender’s Term Percentage of $100,000,000; provided that 150% of the Outstandings will not, at any time, exceed the Borrowing Base.

2.1.3    Swing Line Loans.    Subject to the terms and conditions of this Agreement, the Fronting Lender may from time to time, in its sole and absolute discretion, make loans to the Borrower (collectively the “Swing Line Loans” and individually each a “Swing Line Loan”) in an aggregate amount not at any time exceeding $100,000,000; provided that (x) the Revolving Outstandings will not at any time exceed the Revolving Commitment Amount and (y) 150% of the Outstandings will not, at any time, exceed the Borrowing Base. Swing Line Loans may be made by the Fronting Lender notwithstanding the fact that such Loans, when aggregated with the Fronting Lender’s outstanding Revolving Loans, exceeds its Revolving Commitment.

2.2    Loan Procedures.    The Borrower may request a Loan (and in the case of a Draft presented under clause (i) and a Swing Line Loan funded pursuant to the EFT System under clause (iii), the Borrower shall be deemed to have requested a Loan) (i) subject to Sections 2.4 through 2.7, in the case of a Draft presented by a Manufacturer or an Auction House to the Fronting Lender (it being understood that the Fronting Lender may, but shall have no obligation to, accept any Draft presented by a Person not a party to any Drafting Agreement or accept any Draft presented otherwise than in accordance with the terms of a Drafting Agreement), (ii) in the case of Loans requested directly by the Borrower, only after delivery to the Agent of a written notice of such proposed borrowing (or telephonic notice followed immediately by telephonic confirmation thereof) and (iii) in the case of Swing Line Loans, by following the Fronting Lender’s EFT System policies and procedures, as communicated by the Fronting Lender to the Borrower from time to time. Borrowings are subject to the following and to the remaining provisions hereof:

(a)    Each notice of a proposed borrowing (other than in respect of Drafts presented to the Fronting Lender and in respect of Swing Line Loans) shall set forth the following information:

(i)    the proposed date of such borrowing, which shall be a Business Day; and

(ii)    the aggregate amount of such borrowing.

(b)    Each such notice of borrowing (other than pursuant to the presentation of a Draft and with respect to Swing Line Loans) shall be delivered to the Agent by 10:00 a.m., Detroit time, two Business Days prior to the proposed date of such borrowing. Any notice of borrowing received after 10:00 a.m., Detroit time, shall be deemed to have been delivered by 10:00 a.m.,

19

Detroit time, on the next Business Day. Each notice of borrowing shall be irrevocable. Within one Business Day of receipt of any such notice of borrowing, the Agent shall notify each Lender holding a Commitment in the relevant credit facility hereunder of such notice. Not later than 1:00 p.m., Detroit time, on the date of the proposed borrowing, each such Lender shall provide the Agent at the office specified by the Agent with immediately available funds covering such Lender’s applicable Percentage of such borrowing.

(c)    Notwithstanding the foregoing, if the Fronting Lender has, at the request of the Required Lenders or acting in its discretion according to the terms hereof, taken action to suspend or terminate Drafts pursuant to a Drafting Agreement and such Drafting Agreement has in fact been suspended or terminated in accordance with its terms, then, subject to the terms of such Drafting Agreement, the Fronting Lender shall not fund any Draft under such Drafting Agreement.

(d)    In the case of each borrowing pursuant to the presentation of a Draft, the applicable Manufacturer or Auction House must follow the Fronting Lender’s direct Drafting procedures as established and modified from time to time.

(e)    All Swing Line Loans shall be made through the EFT System pursuant to the Fronting Lender’s EFT System policies and procedures, as communicated by the Fronting Lender to the Borrower from time to time.

2.3    Title Documents.    All original Manufacturer’s invoices and title documents evidencing the ownership by the Company and its Subsidiaries of all of their Motor Vehicles, including the Manufacturer’s Certificate, shall be maintained in safekeeping by the Company and its Subsidiaries in accordance with their standard operating policies and procedures as in effect on the Closing Date or as modified from time to time with the consent of the Agent. If an Event of Default has occurred and is continuing, within three Business Days of request by the Agent, each of the Company and each Subsidiary, as the case may be, shall deliver or cause to be delivered all original invoices and title documents to the Agent and the Agent shall hold all original invoices and title documents received by it after such request.

2.4    Issuance of Drafting Agreements.    Subject to the terms and conditions of this Agreement, the Fronting Lender shall, from time to time, upon the written request of the Borrower or any Subsidiary (other than an Unrestricted Subsidiary), issue Drafting Agreements for the account of the Borrower or such Subsidiary; provided, that for so long as any Ford Restriction exists, the Fronting Lender shall not be obligated to enter into any Drafting Agreement with Ford.

2.5    Conditions to Issuance; Termination of Drafting Agreements prior to Termination Date.    The Fronting Lender shall not be obligated to enter into or issue a Drafting Agreement unless, as of the date of such Drafting Agreement:

20

(a)    the Borrower or any Subsidiary (other than an Unrestricted Subsidiary) requesting such Drafting Agreement shall have delivered to the Fronting Lender a written application and such other documentation as the Fronting Lender may reasonably request, and the terms of such documents and of the proposed Drafting Agreement shall satisfy the terms hereof and otherwise be satisfactory to the Fronting Lender; it being understood that, the Fronting Lender shall, within three Business Days after the Borrower has provided the Fronting Lender with the name of the Manufacturer to which such proposed Drafting Agreement relates, provide the Borrower with the Drafting Agreement proposed by the Fronting Lender for such Manufacturer; and

(b)    the representations and warranties contained in this Agreement and in the other Loan Documents shall be true and correct in all material respects as if made on such date and, both immediately before and after issuance of such Drafting Agreement, no Unmatured Event of Default or Event of Default shall exist.

Each application for a Drafting Agreement issued by the Borrower or any Subsidiary (other than an Unrestricted Subsidiary) hereunder shall constitute certification by the Borrower of the matters set forth in the foregoing clauses (a) and (b), and the Fronting Lender shall be entitled to rely on such certification without further inquiry.

Notwithstanding the foregoing, so long as any Ford Restriction exists, the Fronting Lender shall not be obligated to enter into any Drafting Agreement with Ford.

The Fronting Lender shall take such action as necessary to terminate all Drafting Agreements and all other Drafting arrangements (whether written or oral) within five Business Days prior to the Termination Date.

2.6    Notice of Issuance of or Entering into Drafting Agreements.    The Fronting Lender shall give notice to each Revolving Lender of the issuance of, or the entering into of, each Drafting Agreement not later than five Business Days after issuance of, or the entering into of, each such Drafting Agreement, attaching a copy of such Drafting Agreement, as issued or entered into.

2.7    Draft Procedures.

2.7.1    Generally.    (a) Each Draft submitted by a Manufacturer or an Auction House shall constitute a notice of borrowing of a Revolving Loan, and upon the funding of each such Draft, the Fronting Lender shall be deemed to have disbursed to or on behalf of the Borrower, in payment of the obligations of the Borrower or the applicable Subsidiary in respect of such funded Draft, a Revolving Loan, bearing interest at the Interest Rate. The Borrower shall be irrevocably obligated to reimburse the Fronting Lender on demand for the amount of any Draft presented by a Manufacturer or an Auction House; provided, however that such reimbursement obligation shall be deemed satisfied by the funding of Revolving Loans with respect thereto and shall be subject to Section 2.7.3.

21

(b)    Notwithstanding anything to the contrary herein, the Borrower shall bear all risk of loss resulting from the payment of any Draft, or any resulting disbursement of a Revolving Loan, whether or not due to the negligence, misconduct or fraud of any Manufacturer or Auction House.

(c)    The Fronting Lender shall not be obligated to terminate or suspend the Drafting privileges of any Manufacturer or Auction House under any Drafting Agreement or pursuant to any other Drafting arrangement (whether in writing or oral) even though the aggregate amount of Drafts that may be presented by such Manufacturer or Auction House under such Drafting Agreement or pursuant to such other Drafting arrangement may exceed the availability in effect (under such Drafting Agreement, such other Drafting arrangement or this Agreement) from time to time. Furthermore, (i) any limitation contained in any Drafting Agreement (whether in respect of daily Drafts to be presented or otherwise) or other Drafting arrangement is, for the purpose hereof, for informational purposes only and the Fronting Lender shall not be obligated to monitor or limit the amount of Drafts presented or honored on the basis of any such limitation and (ii) any right of the Fronting Lender, acting in its discretion and not at the direction or with the concurrence of the Required Lenders, to terminate or suspend Drafting privileges of any Manufacturer or Auction House or to otherwise exercise any right or remedy shall be for the sole benefit and protection of the Fronting Lender, and the Fronting Lender shall not owe any duty to any other Lender with respect to such rights or remedies or be required to exercise such rights or remedies to protect any other Lender.

(d)    The Fronting Lender (in its sole and absolute discretion) may, but shall have no obligation to, accept any Draft presented by a Person not a party to any Drafting Agreement and/or accept any Draft presented otherwise than in accordance with the terms of a Drafting Agreement.

2.7.2    Participations in Drafting Agreements and Drafts; Funding.    Concurrently with the issuance of each Drafting Agreement and/or the funding of each Draft (other than the funding of any Draft that is a Fronting Lender Advance), the Fronting Lender shall be deemed to have sold and transferred to each Revolving Lender, and each Revolving Lender shall be deemed irrevocably and unconditionally to have purchased and received from the Fronting Lender, without recourse or warranty, an undivided interest and participation, to the extent of such Revolving Lender’s Revolving Percentage, in such Drafting Agreement or funded Draft and the Borrower’s reimbursement obligations with respect thereto, which participation shall be funded by each Revolving Lender making the Revolving Loans specified in this Section or otherwise funding its participation if Revolving Loans may not then be made. For the purposes of this Agreement, the unparticipated portion of each Drafting Agreement or funded Draft shall be deemed to be the Fronting Lender’s “participation” therein. If the Fronting Lender makes any payment or disbursement under any Draft, the Revolving Lenders will, upon receipt of notice of such payment or disbursement from the Agent, immediately (and by no later than 2:00 p.m, Detroit time on the Business Day of receipt of such notice if such Revolving Lender receives

22

such notice by 10:00 a.m., Detroit time on such Business Day, otherwise by 2:00 p.m., Detroit time, on the following Business Day) and without any request by or notice to the Borrower, provide for the payment of any reimbursement obligations due to the Fronting Lender by making Revolving Loans (in accordance with their respective Revolving Percentages) in the amount thereof, the proceeds of which Revolving Loans shall be paid to the Agent to be paid over to the Fronting Lender; provided that if for any reason the Revolving Lenders may not then make Revolving Loans, then instead of making Revolving Loans each Revolving Lender (other than the Fronting Lender) shall become immediately obligated to fund its participation in all funded Drafts and shall pay to the Agent for the account of the Fronting Lender an amount equal to such Revolving Lender’s Revolving Percentage of such funded Drafts. Further, if, after the time any Fronting Lender Advance is made by the Fronting Lender, the Revolving Outstandings are less than the Revolving Commitment Amount, then, to the extent of such deficiency, such Fronting Lender Advance shall cease to be a Fronting Lender Advance and each Revolving Lender shall transfer to the Agent for the benefit of the Fronting Lender such Revolving Lender’s Revolving Percentage of such deficiency as a Revolving Loan (such advance of funds by such Revolving Lender shall be made to the Agent by 2:00 p.m., Detroit time, on the Business Day of receipt of the notice referred to below, if it receives notice from the Agent of such deficiency by 10:00 a.m., Detroit time on such Business Day, otherwise such Revolving Lender shall transfer such funds by 2:00 p.m., Detroit time, on the following Business Day); provided that if for any reason the Revolving Lenders may not then make Revolving Loans, then instead of making Revolving Loans each Revolving Lender (other than the Fronting Lender) shall become immediately obligated to fund its participation in such Fronting Lender Advances that have ceased to be the same and shall pay to the Agent for the account of the Fronting Lender an amount equal to such Revolving Lender’s Revolving Percentage of such Fronting Lender Advances that have ceased to be the same. The obligations of the Revolving Lenders set forth in the two immediately preceding sentences are irrevocable and unconditional as more fully set forth in Section 2.7.4. All interest that accrues or is earned on any Revolving Lender’s participation interest in any funded Draft or Fronting Lender Advance prior to the date that such Revolving Lender fully funds its participation interest, as set forth above, shall be paid to and retained by the Fronting Lender for its own account. Until the Fronting Lender has been paid the full amount of any Revolving Lender’s participation interest in any funded Draft or Fronting Lender Advance, any principal payments that are to be applied to such funded Draft or Fronting Lender Advance shall be paid to and retained by the Fronting Lender for its own account. Any Revolving Lender’s failure to make available to the Agent its Revolving Percentage of any such payment or disbursement shall not relieve any other Revolving Lender of its obligation hereunder to make available to the Agent such other Revolving Lender’s Revolving Percentage of such payment, but no Revolving Lender shall be responsible for the failure of any other Revolving Lender to make available to the Agent such other Revolving Lender’s Revolving Percentage of any such payment or disbursement.

2.7.3    Obligations Absolute.    The obligations of the Borrower to reimburse the Fronting Lender for Drafts accepted hereunder, and to repay any Revolving Loan funded to pay a Draft, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of

23

this Agreement under all circumstances, including: (a) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Borrower in respect of any Draft or any Drafting Agreement or any other Drafting arrangement (whether in writing or oral) or any other amendment or waiver of or any consent to departure from any Loan Document; (c) the existence of any claim, set-off, defense or other right that the Company, the Borrower or any other Subsidiary may have at any time against any Manufacturer or Auction House or any other beneficiary or transferee of any Draft or Drafting Agreement or other Drafting arrangement (or any Person for whom any such beneficiary or such transferee may be acting), the Fronting Lender or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the other Loan Documents or any unrelated transaction; (d) any Draft or any demand, certificate or other document presented to the Fronting Lender proving to be forged, fraudulent, invalid or insufficient in any respect, or any statement therein being untrue or inaccurate in any respect, or any loss or delay in the transmission or otherwise of any document required in order to make a Draft; (e) any payment by the Fronting Lender on any Draft pursuant to any Drafting Agreement or other Drafting arrangement against presentation of a Draft or certificate that does not strictly comply with the terms of any Drafting Agreement or other Drafting arrangement or any payment made by the Fronting Lender under any Draft to any trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, liquidator, receiver or other representative of a successor to any beneficiary or any transferee of any Draft, including any arising in connection with any bankruptcy or insolvency proceeding; (f) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from all or any of the obligations of the Borrower or any Subsidiary in respect of any Draft or Drafting Agreement or other Drafting arrangement; or (g) any other circumstance whatsoever that might otherwise constitute a defense available to, or discharge of, the Borrower or any Subsidiary; provided that the Borrower shall not be obligated to reimburse the Fronting Lender for a Draft accepted hereunder or to repay any Revolving Loan funded to pay such funded Draft if the Fronting Lender engaged in willful misconduct in accepting such Draft. For the avoidance of doubt, the following actions or failures to act shall not, in and of themselves, be willful misconduct by the Fronting Lender: (i) accepting a Draft without requesting or reviewing supporting documentation from the Person submitting such Draft, (ii) failing to monitor or limit the amount of Drafts presented or honored or (iii) providing incorrect information as to the availability in effect under any Drafting Agreement, any other Drafting Arrangement (whether in writing or oral) or this Agreement.

2.7.4    Participation Obligations Unconditional.    Each Revolving Lender’s obligation to make available to the Agent for the account of the Fronting Lender the amount of its participation interest in any funded Draft or Fronting Lender Advance as provided in Section 2.7.2 shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right that such Revolving Lender may have against the Fronting Lender or any other Person, (ii) the occurrence or continuance of an Event of Default or Unmatured Event of Default, (iii) any adverse change in the condition (financial or otherwise) of the Company or any Subsidiary thereof, (iv) any termination of the Commitments,

24

(v) whether or not the conditions specified in Section 10 have been satisfied or (vi) any other circumstance, happening or event whatsoever.

2.7.5    Repayment of Participations.    Upon (and only upon) receipt by the Agent for the account of the Fronting Lender of immediately available funds from or on behalf of the Borrower (a) in reimbursement of any funded Draft or Fronting Lender Advance with respect to which a Revolving Lender has paid the Agent in full for the account of the Fronting Lender the amount of such Revolving Lender’s participation therein or (b) in payment of any interest on a funded Draft or Fronting Lender Advance with respect to which a Revolving Lender has paid the Agent in full for the account of the Fronting Lender the amount of such Revolving Lender’s participation therein, the Agent will pay to such Revolving Lender its pro rata share (according to its Revolving Percentage) thereof (and the Fronting Lender shall receive the amount otherwise payable to any Revolving Lender which did not so pay the Agent the amount of such Revolving Lender’s participation in such funded Draft or Fronting Lender Advance). All interest that accrues or is earned on any Revolving Lender’s participation interest in any funded Draft or Fronting Lender Advance prior to the date that such Revolving Lender fully funds its participation interest, as set forth above in Section 2.7.2, shall be paid to and retained by the Fronting Lender for its own account. Until the Fronting Lender has been paid the full amount of any Revolving Lender’s participation interest in any funded Draft or Fronting Lender Advance, any principal payments that are to be applied to such funded Draft or Fronting Lender Advance shall be paid to and retained by the Fronting Lender for its own account.

2.8    Swing Line Loan Procedures.

2.8.1    Generally.    Concurrently with the making of each Swing Line Loan, the Fronting Lender shall be deemed to have sold and transferred to each Revolving Lender, and each Revolving Lender shall be deemed irrevocably and unconditionally to have purchased and received from the Fronting Lender, an undivided interest and participation, to the extent of such other Revolving Lender’s Revolving Percentage, in such Swing Line Loan (but such participation shall remain unfunded until required to be funded pursuant to Section 2.8.2).

2.8.2    Refunding of, or Funding of Participations in, Swing Line Loans.    The Fronting Lender may at any time, in its sole discretion, on behalf of the Borrower (which hereby irrevocably authorizes the Fronting Lender to act on its behalf) deliver a notice to the Agent requesting that each Revolving Lender (including the Fronting Lender in its individual capacity) make a Revolving Loan in such Revolving Lender’s Revolving Percentage of the aggregate amount of Swing Line Loans outstanding on such date for the purpose of repaying all Swing Line Loans (and, upon receipt of the proceeds of such Revolving Loans, the Agent shall apply such proceeds to repay Swing Line Loans) (each Revolving Lender shall make its advance under this Section by no later than 2:00 p.m, Detroit time on the Business Day of receipt of such notice of borrowing pursuant to this Section if such Revolving Lender receives such notice by 10:00 a.m., Detroit time on such Business Day, otherwise by 2:00 p.m., Detroit time, on the following Business Day); provided that if for any reason the Revolving Lenders may not then make

25

Revolving Loans, then instead of making Revolving Loans each Revolving Lender (other than the Fronting Lender) shall become immediately obligated to fund its participation in all outstanding Swing Line Loans and shall pay to the Agent for the account of the Fronting Lender an amount equal to such Revolving Lender’s Revolving Percentage of such Swing Line Loans. Any Revolving Lender’s failure to make available to the Agent its Revolving Percentage of the amount of all outstanding Swing Line Loans shall not relieve any other Revolving Lender of its obligation hereunder to make available to the Agent such other Revolving Lender’s Revolving Percentage of such amount, but no Revolving Lender shall be responsible for the failure of any other Revolving Lender to make available to the Agent such other Revolving Lender’s Revolving Percentage of any such amount.

2.8.3    Repayment of Participations.    Upon (and only upon) receipt by the Agent for the account of the Fronting Lender of immediately available funds from or on behalf of the Borrower (a) in reimbursement of any Swing Line Loan with respect to which a Revolving Lender has paid the Agent in full for the account of the Fronting Lender the amount of such Revolving Lender’s participation therein or (b) in payment of any interest on a Swing Line Loan with respect to which a Revolving Lender has paid the Agent in full for the account of the Fronting Lender the amount of such Revolving Lender’s participation therein, the Agent will pay to such Revolving Lender its pro rata share (according to its Revolving Percentage) thereof (and the Fronting Lender shall receive the amount otherwise payable to any Revolving Lender which did not so pay the Agent the amount of such Revolving Lender’s participation in such Swing Line Loan). All interest that accrues or is earned on any Revolving Lender’s participation interest in any Swing Line Loan prior to the date that such Revolving Lender fully funds its participation interest, as set forth above in Section 2.8.2, shall be paid to and retained by the Fronting Lender for its own account. Until the Fronting Lender has been paid the full amount of any Revolving Lender’s participation interest in any Swing Line Loan, any principal payments that are to be applied to such Swing Line Loan shall be paid to and retained by the Fronting Lender for its own account.

2.8.4    Participation Obligations Unconditional.    Each Revolving Lender’s obligation to make available to the Agent for the account of the Fronting Lender the amount of its participation interest in all Swing Line Loans as provided in Section 2.8.2 shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right that such Revolving Lender may have against the Fronting Lender or any other Person, (ii) the occurrence or continuance of an Event of Default or Unmatured Event of Default, (iii) any adverse change in the condition (financial or otherwise) of the Company or any Subsidiary thereof, (iv) any termination of the Commitments, (v) whether or not the conditions specified in Section 10 have been satisfied or (vi) any other circumstance, happening or event whatsoever.

2.9    Fronting Lender Advances.    The Fronting Lender is authorized by the Borrower and the Lenders, from time to time in the Fronting Lender’s sole and absolute discretion, to accept Drafts in an amount that would cause the Revolving Outstandings to exceed the Revolving Commitment Amount (the amount by which any such Draft would so cause the Revolving

26

Outstandings to exceed the Revolving Commitment Amount being a “Fronting Lender Advance”). To the extent that the funding of any such Draft does not cause the Revolving Outstandings to exceed the Revolving Commitment Amount, no Fronting Lender Advance shall be created and such Draft shall constitute part of the Revolving Outstandings. The Fronting Lender Advances shall be secured by the Collateral Documents and guarantied under Section 14 and under the Guaranty.

2.10    Commitments Several.    The failure of any Lender to make a requested Loan on any date shall not relieve any other Lender of its obligation (if any) to make a Loan on such date, but no Lender shall be responsible for the failure of any other Lender to make any Loan to be made by such other Lender.

2.11    Certain Conditions.    Notwithstanding any other provision of this Agreement, no Lender shall have an obligation to make any Loan (other than Revolving Loans funded to pay to the Fronting Lender the participation obligations of the Revolving Lenders in respect of Drafts and Swing Line Loans and Revolving Loans to repay Fronting Lender Advances that have ceased to be the same, all as set forth above), and the Fronting Lender shall not have any obligation to issue any Drafting Agreement, fund any Draft or make a Swing Line Loan, if an Event of Default or Unmatured Event of Default has occurred and is continuing.

2.12    Extension of Termination Date.    The Termination Date shall be automatically extended on each anniversary of the Closing Date for one year unless the Borrower or any Lender shall notify the Agent in writing prior to such anniversary that it does not wish to extend the Termination Date for an additional year (such notice a “No-Extension Notice”). The Agent shall promptly provide written notice of its receipt of a No-Extension Notice to the other parties hereto.

SECTION 3    NOTES EVIDENCING LOANS.

3.1    Notes.    The Loans of each Lender shall be evidenced by a promissory note (each a “Note”) substantially in the form set forth in Exhibit A, with appropriate insertions, payable to the order of such Lender in full on the Termination Date.

3.2    Recordkeeping.    Each Lender shall record in its records, or at its option on the schedule attached to its Note, the date and amount of each Loan made by such Lender and each repayment thereof. The aggregate unpaid principal amount so recorded shall be rebuttable presumptive evidence of the principal amount owing and unpaid on such Note. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the obligations of the Borrower hereunder or under any Note to repay the principal amount of the Loans evidenced by such Note together with all interest accruing thereon.

27

SECTION 4    INTEREST.

4.1    Interest Rate.    The Borrower promises to pay interest on the unpaid principal amount of each Loan for the period commencing on the date of such Loan until such Loan is paid in full at the applicable Interest Rate.

4.2    Interest Payment Dates.    Accrued interest on each Loan shall be payable in arrears for each month on the 10th Business Day of the next succeeding month and at maturity. After maturity (whether as a result of acceleration or otherwise), accrued interest on all Loans shall be payable on demand.

4.3    Computation of Interest.    Interest shall be computed for the actual number of days elapsed on the basis of a year of 360 days.

SECTION 5    FEES.

5.1    Agent’s Fee.    Each Lender hereto that is not DCSNA acknowledges and agrees that the Agent may deduct from interest payments received by it from the Borrower an amount equal to 0.10% per annum of the daily unpaid principal amount of the Loans of such Lender for the period from the later of the Closing Date or the last day on which such fee was paid to the date the Agent receives such interest as payment of the Agent’s fee hereunder, and that all payments of interest to such Lenders by the Agent shall be net of such amount.

5.2    Computation of Fees.    All fees hereunder shall be computed for the actual number of days elapsed on the basis of a year of 360 days.

SECTION 6    REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT AMOUNT; PREPAYMENTS.

6.1.    Voluntary Reduction or Termination of Revolving Commitment Amount.    The Borrower may from time to time on at least one Business Day(s) prior written notice to the Agent (which shall promptly advise each Lender thereof) permanently reduce the Revolving Commitment Amount to an amount not less than the Revolving Outstandings. Concurrently with any reduction of the Revolving Commitment Amount to zero, the Borrower shall pay all interest on the Revolving Loans and shall Cash Collateralize in full all amounts estimated by the Fronting Lender as being potentially payable under all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) then existing with any Manufacturer or Auction House. All reductions of the Revolving Commitment Amount shall reduce the Revolving Commitments pro rata among the Revolving Lenders according to their respective Revolving Percentages.

6.2    Voluntary Prepayments.    The Borrower may, with no advance notice, from time to time prepay the Revolving Loans, Swing Line Loans and Fronting Lender Advances, if such prepayment is effected through the EFT System (it being understood and agreed that payments

28

through the EFT System must be entered and transmitted by no later than 3:00 p.m., Detroit time, on a Business Day); provided that if the Borrower makes a prepayment on the Revolving Loans, Swing Line Loans or Fronting Lender Advances other than through the EFT System, it must give the Agent notice no later than 12:00 p.m., Detroit time, on the Business Day prior to the date of such prepayment; provided, further, that all prepayments pursuant to this sentence may be made without premium or penalty and are permitted to be made in order to prepay the Revolving Loans, Swing Line Loans and Fronting Lender Advances, in whole or in part. The Borrower may, by giving notice to the Agent no later than 12:00 p.m., Detroit time, on the Business Day prior to the date of prepayment, but only if no Fronting Lender Advances, Swing Line Loans or Revolving Loans are outstanding, prepay the entire (but not less than the entire) outstanding principal amount of the Term Loans, without premium or penalty. Each prepayment pursuant to this Section shall be made together with accrued and unpaid interest to the date of such prepayment on the principal amount paid. Reference is made to Section 7.2 for the application of prepayments pursuant to this Section.

6.3    Mandatory Prepayments.    (a) If on any day 150% of the Outstandings exceeds the Borrowing Base, the Borrower shall, before the close of business on the following Business Day, prepay Loans in an amount sufficient to eliminate such excess or prepay Loans and/or Cash Collateralize all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) with Manufacturers and Auction Houses in an amount determined by the Agent in its sole and absolute discretion.

(b)    If on any day on which the Revolving Commitment Amount is reduced pursuant to Section 6.1, the Revolving Outstandings exceed the Revolving Commitment Amount, the Borrower shall immediately prepay Revolving Loans in an amount sufficient to eliminate such excess or prepay Revolving Loans and/or Cash Collateralize all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) with Manufacturers and Auction Houses in an amount determined by the Agent in its sole and absolute discretion.

SECTION 7    MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES.

7.1    Making of Payments.    All payments by the Borrower of (a) interest on any Loans and (b) principal on any Fronting Lender Advance, Swing Line Loan or Revolving Loan, may be effected through the EFT System by 3:00 p.m., Detroit time, on the date due; provided that if the Borrower makes a payment of interest on any Loan or a payment of principal on any Fronting Lender Advance, Swing Line Loan or Revolving Loan other than through the EFT System, such payment must be made by the Borrower to the Agent in immediately available funds at the office specified by the Agent not later than 12:00 p.m., Detroit time, on the date due and funds received after that hour shall be deemed to have been received by the Agent on the following Business Day. All payments of principal on the Term Loans must be made by the Borrower to the Agent in immediately available funds at the office specified by the Agent not later than 12:00 p.m., Detroit time, on the date due; provided that the Borrower will be permitted to make payments of principal on the Term Loans through the EFT System if (i) the Borrower gives the Agent notice

29

of its intention to effect such payment through the EFT System at least two Business Days prior to the date of such payment (and specifies in such notice the date such payment is to be made, which shall be a Business Day) and (ii) such payment is effected through the EFT System not later than 12:00 p.m., Detroit time, on the date specified in such notice. The Agent shall promptly remit to each Lender its share of all such payments received in collected funds by the Agent for the account of such Lender.

7.2    Application of Certain Payments.    At all times that an Event of Default does not exist, each payment of principal (including prepayments under Section 6.2 or 6.3) shall be applied first, to Fronting Lender Advances, second, to Swing Line Loans and funded Drafts for which Revolving Lenders have not yet funded their participations, third, to Revolving Loans and fourth, to Term Loans. Concurrently with each remittance to any Lender of its share of any such payment, the Agent shall advise such Lender as to the application of such payment.

7.3    Due Date Extension.    If any payment of principal or interest with respect to any of the Loans, or of any fees, falls due on a day which is not a Business Day, then such due date shall be extended to the immediately following Business Day and, in the case of principal, additional interest shall accrue and be payable for the period of any such extension.

7.4    Setoff.    The Company and the Borrower agree that the Agent and each Lender have all rights of set-off provided by applicable law, and in addition thereto, the Company and the Borrower agree that at any time any Event of Default or Unmatured Event of Default exists, the Agent and each Lender may apply to the payment of any obligations of the Borrower hereunder, whether or not then due, any and all balances, credits, deposits, accounts or moneys of the Company and the Borrower then or thereafter with the Agent or such Lender. The Agent or the Lender exercising the set-off shall promptly notify the Company or the Borrower, as the case may be, thereof after making such exercise; provided that failure to give such notice shall not affect the validity of the set-off.

7.5    Proration of Payments.    If any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise, but excluding any payment pursuant to Section 13.9) on account of principal of or interest on any Loan (or on account of its exposure under any Draft or Drafting Agreement) in excess of its pro rata share of payments and other recoveries obtained by all Lenders on account of principal of and interest on the Loans then held by them, such Lender shall purchase from the other Lenders such participations in the Loans (or subparticipations in Drafts and Drafting Agreements) held by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery.

7.6    Taxes.    All payments of principal of, and interest on, the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future

30

income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, excluding franchise taxes and taxes imposed on or measured by any Lender’s net income or receipts (all non-excluded items being called “Taxes”). If any withholding or deduction from any payment to be made by the Borrower or the Company hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower or the Company, as applicable, will:

(a)    pay directly to the relevant authority the full amount required to be so withheld or deducted;

(b)    promptly forward to the Agent an official receipt or other documentation satisfactory to the Agent evidencing such payment to such authority; and

(c)    pay to the Agent for the account of the Lenders such additional amount as is necessary to ensure that the net amount actually received by each Lender will equal the full amount such Lender would have received had no such withholding or deduction been required.

Moreover, if any Taxes are directly asserted against the Agent or any Lender with respect to any payment received by the Agent or such Lender hereunder, the Agent or such Lender may pay such Taxes and the Borrower or the Company, as applicable, will promptly pay such additional amounts (including any penalty, interest or expense) as is necessary in order that the net amount received by such Person after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount such Person would have received had such Taxes not been asserted.

If the Borrower or the Company, as applicable, fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent, for the account of the respective Lenders, the required receipts or other required documentary evidence, the Borrower or the Company, as applicable, shall indemnify the Lenders for any incremental Taxes, interest or penalties that may become payable by any Lender as a result of any such failure. For purposes of this Section 7.6, a distribution hereunder by the Agent or any Lender to or for the account of any Lender shall be deemed a payment by the Borrower.

Each Lender that (a) is organized under the laws of a jurisdiction other than the United States of America or a state thereof and (b)(i) is a party hereto on the Closing Date or (ii) becomes an assignee of an interest under this Agreement under Section 13.9.1 after the Closing Date (unless such Lender was already a Lender hereunder immediately prior to such assignment) shall execute and deliver to the Borrower and the Agent one or more (as the Borrower or the Agent may reasonably request) United States Internal Revenue Service Form W-8ECI or Form W-8BEN or such other forms or documents, appropriately completed, as may be applicable to establish that such Lender is exempt from withholding or deduction of Taxes. The Borrower shall not be required to pay additional amounts to any Lender pursuant to this Section 7.6 to the

31

extent that the obligation to pay such additional amounts would not have arisen but for the failure of such Lender to comply with this paragraph.

SECTION 8 WARRANTIES.

To induce the Agent and the Lenders to enter into this Agreement and to induce the Lenders to make Loans hereunder and participate in Drafting Agreements issued hereunder and Drafts, and the Fronting Lender to issue Drafting Agreements hereunder and fund Drafts presented to it, each of the Borrower and the Company warrants to the Agent and the Lenders that:

8.1    Organization.    The Company is a corporation validly existing and in good standing under the laws of the Commonwealth of Virginia; each Subsidiary of the Company is validly existing and in good standing under the laws of the jurisdiction of its organization; and each of the Company and each Subsidiary is duly qualified to do business in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify could not reasonably be expected to have a Material Adverse Effect.

8.2    Authorization; No Conflict.    Each of the Borrower, the Company and each other Loan Party is duly authorized to execute and deliver each Loan Document to which it is a party, the Borrower is duly authorized to borrow monies hereunder and each of the Borrower, the Company and each other Loan Party is duly authorized to perform its obligations under each Loan Document to which it is a party. The execution, delivery and performance by each of the Borrower and the Company of this Agreement and by each of the Borrower, the Company and each other Loan Party of each other Loan Document to which it is a party, and the borrowings by the Borrower hereunder, do not and will not (a) require any consent or approval of any governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect), (b) conflict with (i) any provision of law, (ii) the charter, by-laws or other organizational documents of the Borrower, the Company or any other Loan Party or (iii) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon the Borrower, the Company or any other Loan Party or any of their respective properties or (c) require, or result in, the creation or imposition of any Lien on any asset of the Borrower, the Company, any Subsidiary or any other Loan Party (other than Liens in favor of the Agent created pursuant to the Collateral Documents).

8.3    Validity and Binding Nature.    Each of this Agreement and each other Loan Document to which the Borrower, the Company or any other Loan Party is a party is the legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors= rights generally and to general principles of equity.

32

8.4    Financial Condition.    The audited consolidated financial statements of the CarMax Group as at February 28, 2001 and the unaudited consolidated condensed financial statements of the CarMax Group as at November 30, 2001, copies of each of which have been delivered to the Agent for distribution to each Lender, were prepared in accordance with GAAP (subject, in the case of such unaudited financial statements, to normal year-end audit adjustments) and present fairly the consolidated financial condition of the CarMax Group as at such dates and the results of its operations for the periods then ended.

8.5    No Material Adverse Change.    Since November 30, 2001 there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries taken as a whole.

8.6    Litigation and Contingent Liabilities.    No litigation (including derivative actions), arbitration proceeding or governmental investigation or proceeding is pending or, to the knowledge of the Borrower or the Company, threatened against the Company or any Subsidiary which might reasonably be expected to have a Material Adverse Effect, except as set forth in Schedule 8.6. Other than any liability incident to such litigation or proceedings, neither the Company nor any Subsidiary has any contingent liabilities not listed on Schedule 8.6.

8.7    Ownership of Properties; Liens.    Each of the Company and each Subsidiary owns good and, in the case of real property, marketable title to all of its properties and assets material to its business, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like) except for Permitted Liens.

8.8    Subsidiaries.    As of the Closing Date, neither the Borrower nor the Company has any Subsidiaries other than those listed on Schedule 8.8.

8.9    Pension Plans.    (a) During the twelve-consecutive-month period prior to the date of the execution and delivery of this Agreement or the making of any Loan or the issuance of any Drafting Agreement, (i) no steps have been taken to terminate any Pension Plan and (ii) no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which could result in the incurrence by the Company or any Subsidiary of any liability, fine or penalty that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect.

(b)    All contributions (if any) have been made to any Multiemployer Pension Plan that are required to be made by the Company or any other member of the Controlled Group under the terms of the plan or of any collective bargaining agreement or by applicable law; neither the Company nor any member of the Controlled Group has withdrawn or partially withdrawn from any Multiemployer Pension Plan, incurred any withdrawal liability with respect to any such plan

33

or received notice of any claim or demand for withdrawal liability or partial withdrawal liability from any such plan, and no condition has occurred which, if continued, might result in a withdrawal or partial withdrawal from any such plan; and neither the Company nor any member of the Controlled Group has received any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent.

8.10    Investment Company Act.    Neither the Company nor any Subsidiary is an “investment company” or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940.

8.11    Public Utility Holding Company Act.    Neither the Company nor any Subsidiary is a “holding company”, or a “subsidiary company” of a “holding company”, or an “affiliate” of a “holding company” or of a “subsidiary company” of a “holding company”, within the meaning of the Public Utility Holding Company Act of 1935.

8.12    Regulation U.    The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock.

8.13    Taxes.    Each of the Company and each Subsidiary has filed all Federal and other material tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books.

8.14    Solvency, etc.    On the Closing Date, and immediately prior to and after giving effect to the issuance of each Drafting Agreement and each borrowing hereunder and the use of the proceeds thereof, (a) each of the Borrower’s, the Company’s and each other Loan Party’s assets will exceed its liabilities and (b) each of the Borrower, the Company and each other Loan Party will be solvent, will be able to pay its debts as they mature, will own property with fair saleable value greater than the amount required to pay its debts and will have capital sufficient to carry on its business as then constituted.

8.15    Environmental Matters.

(a)    No Violations.    Except as set forth on Schedule 8.15, neither the Company nor any Subsidiary, nor any operator of the Company’s or any Subsidiary’s properties, is in violation, or alleged violation, of any judgment, decree, order, law, permit, license, rule or regulation pertaining to Environmental Matters, including those arising under the Resource Conservation and Recovery Act (“RCRA”), the Comprehensive Environmental Response,

34

Compensation and Liability Act of 1980 (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986 or any other Environmental Law which individually or in the aggregate might reasonably be expected to have a Material Adverse Effect.

(b)    Notices.    Except as set forth on Schedule 8.15 and for matters arising after the Closing Date, neither the Company nor any Subsidiary has received notice from any third party, including any Federal, state or local governmental authority of any of the following that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect: (i) that any one of them has been identified by the U.S. Environmental Protection Agency as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B; (ii) that any hazardous waste, as defined by 42 U.S.C. ‘6903(5), any hazardous substance as defined by 42 U.S.C. ‘9601(14), any pollutant or contaminant as defined by 42 U.S.C. ‘9601(33) or any toxic substance, oil or hazardous material or other chemical or substance regulated by any Environmental Law (all of the foregoing, “Hazardous Substances”) which any one of them has generated, transported or disposed of has been found at any site at which a Federal, state or local agency or other third party has conducted a remedial investigation, removal or other response action pursuant to any Environmental Law; (iii) that the Company or any Subsidiary must conduct a remedial investigation, removal, response action or other activity pursuant to any Environmental Law; or (iv) of any Environmental Claim for which the Company or any Subsidiary may be liable.

(c)    Handling of Hazardous Substances.    Except as set forth on Schedule 8.15, (i) no portion of the real property or other assets of the Company or any Subsidiary has been used for the handling, processing, storage or disposal of Hazardous Substances except in substantial compliance with applicable Environmental Laws and no underground tank or other underground storage receptacle for Hazardous Substances is located on such properties; (ii) in the course of any activities conducted by the Company, any Subsidiary or the operators of any real property of the Company or any Subsidiary, no Hazardous Substances have been generated or are being used on such properties except in substantial compliance with applicable Environmental Laws; (iii) there have been no Releases or threatened Releases of Hazardous Substances on, upon, into or from any real property or other assets of the Company or any Subsidiary, which Releases singly or in the aggregate might reasonably be expected to have a Material Adverse Effect; (iv) there have been no Releases on, upon, from or into any real property in the vicinity of the real property or other assets of the Company or any Subsidiary which, through soil or groundwater contamination, may have come to be located on, and which might reasonably be expected to have a Material Adverse Effect; and (v) any Hazardous Substances generated by the Company and its Subsidiaries have been transported offsite only by properly licensed carriers and delivered only to treatment or disposal facilities maintaining valid permits as required under applicable Environmental Laws, which transporters and facilities have been and are operating in compliance with such permits and applicable Environmental Laws, except where any violation of this clause (v) could not reasonably be expected to have a Material Adverse Effect.

35

8.16    Insurance.    Set forth on Schedule 8.16 is a complete and accurate summary of the property and casualty insurance program of the Company and its Subsidiaries as of the Closing Date (including the names of all insurers, policy numbers, expiration dates, amounts and types of coverage and a description in reasonable detail of any self-insurance program, retrospective rating plan, fronting arrangement or other risk assumption arrangement involving the Company or any Subsidiary).

8.17    Information.    All information heretofore or contemporaneously herewith furnished in writing by the Borrower, the Company or any other Loan Party to the Agent or any Lender for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of the Company or any Subsidiary to the Agent or any Lender pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by the Agent and the Lenders that any projections and forecasts provided by the Company are based on good faith estimates and assumptions believed by the Company to be reasonable as of the date of the applicable projections or forecasts and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results).

8.18    Intellectual Property.    The Company and each Subsidiary owns and possesses or has a license or other right to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, service mark rights and copyrights as are necessary for the conduct of the business of the Company and its Subsidiaries, without any infringement upon rights of others, except to the extent that failure to comply with any of the foregoing could not reasonably be expected to have a Material Adverse Effect.

8.19    Burdensome Obligations.    Neither the Company nor any Subsidiary is a party to any agreement or contract or subject to any corporate, limited liability company or partnership restriction which might reasonably be expected to have a Material Adverse Effect.

8.20    Labor Matters.    Except as set forth on Schedule 8.20, neither the Company nor any Subsidiary is subject to any labor or collective bargaining agreement. There are no existing or threatened strikes, lockouts or other labor disputes involving the Company or any Subsidiary that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of the Company and its Subsidiaries are not in violation of the Fair Labor Standards Act or any other applicable law, rule or regulation dealing with such matters.

8.21    No Default.    No Event of Default or Unmatured Event of Default exists or would result from the incurring by the Borrower of any Indebtedness hereunder or under any other Loan Document.

36

8.22    Engaged in Motor Vehicle Sales.    (a) The Company and its Subsidiaries (other than Unrestricted Subsidiaries) are engaged, directly or indirectly, in the business of selling, or selling and leasing, New Motor Vehicles and Used Motor Vehicles and in businesses ancillary thereto.

(b)    All such Motor Vehicles consist solely of goods held by the Subsidiaries (other than Unrestricted Subsidiaries) for sale, or for sale and lease; no sales or other transactions involving such Motor Vehicles are (nor shall they become) subject to set-off, counterclaim, defense, allowance or adjustment (other than warranty claims, the aggregate amount of which shall not be material); there is no Lien on any Motor Vehicle (other than Permitted Liens of the type specified in clauses (i), (ii), (iii) and (x) of the definition of “Permitted Liens”) and there is no financing statement or similar statement or instrument of registration under the laws of any jurisdiction, covering or purporting to cover any interest of any kind in any Motor Vehicle or (except with respect to Permitted Liens) their proceeds on file or registered in any public office other than a financing statement in favor of the Agent and the financing statements identified on Schedule 8.22; there is no other floor plan or other financing arrangement relating to Motor Vehicles with any party other than pursuant to this Agreement; and none of the Company nor any of its Subsidiaries has made any other verbal or written contract or arrangement of any kind, the performance of which by the other party thereto would give rise to a Lien against any such Motor Vehicle (except for Permitted Liens of the type described in clauses (i), (ii), (iii) and (x) of the definition of “Permitted Lien”) or, except for Permitted Liens, the proceeds thereof; all such Motor Vehicles are free from damage caused by fire or other casualty, unless covered by insurance, subject to customary deductibles.

8.23    Dealer Franchise Agreements; Material Business Relationships.    As of the Closing Date, neither the Company nor any of its Subsidiaries is a party to any dealer franchise agreement (“Dealer Franchise Agreements”) other than those specifically disclosed in Schedule 8.23, which schedule shows the Manufacturer and the Company or the Subsidiary, as the case may be, that is a party to each such agreement, the date such agreement was entered into and the expiration date of such agreement. Each of such Dealer Franchise Agreements is currently in full force and effect, and neither the Company nor any Subsidiary has received any notice of termination with respect to any such agreement; and, except as disclosed on Schedule 8.23, neither the Company nor any Subsidiary is aware of any event which with notice, lapse of time or both would allow any Manufacturer that is a party to any Dealer Franchise Agreement to terminate any such agreement. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between the Company or any of its Subsidiaries and any customer or any group of customers or with any Manufacturer which, in any case, could reasonably be expected to have a Material Adverse Effect.

SECTION 9    COVENANTS.

Until the expiration or termination of the Commitments and thereafter until all obligations of the Borrower and the Company hereunder and under the other Loan Documents

37

are paid in full and all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) have been terminated, each of the Borrower and the Company agrees that, unless at any time the Required Lenders shall otherwise expressly consent (except as provided in Section 13.1) in writing, it will:

9.1    Reports, Certificates and Other Information.    Furnish to the Agent (which shall promptly provide copies to each Lender):

9.1.1    Annual Report.    Promptly when available and in any event within 90 days after the close of each Fiscal Year, a copy of the annual audit report of the Company and its Subsidiaries for such Fiscal Year, including therein consolidated balance sheets and statements of earnings and cash flows of the Company and its Subsidiaries for such Fiscal Year, audited (without any qualification arising from the scope of the audit or as to the ability of the Company and its Subsidiaries to operate as a going concern) by independent auditors of recognized standing selected by the Company and reasonably acceptable to the Required Lenders, together with (i) a written statement from such accountants to the effect that, in making the examination necessary for the issuance of their opinion on such financial statements, nothing came to their attention that caused them to believe that the Company was not in compliance with any provision of Section 9.6, 9.7, 9.9 or 9.24 of this Agreement insofar as such provision relates to accounting matters or, if something has come to their attention that caused them to believe that the Company was not in compliance with any such provision, describing such non-compliance in reasonable detail and (ii) a comparison with the previous Fiscal Year.

9.1.2    Interim Reports.    (a) Promptly when available and in any event within 45 days after the end of each Fiscal Quarter (except the last Fiscal Quarter of each Fiscal Year), consolidated balance sheets of the Company and its Subsidiaries as of the end of such Fiscal Quarter, together with consolidated statements of earnings and cash flows for such Fiscal Quarter and for the period beginning with the first day of such Fiscal Year and ending on the last day of such Fiscal Quarter, together with a comparison with the corresponding period of the previous Fiscal Year, certified by the chief financial officer or treasurer of the Company; and (b) promptly when available and in any event within 30 days after the end of each month (except the last month of each Fiscal Quarter), a report of assets and liabilities, substantially in the form of Exhibit J hereto, for each store location as of the last day of such month, certified by the chief financial officer or treasurer of the Company.

9.1.3    Compliance Certificates.    Contemporaneously with the furnishing of a copy of each annual audit report pursuant to Section 9.1.1 and each set of quarterly statements pursuant to Section 9.1.2, a duly completed compliance certificate in the form of Exhibit B, with appropriate insertions, dated the date of such annual report or such quarterly statements and signed by the chief financial officer or the treasurer of the Company, containing a computation of each of the financial ratios and restrictions set forth in Section 9.6, a calculation of the amount of Financed Capital Expenditures incurred during the period covered by such certificate and the amount of Financed Capital Expenditures incurred during the period from the Closing Date through the end

38

of the period covered by such certificate and a statement to the effect that such officer has not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it.

9.1.4    Reports to the SEC and to Shareholders.    Promptly upon the filing or sending thereof, copies of all regular, periodic or special reports of Circuit City (so long as Circuit City owns, directly or indirectly, 20% or more of the outstanding Voting Stock of the Company), the Company or any Subsidiary (other than Unrestricted Subsidiaries) filed with the SEC; copies of all registration statements of Circuit City (so long as Circuit City owns, directly or indirectly, 20% or more of the outstanding Voting Stock of the Company), the Company or any Subsidiary (other than Unrestricted Subsidiaries) filed with the SEC (other than on Form S-8); and copies of all proxy statements or other communications made to security holders of Circuit City (so long as Circuit City owns, directly or indirectly, 20% or more of the outstanding Voting Stock of the Company) or the Company generally.

9.1.5    Notice of Default, Litigation and ERISA Matters.    Promptly upon the Borrower or the Company obtaining knowledge of any of the following, written notice describing the same and the steps being taken by the Company or the Subsidiary affected thereby with respect thereto:

(a)    the occurrence of an Event of Default or an Unmatured Event of Default;

(b)    any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Borrower or the Company to the Lenders which has been instituted or, to the knowledge of the Borrower or the Company, is threatened against the Company or any Subsidiary or to which any of the properties of any thereof is subject which might reasonably be expected to have a Material Adverse Effect;

(c)    the institution of any steps by any member of the Controlled Group or any other Person to terminate any Pension Plan, or the failure of any member of the Controlled Group to make a required contribution to any Pension Plan (if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the taking of any action with respect to a Pension Plan which could result in the requirement that the Company furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan or Multiemployer Pension Plan which could result in the incurrence by any member of the Controlled Group of any liability, fine or penalty (including any claim or demand for withdrawal liability or partial withdrawal from any Multiemployer Pension Plan) that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect, or any material increase in the contingent liability of the Company with respect to any post-retirement welfare plan benefit, or any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of an excise tax, that any such plan is or has

39

been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent;

(d)    any cancellation (unless contemporaneously replaced with similar coverage) or material change in any Property Insurance or any insurance for bodily injury, personal injury or property damage, in each case securing Motor Vehicles, maintained by the Company or any Subsidiary;

(e)    any material violation of law by the Company or any Subsidiary; or

(f)    any other event (including (i) any violation of any Environmental Law or the assertion of any Environmental Claim or (ii) the enactment or effectiveness of any law, rule or regulation) which might reasonably be expected to have a Material Adverse Effect.

9.1.6    Borrowing Base Certificates.    Within 10 days of the end of each month, a Borrowing Base Certificate dated as of the end of such month (and, from time to time as the Agent may request, a Borrowing Base Certificate dated as of a date after the date of such request) and executed by the chief financial officer or the treasurer of the Company on behalf of the Company (provided that (i) the Company may deliver a Borrowing Base Certificate more frequently if it chooses and (ii) at any time an Event of Default exists, the Agent may require the Company to deliver Borrowing Base Certificates more frequently).

9.1.7    Management Reports.    Promptly upon receipt thereof, copies of all detailed financial and management reports submitted to the Company by independent auditors in connection with each audit made by such auditors of the books of the Company, to the extent such reports identify a material weakness in the Company’s internal controls.

9.1.8    Subordinated Debt Notices.    Promptly from time to time, copies of any notices (including notices of default or acceleration) received from any holder or trustee of, under or with respect to any Subordinated Debt (other than such notices that are purely administrative in nature).

9.1.9    Manufacturer/Dealer Statements.    Upon request of the Agent, copies of each Manufacturer/Dealer Statement of the Company and each Subsidiary.

9.1.10    Inventory Detail Report.    Within 15 days of the end of each Fiscal Quarter (commencing with the Fiscal Quarter ending August 31, 2002), reports as to the Motor Vehicles of the Company and its Subsidiaries (other than Unrestricted Subsidiaries), which reports shall include inventory agings, inventory turns, WIP and title aging reporting and shall be in substantially the form agreed to under Section 9.25.

40

9.1.11    Dealer Franchise Agreements.    Promptly upon the Borrower or the Company obtaining knowledge thereof, notice of the termination of any Dealer Franchise Agreement.

9.1.12    Other Information.    Promptly from time to time, such other information concerning the Company and its Subsidiaries as any Lender or the Agent may reasonably request; provided that this subsection shall apply to Unrestricted Subsidiaries only to the extent reasonably required by the Agent to monitor capital contributions to, and Investments in, Unrestricted Subsidiaries.

9.2    Books, Records and Inspections.    Keep, and cause each Subsidiary to keep, its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP; permit, and cause each Subsidiary (other than Unrestricted Subsidiaries, except to the extent reasonably required by the Agent to monitor capital contributions to, and Investments in, Unrestricted Subsidiaries and compliance with Section 9.24) to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists), any Lender or the Agent or any representative thereof to audit and inspect the properties and operations of the Company or such Subsidiary (to the extent the Agent determines (in its sole discretion) such operations relate to the acquisition, administration and disposition of inventory, or to other matters concerning the creditworthiness of the Borrower, the Company or any Subsidiary (other than an Unrestricted Subsidiary) or the ability of the Borrower, the Company or any Subsidiary (other than an Unrestricted Subsidiary) to perform its payment and other obligations hereunder and under the other Loan Documents); and permit, and cause each Subsidiary (other than Unrestricted Subsidiaries, except to the extent reasonably required by the Agent to monitor capital contributions to, and Investments in, Unrestricted Subsidiaries and compliance with Section 9.24) to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists), any Lender or the Agent or any representative thereof to visit any or all of its offices, to discuss its financial matters with its officers and its independent auditors (and each of the Borrower and the Company hereby authorizes such independent auditors to discuss such financial matters with any Lender or the Agent or any representative thereof), and to examine (and, at the expense of the Company or such Subsidiary, photocopy extracts from) any of its books or other records (to the extent the Agent determines (in its sole discretion) such books and records relate to the acquisition, administration and disposition of inventory, or to other matters concerning the creditworthiness of the Borrower, the Company or any Subsidiary (other than an Unrestricted Subsidiary) or the ability of the Borrower, the Company or any Subsidiary (other than an Unrestricted Subsidiary) to perform its payment and other obligations hereunder and under the other Loan Documents); and permit, and cause each Subsidiary (other than Unrestricted Subsidiaries) to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists) the Agent and its representatives to audit and inspect the Motor Vehicles of the Company and such Subsidiaries and to inspect, audit, check and make copies of and extracts from the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating to such Motor Vehicles and any other collateral under the Collateral Documents. All such inspections or audits shall be at the Agent’s

41

expense, unless an Event of Default has occurred and is continuing, in which case such inspections and audits shall be at the Company’s expense.

9.3    Maintenance of Property; Insurance.    (a) Keep, and cause each Subsidiary (other than Unrestricted Subsidiaries) to keep, all property useful and necessary in the business of the Company or such Subsidiary in good working order and condition, ordinary wear and tear excepted.

(b)    Maintain, and cause each Subsidiary (other than Unrestricted Subsidiaries) to maintain, with responsible insurance companies, such insurance as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent (including commercially reasonable deductibles) and against such hazards and liabilities, as is customarily maintained by companies similarly situated; and, upon request of the Agent or any Lender, furnish to the Agent or such Lender a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by the Company and its Subsidiaries (other than Unrestricted Subsidiaries). The Company shall cause each issuer of each policy of Property Insurance or insurance for bodily injury, personal injury or property damage, in each case insuring the Motor Vehicles of the Company and any Subsidiary (other than an Unrestricted Subsidiary), to provide the Agent with a certificate of insurance (with attached endorsement) (i) showing the Agent as lender’s loss payee with respect to each policy of Property Insurance and naming the Agent and each Lender as an additional insured with respect to each policy of insurance for liability for bodily injury, personal injury or property damage, (ii) providing that 30 days’ notice will be given to the Agent prior to any cancellation of, material reduction or change in coverage provided by or other material modification to such policy and (iii) reasonably acceptable in all other respects to the Agent. Each of the Borrower and the Company shall, and the Company shall cause each Subsidiary (other than Unrestricted Subsidiaries) to, execute and deliver to the Agent a collateral assignment, in form and substance satisfactory to the Agent, of each business interruption insurance policy maintained by the Borrower, the Company or such Subsidiary; provided that no such collateral assignment shall be required as long as the Agent is named as loss payee under such business interruption insurance policy.

9.4    Compliance with Laws; Payment of Taxes and Liabilities.    (a) Comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations, decrees, orders, judgments, licenses and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect; and (b) pay, and cause each Subsidiary (other than an Unrestricted Subsidiary) to pay, prior to delinquency, all taxes and other governmental charges against it or any of its property, as well as claims of any kind which, if unpaid, might become a Lien on any of its property; provided that the foregoing shall not require the Borrower, the Company or such Subsidiary to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP.

42

9.5    Maintenance of Existence, etc.    Maintain and preserve, and (subject to Section 9.10) cause each Subsidiary to maintain and preserve, (a) its existence and good standing in the jurisdiction of its organization and (b) its qualification to do business and good standing in each other jurisdiction where the nature of its business makes such qualification necessary, except, in the case of this clause (b), in those instances in which the failure to be qualified or in good standing does not have a Material Adverse Effect; provided that the Company shall be permitted to dissolve Unrestricted Subsidiaries if such dissolution could not reasonably be expected to have a Material Adverse Effect.

9.6    Financial Covenants.

9.6.1    Current Ratio.    Not permit the ratio of Consolidated Current Assets to Consolidated Current Liabilities at any time to be less than 1.5:1.0.

9.6.2    Ratio of Total Liabilities to Consolidated Tangible Net Worth.    Not permit the ratio of Total Liabilities to Consolidated Tangible Net Worth at any time to be greater than 2.0:1.0.

9.6.3    Fixed Charge Coverage Ratio.    Not permit the Fixed Charge Coverage Ratio for any Computation Period to be less than 1.25:1.0.

9.7    Limitation on Indebtedness.    Not, and not permit any Subsidiary (other than Unrestricted Subsidiaries) to, create, incur, assume or suffer to exist any Indebtedness, except:

(a)    obligations under this Agreement and the other Loan Documents;

(b)    Indebtedness of Subsidiaries to the Company;

(c)    unsecured Indebtedness of the Company to Subsidiaries (other than Unrestricted Subsidiaries);

(d)    Subordinated Debt;

(e)    Hedging Obligations incurred for bona fide hedging purposes and not for speculation;

(f)    Indebtedness existing on the date hereof and described on Schedule 9.7 (including amounts available under commitments related thereto but not yet drawn upon) (the “Existing Indebtedness”) and any Indebtedness extending the maturity of, or refunding or refinancing, such Existing Indebtedness, provided that (i) the principal amount of such Existing Indebtedness shall not be increased above the lesser of (x) the amount thereof immediately prior to such extension, refunding or refinancing (including amounts available under commitments related thereto but not yet drawn upon) and (y) the amount set forth across from such Indebtedness on Schedule 9.7 under the column “Current Balance”, and (ii) the direct or

43

contingent obligors therefor shall not be changed as a result of or in connection with such extension, refunding or refinancing;

(g)    Indebtedness secured by Liens permitted by clause (vi) of the definition of Permitted Liens, provided that the aggregate amount of all such Indebtedness at any time outstanding shall not exceed $5,000,000; and any Indebtedness extending the maturity of, or refunding or refinancing, such Indebtedness, provided that the principal amount of such Indebtedness shall not be increased above the amount thereof immediately prior to such extension, refunding or refinancing (including amounts available under commitments related thereto but not yet drawn upon), and the direct or contingent obligors therefor shall not be changed as a result of or in connection with such extension, refunding or refinancing;

(h)    unsecured Indebtedness of the Borrower (which may be Guaranteed by the Company provided such Guarantee is unsecured), in addition to the Indebtedness listed above, in an aggregate principal amount not at any time exceeding $200,000,000; provided that (i) the amount of each credit facility in respect of such Indebtedness (including amounts available under commitments related thereto but not yet drawn upon) shall be no less than $5,000,000, (ii) immediately after giving effect to the incurrence of such Indebtedness, no Event of Default or Unmatured Event of Default shall exist and (iii) such Indebtedness is used to finance the working capital needs of the Company and its Subsidiaries; and

(i)    other Indebtedness, in addition to the Indebtedness listed above, in an aggregate principal amount not at any time exceeding $5,000,000.

9.8.    Liens.    Not, and not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any if its real or personal properties, assets or rights of whatever nature (whether now owned or hereafter acquired), except Permitted Liens; provided, however, that there shall be no Liens (including any Permitted Lien) on any Motor Vehicle other than Liens in favor of the Agent and Permitted Liens of the type described in clauses (i), (ii) and (iii) of the definition of “Permitted Liens.”

9.9    Restricted Payments.    Not, and not permit any Subsidiary (other than Unrestricted Subsidiaries) to, (a) make any distribution to any of its equity holders, (b) purchase or redeem any of its equity interests or any warrants, options or other rights in respect thereof, (c) make any redemption, prepayment, defeasance or repurchase of any Subordinated Debt, (d) make any payment of interest on account of any Subordinated Debt if immediately after giving effect to such interest payment, an Event of Default or Unmatured Event of Default would exist or (e) set aside funds for any of the foregoing. Notwithstanding the foregoing, (i) any Subsidiary may pay dividends or make other distributions to the Company or to a Wholly-Owned Subsidiary, (ii) so long as no Event of Default or Unmatured Event of Default exists, the Company may pay dividends or make other distributions if immediately after such dividend or distribution it is in pro forma compliance with all the financial ratios and restrictions set forth in Section 9.6 (it being understood that, for purposes of calculating pro forma compliance with Section 9.6.3, the

44

amount of such dividend or distribution shall be subtracted from EBITDAR), (iii) the Company may pay dividends payable solely in shares of common stock of the Company, (iv) the Company may, in connection with the proposed separation of the CarMax Group from Circuit City, make, prior to December 31, 2002, a one-time special dividend payment in a maximum amount of $50,000,000 to Circuit City in recognition of contingent obligations retained by Circuit City on leases assigned to the Company in connection with such separation (provided that the Company shall give the Lenders ten Business Days’ prior written notice of such dividend) and (v) the Company or any Subsidiary may purchase or redeem any of its common stock or any warrants, options or other rights in respect thereof from (A) employees, officers and directors of the Company or such Subsidiary (or their estates) upon the death, permanent disability, retirement or termination of employment of any such Person or otherwise in accordance with any stock incentive plan, employee stock purchase plan or other similar employee benefit plan maintained by the Company or such Subsidiary or (B) other stockholders of the Company so long as the purpose of such purchase or redemption is to acquire common stock in accordance with any such stock incentive plan, employee stock purchase plan or other similar employee benefit plan or for reissuance to new employees, officers or directors (or their estates) of the Company or any Subsidiary and such common stock is reissued within 12 months of such purchase or redemption, provided, in each case, that immediately after giving effect to such purchase or redemption under this clause (v), (x) the Company is in pro forma compliance with all the financial ratios and restrictions set forth in Section 9.6 and (y) no Event of Default or Unmatured Event of Default exists.

9.10    Mergers, Consolidations, Sales; Use of Motor Vehicles as Inventory.    Not, and not permit any Subsidiary to, be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any stock of any class of, or any membership or partnership or joint venture interest in, any other Person, or, except in the ordinary course of its business (which shall include sales or leases of Motor Vehicles), sell, transfer, convey, lease or assign all or any Substantial Portion of its Properties, or sell or assign with or without recourse any receivables, except for (a) any such merger, consolidation, sale, transfer, conveyance, lease or assignment of or by any Wholly-Owned Subsidiary into, with or to the Company or into, with or to any other Wholly-Owned Subsidiary (other than an Unrestricted Subsidiary); (b) any such purchase or other acquisition by the Company or any Wholly-Owned Subsidiary of the assets or stock of any Wholly-Owned Subsidiary; (c) transfers in the ordinary course of business of Motor Vehicle Receivables in connection with a Securitization of such Motor Vehicle Receivables owing (immediately prior to such transfer) to the Company or any Subsidiary (other than an Unrestricted Subsidiary) and which Securitization is without recourse to the Company or such Subsidiary, other than Customary Recourse Arrangements; (d) sales and dispositions of assets (including the stock of Subsidiaries) for at least fair market value (as determined by the Board of Directors of the Company) so long as the net book value of all assets sold or otherwise disposed of in any Fiscal Year of the Company does not exceed 10% of the net book value of the consolidated assets of the Company and its Subsidiaries as of the last day of the preceding Fiscal Year; (e) any Acquisition by the Company or any Subsidiary if (1) immediately before and after giving effect to such Acquisition, no Event of Default or Unmatured Event of Default shall exist,

45

(2) immediately after giving effect to such Acquisition, the Company is in pro forma compliance with all the financial ratios and restrictions set forth in Section 9.6, (3) in the case of the Acquisition of any Person, the Board of Directors of such Person has approved such Acquisition and (4) prior to and after such Acquisition, the Chief Financial Officer of the Company has delivered a certificate to the Agent confirming that the conditions set forth in clauses (1) - (3) above will be (in the case of a certificate delivered prior to such Acquisition) or have been (in the case of a certificate delivered after such Acquisition) met; and (f) so long as no Event of Default or Unmatured Event of Default shall exist or would result therefrom, the Company and its Subsidiaries may sell real property (and improvements thereon) acquired by them for the purpose of establishing new retail locations in sale leaseback transactions where the lease by the Company or the applicable Subsidiary of such sold property is an Operating Lease permitted hereunder, provided that the consideration received by the Company or the applicable Subsidiary in such sale is in cash and is at least equal to the lesser of the cost or the fair market value of the property sold (provided that such amount equals or exceeds the book value of such property). Notwithstanding the foregoing, neither the Borrower nor the Company shall, and the Company shall not permit any Subsidiary to (i) sell any Motor Vehicle other than in the ordinary course of business or (ii) permit any Motor Vehicle to be used for any purpose that would cause such Motor Vehicle to be characterized as equipment (as defined in the Uniform Commercial Code) without giving the Agent prior written notice that such Motor Vehicle is no longer in the Borrowing Base.

9.11    Modification of Organizational Documents.    Not permit the Certificate or Articles of Incorporation, Certificate of Formation, By-Laws, Limited Liability Company Agreement or other organizational documents of the Company or any Subsidiary to be amended or modified in any way which might reasonably be expected to affect the interests of the Lenders in a materially adverse manner.

9.12    Use of Proceeds.    Use the proceeds of the Loans, Drafts and the Drafting Agreements solely for the purpose of purchasing Motor Vehicles for the Company and its Subsidiaries (other than Unrestricted Subsidiaries) or for the purpose of reimbursing the Company or such Subsidiary for previously-incurred motor vehicle financing costs; and not use or permit any proceeds of any Loan to be used, either directly or indirectly, for any other purpose, including for the purpose, whether immediate, incidental or ultimate, of “purchasing or carrying” any Margin Stock.

9.13    Further Assurances.    Take, and cause each Subsidiary (other than an Unrestricted Subsidiary) to take, such actions as are necessary or as the Agent or the Required Lenders may reasonably request from time to time (including the execution and delivery of guaranties, security agreements, financing statements and other documents, the filing or recording of any of the foregoing and the delivery of stock certificates and other collateral with respect to which perfection is obtained by possession) to ensure that (a) the obligations of the Borrower and the Company hereunder and under the other Loan Documents are guaranteed by all Subsidiaries (other than Unrestricted Subsidiaries) (including, promptly upon the acquisition or creation

46

thereof, any Subsidiary (other than an Unrestricted Subsidiary) acquired or created after the date hereof) by execution of a counterpart of the Guaranty and (b) the obligations of the Company and each of its Subsidiaries (other than Unrestricted Subsidiaries) (including each Subsidiary (other than an Unrestricted Subsidiary) acquired or created after the date hereof) under the Loan Documents to which they are a party are secured by all Motor Vehicles, all rights of the Company and each such Subsidiary against Manufacturers arising out of or in connection with the purchase of Motor Vehicles, all rights to receive payment from any Person in connection with any transfer of a Motor Vehicle Receivable to such Person (but excluding any right of the Company or a Subsidiary to receive payments in its capacity as servicer of any such Motor Vehicle Receivable), all collections received by the Company and each such Subsidiary on account of any Motor Vehicle Receivable (other than Motor Vehicle Receivables transferred in a Securitization or to an unaffiliated third party in the ordinary course of business) and all proceeds thereof (other than Motor Vehicle Receivables); provided that Kenosha shall not have to grant a Lien to the Agent to secure Kenosha’s obligations under the Loan Documents on any New Motor Vehicles held by Kenosha of the Ford, Lincoln or Mercury makes for so long as any Ford Restriction exists. For the avoidance of doubt, if an Unrestricted Subsidiary ceases to be such, it shall be required to comply with this Section promptly after ceasing to be an Unrestricted Subsidiary.

9.14    Transactions with Affiliates.    Not, and not permit any Subsidiary to, enter into, or cause, suffer or permit to exist any transaction, arrangement or contract with any of its other Affiliates (other than the Company and its Subsidiaries (other than Unrestricted Subsidiaries)) which is on terms that are less favorable than are obtainable from any Person which is not one of its Affiliates.

9.15    Employee Benefit Plans.    Maintain, and cause each Subsidiary to maintain, each Pension Plan in substantial compliance with all applicable requirements of law and regulations.

9.16    Environmental Matters.    (a) If any Release or Disposal of Hazardous Substances shall occur or shall have occurred on any real property or any other assets of the Company or any Subsidiary, the Borrower and the Company shall, and the Company shall cause the applicable Subsidiary to, cause the prompt containment and removal of such Hazardous Substances and the remediation of such real property or other assets as necessary to comply with all Environmental Laws. Without limiting the generality of the foregoing, the Borrower and the Company shall, and the Company shall cause each Subsidiary to, comply with any valid Federal or state judicial or administrative order requiring the performance at any real property of the Company or any Subsidiary of activities in response to the Release or threatened Release of a Hazardous Substance.

(b)    To the extent that the transportation of “hazardous waste” as defined by RCRA is permitted by this Agreement, the Borrower and the Company shall, and the Company shall cause its Subsidiaries to, dispose of such hazardous waste only at licensed disposal facilities operating in substantial compliance with Environmental Laws.

47

9.17    Unconditional Purchase Obligations.    Not, and not permit any Subsidiary to, enter into or be a party to any contract for the purchase of materials, supplies or other property or services if such contract requires that payment be made by it regardless of whether delivery is ever made of such materials, supplies or other property or services, other than such contracts which in the aggregate require purchases of less than $5,000,000 per year.

9.18    Inconsistent Agreements.    Not, and not permit any Subsidiary to, enter into any agreement (other than this Agreement or any other Loan Document) containing any provision which would (a) be violated or breached by any borrowing by the Borrower hereunder or by the performance by the Borrower, the Company or any Subsidiary of any of its obligations hereunder or under any other Loan Document, (b) other than the Ford Restriction, prohibit the Borrower, the Company or any Subsidiary from granting to the Agent, for the benefit of the Lenders, a Lien on any of its Motor Vehicles or any other property in which the Company and its Subsidiaries are required to grant a Lien to the Agent under Section 9.13(b) or (c) create or permit to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends or make other distributions to the Company or any other applicable Subsidiary, or pay any Indebtedness owed to the Company or any other Subsidiary, (ii) make loans or advances to the Company or (iii) transfer any of its assets or properties to the Company (other than any such encumbrance or restriction contained in one or more agreements relating to the sale of a Subsidiary pending such sale, provided that such encumbrance or restriction applies only to such Subsidiary and such sale is permitted hereunder).

9.19    Business Activities.    Not, and not permit any Subsidiary to, engage in any line of business other than the businesses engaged in on the Closing Date and businesses reasonably related thereto.

9.20    Investments.    Not, and not permit any Subsidiary to, make or permit to exist any Investment in any other Person, except (without duplication) the following:

(a)    contributions by the Company to the capital of any of its Subsidiaries, or by any such Subsidiary to the capital of any of its Subsidiaries;

(b)    Investments by the Company in any Subsidiary or by any Subsidiary in the Company, by way of intercompany loans, advances or guaranties, all to the extent permitted by Section 9.7, provided that neither the Company nor any Subsidiary may Guarantee, or otherwise provide any credit support of any kind (including any undertaking, Guarantee, indemnity, agreement or instrument that would constitute Indebtedness) with respect to any Indebtedness of an Unrestricted Subsidiary or otherwise have any direct or indirect liability with respect to any such Indebtedness, in each case other than under Customary Recourse Arrangements;

(c)    Guarantees permitted by Section 9.7;

48

(d)    Cash Equivalent Investments;

(e)    bank deposits in the ordinary course of business;

(f)    Investments in securities of account debtors received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such account debtors;

(g)    Investments existing on the date hereof and listed on Schedule 9.20;

(h)    accounts receivable (including Motor Vehicle Receivables) arising and trade credit granted in the ordinary course of business and any securities received in satisfaction or partial satisfaction thereof in connection with accounts of financially troubled Persons to the extent reasonably necessary to prevent or limit loss;

(i)    residual or subordinate interests retained by the Company or any Subsidiary in connection with a Securitization of Motor Vehicle Receivables owing (immediately prior to such Securitization) to the Company or any Subsidiary (other than an Unrestricted Subsidiary);

(j)    Investments to consummate Acquisitions permitted by Section 9.10;

(k) (x)    bona fide Hedging Agreements entered into by the Company or any Subsidiary (other than an Unrestricted Subsidiary) with an Unrestricted Subsidiary to protect against fluctuations in interest rates (and not entered into for speculative purposes) in respect of Indebtedness of such Unrestricted Subsidiary so long as the notional amount of Indebtedness hedged thereby does not exceed the amount of Indebtedness of such Unrestricted Subsidiary reasonably expected to be outstanding and (y) other Hedging Agreements (not entered into with any Unrestricted Subsidiary) entered into for bona fide hedging purposes and not for speculation;

(l)    Investments, in addition to the Investments listed above, in an aggregate amount not exceeding $25,000,000; provided that (x) any Investment which when made complies with the requirements of the definition of the term “Cash Equivalent Investment” may continue to be held notwithstanding that such Investment if made thereafter would not comply with such requirements; and (y) no Investment otherwise permitted by clause (b), (c), (j), (k) or (l) shall be permitted to be made if, immediately before or after giving effect thereto, any Event of Default or Unmatured Event of Default exists.

9.21    Restriction of Amendments to Certain Documents.    Not amend or otherwise modify, or waive any rights under, any document evidencing Subordinated Debt, if, in any case, such amendment, modification or waiver could reasonably be expected to be adverse to the interests of the Lenders.

49

9.22    Fiscal Year.    Not change its Fiscal Year; provided that (a) the Company shall be permitted to change its Fiscal Year one time if the Company gives the Agent at least 60 days’ prior notice thereof and (b) after the giving of such notice the Company and the Lenders shall negotiate in good faith to make arrangements (including, if the Agent determines the same is necessary, entering into an amendment hereto) to take the consequences of such change into account (including as to financial reporting).

9.23    Landlord Agreements.    Use its commercially reasonable efforts to deliver to the Agent by no later than August 31, 2002 landlord agreements, in form and substance satisfactory to the Agent, from the landlord of each location of the Company and its Subsidiaries where Motor Vehicles are kept and that is not owned by the Company or the applicable Subsidiary (it being understood that neither the Company nor any Subsidiary (i) has any right to require any landlord to enter into such agreements or (ii) is required to incur any material expense or liability in its effort to obtain such agreements).

9.24    Excess Collections.    Cause to be paid to the Company and its Subsidiaries (other than Unrestricted Subsidiaries) at least once during each calendar quarter, any and all excess collections held by any Unrestricted Subsidiary in connection with a Securitization (it being understood that excess collections shall mean collections that are not required to be paid to or held for the benefit of investors, servicers, credit support providers, trustees or other parties to such Securitization or required to be retained by such Unrestricted Subsidiary to satisfy minimum capitalization requirements).

9.25    Reports.    Not later than July 31, 2002, provide to the Agent a form of a Borrowing Base Certificate and a form of inventory detail report to be submitted pursuant to Section 9.1.10, which forms shall be reasonably acceptable to the Agent.

SECTION 10    EFFECTIVENESS; CONDITIONS OF LENDING, ETC.

The obligation of each Lender to make its Loans (and the obligation of the Fronting Lender to enter into Drafting Agreements or any other Drafting arrangements (whether in writing or oral)) is subject to the following conditions precedent:

10.1    Initial Credit Extension.    The obligation of the Lenders to make the initial Loans, and the obligation of the Fronting Lender to enter into the initial Drafting Agreement and to fund any initial Draft, is, in addition to the conditions precedent specified in Section 10.2, subject to the conditions precedent that the Agent shall have received all of the following, each duly executed and dated the Closing Date (or such earlier date as shall be satisfactory to the Agent), in form and substance satisfactory to the Agent (and the date on which all such conditions precedent have been satisfied or waived in writing by the Agent and the Required Lenders is called the “Closing Date”):

50

10.1.1    Notes.    A Note executed by the Borrower in favor of each Lender.

10.1.2    Resolutions.    Certified copies of resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance by the Borrower of this Agreement, the Notes and the other Loan Documents to which the Borrower is a party; and certified copies of resolutions of the Board of Directors (or other governing body) of each other Loan Party authorizing the execution, delivery and performance by such Loan Party of each Loan Document to which such entity is a party.

10.1.3    Consents, etc.    Certified copies of all documents evidencing any necessary corporate, limited liability company or partnership action, consents and governmental approvals (if any) required for the execution, delivery and performance by the Borrower, the Company and each other Loan Party of the documents referred to in this Section 10.

10.1.4    Incumbency and Signature Certificates.    A certificate of the Secretary or an Assistant Secretary (or other appropriate representative) of each Loan Party certifying the names of the officer or officers of such entity authorized to sign the Loan Documents to which such entity is a party, together with a sample of the true signature of each such officer (it being understood that the Agent and each Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein).

10.1.5    Guaranty.    A counterpart of the Guaranty executed by each of the Company’s Subsidiaries (other than the Unrestricted Subsidiaries).

10.1.6    Security Agreement.    A counterpart of the Security Agreement executed by the Borrower, the Company and each of its Subsidiaries (other than Unrestricted Subsidiaries).

10.1.7    Opinion of Counsel.    The opinion of McGuireWoods LLP, substantially in the form of Exhibit H.

10.1.8    Insurance.    Evidence satisfactory to the Agent of the existence of insurance required to be maintained pursuant to Section 9.3(b), together with evidence that the Agent has been named as a lender’s loss payee and the Agent and the Lenders have been named as additional insureds on all related insurance policies.

10.1.9    Copies of Documents.    Copies, certified by the Secretary or an Assistant Secretary (or other appropriate representative) of each Loan Party, of the organizational documents of such entity and each Dealer Franchise Agreement to which such entity is a party, together, in each case, with all instruments, agreements and other documents required to be delivered or furnished thereunder or in connection therewith.

10.1.10    Payment of Fees.    Evidence of payment by the Borrower of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together

51

with all Attorney Costs of the Agent to the extent invoiced prior to the Closing Date, plus such additional amounts of Attorney Costs as shall constitute the Agent’s reasonable estimate of Attorney Costs incurred or to be incurred by the Agent through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Agent).

10.1.11    Solvency Certificate.    A Solvency Certificate, substantially in the form of Exhibit F, executed by the Chief Financial Officer of each Loan Party.

10.1.12    Search Results; Lien Terminations.    Certified copies of Uniform Commercial Code Requests for Information or Copies, or a similar search report certified by a party acceptable to the Agent, dated a date reasonably near to the Closing Date, listing all effective financing statements which name the Company and each Subsidiary (under their present names and any previous names) as debtors and which are filed in the jurisdictions in which filings are to be made pursuant to the Collateral Documents (as well as in all jurisdictions in which, in the Agent’s opinion, filings would have been made pursuant to the Collateral Documents under any version of the Uniform Commercial Code in effect prior to July 1, 2001), together with (i) copies of such financing statements and (ii) authorized copies of proper Uniform Commercial Code Form UCC-3 termination statements, if any, necessary to release all Liens and other rights of any Person in any collateral described in the Collateral Documents previously granted by any Person.

10.1.13    Filings, Registrations and Recordings.    The Agent shall have received each document (including Uniform Commercial Code financing statements) required by the Collateral Documents or under law or reasonably requested by the Agent to be filed, registered or recorded in order to create in favor of the Agent, for the benefit of the Lenders, a perfected Lien on the collateral described therein, prior and superior to the Lien of any other Person, in proper form for filing, registration or recording.

10.1.14    Borrowing Base Certificate.    A certificate, in a summary format reasonably acceptable to the Agent, certifying as to the Borrowing Base as of April 30, 2002.

10.1.15    Closing Certificate.    A certificate signed by a Vice President of the Company dated as of the Closing Date, affirming the matters set forth in Section 10.2.1 as of the Closing Date.

10.1.16    Other.    Such other documents as the Agent or any Lender may reasonably request.

10.2    Conditions.    The obligation of each Lender to make each Loan and of the Fronting Lender to enter into Drafting Agreements or any other Drafting arrangements (whether in writing or oral) is subject to the following further conditions precedent that:

52

10.2.1    Compliance with Warranties, No Default, etc.    Both before and after giving effect to the making of any Loan (other than Revolving Loans made to refund the Borrower’s reimbursement obligation with respect to any Draft, Revolving Loans to refund Swing Line Loans and Revolving Loans to refund Fronting Lender Advances that have ceased to be the same), the issuance of any Drafting Agreement or any other Drafting arrangement, the following statements shall be true and correct:

(a)    the representations and warranties of the Borrower, the Company and each other Loan Party set forth in this Agreement and the other Loan Documents shall be true and correct in all material respects with the same effect as if then made (except to the extent stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); and

(b)    no Event of Default or Unmatured Event of Default shall have then occurred and be continuing.

10.2.2 Confirmatory Certificate.    If requested by the Agent or any Lender, the Agent shall have received (in sufficient counterparts to provide one to each Lender) a certificate dated the date of such requested Loan and signed by a duly authorized representative of the Borrower as to the matters set out in Section 10.2.1 (it being understood that each request by the Borrower for the making of a Loan (and each deemed request therefor) or for the Fronting Lender to enter into any Drafting Agreement shall be deemed to constitute a warranty by the Borrower that the conditions precedent set forth in Section 10.2.1 will be satisfied at the time of the making of such Loan or of the entering into such Drafting Agreement), together with such other documents as the Agent or any Lender may reasonably request in support thereof.

SECTION 11    EVENTS OF DEFAULT AND THEIR EFFECT.

11.1    Events of Default.    Each of the following shall constitute an Event of Default under this Agreement:

11.1.1    Non-Payment of the Loans, etc.    Default in the payment when due of the principal of any Loan; or default, and continuance thereof for ten days, in the payment when due of any interest, fee, reimbursement obligation or other amount payable by the Borrower hereunder or under any other Loan Document.

11.1.2    Non-Payment of Other Indebtedness.    Any default shall occur under the terms applicable to any Indebtedness of the Company or any Subsidiary in an aggregate amount (for all such Indebtedness so affected) exceeding $5,000,000 and such default shall (a) consist of the failure to pay such Indebtedness when due, whether by acceleration or otherwise and after giving effect to any applicable grace period, or (b) accelerate the maturity of such Indebtedness or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such Indebtedness to become due and payable prior to its expressed maturity; or any such

53

Indebtedness shall be required to be prepaid or redeemed (other than by a regularly scheduled prepayment or redemption), purchased or defeased or an offer to prepay, redeem, purchase or defease such Indebtedness shall be required to be made, in each case prior to the stated maturity thereof.

11.1.3    Other Material Obligations.    Default in the payment when due, or in the performance or observance of, any material obligation of, or condition agreed to by, the Company or any Subsidiary with respect to any material purchase or lease of goods or services, or any agreement with a Manufacturer, where such default, singly or in the aggregate with all other such defaults, might reasonably be expected to have a Material Adverse Effect; or default in the performance or observance by the Company or any Subsidiary of any of its obligations under any Dealer Franchise Agreement where such default might reasonably be expected to have a Material Adverse Effect.

11.1.4    Bankruptcy, Insolvency, etc.    The Company or any Subsidiary (other than an Unrestricted Subsidiary) becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or the Company or any Subsidiary (other than an Unrestricted Subsidiary) applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for the Company or such Subsidiary or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for the Company or such Subsidiary or for a substantial part of the property of any thereof and is not discharged within 60 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is commenced in respect of the Company or any Subsidiary (other than an Unrestricted Subsidiary), and if such case or proceeding is not commenced by the Company or such Subsidiary, it is consented to or acquiesced in by the Company or such Subsidiary, or remains for 60 days undismissed; or the Company or any Subsidiary (other than an Unrestricted Subsidiary) takes any action to authorize, or in furtherance of, any of the foregoing.

11.1.5    Non-Compliance with Loan Documents.    (a) Failure by the Borrower or the Company to comply with or to perform any covenant set forth in Section 9.1.5(a), 9.5 through 9.14, 9.19 through 9.21, 9.24 or 9.25 or (b) failure by the Borrower, the Company or any other Loan Party to comply with or to perform any other provision of this Agreement or any other Loan Document (and not constituting an Event of Default under any other provision of this Section 11) and continuance of such failure for 30 days.

11.1.6    Warranties.    Any warranty made by the Company or any Subsidiary herein or in any other Loan Document is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by the Company or any Subsidiary to the Agent or any Lender in connection herewith is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified.

54

11.1.7    Pension Plans.    (i) Institution of any steps by the Company or any other Person to terminate a Pension Plan if as a result of such termination the Company could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $5,000,000; (ii) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; or (iii) there shall occur any withdrawal or partial withdrawal from a Multiemployer Pension Plan and the withdrawal liability (without unaccrued interest) to Multiemployer Pension Plans as a result of such withdrawal (including any outstanding withdrawal liability that the Company and the Controlled Group have incurred on the date of such withdrawal) exceeds $5,000,000.

11.1.8    Judgments.    Final judgments which exceed an aggregate of $5,000,000 shall be rendered against the Company or any Subsidiary and shall not have been paid, discharged or vacated or had execution thereof stayed pending appeal within 30 days after entry or filing of such judgments.

11.1.9    Invalidity of Guaranty, etc.    The Guaranty shall cease to be in full force and effect with respect to any Subsidiary party thereto, other than by virtue of the release of such Subsidiary after sale thereof in a transaction permitted hereunder; or any Subsidiary (or any Person by, through or on behalf of such Subsidiary) shall contest in any manner the validity, binding nature or enforceability of the Guaranty with respect to such Subsidiary; or the provisions of Section 14 shall cease to be in full force and effect with respect to the Company; or the Company (or any Person by, through or on behalf of the Company) shall contest in any manner the validity, binding nature or enforceability of the provisions of Section 14.

11.1.10    Invalidity of Collateral Documents, etc.    Any Collateral Document shall cease to be in full force and effect; or the Company or any Subsidiary (or any Person by, through or on behalf of the Company or any Subsidiary) shall contest in any manner the validity, binding nature or enforceability of any Collateral Document.

11.1.11    Change in Control.    Any Change in Control shall occur.

11.2    Effect of Event of Default.    If any Event of Default described in Section 11.1.4 shall occur, the Commitments (if they have not theretofore terminated) shall immediately terminate and the Loans and all other obligations hereunder shall become immediately due and payable and the Borrower shall become immediately obligated to Cash Collateralize in full all amounts estimated by the Fronting Lender as being potentially payable under all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) then existing with any Manufacturer or Auction House, all without presentment, demand, protest or notice of any kind, and the Fronting Lender shall terminate all Drafting Agreements and all other Drafting arrangements (whether in writing or oral); and, if any other Event of Default shall occur and be continuing, (i) the Agent (upon written request of the Required Lenders) shall declare the Commitments (if they have not theretofore terminated) to be terminated and/or declare all Loans and all other

55

obligations hereunder to be due and payable and/or demand that the Borrower immediately Cash Collateralize in full all amounts estimated by the Fronting Lender as being potentially payable under all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) then existing with any Manufacturer or Auction House, whereupon the Commitments (if they have not theretofore terminated) shall immediately terminate and/or all Loans and all other obligations hereunder shall become immediately due and payable and/or the Borrower shall immediately become obligated to Cash Collateralize in full all amounts estimated by the Fronting Lender as being potentially payable under all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) then existing with any Manufacturer or Auction House, all without presentment, demand, protest or notice of any kind and (ii) the Fronting Lender in its sole discretion may, and at the request of the Required Lenders shall (and, to the extent the Commitments have been terminated, such request shall be deemed to have been made), terminate all Drafting Agreements and all other Drafting arrangements (whether in writing or oral). The Agent shall promptly advise the Borrower of any such declaration, but failure to do so shall not impair the effect of such declaration. Notwithstanding the foregoing, the effect as an Event of Default of any event described in Section 11.1.1 or Section 11.1.4 may be waived by the written concurrence of all of the Lenders, and the effect as an Event of Default of any other event described in this Section 11 may be waived by the written concurrence of the Required Lenders (except as provided in Section 13.1). Any cash collateral delivered hereunder shall be held by the Agent (without liability for interest thereon) and applied to obligations arising in connection with any funding of any Draft. After the expiration or termination of all Drafting Agreements and all other Drafting arrangements (whether in writing or oral), such cash collateral shall be applied by the Agent to any remaining obligations hereunder and any excess shall be delivered to the Borrower or as a court of competent jurisdiction may direct.

SECTION 12    THE AGENT.

12.1    Appointment and Authorization.    Each Lender hereby irrevocably (subject to Section 12.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duty or responsibility except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent.

12.2    Delegation of Duties.    The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent

56

shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care.

12.3    Liability of Agent.    None of the Agent nor any of its directors, officers, employees or agents shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Borrower, the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company’s Subsidiaries or Affiliates.

12.4    Reliance by Agent.    The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Borrower or the Company), independent accountants and other experts reasonably selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, confirmation from the Lenders of their obligation to indemnify the Agent against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders.

12.5    Notice of Default.    The Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default or Unmatured Event of Default except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Lenders, unless the Agent shall have received written notice from a Lender, the Borrower or the Company referring to this Agreement, describing such Event of Default or Unmatured Event of Default and stating that such notice is a “notice of default”. The Agent will notify the Lenders of its receipt of any such notice. The Agent shall take such action with respect to such Event of Default or Unmatured Event of Default as may be requested by the Required

57

Lenders in accordance with Section 11; provided that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default or Unmatured Event of Default as it shall deem advisable or in the best interest of the Lenders.

12.6    Credit Decision.    Each Lender acknowledges that the Agent has not made any representation or warranty to it, and that no act by the Agent hereafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and made its own decision to enter into this Agreement and to extend credit to the Borrower hereunder. Each Lender also represents that it will, independently and without reliance upon the Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by the Agent, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial or other condition or creditworthiness of the Borrower, the Company or any other Loan Party which may come into the possession of the Agent.

12.7    Indemnification.    Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent and its directors, officers, employees and agents (to the extent not reimbursed by or on behalf of the Company and the Borrower and without limiting the obligation of the Company and the Borrower to do so), pro rata, from and against any and all Indemnified Liabilities; provided that no Lender shall be liable for any payment to any such Person of any portion of the Indemnified Liabilities resulting from such Person’s gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company and the Borrower. The undertaking in this Section shall survive repayment of the Loans, termination of the Commitments, cancellation of the Notes, expiration or termination of the Drafting Agreements, any foreclosure under, or modification, release or discharge of, any or all of the Collateral Documents, termination of this Agreement and the resignation or replacement of the Agent.

58

12.8    Agent in Individual Capacity.    DCSNA and its Affiliates may make loans to, issue letters of credit for the account of, acquire equity interests in and generally engage in any kind of business with the Company and its Subsidiaries and Affiliates as though DCSNA were not the Agent or the Fronting Lender hereunder and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, DCSNA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Affiliate) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to their Loans (if any), DCSNA and its Affiliates shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though DCSNA were not the Agent or the Fronting Lender, and the terms “Lender” and “Lenders” include DCSNA and its Affiliates, to the extent applicable, in their individual capacities.

12.9    Successor Agent.    The Agent may resign as Agent upon 120 days’ notice to the Lenders and the Borrower. If the Agent resigns under this Agreement, the Required Lenders shall, with (so long as no Event of Default exists) the consent of the Borrower (which shall not be unreasonably withheld or delayed), appoint from among the Lenders a successor agent for the Lenders. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Lenders and the Borrower, a successor agent from among the Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term “Agent” shall mean such successor agent, and the retiring Agent’s appointment, powers and duties as Agent shall be terminated. After any retiring Agent’s resignation hereunder as Agent, the provisions of this Section 12 and Sections 13.6 and 13.13 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent’s notice of resignation, the retiring Agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above.

12.10    Collateral Matters.    The Lenders irrevocably authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent under any Collateral Document (i) upon termination of the Commitments and payment in full of all Loans and all other obligations of the Borrower hereunder and the expiration or termination of all Drafting Agreements and all other Drafting arrangements (whether in writing or oral); (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; or (iii) subject to Section 13.1, if approved, authorized or ratified in writing by the Required Lenders. Upon request by the Agent at any time, the Lenders will confirm in writing the Agent’s authority to release particular types or items of collateral pursuant to this Section 12.10.

59

12.11    Funding Reliance.    (a)    Unless the Agent receives notice from a Lender by noon, Detroit time, on the day of a proposed borrowing that such Lender will not make available to the Agent an amount equal to its pro rata share of such borrowing, the Agent may assume that such Lender has made such amount available to the Agent and, in reliance upon such assumption, make a corresponding amount available to the Borrower. If and to the extent such Lender has not made such amount available to the Agent, such Lender and the Borrower jointly and severally agree to repay such amount to the Agent forthwith on demand, together with interest thereon at the interest rate applicable to Loans comprising such borrowing or, in the case of any Lender which repays such amount within three Business Days, the Federal Funds Rate. Nothing set forth in this clause (a) shall relieve any Lender of any obligation it may have to make any Loan hereunder.

(b)    Unless the Agent receives notice from the Borrower prior to the due date for any payment hereunder that the Borrower does not intend to make such payment, the Agent may assume that the Borrower has made such payment and, in reliance upon such assumption, make available to each Lender its share of such payment. If and to the extent that the Borrower has not made any such payment to the Agent, each Lender which received a share of such payment shall repay such share (or the relevant portion thereof) to the Agent forthwith on demand, together with interest thereon at the Interest Rate (or, in the case of any Lender which repays such amount within three Business Days, the Federal Funds Rate). Nothing set forth in this clause (b) shall relieve the Borrower of any obligation it may have to make any payment hereunder.

60

SECTION 13    GENERAL.

13.1    Waiver; Amendments.    No delay on the part of the Agent or any Lender in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the Notes shall in any event be effective unless the same shall be in writing and signed and delivered by Lenders having an aggregate Total Percentage of not less than the aggregate Total Percentage expressly designated herein with respect thereto or, in the absence of such designation as to any provision of this Agreement or the Notes, by the Required Lenders, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, the Lenders authorize the Agent to act within its discretion (and without notice to or the consent of any Lender) to waive or forbear on behalf of all Lenders any noncompliance by the Borrower or the Company (other than a waiver of, or forbearance with respect to, any Event of Default under Section 11.1.4 and other than a waiver of any Event of Default under Section 11.1.1) with this Agreement (provided that no such waiver shall be for a period in excess of 90 days). No amendment, modification, waiver or consent shall change the Total Percentage of any Lender without the consent of such Lender. No amendment, modification, waiver or consent shall (i) increase the Revolving Commitment Amount, (ii) extend the date for payment of any principal of or interest on the Loans or any fees payable hereunder, (iii) reduce the principal amount of any Loan, the rate of interest thereon or any fees payable hereunder, (iv) release the Guaranty, release the Company from the provisions of Section 14 or release all or any substantial part of the collateral granted under the Collateral Documents or (v) reduce the aggregate Total Percentage required to effect an amendment, modification, waiver or consent without, in each case, the consent of all Lenders. No provision of Section 12 or other provision of this Agreement affecting the Agent in its capacity as such shall be amended, modified or waived without the consent of the Agent. No provision of this Agreement relating to the rights or duties of the Fronting Lender in its capacity as such shall be amended, modified or waived without the consent of the Fronting Lender.

13.2    Confirmations.    The Borrower and each holder of a Note agree from time to time, upon written request received by it from the other, to confirm to the other in writing (with a copy of each such confirmation to the Agent) the aggregate unpaid principal amount of the Loans then outstanding under such Note.

13.3    Notices.    Except as otherwise provided in Section 2.2, all notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown on Schedule 13.3 or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service

61

shall be deemed to have been given when received. For purposes of Section 2.2, the Agent shall be entitled to rely on telephonic instructions from any person that the Agent in good faith believes is an authorized officer or employee of the Borrower, and the Borrower shall hold the Agent and each other Lender harmless from any loss, cost or expense resulting from any such reliance.

13.4    Computations.    Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purpose of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be made in accordance with GAAP, consistently applied; provided that if the Company notifies the Agent that the Company wishes to amend any covenant in Section 9 to eliminate or to take into account the effect of any change in GAAP or any change in the Company’s application of GAAP on the operation of such covenant (or if the Agent notifies the Company that the Required Lenders wish to amend Section 9 for such purpose), then the Company’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP or the relevant change in the Company’s application of GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Lenders. The Company may notify the Agent of any one-time adjustments to its financial statements and after the giving of such notice the Company and the Lenders shall negotiate in good faith to make arrangements (including, if the Agent determines the same is necessary, entering into an amendment hereto) to take the consequences of such adjustment into account.

13.5    Regulation U.    Each Lender represents that it in good faith is not relying, either directly or indirectly, upon any Margin Stock as collateral security for the extension or maintenance by it of any credit provided for in this Agreement.

13.6  Costs, Expenses and Taxes.    The Company and the Borrower jointly and severally agree to pay on demand all reasonable out-of-pocket costs and expenses of the Agent (including Attorney Costs) in connection with the preparation, execution, syndication, delivery and administration of this Agreement, the other Loan Documents and all other documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendment, supplement or waiver to any Loan Document), and all out-of-pocket costs and expenses (including Attorney Costs) incurred by the Agent and each Lender after an Event of Default in connection with the enforcement of this Agreement, the other Loan Documents or any such other documents. In addition, the Company and the Borrower jointly and severally agree to pay, and to save the Agent and the Lenders harmless from all liability for, (a) any stamp or other taxes (excluding income taxes and franchise taxes based on net income) which may be payable in connection with the execution and delivery of this Agreement, the borrowings hereunder, the issuance of the Notes or the execution and delivery of any other Loan Document or any other document provided for herein or delivered or to be delivered hereunder or in connection herewith and (b) any fees of the Company’s auditors in connection with any exercise by the Agent and the

62

Lenders of their rights pursuant to Section 9.2. All obligations provided for in this Section 13.6 shall survive repayment of the Loans, termination of the Commitments, cancellation of the Notes, expiration of the Drafting Agreements and termination of this Agreement.

13.7    Subsidiary References.    The provisions of this Agreement relating to Subsidiaries shall apply only during such times as the Company has one or more Subsidiaries.

13.8    Captions.    Section captions used in this Agreement are for convenience only and shall not affect the construction of this Agreement.

13.9    Assignments; Participations.

13.9.1    Assignments.    Any Lender may, with the prior written consent of the Agent and (so long as no Event of Default exists) the Borrower (which consents shall not be unreasonably delayed or withheld and, in any event, shall not be required for an assignment by a Lender to one of its Affiliates or to any other Lender), at any time assign and delegate to one or more commercial banks or other Persons (any Person to whom such an assignment and delegation is to be made being herein called an “Assignee”) all or any fraction of such Lender’s Loans and Commitment (which assignment and delegation shall be of a constant, and not a varying, percentage of all the assigning Lender’s Loans and Commitment) in a minimum aggregate amount equal to the lesser of (i) the amount of the assigning Lender’s Revolving Percentage of the Revolving Commitment Amount plus such Lender’s Term Loans and (ii) $50,000,000; provided that (a) no assignment and delegation may be made to any Person if, at the time of such assignment and delegation, the Borrower would be obligated to pay any greater amount under Section 7.6 to the Assignee than the Borrower is then obligated to pay to the assigning Lender under such Section (and if any assignment is made in violation of the foregoing, the Borrower will not be required to pay the incremental amounts) and (b) the Borrower and the Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned and delegated to an Assignee until the date when all of the following conditions shall have been met:

(x) five Business Days (or such lesser period of time as the Agent and the assigning Lender shall agree) shall have passed after written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee, shall have been given to the Borrower and the Agent by such assigning Lender and the Assignee,

(y) the assigning Lender and the Assignee shall have executed and delivered to the Borrower and the Agent an assignment agreement substantially in the form of Exhibit G (an “Assignment Agreement”), together with any documents required to be delivered thereunder, which Assignment Agreement shall have been accepted by the Agent, and

63

(z) except in the case of an assignment by a Lender to one of its Affiliates, the assigning Lender or the Assignee shall have paid the Agent a processing fee of $3,500.

From and after the date on which the conditions described above have been met, (x) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (y) the assigning Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it pursuant to such Assignment Agreement, shall be released from its obligations hereunder. Within five Business Days after effectiveness of any assignment and delegation, the Borrower shall execute and deliver to the Agent (for delivery to the Assignee) a new Note (unless the Assignee was already a holder of a Note immediately prior to such effectiveness). Each such Note shall be dated the effective date of such assignment. Accrued interest on that part of the predecessor Note being assigned shall be paid as provided in the Assignment Agreement. Accrued interest and fees on that part of the predecessor Note not being assigned shall be paid to the assigning Lender. Accrued interest and accrued fees shall be paid at the same time or times provided in the predecessor Note and in this Agreement. Any attempted assignment and delegation not made in accordance with this Section 13.9.1 shall be null and void.

Notwithstanding the foregoing provisions of this Section 13.9.1 or any other provision of this Agreement, any Lender may at any time assign all or any portion of its Loans and its Note to a Federal Reserve Bank (but no such assignment shall release any Lender from any of its obligations hereunder).

13.9.2    Participations.    Any Lender may at any time sell to one or more commercial banks or other Persons participating interests in any Loan owing to such Lender, the Note held by such Lender, the Commitment of such Lender or any other interest of such Lender hereunder (any Person purchasing any such participating interest being herein called a “Participant”). In the event of a sale by a Lender of a participating interest to a Participant, (x) such Lender shall remain the holder of its Note for all purposes of this Agreement, (y) the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations hereunder and (z) all amounts payable by the Borrower shall be determined as if such Lender had not sold such participation and shall be paid directly to such Lender. No Participant shall have any direct or indirect voting rights hereunder except with respect to any of the events described in the fourth sentence of Section 13.1. Each Lender agrees to incorporate the requirements of the preceding sentence into each participation agreement which such Lender enters into with any Participant. The Borrower agrees that if amounts outstanding under this Agreement and the Notes are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement and any Note to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement or such Note; provided that such right of setoff shall be subject to the obligation of each Participant to share with the Lenders, and the Lenders agree to share with each Participant, as provided in

64

Section 7.5.    The Borrower also agrees that each Participant shall be entitled to the benefits of Section 7.6 as if it were a Lender (provided that no Participant shall receive any greater compensation pursuant to Section 7.6 than would have been paid to the participating Lender if no participation had been sold).

13.10    Governing Law.    This Agreement and each Note shall be a contract made under and governed by the laws of the State of Michigan applicable to contracts made and to be performed entirely within such State. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. All obligations of the Borrower and the Company and rights of the Agent and the Lenders expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law.

13.11    Counterparts.    This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement.

13.12    Successors and Assigns.    This Agreement shall be binding upon the Borrower, the Company, the Lenders and the Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Company, the Lenders and the Agent and the successors and assigns of the Lenders and the Agent.

13.13    Indemnification by the Company and the Borrower.    In consideration of the execution and delivery of this Agreement by the Agent and the Lenders and the agreement to extend the Commitments provided hereunder, the Company and the Borrower hereby jointly and severally agree to indemnify, exonerate and hold the Agent, each Lender and each of the officers, directors, employees, Affiliates and agents of the Agent and each Lender (each a “Lender Party”) free and harmless from and against any and all actions, causes of action, suits, losses, liabilities, damages and expenses, including Attorney Costs (collectively, the “Indemnified Liabilities”), incurred by the Lender Parties or any of them as a result of, or arising out of, or relating to (i) any tender offer, merger, purchase of stock, purchase of assets or other similar transaction financed or proposed to be financed in whole or in part, directly or indirectly, with the proceeds of any of the Loans, (ii) the use, handling, release, emission, discharge, transportation, storage, treatment or disposal of any hazardous substance at any property owned or leased by the Company or any Subsidiary, (iii) any violation of any Environmental Law with respect to conditions at any property owned or leased by the Company or any Subsidiary or the operations conducted thereon, (iv) the investigation, cleanup or remediation of offsite locations at which the Company or any Subsidiary or their respective predecessors are alleged to have directly or indirectly disposed of hazardous substances (it being understood that such indemnity shall not

65

apply to the extent any such liabilities are finally determined by a court to have been caused by a Lender Party’s involvement at such offsite location) or (v) the execution, delivery, performance or enforcement of this Agreement or any other Loan Document by any of the Lender Parties, except for any such Indemnified Liabilities arising on account of the applicable Lender Party’s gross negligence or willful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Company and the Borrower hereby jointly and severally agree to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. All obligations provided for in this Section 13.13 shall survive repayment of the Loans, termination of the Commitments, cancellation of the Notes, expiration of the Drafting Agreements, any foreclosure under, or any modification, release or discharge of, any or all of the Collateral Documents and termination of this Agreement.

13.14    Nonliability of Lenders.    The relationship between the Borrower on the one hand and the Lenders and the Agent on the other hand shall be solely that of borrower and lender. Neither the Agent nor any Lender shall have any fiduciary responsibility to the Borrower or the Company. Neither the Agent nor any Lender undertakes any responsibility to the Company or the Borrower to review or inform the Company or the Borrower of any matter in connection with any phase of the Company’s or the Borrower’s business or operations. Each of the Borrower and the Company agrees that neither the Agent nor any Lender shall have liability to the Borrower or the Company (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower or the Company in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. Neither the Agent nor any Lender shall have any liability with respect to, and each of the Borrower and the Company hereby waives, releases and agrees not to sue for, any special, indirect or consequential damages suffered by the Borrower or the Company in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby.

13.15    Consent to Jurisdiction.    EACH OF THE BORROWER AND THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF MICHIGAN AND OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN FOR THE PURPOSE OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. EACH OF THE BORROWER AND THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF MICHIGAN. EACH OF THE BORROWER AND THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW

66

OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

13.16    Waiver of Jury Trial.    EACH OF THE BORROWER, THE COMPANY, THE AGENT AND EACH LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

13.17    Confidentiality.    Each Lender agrees to take, and to cause its Affiliates to take, normal and reasonable precautions and exercise due care to maintain the confidentiality of all non-public information provided to it by the Company or any Subsidiary or by Circuit City, or by the Agent on the Company’s or any Subsidiary’s or Circuit City’s behalf, under this Agreement or any other Loan Document, and neither such Lender nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary or Circuit City, except to the extent such information was or becomes generally available to the public other than as a result of disclosure by such Lender or was or becomes available on a non-confidential basis from a source other than the Company, a Subsidiary or Circuit City (provided that such source is not bound by a confidentiality agreement with the Company or any Subsidiary known to such Lender); provided, however, that any Lender may disclose such information (A) at the request or pursuant to any requirement of any governmental authority to which such Lender is subject or in connection with an examination of such Lender by any such authority, (B) pursuant to subpoena or other court process, when required to do so in accordance with the provisions of any applicable requirement of law, (C) to the extent reasonably required in connection with any litigation or proceeding to which the Agent or any Lender or any of their respective Affiliates may be party, (D) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document, (E) to such Lender’s independent auditors and other professional advisors, (F) to any participant or assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Lenders hereunder, (G) as to any Lender or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company, any Subsidiary or Circuit City is party or is deemed party with such Lender or such Affiliate, (H) to its Affiliates and (I) to any nationally recognized rating agency that requires access to information about such Lender’s investment portfolio in connection with ratings issued to such Lender.

67

SECTION 14 GUARANTY.

14.1    The Guaranty.    The Company hereby unconditionally and irrevocably guarantees (as primary obligor and not merely as surety) to the Lenders and the Agent, and to each of them, the due and punctual payment, observance and performance of all of the Guaranteed Obligations when and as due, whether at maturity, by acceleration, mandatory prepayment or otherwise, according to the terms hereof and thereof, and the Company hereby unconditionally and irrevocably agrees to cause payment or performance of the Guaranteed Obligations to be made punctually as and when the same shall become due upon demand. This guaranty shall be of payment and performance and not of collection merely.

14.2    Guaranty Unconditional.    The obligations of the Company under this Section 14 shall be continuing, unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by:

(a)    any extension, renewal, settlement, compromise, waiver or release in respect of any Guaranteed Obligation, by operation of law or otherwise;

(b)    any modification or amendment of or supplement to any Loan Document;

(c)    any modification, amendment, waiver, release, non-perfection or invalidity of any direct or indirect security, or of any Guarantee or other liability of any third party, for any Guaranteed Obligation;

(d)    any change in the corporate existence, structure or ownership of the Borrower or any other Loan Party, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower or any other Loan Party or its assets or any resulting release or discharge of any Guaranteed Obligation;

(e)    the existence of any claim, setoff or other right which the Company may have at any time against the Borrower, the Agent, any Lender or any other Person, whether or not arising in connection with the Loan Documents;

(f)    any invalidity or unenforceability relating to or against the Borrower or any other Loan Party for any reason of the whole or any provision of any Loan Document, or any provision of applicable law purporting to prohibit the payment or performance by the Borrower of the Guaranteed Obligations; or

(g)    any other act or omission of any kind to act or delay by the Borrower, any other Loan Party, the Agent, any Lender or any other Person or any other circumstance whatsoever that might, but for the provisions of this Section 14.2, constitute a legal or equitable discharge of the obligations of the Company under this Section 14.

68

14.3    Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances.    The Company’s obligations under this Section 14 shall remain in full force and effect until all of the Commitments shall have expired or been terminated and all of the Guaranteed Obligations shall have been paid in full in cash. If at any time all or any part of any payment previously applied to any Guaranteed Obligation is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, the obligations of the Company under this Section 14 with respect to such payment shall be reinstated at such time as though such payment had not been made at such time.

14.4    Waiver.    The Company irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Borrower or any other Person or any collateral. The Company hereby expressly waives (a) notice of the acceptance by the Agent or any Lender of this Section 14 and (b) notice of the existence or creation or nonpayment of all or any of the Guaranteed Obligations.

14.5    Stay of Acceleration.    If acceleration of the time for payment of any amount payable by the Borrower under any Loan Document is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of the Loan Documents shall nonetheless be payable by the Company hereunder forthwith on demand by the Agent.

14.6    Delay of Subrogation.    Notwithstanding any payment made by or for the account of the Company pursuant to this Section 14, the Company shall not be subrogated to any right of the Agent or any Lender until such time as the Agent and each Lender shall have received final payment in cash of the full amount of the Guaranteed Obligations.

69

Delivered at Detroit, Michigan as of the day and year first above written.

CARMAX AUTO SUPERSTORES, INC.

By

Title

CARMAX, INC.

By

Title

DAIMLERCHRYSLER SERVICES NORTH

AMERICA LLC, as Agent and as a Lender

By

Title

TOYOTA MOTOR CREDIT CORPORATION,

as a Lender

By

Title

70

EXHIBIT A

FORM OF

NOTE

            , 200  

Detroit, Michigan

The undersigned, for value received, promises to pay to the order of                          (the “Lender”) at the principal office of DaimlerChrysler Services North America LLC (the “Agent”) in Southfield, Michigan the aggregate unpaid amount of all Loans made to the undersigned by the Lender pursuant to the Credit Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of the Lender), such principal amount to be payable on the dates set forth in the Credit Agreement.

The undersigned further promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America.

This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Credit Agreement, dated as of May 17, 2002 (as amended or otherwise modified from time to time, the “Credit Agreement”; capitalized terms not otherwise defined herein are used herein as defined in the Credit Agreement), among the undersigned, CarMax, Inc., certain financial institutions (including the Lender) and the Agent, to which Credit Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated.

This Note is made under and governed by the laws of the State of Michigan applicable to contracts made and to be performed entirely within such State.

CARMAX AUTO SUPERSTORES, INC.

By:

Title:

A-1

Schedule attached to Note dated             , 200   of CARMAX AUTO SUPERSTORES, INC.

payable to the order of                         

Date and Amount of Loan Date and Amount of Repayment Maturity Date Unpaid Principal Balance Notation Made by

A-2

EXHIBIT B

FORM OF COMPLIANCE CERTIFICATE

I,            , the duly elected, qualified and acting [Chief Financial Officer/Treasurer] of CarMax, Inc., a Virginia corporation (the “Company”), DO HEREBY CERTIFY, pursuant to Section 9.1.3 of the Credit Agreement dated as of May 17, 2002 (as amend, supplemented or otherwise modified from time to time, the “Credit Agreement”; capitalized terms used herein without definition have the meanings assigned thereto in, and Section references are to, the Credit Agreement ) among CarMax Auto Superstores, Inc., the Company, the financial institutions named therein and DaimlerChrysler Services North America LLC, as Agent for the Lenders, as follows:

Enclosed herewith is a copy of the [annual audited/quarterly] report of the Company as at [     ], 200[            ] (the “Computation Date”), which report fairly presents in all material respects the financial condition and results of operations [(subject to the absence of footnotes and to normal year-end adjustments)] of the Company as of the Computation Date and has been prepared in accordance with GAAP consistently applied.

A review of the activities of the Company during the Fiscal Quarter ended has been made under my supervision, and the Company has observed, performed and fulfilled each and every obligation and covenant contained in the Credit Agreement and no Event of Default or Unmatured Event of Default exists.

Set forth below are computations in reasonable detail, as of the end of             , of compliance with Section 9.6 of the Credit Agreement:

I.    Current Ratio (Section 9.6.1)

A.    Consolidated Current Assets:

B.    Consolidated Current Liabilities:

C.    Permitted Ratio of A to B: Not less than 1.5:1.0.

RATIO:

II.    Ratio of Total Liabilities to Consolidated Tangible Net Worth (Section 9.6.2)

A.    Total Liabilities:

B.    Consolidated Tangible Net Worth:

B-1

1.    Stockholder’s equity:

2.    MINUS Asset write-up:

3.    MINUS Treasury stock:

4.    MINUS Intangibles:

5.    MINUS Net capital contributions to and Investments in Unrestricted Subsidiaries (to the extent not otherwise eliminated in the consolidation of the balance sheet of the Company and its Subsidiaries):

6.    TOTAL:

C.    Permitted Ratio of A to B: Not greater than 2.0:1.0.

RATIO:

III.    Fixed Charge Coverage Ratio (Section 9.6.3)

A.    Net Income:

1.    MINUS Gains from Asset Sales:

2.    MINUS EXTRAORDINARY GAINS:

3.    MINUS Gains from Discontinued Operations:

4.    TOTAL (Consolidated Net Income):

B.    EBITDAR:

1.    Consolidated Net Income (Item III.A.4):

2.    PLUS Interest Expense:

3.    PLUS Rental Expense:

4.    PLUS Income Tax Expense:

5.    PLUS Depreciation:

6.    PLUS Amortization:

B-2

7.    TOTAL (EBITDAR):

C.    Adjusted EBITDAR:

1.    EBITDAR (Item III.B.7):

2.    MINUS Income Taxes Paid:

3.    MINUS Capital Expenditures (other than Financed Capital Expenditures):

4.    TOTAL (Adjusted EBITDAR):

D.    Interest Expense:

E.    Rental Expense:

F.    TOTAL D PLUS E:

G.    Permitted Ratio of C.4 to F: Not less than 1.25:1.0.

RATIO:

IV.    Financed Capital Expenditures (Section 9.1.3)

A.    Financed Capital Expenditures this period:

B.    Aggregate Financed Capital Expenditures from Closing Date:

IN WITNESS WHEREOF, I have signed this certificate this             day of            , 200     .

CARMAX, INC.

By: ____________________

        Name:

        Title: [Chief Financial Officer/Treasurer]

B-3

EXHIBIT I

FORM OF BORROWING BASE CERTIFICATE

To:    DaimlerChrysler Services North America LLC, as Agent

Ladies and Gentlemen:

Please refer to the Credit Agreement dated as of May 17, 2002 (as amended or otherwise modified from time to time, the “Credit Agreement”) among CarMax Auto Superstores, Inc. (the “Borrower”), CarMax, Inc. (the “Company”), various financial institutions and DaimlerChrysler Services North America LLC, as agent. This certificate (this “Certificate”), together with supporting calculations attached hereto, is delivered to you pursuant to the terms of the Credit Agreement. Capitalized terms used but not otherwise defined herein shall have the same meanings herein as in the Credit Agreement.

The Company hereby certifies and warrants to the Agent and the Lenders that at the close of business on             , 200     (the “Calculation Date”), the Borrowing Base¹ was $            , computed as set forth on the schedule attached hereto. The Company hereby further certifies and warrants that as of the close of business on the Calculation Date the aggregate final cost of all Securitization Repossessions was less than 1% of the Borrowing Base.²

IN WITNESS WHEREOF, the Company has caused this Certificate to be executed and delivered by its officer thereunto duly authorized on             , 200    .

1 See definition of Borrowing Base — such term does not include Motor Vehicles subject to any Lein, other than Permitted Liens of the type described in clauses (i), (ii), (iii) and (x) of the definition of Permitted Lein. The Borrowing Base shall not include any Motor Vehicle securing a Transferred Receivable (as defined in the Security Agreement), which Motor Vehicle has been returned to, repossessed by or foreclosed on by the Company or any Subsidiary.

2 If the Company is unable to certify as set forth in this sentence, it must deduct the final cost of all Securitization Repossessions from the Borrowing Base.

I-1

CARMAX, INC.

By: _______________________

Title: _____________________

I-2

SCHEDULE TO BORROWING BASE CERTIFICATE

Dated as of [            ]

I-3

EX-10.12

Exhibit 10.12

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (this “Agreement”) dated as of May 17, 2002, is among CARMAX AUTO SUPERSTORES, INC. (the “Borrower”); the other persons or entities which are listed on the signature pages hereof as debtors or which from time to time become parties hereto as debtors (collectively, including the Borrower, the “Debtors” and individually each a “Debtor”); and DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC (“DCSNA”), in its capacity as agent for the Lenders referred to below (in such capacity, the “Agent”).

W I T N E S S E T H:

WHEREAS, the Borrower, CarMax, Inc. (the “Company”), various financial institutions (the “Lenders”) and the Agent have entered into a Credit Agreement dated as of the date hereof (as amended or otherwise modified from time to time, the “Credit Agreement”), pursuant to which the Lenders have agreed to make extensions of credit to the Borrower;

WHEREAS, each of the Debtors (other than the Borrower) has executed and delivered a guaranty (as amended or otherwise modified from time to time, the “Guaranty”; for the avoidance of doubt, such term includes the guaranty of the Company pursuant to the provisions of Section 14 of the Credit Agreement) of all obligations of the Borrower under the Credit Agreement; and

WHEREAS, the obligations of the Borrower under the Credit Agreement and the obligations of each other Debtor under the Guaranty are to be secured pursuant to this Agreement;

NOW, THEREFORE, for and in consideration of any loan, advance or other financial accommodation heretofore or hereafter made to the Borrower under or in connection with the Credit Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.    Definitions.    When used herein, (a) the terms, Account, Chattel Paper, Commercial Tort Claim, Document, General Intangible, Instrument and Payment Intangible have the respective meanings assigned thereto in the UCC (as defined below); (b) capitalized terms used but not defined herein are used as defined in the Credit Agreement; and (c) the following terms have the following meanings (such definitions to be applicable to both the singular and plural forms of such terms):

Assignee Deposit Account—see Section 4.

Automobile Inventory means Motor Vehicles, and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor.

Collateral means, with respect to any Debtor, all property and rights of such Debtor in which a security interest is granted hereunder.

Collections means all payments and items of payment (including, without limitation, cash and Instruments) that are received by the Debtors from or on behalf of any Obligor in payment of any amounts owed (including invoice prices, finance charges, interest and all other charges, if any) in respect of any Receivable or Related Asset, or otherwise applied to repay or discharge any Receivable (including insurance payments that the Debtors apply in the ordinary course of its business to amounts owed in respect of such Receivable and net proceeds of sale or other disposition of repossessed goods that were the subject of such Receivable).

Contracts means, with respect to any Receivable, the agreements (including, without limitation, Chattel Paper and Instruments) between the Debtors and the related Obligors governing the terms and conditions of such Receivable.

Contributed Receivable means a Receivable contributed by a Debtor to an SPE in connection with a Securitization.

Default means the occurrence of any Event of Default.

Intellectual Property means all past, present and future: trade secrets and other proprietary information; trademarks, service marks, trade names, business names, designs, logos, indicia and other source and/or business identifiers, and the goodwill of the business relating thereto and all registrations or applications for registration which have heretofore been or may hereafter be issued thereon throughout the world; copyrights (including copyrights for computer programs) and copyright registrations or applications for registration which have heretofore been or may hereafter be issued throughout the world and all tangible property embodying the copyrights; unpatented inventions (whether or not patentable); patent applications and patents; industrial designs, industrial design applications and registered industrial designs; license agreements related to any of the foregoing and income therefrom; books, records, writings, computer tapes or disks, flow diagrams, specification sheets, source codes, object codes and other physical manifestations, embodiments or incorporations of any of the foregoing; the right to sue for all past, present and future infringements of any of the foregoing; and all common law and other rights throughout the world in and to all of the foregoing.

Liabilities means, as to each Debtor, all obligations (monetary or otherwise) of such Debtor under or in connection with the Credit Agreement, any Note, the Guaranty, any other Loan Document and any other document or instrument executed in connection therewith, in each case

2

howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due.

Obligor means a Person obligated to make payments on a Receivable.

Purchased Receivable means a Receivable purchased by an SPE in a Securitization.

Receivable means an Account, Chattel Paper, Document, General Intangible, Instrument or Payment Intangible arising from the sale or lease of Motor Vehicles.

Related Assets means, with respect to any Receivable: (a) all Contracts that relate to such Receivable; (b) the merchandise (including returned merchandise), if any, relating to the sale which gave rise to such Receivable; (c) all other security interests or liens and property subject thereto from time to time purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise; (d) all UCC financing statements covering any collateral securing payment of such Receivable; and (e) all guarantees and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise.

Returned Goods means all right, title and interest of the Debtors in and to goods and/or merchandise, the sale of which gave rise to Receivables (other than Transferred Receivables), that have been returned to, repossessed by or foreclosed on by any Debtor.

Subject Receivables means any Receivables, other than Transferred Receivables and Receivables sold by any Debtor to a Person not an Affiliate in the ordinary course of business.

Transferred Receivables means all Purchased Receivables and Contributed Receivables.

UCC means the Uniform Commercial Code as in effect from time to time in the State of Michigan; provided that, as used in Section 10 hereof, “UCC” shall mean the Uniform Commercial Code as in effect from time to time in any applicable jurisdiction.

2.    Grant of Security Interest.    As security for the payment of all Liabilities, each Debtor hereby assigns to the Agent for the benefit of the Lenders, and grants to the Agent for the benefit of the Lenders a continuing security interest in, the following, whether now or hereafter existing or acquired:

(i)  all of such Debtor’s Automobile Inventory;

(ii)  all of such Debtor’s rights against Manufacturers arising out of the purchase of Automobile Inventory from such Manufacturers;

3

(iii)  all of such Debtor’s rights to receive payment (whether arising from any sale or other disposition or any collection or distribution) from any Person in connection with such Debtor’s transfer of a Receivable to such Person, including, without limitation, all rights to payment pursuant to any agreement pursuant to which such Receivable was transferred to such Person (but excluding any right of such Debtor to receive payments in its capacity as servicer of a Transferred Receivable or of a Contract related to a Transferred Receivable); and

(iv)  all Collections received by such Debtor on account of any Subject Receivables;

together with all books, records, writings, data bases, information and other property relating to, used or useful in connection with, or evidencing, embodying, incorporating or referring to any of the foregoing, and all proceeds, products, offspring, rents, issues, profits and returns of and from, and any and all claims and/or insurance payments arising out of the loss, nonconformity or interference with the use of, defects or infringements of rights in, or damage to, any of the foregoing; provided that:

(x)  the property in which a security interest is granted hereunder shall not include or continue into any Receivable (or any Related Asset related to such Receivable);

(y)  nothing in the foregoing clause (x) shall be deemed to constitute a release by the Agent of: (A) its lien on and security interest in the proceeds received by any Debtor from or on behalf of any SPE or other Person for any sale of Receivables and Related Assets (including, without limitation, cash payments made by an SPE or other Person and any note or other Instrument issued by an SPE or other Person in favor of a Debtor in connection with any such sale), (B) any lien, claim, encumbrance or security interest the Agent may have in Collections of Subject Receivables, (C) any lien, claim, encumbrance or security interest the Agent may have as against any interest of a Debtor in Returned Goods, and (D) any other Collateral not constituting Receivables and Related Assets related to Receivables; and

(z)  so long as any Ford Restriction exists, the Collateral shall not include, and Kenosha shall be deemed not to have granted a security interest in, any New Motor Vehicle of the Ford, Lincoln or Mercury makes that is held by Kenosha.

3.    Warranties.    Each Debtor warrants that as of the date hereof (or as of the date such Debtor becomes a party hereto by delivering a counterpart hereof) and as of each date on which the representations and warranties under the Credit Agreement and the other Loan Documents shall be made: (i) no financing statement (other than any which may have been filed on behalf of the Agent or in connection with liens expressly permitted by the Credit Agreement (“Permitted Liens”)) covering any of the Collateral is on file in any public office; (ii) such Debtor is and will be the lawful owner of all Collateral in which it has granted a security interest hereunder, free of all liens and

4

claims whatsoever, other than the security interest hereunder and Permitted Liens, with full power and authority to execute this Agreement and perform such Debtor’s obligations hereunder, and to subject such Collateral to the security interest hereunder; (iii) all information with respect to such Collateral set forth in any schedule, certificate or other writing at any time heretofore or hereafter furnished by such Debtor to the Agent or any Lender is and will be true and correct in all material respects as of the date furnished; (iv) such Debtor’s state of incorporation/organization, organizational identification number, chief executive office and principal place of business are as set forth on Schedule I hereto (and such Debtor has not maintained its chief executive office and principal place of business at any other location at any time after January 1, 2001); (v) each other location where such Debtor maintains a place of business is set forth on Schedule II hereto; (vi) except as set forth on Schedule III hereto, such Debtor is not now known and during the five years preceding the date hereof has not previously been known by any trade name; (vii) except as set forth on Schedule III hereto, during the five years preceding the date hereof such Debtor has not been known by any legal name different from the one set forth on the signature pages of this Agreement nor has such Debtor been the subject of any merger or other corporate reorganization; (viii) such Debtor is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation or a limited liability company duly formed and validly existing under the laws of the state of its organization; (ix) the execution and delivery of this Agreement and the performance by such Debtor of its obligations hereunder are within such Debtor’s corporate or limited liability company powers, have been duly authorized by all necessary corporate or limited liability company action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws or other organizational documents of such Debtor or of any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon such Debtor; (x) this Agreement is a legal, valid and binding obligation of such Debtor, enforceable against such Debtor in accordance with its terms, except that the enforceability of this Agreement may be limited by bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors’ rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (xi) such Debtor is in compliance in all material respects with the requirements of all applicable laws (including the provisions of the Fair Labor Standards Act), rules, regulations and orders of every governmental authority; and (xii) each Debtor that owns Motor Vehicles covered by certificates of title is and shall continue to be in the business of selling goods of that kind.

4.    Collections, etc.    Until such time during the existence of a Default as the Agent shall notify such Debtor of the revocation of such power and authority, each Debtor may, in the ordinary course of its business, at its own expense, sell, lease or furnish under contracts of service any of the Automobile Inventory normally held by such Debtor for such purpose, use and consume, in the ordinary course of its business, any raw materials, work in process or materials normally held by such Debtor for such purpose, and use, in the ordinary course of its business (but subject to the terms of the Credit Agreement), the cash proceeds of Collateral and other money which constitutes

5

Collateral. The Agent may, at any time that a Default exists, whether before or after any revocation of such power and authority or the maturity of any of the Liabilities, notify any parties obligated on any of the Subject Receivables to make payment to the Agent of any amounts due or to become due thereunder (but only if the applicable Debtor shall have failed, within two Business Days after having been requested in writing to do so by the Agent, to notify such parties to make payment of such amounts to the Agent) and enforce collection of any of the Subject Receivables by suit or otherwise and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby.

Upon request by the Agent during the existence of a Default, each Debtor will forthwith, upon receipt, transmit and deliver to the Agent, in the form received, all cash, checks, drafts and other instruments or writings for the payment of money (properly endorsed, where required, so that such items may be collected by the Agent) which may be received by such Debtor at any time in full or partial payment or otherwise as proceeds of any of the Collateral. Except as the Agent may otherwise consent in writing, any such items which may be so received by any Debtor will not be commingled with any other of its funds or property, but will be held separate and apart from its own funds or property and in express trust for the Agent until delivery is made to the Agent. Each Debtor will comply with the terms and conditions of any consent given by the Agent pursuant to the foregoing sentence.

During the existence of a Default, all items or amounts which are delivered by any Debtor to the Agent on account of partial or full payment or otherwise as proceeds of any of the Collateral shall be deposited to the credit of a deposit account (each an “Assignee Deposit Account”) of such Debtor with a financial institution selected by the Agent over which the Agent has sole dominion and control, as security for payment of the Liabilities. No Debtor shall have any right to withdraw any funds deposited in the applicable Assignee Deposit Account. The Agent may, from time to time, in its discretion, and shall upon request of the applicable Debtor made not more than once in any week, apply all or any of the then balance, representing collected funds, in the Assignee Deposit Account toward payment of the Liabilities, whether or not then due, in such order of application as the Agent may determine, and the Agent may, from time to time, in its discretion, release all or any of such balance to the applicable Debtor.

At any time that a Default exists, the Agent (or any designee of the Agent) is authorized to endorse, in the name of the applicable Debtor, any item, howsoever received by the Agent, representing any payment on or other proceeds of any of the Collateral.

5.    Certificates, Schedules and Reports.    Each Debtor will from time to time, as the Agent may request, deliver to the Agent such schedules, certificates and reports respecting all or any of the Collateral at the time subject to the security interest hereunder, and the items or amounts received by such Debtor in full or partial payment of any of the Collateral, as the Agent may

6

reasonably request. Any such schedule, certificate or report shall be executed by a duly authorized officer of such Debtor and shall be in such form and detail as the Agent may reasonably specify. Each Debtor shall immediately notify the Agent of the occurrence of any event causing any loss or depreciation in the value of its Automobile Inventory or other assets which could reasonably be expected to have a Material Adverse Effect, and such notice shall specify the amount of such loss or depreciation.

6.    Agreements of the Debtors.    Each Debtor (a) hereby authorizes the Agent to file (with or without the signature of such Debtor), and will upon request of the Agent execute, such financing statements and other documents (and pay the cost of filing or recording the same in all public offices reasonably deemed appropriate by the Agent) and do such other acts and things, all as the Agent may from time to time reasonably deem necessary or request, to establish and maintain a valid security interest in the Collateral (free of all other liens, claims and rights of third parties whatsoever, other than Permitted Liens) to secure the payment of the Liabilities; (b) will keep all its Automobile Inventory at, will not change its state of incorporation/organization and will not maintain any place of business at any location other than, its state of incorporation/organization and address(es) shown on Schedules I and II hereto or in such other jurisdiction or at such other addresses of which such Debtor shall have given the Agent not less than thirty (30) days’ prior written notice; (c) will not change its type of organization from that listed on the financing statements filed on behalf of the Agent or be the subject of any merger or other corporate reorganization unless the applicable Debtor shall have given the Agent not less than thirty (30) days’ prior written notice; (d) will keep its records concerning the Subject Receivables in such a manner as will enable the Agent or its designees to determine at any time the status of the Subject Receivables; (e) will furnish the Agent such information concerning such Debtor and the Collateral as the Agent may from time to time reasonably request; (f) will permit the Agent and its designees, from time to time, on reasonable notice and at reasonable times and intervals during normal business hours (or at any time without notice during the existence of a Default) to inspect such Debtor’s Automobile Inventory, and to inspect, audit and make copies of and extracts from all records and other papers in the possession of such Debtor pertaining to the Collateral; (g) will, upon request of the Agent, stamp on its records concerning the Collateral, and add on all Chattel Paper and Instruments constituting a portion of the Collateral, a notation, in form satisfactory to the Agent, of the security interest of the Agent hereunder; (h) except for the sale or lease of Automobile Inventory in the ordinary course of its business and for dispositions permitted by Section 9.10 of the Credit Agreement, will not sell, lease, assign or create or permit to exist any Lien on any Collateral other than Permitted Liens; (i) will at all times keep all of its Automobile Inventory insured as required by Section 9.3 of the Credit Agreement and cause all policies covering the Collateral to provide that loss thereunder shall be payable to the Agent as its interest may appear (it being understood that (A) so long as no Default shall be existing, the Agent shall deliver any proceeds of such insurance which may be received by it to such Debtor and (B) whenever a Default shall be existing, the Agent may apply any proceeds of such insurance which may be received by it toward payment of the Liabilities, whether or not due, in such order of application as the Agent may determine), and such policies or certificates thereof shall,

7

if the Agent so requests, be deposited with or furnished to the Agent; (j) will take such actions as are reasonably necessary to keep its Automobile Inventory in good repair and condition; (k) will take all steps reasonably necessary to protect, preserve and maintain all of its rights in the Collateral; (l) will keep all of the Automobile Inventory in the United States; (m) will not change its name without providing thirty (30) days’ prior written notice to the Agent; (n) if such Debtor has any Commercial Tort Claim against any Manufacturer arising out of the purchase by such Debtor of Automobile Inventory from such Manufacturer, and the amount of such Commercial Tort Claim exceeds $500,000, such Debtor shall provide to the Agent a detailed description of such Commercial Tort Claim and this Agreement shall be amended to include a specific reference (sufficient under Section 9-108 of the UCC) to such Commercial Tort Claim; and (o) acknowledges and agrees that it is not authorized to file any financing statement in favor of the Agent without the prior written consent of the Agent and that it will not do so without the prior written consent of the Agent, subject to such Debtor’s rights under Section 9-509(d)(2) of the UCC.

Any expenses incurred in protecting, preserving or maintaining any Collateral shall be borne by the applicable Debtor, and each Debtor shall promptly, upon demand, reimburse and indemnify the Agent for all reasonable costs and expenses incurred by the Agent in the exercise of its rights under this Section 6. Notwithstanding the foregoing, the Agent shall have no obligation or liability regarding the Collateral or any thereof by reason of, or arising out of, this Agreement, except to the extent caused by the gross negligence or wilful misconduct of the Agent.

7.    Default.    During the existence of a Default, the Agent may exercise from time to time any right or remedy available to it under applicable law. Each Debtor agrees, in case of Default, to assemble, at its expense, all its Automobile Inventory that is not then located at one of the inventory locations listed on the inventory detail report most recently delivered pursuant to Section 9.1.10 of the Credit Agreement and make it available to the Agent at one or more of such locations. Any notification of intended disposition of any of the Collateral required by law shall be deemed reasonably and properly given if given at least ten days before such disposition. Any proceeds of any disposition by the Agent of any of the Collateral may be applied by the Agent to payment of expenses in connection with the Collateral, including Attorney Costs, and any balance of such proceeds may be applied by the Agent toward the payment of such of the Liabilities, and in such order of application, as the Agent may from time to time elect.

8.    License of Intellectual Property.    Each Debtor hereby grants to the Agent a non-exclusive and royalty-free right and license to use, during the existence of a Default, all of such Debtor’s Intellectual Property throughout the world, solely for the purpose of enabling the Agent to exercise its rights and remedies hereunder including, without limitation, the right to use the Intellectual Property in connection with the disposition or maintenance of Automobile Inventory as the Agent deems necessary or appropriate. The Agent shall have the right to grant sublicenses to others to use the Intellectual Property during the existence of a Default and solely to enable such sublicensees to exercise any rights and remedies of the Agent under this Agreement, provided each

8

such sublicensee agrees to be bound by an agreement similar to the next sentence. The Agent agrees that it will, when exercising its rights under any Intellectual Property license hereunder, comply in all material respects with quality standards and specifications employed by the Debtors in commerce prior to the Closing Date.

9.    Limitation on Duty in Respect of Collateral.    Beyond the exercise of reasonable care in the custody and preservation thereof, the Agent will have no duty as to any Collateral in its possession or control or in the possession or control of any sub-agent or bailee or any income therefrom or as to the preservation of rights against prior parties or any other rights pertaining thereto. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it takes such action for that purpose as any applicable Debtor requests in writing, but failure of the Agent to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of the Agent to preserve or protect any right with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by any Debtor, shall be deemed of itself a failure to exercise reasonable care in the custody or preservation of such Collateral.

To the extent that applicable law imposes duties on the Agent to exercise remedies in a commercially reasonable manner, each Debtor acknowledges and agrees that it is not commercially unreasonable for the Agent (a) to fail to incur expenses reasonably deemed significant by the Agent to prepare Collateral for disposition or otherwise to complete raw material or work-in-process into finished goods or other finished products for disposition, (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (c) to fail to exercise collection remedies against account debtors or other Persons obligated on Collateral or to remove liens or encumbrances on or any adverse claims against Collateral, (d) to exercise collection remedies against account debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (e) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (f) to contact other Persons, whether or not in the same business as the Debtors, for expressions of interest in acquiring all or any portion of the Collateral, (g) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (h) to dispose of Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (i) to dispose of assets in wholesale rather than retail markets, (j) to disclaim disposition warranties, including, without limitation, any warranties of title, merchantability or fitness for a particular purpose, (k) to purchase insurance or credit enhancements to insure the Agent against risks of loss, collection or disposition of Collateral, or to provide to the Agent a guaranteed return from the collection or

9

disposition of Collateral or (l) to the extent deemed appropriate by the Agent, to obtain the services of brokers, investment bankers, consultants and other professionals to assist the Agent in the collection or disposition of any of the Collateral. Each Debtor acknowledges that the purpose of this Section is to provide non-exhaustive indications of what actions or omissions by the Agent would not be commercially unreasonable in the Agent’s exercise of remedies against the Collateral and that other actions or omissions by the Agent shall not be deemed commercially unreasonable solely on account of not being specifically referred to in this Section. Without limitation upon the foregoing, nothing contained in this Section shall be construed to grant any right to a Debtor or to impose any duties on the Agent that would not have been granted or imposed by this Agreement or by applicable law in the absence of this Section.

10.    General.    All notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown below its signature hereto or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service shall be deemed to have been given when received.

Each of the Debtors agrees to pay all reasonable expenses, including Attorney Costs, paid or incurred by the Agent or any Lender in endeavoring to collect the Liabilities of such Debtor, or any part thereof, and in enforcing this Agreement against such Debtor, and such obligations will themselves be Liabilities.

No delay on the part of the Agent in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Agent of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy.

This Agreement shall remain in full force and effect until all Liabilities have been paid in full and all Commitments have terminated. If at any time all or any part of any payment theretofore applied by the Agent or any Lender to any of the Liabilities is or must be rescinded or returned by the Agent or such Lender for any reason whatsoever (including the insolvency, bankruptcy or reorganization of any Debtor), such Liabilities shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Agent or such Lender, and this Agreement shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by the Agent or such Lender had not been made.

This Agreement shall be construed in accordance with and governed by the laws of the State of Michigan applicable to contracts made and to be performed entirely within such State

10

(except to the extent that perfection, the effect of perfection or nonperfection, or the priority of the security interests granted hereunder may be determined by the UCC of a different jurisdiction). Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

The rights and privileges of the Agent hereunder shall inure to the benefit of its successors and assigns.

This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. At any time after the date of this Agreement, one or more additional Persons may become parties hereto by executing and delivering to the Agent a counterpart of this Agreement together with supplements to the Schedules hereto setting forth all relevant information with respect to such party as of the date of such delivery. Immediately upon such execution and delivery (and without any further action), each such additional Person will become a party to, and will be bound by all the terms of, this Agreement.

EACH DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF MICHIGAN AND OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN FOR THE PURPOSE OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. EACH DEBTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS SET FORTH BELOW ITS SIGNATURE HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE SPECIFIED IN WRITING TO THE AGENT AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF MICHIGAN. EACH DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

EACH OF EACH DEBTOR, THE AGENT AND (BY ACCEPTING THE BENEFITS HEREOF) EACH LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL

11

BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

12

IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written.

DEBTORS:

CARMAX, INC.

By:

Title:

Address:

Attention:

Telephone:

Facsimile:

CARMAX AUTO SUPERSTORES, INC.

By:

Title:

Address:

Attention:

Telephone:

Facsimile:

CARMAX AUTO SUPERSTORES WEST COAST, INC.

By:

Title:

Address:

Attention:

Telephone:

Facsimile:

13

KENOSHA AUTOMOTIVE, LLC

By:

Title:

Address:

Attention:

Telephone:

Facsimile:

CARMAX AUTO MALL, INC.

By:

Title:

Address:

Attention:

Telephone:

Facsimile:

CARMAX OF LAUREL, LLC

By:

Title:

Address:

Attention:

Telephone:

Facsimile:

14

AGENT:

DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, as Agent

By:

Title:

Address:

Address:

27777 Franklin Road, 18th Floor

Southfield, Michigan 48034-8286

CIMS 465-18-15

Attention: Jeff Canizaro

Telephone: (248) 948-3108

Facsimile: (248) 948-3848

Signature page for the Security Agreement dated as of May 17, 2002 among CARMAX AUTO SUPERSTORES, INC., CARMAX, INC. (the “Company”), various subsidiaries of the Company and DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, as Agent.

The undersigned is executing a counterpart hereof for purposes of becoming a party hereto (and attached to this signature page are supplements to the Schedules to the Security Agreement setting forth all relevant information with respect to the undersigned):

[ADDITIONAL DEBTOR]

By:

Title:

Address:

Attention:

Telephone:

Facsimile:

15

EX-10.13

Exhibit 10.13

GUARANTY

THIS GUARANTY dated as of May 17, 2002 is executed in favor of DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC (“DCSNA”), as Agent, and the Lender Parties referred to below.

WITNESSETH:

WHEREAS, CarMax Auto Superstores, Inc. (the “Borrower”), Carmax, Inc. (the “Company”), various financial institutions and DCSNA, as agent (in its capacity as agent, together with any successor in such capacity, the “Agent”), have entered into a Credit Agreement dated as of the date hereof (as amended or otherwise modified from time to time, the “Credit Agreement”; capitalized terms used but not defined herein are used as defined in the Credit Agreement), pursuant to which such financial institutions have agreed to make extensions of credit to the Borrower; and

WHEREAS, each of the undersigned will benefit from the extensions of credit pursuant to the Credit Agreement and is willing to guaranty the Liabilities (as defined below) as hereinafter set forth;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of the undersigned hereby jointly and severally, unconditionally and irrevocably, as primary obligor and not merely as surety, guarantees the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, of all obligations (monetary or otherwise) of the Borrower and the Company to each of the Agent and each Lender Party (as defined below) under or in connection with the Credit Agreement, the Notes, any other Loan Document and any other document or instrument executed in connection therewith, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due (all such obligations being herein collectively called the “Liabilities”); provided that the liability of each of the undersigned hereunder shall be limited to the maximum amount of the Liabilities which such undersigned may guaranty without violating any fraudulent conveyance or fraudulent transfer law (plus all reasonable costs and expenses paid or incurred by the Agent or any Lender Party in enforcing this Guaranty against such undersigned). As used herein, “Lender Party” means each Lender under and as defined in the Credit Agreement and DCSNA.

Each of the undersigned agrees that if any Event of Default shall occur under Section 11.1.4 of the Credit Agreement, and if such event shall occur at a time when any of the Liabilities may not then be due and payable, such undersigned will pay to the Agent for the account of the Lender Parties forthwith the full amount which would be payable hereunder by such undersigned if all Liabilities were then due and payable.

To secure all obligations of each of the undersigned hereunder, the Agent and each Lender Party shall have a lien on and security interest in and may, without demand or notice of any kind, at any time and from time to time when any Event of Default exists, appropriate and

apply toward the payment of such amount, in such order of application as the Agent and the Lender Parties may elect, any and all balances, credits, deposits, accounts or moneys of or in the name of such undersigned now or hereafter with the Agent or such Lender Party. The Agent or the Lender Party exercising the set-off rights it has under this paragraph shall promptly notify such undersigned thereof after making such exercise; provided that failure to give such notice shall not affect the validity of the set-off.

This Guaranty shall in all respects be a continuing, irrevocable, absolute and unconditional guaranty, and shall remain in full force and effect (notwithstanding, without limitation, the dissolution of any of the undersigned or that at any time or from time to time no Liabilities are outstanding) until all Commitments have terminated and all Liabilities have been paid in full.

The undersigned further agree that if at any time all or any part of any payment theretofore applied by the Agent or any Lender Party to any of the Liabilities is or must be rescinded or returned by the Agent or such Lender Party for any reason whatsoever (including the insolvency, bankruptcy or reorganization of the Borrower, the Company or any of the undersigned), such Liabilities shall, for the purposes of this Guaranty, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Agent or such Lender Party, and this Guaranty shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by the Agent or such Lender Party had not been made.

The Agent or any Lender Party may, from time to time, at its sole discretion and without notice to the undersigned (or any of them), take any or all of the following actions: (a) retain or obtain a security interest in any property to secure any of the Liabilities or any obligation hereunder, (b) retain or obtain the primary or secondary obligation of any obligor or obligors, in addition to the undersigned, with respect to any of the Liabilities, (c) extend or renew any of the Liabilities for one or more periods (whether or not longer than the original period), alter or exchange any of the Liabilities, or release or compromise any obligation of any of the undersigned hereunder or any obligation of any nature of any other obligor with respect to any of the Liabilities, (d) release its security interest in, or surrender, release or permit any substitution or exchange for, all or any part of any property securing any of the Liabilities or any obligation hereunder, or extend or renew for one or more periods (whether or not longer than the original period) or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such property and (e) resort to the undersigned (or any of them) for payment of any of the Liabilities when due, whether or not the Agent or such Lender Party shall have resorted to any property securing any of the Liabilities or any obligation hereunder or shall have proceeded against any other of the undersigned or any other obligor primarily or secondarily obligated with respect to any of the Liabilities.

2

Each of the undersigned hereby expressly waives: (a) notice of the acceptance by the Agent or any Lender Party of this Guaranty, (b) notice of the existence or creation or non payment of all or any of the Liabilities, (c) presentment, demand, notice of dishonor, protest, and all other notices whatsoever, and (d) all diligence in collection or protection of or realization upon any Liabilities or any security for or guaranty of any Liabilities.

Notwithstanding any payment made by or for the account of any of the undersigned pursuant to this Guaranty, the undersigned shall not be subrogated to any right of the Agent or any Lender Party until such time as the Agent and the Lender Parties shall have received final payment in cash of the full amount of all Liabilities.

Each of the undersigned further agrees to pay all reasonable expenses (including Attorney Costs) paid or incurred by the Agent or any Lender Party in endeavoring to collect the Liabilities of such undersigned, or any part thereof, and in enforcing this Guaranty against such undersigned.

The creation or existence from time to time of additional Liabilities to the Agent or the Lender Parties or any of them is hereby authorized, without notice to the undersigned (or any of them), and shall in no way affect or impair the rights of the Agent or the Lender Parties or the obligations of the undersigned under this Guaranty, including each of the undersigned’s guaranty of such additional Liabilities.

The Agent and any Lender Party may from time to time without notice to the undersigned (or any of them), but subject to Section 13.9 of the Credit Agreement, assign or transfer any or all of the Liabilities or any interest therein; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Liabilities shall be and remain Liabilities for the purposes of this Guaranty, and each and every immediate and successive assignee or transferee of any of the Liabilities or of any interest therein shall, to the extent of the interest of such assignee or transferee in the Liabilities, be entitled to the benefits of this Guaranty to the same extent as if such assignee or transferee were an original Lender Party.

No delay on the part of the Agent or any Lender Party in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Agent or any Lender Party of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy; nor shall any modification or waiver of any provision of this Guaranty be binding upon the Agent or the Lender Parties, except as expressly set forth in a writing duly signed and delivered on behalf of the Agent. No action of the Agent or any Lender Party permitted hereunder shall in any way affect or impair the rights of the Agent or any Lender Party or the obligations of the undersigned under this Guaranty. For purposes of this Guaranty, Liabilities shall include all obligations of the Borrower and the Company to the Agent or any Lender Party arising under or in connection with the Credit Agreement, any Note, any other Loan

3

Document or any other document or instrument executed in connection therewith, in each case notwithstanding any right or power of the Borrower or the Company or anyone else to assert any claim or defense as to the invalidity or unenforceability of any such obligation, and no such claim or defense shall affect or impair the obligations of any of the undersigned hereunder.

Pursuant to the Credit Agreement, (a) this Guaranty has been delivered to the Agent and (b) the Agent has been authorized to enforce this Guaranty on behalf of itself and each of the Lender Parties. All payments by the undersigned pursuant to this Guaranty shall be made to the Agent for the benefit of the Lender Parties.

This Guaranty shall be binding upon the undersigned and the successors and assigns of the undersigned; and to the extent that the Borrower, the Company or any of the undersigned is either a partnership, limited liability company or a corporation, all references herein to the Borrower, the Company and to the undersigned, respectively, shall be deemed to include any successor or successors, whether immediate or remote, to such partnership, limited liability company or corporation. The term “undersigned” as used herein shall mean all parties executing this Guaranty and each of them, and all such parties shall be jointly and severally obligated hereunder.

This Guaranty shall be governed by and construed in accordance with the laws of the State of Michigan applicable to contracts made and to be fully performed in such State. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty.

This Guaranty may be executed in any number of counterparts and by the different parties hereto on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Guaranty. At any time after the date of this Guaranty, one or more additional Persons may become parties hereto by executing and delivering to the Agent a counterpart of this Guaranty. Immediately upon such execution and delivery (and without any further action), each such additional Person will become a party to, and will be bound by all of the terms of, this Guaranty.

This Guaranty may be secured by one or more security agreements or other similar documents.

EACH OF THE UNDERSIGNED HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF MICHIGAN AND OF THE UNITED STATES DISTRICT COURT FOR THE

4

EASTERN DISTRICT OF MICHIGAN FOR THE PURPOSE OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS GUARANTY OR ANY OTHER LOAN DOCUMENT. EACH OF THE UNDERSIGNED FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS SET FORTH OPPOSITE ITS SIGNATURE HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE SPECIFIED IN WRITING TO THE AGENT AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF MICHIGAN. EACH OF THE UNDERSIGNED HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

EACH OF THE UNDERSIGNED, AND (BY ACCEPTING THE BENEFITS HEREOF) EACH OF THE AGENT AND EACH LENDER PARTY, HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS GUARANTY, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

5

IN WITNESS WHEREOF, this Guaranty has been duly executed and delivered as of the day and year first above written.

CARMAX AUTO SUPERSTORES WEST

COAST, INC.

By:                                                                                                  

Title:                                                                                              

Address:

Attention:

Telephone:

Facsimile:

KENOSHA AUTOMOTIVE, LLC

By:                                                                                                  

Title:                                                                                              

Address:

Attention:

Telephone:

Facsimile:

CARMAX AUTO MALL, LLC

By:                                                                                                  

Title:                                                                                              

Address:

Attention:

Telephone:

6

Facsimile:

CARMAX OF LAUREL, LLC

By:                                                                                                  

Title:                                                                                              

Address:

Attention:

Telephone:

Facimile:

7

Signature page for the Guaranty dated as of May 17, 2002 in favor of DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, as agent for the Lender Parties referred to in such Guaranty.

The undersigned is executing a counterpart hereof for purposes of becoming a party hereto:

[ADDITIONAL GUARANTOR]

By:                                                                                                    

Title:                                                                                                

Address:

Attention:

Telephone:

Facsimile:

8

EX-23.1

EXHIBIT 23.1

CONSENT OF KPMG LLP

The Board of Directors and Stockholders

Circuit City Stores, Inc.:

We consent to the use of our reports dated April 2, 2002, relating to the consolidated balance sheets of Circuit City Stores, Inc. and subsidiaries as of February 28, 2002 and 2001 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, 2002, and the related financial statement schedule, which reports are included in this proxy statement/prospectus and which reports are incorporated by reference from the annual report to stockholders, in the February 28, 2002 annual report on Form10-K of Circuit City Stores, Inc., which annual report is incorporated by reference in this Registration Statement on Form S-4 of CarMax, Inc.

We also consent to the use of our reports dated April 2, 2002, relating to the balance sheets of the Circuit City Group as of February 28, 2002 and 2001 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, 2002, and the related financial statement schedule, which reports are incorporated by reference from the annual report to stockholders, in the February 28, 2002 annual report on Form 10-K of Circuit City Stores, Inc., which annual report is incorporated by reference in this Registration Statement on Form S-4 of CarMax, Inc. Our reports on the Circuit City Group dated April 2, 2002, include a qualification related to the effects of not consolidating the CarMax Group with the Circuit City Group as required by accounting principles generally accepted in the United States of America.

We also consent to the use of our reports dated April 2, 2002, relating to the balance sheets of the CarMax Group as of February 28, 2002 and 2001 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, 2002, and the related financial statement schedule, which reports are incorporated by reference from the annual report to stockholders, in the February 28, 2002 annual report on Form 10-K of Circuit City Stores, Inc., which annual report is incorporated by reference in this Registration Statement on Form S-4 of CarMax, Inc.

/s/ KPMG LLP

Richmond, Virginia

June 5, 2002

The Board of Directors and Stockholders

Circuit City Stores, Inc.:

We consent to the use of our report dated April 2, 2002, relating to the consolidated balance sheets of CarMax, Inc. and subsidiaries as of February 28, 2002 and 2001, and the related consolidated statements of earnings, equity and cash flows for each of the fiscal years in the three-year period ended February 28, 2002, which report is included in this proxy statement/prospectus. Additionally, we consent to the use of our report dated April 2, 2002, relating to the financial statement schedule of CarMax, Inc. and subsidiaries, relating to the consolidated financial statements of CarMax, Inc. as of February 28, 2002 and 2001 and for each of the fiscal years in the three-year period ended February 28, 2002, which report is included in this proxy statement/prospectus.

/s/ KPMG LLP

Richmond, Virginia

June 5, 2002

2

EX-23.3

Exhibit 23.3

CONSENT OF MORGAN STANLEY& CO. INCORPORATED

Board of Directors

Circuit City Stores, Inc.

9950 Mayland Drive

Richmond, Virginia 23233

Members of the Board:

We hereby consent to the use in the Registration Statement of CarMax, Inc. (“CarMax”) on Form S-4 and in the Proxy Statement/Prospectus of Circuit City Stores, Inc. (“Circuit City”), which is part of the Registration Statement, of our opinion dated May 21, 2002 appearing as Annex G to such Proxy Statement/Prospectus, and to the description of such opinion and to the references to our name contained therein under the heading “Proposal One: The CarMax Separation Proposal  — Opinion of Circuit City’s Financial Advisor”. In giving the foregoing consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended (the “Securities Act”), or the rules and regulations promulgated thereunder, nor do we admit that we are experts with respect to any part of such Registration Statement within the meaning of the term “experts” as used in the Securities Act or the rules and regulations promulgated thereunder.

MORGAN STANLEY & CO. INCORPORATED

By: /s/ KEITH HENNESSEY

            Keith Hennessey

            Managing Director

NewYork, NY

June 5, 2002